The Housing Bubble

Thanks to the reader who sent in this link.

Here’s a link to the latest Twin Cities RE Weekly Market Activity report - in .pdf format:

http://www.mplsrealtor.com/Segments/Realtors/WMAR_2006_06-12.pdf

‘Will they panic, and all put their houses on the market at once,’ hoping to lock in the hefty appreciation gains many have been counting on to help finance a comfortable retirement?’

In Brooklyn, the early boomers are already selling. Just like their sold their 1980s condos and coops at inflated prices, many to those of us at the back end of the baby boom, before the early 1990s bust. They’ll screw us in the stock market and on social security too.

It may not be a nice g-g-generation, but it’s a smart one.

‘We’re not 100 percent sure how home sellers are going to react.’

You’re not 1% sure how sellers will react

http://finance.yahoo.com/columnist/article/richricher/5766

OT - sorry but……

kiyoski just hit a homerun

Is this what they mean by a “soft-landing”:

GLOBAL MARKET SELL-OFF
National benchmarks’ one-day declines
Colombia 9.5%
Russia 9.4%
Turkey 5.7%
Austria 4.7%
India 4.4%
Pakistan 4.3%
Japan 4.0%
S. Africa 4.0%

too good not to post

enjoy..

How to Profit From a Cooling Real Estate Market
by Robert Kiyosaki
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Printable ViewEmail this PageTuesday, June 13, 2006
All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages — borrowing 125% of home value or choosing adjustable-rate mortgages — are struggling to make their payments, and some aren’t making it.

Also, a glut of new property supply, especially condominiums, is coming on line. A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market — just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he’s correct, that means 12 years of supply will be ready for market in the next year.

As interest rates rise and the number of eager new buyers begins to diminish, adding supply to an already bad real estate market for sellers may mean a very good market for buyers and for property investors.

Hungry Alligators

The people who are in the most trouble are flippers — people who aim to buy low and sell high within a short space of time. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered. Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there’s a greater fool than they were somewhere out there real estate.

If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market, buying up tech stocks or any IPO with a dot-com after the company name.

In the coming months, I predict we’ll see an increase in people dumping real estate they can’t afford. They’ll be forced to sell because they’ll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators — if you can’t afford to feed the property every month, it eats you.

I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit — but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators. The problem is, he and his wife don’t earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips — and their savings.

To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They’re toast. The alligators are eating them alive. They can’t afford to feed them, and they can’t afford to sell them because the prices they paid for these alligators are more than they’re worth today. And this is only one story — out of who knows how many. Over the next couple of years, keep your eyes open for some great bargains.

It’s Time for the Pros

Some people say we’re now entering a bad real estate market. I disagree. I think we’re entering a great market. A bad one is when amateur investors become real estate experts and they bid up prices. They make housing expensive for homeowners, often adding little to no value to the property. They simply muddy the waters and make a valuable investment, a home, expensive.

Now, I must admit, I sometimes do buy to flip, so I can’t be too critical. Yet it’s the amateurs who come late to the party — and who eventually donate their money back to the professionals. What I’m saying is: Now is the time to turn pro. Now is not the time to be an amateur. It’s the amateurs who jump in when the market is hot. It’s the professional who comes in when it’s cooling down. Get the message?

When the red-hot bull market of real estate was beginning to overheat, you didn’t have time to make considered decisions. Sellers were receiving multiple, over-asking-price offers. In a bull market, you had to be quick, have money, and be a little foolish. Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator’s jaws.

Bad News That’s Good

But don’t be in too much of a hurry. I think we still have some bad news yet to come — and I believe it may come from the bond market. I suspect that many of our foreign investors who have been buying our debt may be becoming more cautious about investing in American assets, especially U.S. bonds. Many foreign bankers may be having doubts about the U.S. government paying the interest on our debt. In other words, many investors will be moving increasingly out of their cash into tangible assets such as gold, silver, and other metals. Again, this is only a suspicion. We should know more by September of this year.

If investors stop buying U.S. government debt, who knows what might happen? The U.S. may need to raise interest rates even higher, which will drive home values down even further. So be patient, keep looking at real estate, but keep your hand on your wallet (unless of course you find a seller with a really mean alligator eating him alive).

A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news — good news for real investors and bad news for amateur alligator wrestlers.

A story from North San Diego County:

Last fall I signed up for a Zip Realty housing alert for Encinitas/Cardiff that would email me properties selling for $500,000 and under. For four months, nothing, nada, zip. Then around January/February I started to get a trickle of one and two bedroom condos asking $499,000. Those became more common but they started lowering the asking price to $450,000. They are now coming faster than I can read them. Some days I get five listings in one e-mail! Except now the price is around $375,000 for the one/two bedrooms and the 3 bederoom 21/2 bath condos are now in the high $400,000 range.

Then a couple of days ago I got my first email from the listing agent:

Hi (Rainman18),

Most kindly,

My how things have changed. And this is one of those ‘everyone wants to live here’ places.

OT don’t know if anyone saw this yesterday evening. Sorry if it’s double.
Farewell to the flippers_Home prices are falling

A few weeks ago, I had some how wound up clicking on a quickenloan site. Now, one of their guys has been calling (luckily it is a separate voice mail) me daily (sometimes more than once) and now emailing me. They really are desperate for business. Here is the email. I never expressed any real interest. Enjoy

Dear Al,

I’d like to thank you for contacting Quicken Loans about home
financing. My name is Brandon Caldwell, a Quicken Loans Mortgage Expert, and I’m
looking forward to working with you.

Call me as soon as you can. We’ll discuss your goals and needs, and
then we’ll find the right loan for you. Quicken Loans has more than 100
loan programs and I’m confident you’ll find our mortgage process
exceptionally quick and easy – from application to close.

I’m sure you’d like to get started right away, so please call me at
800.226.6308, Extension: 12321 or email me to talk about your loan
options. I can lock in a low rate and approve your loan right away.

I look forward to speaking with you today!

Brandon Caldwell
Quicken Loans – Mortgage Banker
Direct: 800.226.6308 Extension: 12321
E-mail: brandoncaldwell@quickenloans

I have a burning OT question and I thought that maybe some of you might help me out. There are so many well informed people in this forum! So thanks ahead. Also, THANKS, BEN JONES. I have been reading this blog for a while and it’s been extremely informative and helpful.
My question is regarding local markets. IF the bubble is national, as it seems, (and even international), BUT there are local differences as in the degree of the overvaluation, (case in point: Milwaukee vs. L.A.), AND you want to lowball offers when a property is shown to you, WHAT PERCENTAGE LESS would you offer? Would 10% less be okay in L.A. but waaaaaaay too much for Milwaukee? In L.A it would mean that a property offered at 650,000 needs a 65,000 chopped out, which sounds like NOT ENOUGH. In Milwaukee, a property offered at 99,000 would have a 9,900 reduction, which seems a LOT, because in theory is not that overvaluated. Any ideas?

““The answer, Anderson said, will depend largely on baby boomers, who are approaching retirement.”

I nominate this statement for the stupidest of the day. Based on exactly what evidence Mr. Anderson, pray tell? Most of my fellow baby boomers plan on living in their house for the foreseeable future. Ya gotta live somewhere, and home prices have gone up pretty much everywhere. So unless we all ‘downsize’ into tiny one story houses (good luck finding many), where exactly is all that capital going to come from? Also, it’s been my experience that my fellow boomers are not rushing to downsize anyway.

And the first wave begins. It’s going to be nothing but “how much can I lowball” posts between here and 2008, 2010, whenever - and lots of sad tales of catching the overused metaphor that shall not be named.

No offense, Marie. If you do a bit of reading here and there on relevant sites, you’ll form your own opinion, which beats relying on someone else’s. Start by googling the phrase “falling knife”. (oops. damn.)

Back on topic:
I’m glad that our Newspaper (the Star Tribune, affectionately called “the strib” here) is covering this.

My hope is that we will burst our bubble, and get back down to our fundamental house price level sooner rather than later, before it’s too late like it is in California.

If we do it now, my feeling is that we don’t have too far to fall (in dollar terms, and maybe in percentage as well).

The median home price for the TC is in the $220k range. Even if we lost 30%, that’s $66k in the hole that people would be in. Not fun, but doable. (we have high salaries in general here)

Contrast this to the coasts, where a 30% haircut would be in the $150-300k range. That’s indentured servitued for life.

And besides, our rent to mortgage payment ratio is reasonable IMO (again, except for the new construction, especially condos). A 30 yr fixed mortgage with 20% down on my house would probably run about $2200 to 2500/month. I could rent my place without problem for $1600/month (a conservative estimate… there is one rental on my block in a duplex, they pay $1350/month for a 2br 2ba duplex, my house is 3br/3bath home and twice the size)

So I’m forecasting and hoping for no more than 30% off our top… truly because at that point most mortgages would be cheaper than rent, which I find unlikely to happen long term (there may be a short term overshoot)

Of course, if we go into major recession/depression, all bets are off everywhere…

another wild card is ARMs. I have not recently seen data on percentage of mortgages that are ARMs here. It is low by coast standards for sure, but may have creeped up in the last year…

clouseau

“The median sale price in May was $230,000, up 1.1 percent from May 2005. Last year, the median sale price — the point where half are more, half are less — rose 7.7 percent.”

wow. we may see negative YOY this next month…

interesting.

“New listings of 11,419 homes in the 13-county metro area were a record high for the 10th consecutive month”

YAY! We are record breakers again and again! Beat THAT California!

clouseau

memphis,

I don’t feel offended at all. I know I’m an amateur. And of course I’ll form my own opinion, EVENTUALLY. I was just asking the pros for THEIR opinion in order to compare, contrast, and keep learning. Any problem with that?
Marie

LinQ :
It makes sense. Thank you!
Marie

Marie - no problem, but your post I think precipitates a lot of similar questions that are going to land here, for some time to come, and so I do expect the return of the locusts, I mean the RE agents and speculators and other shady types who were taunting our silly bubble fears not so long ago. They’ll be back on the downside now to convince everyone that they’re a weeny (I had another word but not sure about moderation rules here…) if they don’t take advantage of this ONCE IN A LIFETIME OPPORTUNITY, NOW NOW NOW!

Actually, I’m wondering what’s keeping them already.

Oh, and I’m an amateur, too.

Inman reported this ‘challenge’ today:

‘Home sales in the Twin Cities, Minn., area tumbled for the second straight month in May..’Now is the best time for buyers to challenge sellers to find out if they are serious about selling, at all,’ said June Wiener, president of the Saint Paul association. ‘We have the highest inventory levels in history, price appreciation at it’s slowest pace in years, interest rates that have been moving up, but are still historically low, and that tilts the balance toward the buyer.’

It’s not just homeowners who are getting taken to the cleaners by unscrupulous RE agents and mortgage lenders - farmers are getting screwed, too:

Hmong-American family’s dream of farming ended in bankruptcy
LAURA YUEN
St. Paul Pioneer Press

FRIDLEY, Minn. — The newspaper ad promised expansive land for chicken farming. After reading it, Pao Vang and Jada Lo Vang of Fridley chased the American Dream all the way to the Ozarks.

Three years after arriving on the eastern edge of Oklahoma, their dreams have been dashed. The bank is foreclosing on their farm, and they are living in a relative’s back yard in a tent.

They are representative of the other Hmong families who have struck out for the Ozarks in the past six years now facing financial collapse. At least six of those farmers have sued, alleging that bankers and appraisers led them into signing questionable real-estate deals.

Many believe they overpaid for their farms and blame appraisers for inflating values by up to 45 percent, their attorneys say. Exaggerated income projections from the banks made it unlikely the farms would generate enough money to pay off the debt, the attorneys add.

Their enthusiasm to own land, become self-sufficient and return to their farming roots became obvious to Sean Brister, a Fayetteville, Ark., attorney whose firm represents several Hmong. Some potential buyers were old enough to have tended the fields in the hills of Laos before the Vietnam War. Even after postwar persecution pushed them into refugee camps and, eventually, to states like Minnesota, many Hmong remain tied to agrarian and family ideals.

“They’ll do anything it takes to get the farm,” Brister said.

That hunger led the buyers to buy farms at inflated prices, he said. Although Brister and his colleagues stopped short of pointing to a conspiracy, they blame players in the real estate business, from appraisers who pumped up property values to banks that inflated cash-flow projections.

North Carolina-based RAFI-USA, along with Minnesota groups like the Farmers’ Legal Action Group and the Minnesota Food Association, were alarmed last month when they began to investigate the loan documents signed by a couple of dozen struggling Hmong-American farmers in Arkansas.

In some cases, sellers refused to show properties to buyers before closing, Klauke said. Others misrepresented the conditions and ages of chicken houses, which can affect production rates. By the time families filed for bankruptcy, they typically owed the banks $500,000 or more.

The Hmong-Americans’ keen interest in poultry farms — while others were fleeing the business — drove up already soaring land values, Brister said. Their desire for land and the crush of mortgage documents that weren’t in their native language made them easy targets.

Most of the families who have filed for bankruptcy protection financed their purchases through bank loans guaranteed by the federal Farm Service Agency, which generally pays 90 percent of the loss if borrowers default. The arrangement encouraged banks to lend money that they ordinarily wouldn’t, Henry said.

“A lot of these folks may have been unsophisticated in business matters, and they relied on people who were more motivated by profit,” he said.

The Hmong now headed for financial ruin generally had built comfortable lives in the United States. Tria Xiong, 38, said he enjoyed decent benefits after working 19 years as a Postal Service clerk in Milwaukee. Enticed by opportunities in the Ozarks, he and a cousin both bought turkey farms.

“When you talk to the sellers and the bank, they said … every year I will have $42,000 in pocket (after paying off mortgage, utilities and other expenses),” said Tria Xiong of Oark, Ark., who filed for Chapter 12 bankruptcy reorganization. “I say, ‘Well, that’s good.’ Well, you never make anything.”

He and his cousin have sued their lenders and appraisers. Tria Xiong said he fears he paid hundreds of thousands of dollars too much for his 78-acre farm, which he bought for $700,000 in 2003.

Xiong, the father of five said if he can’t stay on his farm, he will follow other failed farmers to Tulsa, Okla., to work in factories in the same jobs they had hoped to escape.

http://ap.brainerddispatch.com/pstories/state/mn/20060610/4007400.shtml

A lot of Hmongs in the Cities will only deal with members of their own ethnic group, preferably in cash transactions. Like a lot of Hispanics, they’re learning the hard way that the lure of easy money trumps ethnic solidarity any day.