‘Unstoppable Trend’ Becomes ‘So Much Uncertainty’
A pair of reports on the condo market. “Turning apartments into buyable condos was supposed to be one of the biggest trends in San Luis Obispo’s red-hot housing market, but so far this year only 16 apartment units are up for the change. The trend seemed unstoppable last year, when apartment owners lined up in a fierce competition to turn rental space into condominiums. But that was before the market for homes softened up.”
“Then, because there were more units up for conversion than city policy allows, owners began offering incentives such as below-market-price units and open space to entice City Council members into supporting their plans. It was an expensive competition that may have frightened off some potential conversion applicants this time around, said the sole developer offering apartments for conversion this year.”
“‘People talk to the city and they aren’t sure if there is going to be a lot of competition this year,’ said (developer) Brian Rolph. ‘That can scare people off.’”
“The softening could be discouraging apartment building owners from going into the condo selling business because they could get less for their money. ‘It’s kind of scary, as an investor, to go into something with so much uncertainty,’ Rolph said.”
And from Florida. “Various national surveys have identified Naples as the third most overpriced real estate market in the country. Prices soared approximately 50 percent from 2004 to 2005.”
“Cornerstone Group, a developer based in Coral Gables, has recently bought an apartment complex near the corner of Airport-Pulling Road and Pine Ridge Road and is converting it to condominiums.”
“Two things stand out in this situation: In a market where the median price for a home is over half a million dollars, Laguna Bay is offering one-bedroom condos starting at $189,900 and two-bedroom units starting at $249,900; and the company is drawing customers using scantily-clad women waving to passing motorists on Airport-Pulling Road. (The women hold signboards; men are also used).”
“Lawrence Rodriguez, a representative for Cornerstone Group, said that the converted units are so affordable because buyers do not choose decor colors or materials. ‘We gutted the entire unit and we bought everything in bulk,’ he said. ‘There’s no carpet selection.’”
“As for the marketing campaign, it may be a bit risqué for generally conservative Naples. ‘Collier County has come a long way from the days when developers sold land that was underwater,’ said a long-time Naples Realtor who chose to remain anonymous. ‘The county provides lots of information for first-time buyers. I hope young people seek out that information and remain skeptical of marketing tactics that include young men and women beckoning them on the street.’”
“Representatives from the Naples Area Board of Realtors were not available for comment. Rodriguez stands by his company’s product. ‘It’s a really good deal.’”
‘People talk to the city and they aren’t sure if there is going to be a lot of competition this year,’ said (developer) Brian Rolph. ‘That can scare people off.’ The softening could be discouraging apartment building owners from going into the condo selling business because they could get less for their money. ‘It’s kind of scary, as an investor, to go into something with so much uncertainty,’ Rolph said’
Now with less competition, he is afraid to go ahead. What happened to all that California RE gusto? When he can’t run with the herd, he doubts the market.
We’re not all crazy out here
Condo conversions are expensive, take a lot of time to complete, and are quite risky, especially with mortgage rates rising. And if the city is demanding give-backs (bribes) such as subsidized units and “open space”, it’s unlikely to pencil out even if you’re mainlining “gusto”.
Exactly
we gotta get some of those stripper sign twirlers around here in los angeles
Collier County has come a long way from the days when developers sold land that was underwater
___________________________________________
Now they sell homes that will soon be underwater!
Just spotted this funny comment on Lansner’s RE blog. Had to share:
Conversation #1:
Seller: I don’t know if I should sell now. It’s slumping and I want to get would I could have gotten at the peak.
Realtor: You can always wait for appreciation, but if you don’t sell now it could take years to get there and you’re stuck. Interest rates are going up and home prices will tend downwards to make up the affordability, even for these folks in OC. So sell now.
Conversation #2:
Buyer: I don’t know if I should buy now prices are going down right now. I’ll wait til it hits bottom.
Realtor: Prices will go up soon and also interest rates are going up, you should buy now!
Conversation #3:
Wife: Honey, we should sell our house and move to Florida to make the most of it.
Realtor: Don’t worry about our home price, I’m too busy making money off of these people
With all those scantily-clad gals hanging out on street corners, what is a poor hooker to do?
She can always become a human directional
become a real estate agent
… and lower my self-esteem. I DON”T THINK SO!!
Great example of herd mentality. In the presense of intense competion, everyone rushes madly ahead. With little competion, everyone is frozen with uncertainty. I guess with no competion, everyone runs blindly over a cliff. But I guess it’s had to end this way…
Interesting. I had heard about “selling” downtown hotel rooms, but I never heard about the condo conversion plans. Guess I do not get out much (despite the weather, which has finally turned very nice after a cold, rainy spring).
SLO county now has 3000 homes on the market (up from 1714 in January). Must have been the weather. Predictions on 100% increase in inventory (3428!). I’ll say mid-July.
O.T.-None of this will go away until the easy lending goes away.
As Chris Thornburg has stated, this is well beyond interest rates.
“O.T.-None of this will go away until the easy lending goes away.
As Chris Thornburg has stated, this is well beyond interest rates.”
And that is why the US Fed cutting the money supply and jacking interest rates is a good thing to do, no matter what the guests on CNBC say.
I know they are raising rates, however, where did you here they are cutting money supply?
Even if they did, the obly way to stop this thing is to tighten loan standards.
Rising interest rates is equivalent to raising reserve requirements, forcing banks to withhold cash, in other words to tighten lending. This naturally, decreases the money supply according the 1/r rule (r - reserve requerement).
Is the FED cutting the money supply? Without M3 reporting, I am curious.
OT, but did anyone else notice that the yield curve flatlined again today?
6 month Treasuries 1 basis point over the 10 year.
It looks to me like that camel’s back was recently broken by the last straw.
http://www.bloomberg.com/markets/rates/index.html
Scroll down to get my point…
Speaking of markets, we have had several comments recently about the Plunge Protection Team rigging the stock market. Some believe it, some don’t.
Here are the comments today by Bill Murphy who writes the MIDAS report at lemetropolecafe.com:
“Most of this MIDAS was written a number of hours ago, with some later filling in after lunch. I have spent the last hour watching CNBC to see when the PPT would make its move. Earlier the DOW was down around 120. With an hour to go the DOW was 108 lower. I could hear the chant building though. Hail Mary Play! Hail Mary Play! Hail Mary Play! PPT! PPT! PPT!
It wasn’t long until it the PPT’s bugler sounded “CHARGE.” I blinked for a few minutes and when I looked up the DOW was only down 40. All day long the S&P, the weapon of choice for the PPT was only down half as much as the DOW and DOG would suggest it should have been. This was a clue as to what would surface late in the day … as ALWAYS and like clockwork.
Market just closed. Sure enough, the PPT did it again. Stalin would be so proud of this bunch. “The End Justifies The Means.” We fought the Cold War against Russia and their state controlled ways. We fought to preserve individual freedoms, free markets, a free press and to prevent unwarranted aggression against other countries. Now the former enemy is us!
The DOW miraculously closed above psychologically important 11,000 at 11,002, down .47. The DOG finished off only 7 to 2163. The telltale S&P only closed 1.44 lower to 1264.
I caught CNBC’s Bob Pisani lamenting after the close that there was almost no volume on the up move late in the day. Simple BP, it’s because all the action in the last hour was PPT inspired in the futures market. It wasn’t Joe investor jumping back in to buy new bargains.
What is it going to take to have more market commentators to comment on this obvious market manipulation? I mean these PPT guys are like the football teams of yesteryear, running the three yard and a cloud of dust off tackle play over and over again. There is no surprise at all and they don’t care who knows it.”
Dog is NASDAQ.
Wow! I am sure glad I did not write that
With the Prime Rate at 8%, why are mortgage rates not higher than they are?
In a nutshell..and this also explains the inverted yield curve….but basically smart money and institutions betting on a RECESSION, in which case rates will be cut. Foreward thinking is all it is..
Another seemingly unstoppable trend: The use of exotic mortgages.
http://tinyurl.com/mz2h3
‘Despite their prominence in the news, exotic mortgages do not, in fact, entice all that many Americans. The good old 30-year fixed-rate mortgage is still used by 72% of U.S. homeowners, although that loan type is less popular in the West, where home prices have been highest.
“Fixed rates are a great deal right now,” says Greg Eckert, vice president of Centennial Mortgage in Kingston, N.Y. “Historically, rates under 7% are low and that is what we have at this time. This payment offers stability and predictability.”‘
The problem for fixed rate buyers in bubble zones is completely (deliberately?) missed by the main stream media. The omission is probably accidental, due to a lack of understanding of risk; hence I will try to explain it with a simple example.
Suppose you lived in a town where everyone earned $65K/year (a level near the SD median income), and where recently, the majority of homebuyers were using exotic financing, while the prudent minority used fixed-rate I/O loans. Unfortunately for the prudent buyers, the initial rate on the exotic loans is 3% while it is 6%+ on the fixed-rate I/O loans. Consequently, those who buy w/exotic loans can outbid the prudent buyers and live in much larger, nicer homes, as they finance twice the purchase price on the same income (and monthly payment). What is worse, when those who bought with exotic loans go bankrupt, and their houses are added to the growing inventory glut of new and used homes already for sale, the prudent fixed-rate buyers will see the market value of their homes drop in synch with the foreclosed properties.
Getstucco,
You have hit the nail squarely on the head. I can bid on a home with a rather high degree of confidence as my wife and I have saved a rather large downpayment and are preapproved for a fixed rate mortgage of ample size yet we have been outbid by people with little to put down with an exotic mortgage. If they lose their home so be it — there are winners and losers and they “won.”
Very good analysis.
Yea, contrary to the thoughts, beliefs and wishes of many here. I really don’t see a scenario where these “exotic” loans go away.
Really? You expect the secondary market to keep buying up bonds backed by “exotic mortgages?” I’d like to know more about your thinking. The last 5 years bonds haven’t behaved as they traditionally have related to risk. But as soon as we have some losses… they’ll remember the old rules.
The only reason we have the mortgages we do is that the brokerages were able to pawn off the debt onto the secondary market. Have you noticed the losses starting at the sub-primes as they aren’t able to sell their bonds for what they anticipated? Thus, they must either:
1. Raise their interest rates
2. Buy bond insurance (PMI)
3. Reduce the risk (mandate increased down payments)
I see exotic mortgages surving until… about Spring of 2007. After then, it will be cheaper to buy a house with a conventional mortgage.
Neil
I totally agree with you, Neil. Part of the death of the conundrum is a return to risk premiums which properly price risk. And one of these risk premiums is the interest rate on exotic mortgages, or any security which repackages them.
Risk premiums aren’t important, until they are.
Yoda says, Home prices go down never. Never every ten year happen.
Thanks for missing my point, or strawman-izing it. Let me be perfectly clear: The conditions fostered by these exotic loans, which provide short-term rewards to fools (like the zero-downpayment crowd you favor) in the form of letting them occupy homes they cannot really afford to buy, are a transient feature of the bubble, similar to the period in the 1920s (just before the Great Depression) when similar loans were popular. Their widespread use sows the seeds of their own destruction.
You see, you have to remember that Mr Income Stream derives his well being from the Real Estate Industry. He thinks that it’s all the buyers fault that we have these exotic loans and that the honorable Mortgage Brokers and Loan Officers couldn’t possibly have known that the buyers “stated income” was fales or misleading.
Here’s a reality check Mr Income Stream, the sheople always get what they want until of course, it becomes too risky for the people giving them money to buy it all. Then the sheople don’t get what they want. How’s that for simplistic. Even a realtor could understand that…
Mr Stream is absolutely correct. They will not go away at all.
They will just become very very very very very hard to qualify for.
It has nothing to do with where I derive my income it’s was just a statement of fact. These so called “exotic” products have been around since the 70’s in some form or fashion with the exception of the new 40 to 50 yr mortgage.
Although most consumers (ie: 9 to 5 types) prefer 30 yr fixed rate instruments the bank would prefer not to offer them. They view being tied into long term commitments such as this as risky. http://tinyurl.com/eve2y . I attended a symposium of Secondary Market Mortgage Investors and in a Q&A about hypothecation a question was posed about using the tool offered as a means to buy large pools of the current low fixed rate mortgages available. The answer was no because the margins were too thin and there was no way to increase the returns. I would venture to guess that much to your chagrin there will always be buyers for the so-called exotic products. They may not necessarily fit your needs but there is a primary and secondary market for them no matter how of much a risk you percieve them to be.
Will these loans COMPLETELY go away? Doubtful. But they will be offered on a much less widespread basis, and some may in fact disappear. Reason: Losses are going to rapidly — and I do mean RAPIDLY — build on these loans in the next two years. Rate resents, slumping and/or stagnant prices, and the crushing of idiot flippers who own multiple properties are going to drive default rates through the roof. Once the end investors (hedge funds, overseas buyers, etc.) see these losses start hitting home, they’ll start dumping their crappy mortgage bonds. The subprimers won’t be able to sell loans at decent prices into the secondary market. That will force them to stop or curtail offering them to primary borrowers. I don’t know how long you’ve been in the business, but this is EXACTLY what happened in 1998 when all of a sudden, secondary market investors didn’t want crappy, high-risk bonds anymore. The 125% LTV home equity loan was the big rage product back then — and literally in the span of a few months, many of the subprime lenders that had been offering it were vaporized. Up in smoke. Contifinancial ring a bell? What about the Money Store? A few lenders got bought up by big banks … and then were completely shut down.
Back then, 125% LTV loans weren’t a huge part of the overall subprime market. And the overall market was much small. Now, it’s much, much bigger — and there is much, much more exposure given the magnitude of the nationwide housing bubble. So in the coming implosion I see happening, the fallout should be much more severe. Hate to sound so dire, but I truly believe that the complete abandonment of underwriting standards in the primary market and complete embracing of ridiculous levels of risk in the secondary market has set us up for a dramatic credit tightening/meltdown scenario. No matter what, the next 24 months are going to be very interesting.
Getstucco,
Mea culpa, I was trying to rebut mrincomestream. In no way did I mean to miss your point but rather agree with it and reinforce it. Ergo, why my comment is a sub-point of mrincomestream.
Neil
Neil,
If you look at the way the comments line up closely, you will see that I, too, was rebutting the realtor-troll!
Sorry for the confusion
Ahhhh Stucco Dude, a Realtor-troll jeez?? I would expect that from the a$$hats posting above you. But not you, especially when in a sense I was agreeing with you. I wasn’t disputing you anaylsis of a seeming unstoppable trend. Just commenting on the fact I don’t see those loans going away anytime soon.
Oh well carry-on
the shift to capital preservation will be quite abrupt when the mbs investors find out that credit default swaps and mi coverage are vaporware in the face of massive defaults. if the curve stays inverted, i wouldn’t give most of these subprime lenders six months. you keep dreamin brutha.
Were you in the mortgage business during the last downturn. Just curious not being flip.
I think whether these exotic loans stick around is THE important question. These loans (more than low interest rates) fuel demand for housing. If these loans persist, then demand can be permanently higher compared to the pre-bubble times. My own sense is that they will be greatly reduced. Even financial markets have to “learn” about new debt instruments, and when they reevaluate the risk in these, the secondary market will dry up. But I agree that they won’t go completely away.
and in CA, a lot of folks bought homes that will be under water sometime this summer. Of course, we all know that is coming financially. But when the flooding of the Sac and American rivers goes on and breaks the levees, LOOK OUT BELOW. What will those poor FBers going to do. $1M mortgage debt and NO McMansion to show for it?
and in CA, a lot of folks bought homes that will be under water sometime this summer. Of course, we all know that is coming financially. But when the flooding of the Sac and American rivers goes on and breaks the levees, LOOK OUT BELOW. What will those poor FBers going to do. $1M mortgage debt and NO McMansion to show for it?
Wow! Front page of Forbes:
“Recession Dead Ahead”
They are mirroring the sentements on this board. Looks like the Bulls that said we will have no drop in RE prices without a recession may get their wish
http://www.forbes.com/home/investmentnewsletters/2006/06/06/stack-recession-in_js_0606soapbox_inl.html
Oh my god… that article deserves its own thread!
Neil
“We wish it wasn’t so, and we wish we didn’t have to say it. But today’s economy is on a collision course with a recession. And the most probable starting point is the fourth quarter of this year or early 2007. Since the stock market typically leads the economy by six to nine months, you can guess what that means for Wall Street this year.”
Shiver…
I have been following Jim Stack for awhile ,and he has been pretty dead on….Check out his housing index graph..eerily similar to the 2000 crash.
http://www.investech.com/
“We’ve actually been watching these pressures unfold for over a year now,”
Translation: we (Forbes, who are scooping this calamity about to happen) are not blaming Ben Bernanke for the debacle that is about to ensue.
Even financial planners don’t get it. And they are supposed to be financially smart.
http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&pubid=968163964505&cid=1149545411403&call_page=TS_Business&call_pageid=968350072197&call_pagepath=Business/News
It sounds like this guys house is worth $700K or so. Inventory is beginning to build in his area. He is 56 years old. Why the heck doesn’t he rent a condo ? Why is it that people just can’t bring themselves to sell their stocks or houses when the prices start dropping ? My friend is crying in his beer because his stocks fall every day and yet he can’t bring himself to sell them because he thinks they will go up. He has lost $20K so far.
$700K is a nice retirement nest egg. Invested at 5% it would yield $35K per year, probably more than enough to rent a nice place. It doesn’t sound like housing is going up in his neck of the woods. And I’ll bet that the houses are more than a little over priced at $700K. Why keep holding the bag ?
“$700K is a nice retirement nest egg. Invested at 5% it would yield $35K per year, probably more than enough to rent a nice place. It doesn’t sound like housing is going up in his neck of the woods. And I’ll bet that the houses are more than a little over priced at $700K. Why keep holding the bag ?”
Too many folks like your friend have been brainwashed by the Wall Street Industrial Complex into thinking that they need to buy stocks in order to retire wealthy and comfortably. Too bad that stocks don’t even return as much as risk-free investments these days, and that is before factoring in the risk premium (or lack thereof).
GetStucco — great point — that will screw a lot of boomer retirees who, unfortunately, are churning their investments just when they should be seeking max stability, IMHO.
If inflation is 3% you are eating into the nest egg. Living on 2% — $14K/year — is a pretty spartan existance. Health insurance alone will eat up $10K (I’m not kidding about this — an independent health insurance plan is $750 for someone age 55 — if you can even get it). Living on $4K a year is obviously impossible.
Don’t know if anyone is still awake, but here is an interesting article from the LA Times…
To Live and Buy in L.A.
More people. Prices stuck in the stratosphere. Vanishing open land. These and other factors give the housing crunch new bite.
http://tinyurl.com/qcx7h
…developable land in the Southland continues to shrink.
Bull. Grab your copy of google earth and see otherwise. There’s enough land in San Bernardino County to house the ENTIRE US population at the current LA UA density.
Laughing. I always enjoy your post Senor Cote.
I’m never sure when I’m being funny. Thanks anyway.
Well, let’s be truthful here…San Bernardino County isn’t exactly LA…ever try to commute from Needles to Downtown LA?
San Bernardino County is about 20,000 square miles…more area than 9 of the smallest states.
Robert: I agree: people need to read “The Little Prince” for reality check every once in a while.
The children’s perspective vs adult on home is so very appropriate for today’s bubble….
If they’re defining ‘developable’ land as being land with water and sewer connections, they may be right. If the local water supply/sewage treatment facilities are maxxed out, they may not be able to develop further without a significantly expensive expansion of that infrastructure, which the local populace may not be willing to pay for.
Builders define developable land as subsidized land. They don’t like to pay for things like sewers and roads that’s all.
A little OT. Frightening.
U.S. Not Prepared for Retirement
A Boston College study suggests that most Americans will struggle for financial security.
http://tinyurl.com/rgrvp
OT–
One thing I do not understand is Zip realty shows about 824k some odd houses for sale in the U.S. According NAHB there 565k new homes for sale and like 3.8 million existing homes for sale in the U.S. That would mean Zip Realty is off by roughly 3.5 milly, that is kinda of not even really close.
Also what the eff is PPT? I caught something about this a while back. I looked it up on google and came up with power point, pittsbugh public theatre, and planned parenthood of toronto. Could you guys try not to use acronyms so much. I am still learning and all. Fark main!!!
You found it. It’s the Pittsburgh Public Theatre.
They’re behind everything. Them and the gay aliens that is.
Seriously I don’t have any opinion on the PPT other than I think the market is already composed of billions of irrational people following infinite behaviors I have no chance of understanding. I don’t need a plunge protection team to explain irrational trading behavior. Especially my own.
In this context PPT stands for Plunge Protection Team, which may or may not be an urban myth (I’m not able to judge from Australia :)). Supposedly this is a government sponsored group covertly acting to prevent (or at least smooth) disastrous selloffs in various markets.
Rather than mocking myself like “the jdog” and other self-proclaimed experts on this subject, I will cite an objective source of information:
http://en.wikipedia.org/wiki/Plunge_Protection_Team
OT- But….
if I hear one more person complain about granite countertops I’m gonna go balistic.
So what that the spooks can afford it…it’s the #1 greatest “invention” in the 2000s. You guys should be happy that it’s affordable for the masses.
Granite was invented in the 2000’s that is funny.
Apparently you didn’t see the term “invention” in quotes in my post….thanks for your input thogh professor.
PPT is the mythical “Plunge Protection Team” variously trotted out to explain counter trend market indicies movements.
Granite sucks. Tough to work, easily damaged, poor hygenics, expensive. Poor mans Corian if you ask me. Corian (composite epoxies) are great. Coming up on the ten year anniversiary of my custom kitchen countertop installation. Still draws raves, still looks new, still works this being a kitchen after all. I see backsplashed 8 foot granite tops at contractors wherehouse for $218. I’m actually going to buy two for plant shelves on my patio.
Ahh the “Plunge Protection Team.” Are they traded publically or will I have to get in on the IPO later in this decade? I think their going to really take of if indeed they do what they claim? The stock market I am afraid is going to get hammered for the foreseeable future. I still can’t believe Forbes has called out a recession on the front page of the Ezine. That is not what the masses want to hear I am afraid.
http://www.forbes.com/home/investmentnewsletters/2006/06/06/stack-recession-in_js_0606soapbox_inl.html
Ahhh…the PPT has its doubters. Getstucco, we need you front and center…bring your tin-foil hat…
J-dog — bring your illiterate spelling.
And I was explaining why the trend is eminently stoppable, and soon to end. I guess I have to be far more blunt in order to get my points across.
Granite may be causing health problems; some granite is obtained from areas that would otherwise be off limits (old nuke test sites, etc).
I’d rather have radioactive countertops. It’s the bacteria.
It’s not too bad after the radioactive gasses bleed off.
Yeah wait they get some funky oils soaked into their granite and can’t get the smell out.
Years ago I had to remove some granite from a casino kitchen that stunk so bad I had to keep them outside for plants to sit on.
Ok Ben I am not sure if you are aware but your blog is linked from the wikipedia.org site on the housing bubble in PHX. Yeah that is exciting and also maybe like not cool eithout without your consent
If you hit the link under Smmary “[1]“you will see it is true.
http://en.wikipedia.org/wiki/Image:PHX_inventory_July2005-March2006.png
Oh yeah, and if for any reason you are able to sue for this I get a modest 10% finders fee. Thanks from the Cbass
Allstate to drop quake coverage for 352,000
http://www.usatoday.com/money/industries/insurance/2006-06-06-allstate-usat_x.htm?csp=26
OT, but have we hit 50K inventory in PHX yet?
Not yet. Its still just below 48k.
OCrenter’s excellent site
http://bubbletracking.blogspot.com/:
Reminds me of watching the WWF when I was a little kid -
“What happens when the unstoppable force meets the immovable object?!” - Gorilla Monsoon