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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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Take in a movie for the weekend:
http://smhbn.blogspot.com/2006/06/agents-of-fortune.html
HELLO!!! The best film I’ve seen this year. Two thumbs up!!! I just hope Susanne can find the time to take it in.
Many of us have talked about the creative loan issue.
Some study results. (I was surprised to see this in the San Diego Union Tribune, the biggest RE shill paper in the country IMO)
“Creative-loans study may lead to crackdown
June 11, 2006″
http://www.signonsandiego.com/uniontrib/20060611/news_1h11harney.html
Some highlights:
Nearly 54 percent of payment-option users in the sample had FICO scores below 700
(wow, I didn’t realize “sophisticated borrower” meant “below average borrower)
Some mortgage securities industry experts estimate that upward of 70 percent of payment-option borrowers elect to go with the minimum payment
(Shocking, to anybody who hasn’t been looking at what the option arm customer is like, or the average American even)
Sub-par FICOs “are not what you really want to see” in connection with payment-option mortgages
(duh)
More than three out of five payment-option plan borrowers and 47 percent of interest-only borrowers had annual household earnings of $72,000 – seemingly a good sign. But Woodall noted in an interview that many of these households still had incomes well below the median for their own metropolitan areas
(so what they really mean to say is that the poorest people in each area are taking out the riskiest mortgages, and even worse these people live in the highest COL areas so their mortgages are huge)
One out of eight payment-option borrowers and one out of six interest-only borrowers earned less than $48,000.
(We’ve brought the dream-soon-to-be-nightmare to so many people!)
Clouseau
I agree Inspector….To many had no business whats so ever being in ownership….job stability suspect, credit history exposing the inability to properly manage small amouts of debt and then we hand them enough debt that will likely sink the boat……I wonder how bad it will get ??
Inflation, recession, or stagflation?
Or deflation and depression. That’s where my vote is. It is hard to know if food, etc, will show any deflation, but I think RE, stocks, bonds and commodities will all show deflation in the next couple of years. With the stock market having such a long way to go to reach a real correction (in all serious bear markets the PE ratio comes within 2 of the dividend yield in the Dow)and since so many people have gone far into debt by refinancing and spending the money on consumable items, there is no way for the economy to correct itself without a great deal of pain and problems. The situation is similar to 1929 except that in 1929 most of the over priced RE was in Florida and the rest of the country was not so overpriced, which is not the case now; the inflated real estate prices have infected most of the country, and the stock market situation is similar, too, with many PE ratios still far too high and the dividend yield low.
Someone once said (on this board I think), and I’m probably paraphrasing it a bit wrong:
Inflation for the things you need, deflation for the things you want.
(obviously using the words “inflation” and “deflation” to indicate prices of things, and not the pure definition as it relates to monetary supply)
clouseau
That would be moi. As prescribed by the Fed & BLS:
Price of stuff regular people need goes up = NOT inflation
Price of stuff regular people DON’T need goes up = inflation
“(in all serious bear markets the PE ratio comes within 2 of the dividend yield in the Dow)”
YIKES!
Also in 1929 there was a positive savings rate.
If buying house is not advisable then where would you park your savings?
HSBCDirect at 4.65%
EmigrantDirect at 4.65%
Citibank at 4.75%
Splitting among these 3 you can FDIC insure 300k, 600k if you open them up as joint accounts.
“Splitting among these 3 you can FDIC insure 300k, 600k if you open them up as joint accounts.”
This will only work if FDIC can really cover the defaults, which it may not be able to. 3 month T bills are yielding more than 4.8% at this time so it is hard for me to see why anyone would put their money in a CD with more risk, less liquidity, and less yield.
Even if those are not CD’s, they still have more risk and less yield.
I think those might be money market rates. Countrywide bank offers 5.41% on 12 month cd right now.
If FDIC doesn’t back the savings, what makes you think T-bills would be any safer?
Treasury bills are government debt. The FDIC is a government insurance company.
If the government defaults on the debt, all those dollars backed by the FDIC are worthless any way.
CASH…..
Ok, but which countries? I am thinking the Yuan.
But the Yuan is not readily spendable here in the US. By cash, of course, he means, that which can be stuffed in the mattress and used when the virtual money in the banks disappears, a la 1929. If enough banks fail so that the FDIC was swamped (unlikely, I think, but not impossible. The number of bank failures in the early 90s came close, and this could be worse), you want to have something you can actually put your hands on.
Then I would want Loonies!
And twoonies, canadian dollar has made some serious advance against the dollar in the last year.
Swiss Franc if you are a girly man, Gold if you have a set of nuts, both if you are hermaphrodite.
When the recession comes and people can’t buy so much bling, gold will go down with the rest of the commodities.
Not true. Given a choice between a stack of paper or a 100 oz bar of gold which one do you think the car dealer will accept?
What car dealer would accept payment in 100 oz bars of gold? The car dealer will accept dollars, the question is whether gold will go up or down in terms of dollars. If there is a depression or strong recession, there will probably be enough people who have to unload their gold investments to drive the prices down. Also, the spike in gold may have been merely caused by the spike in the money supply brought on by excessive liquididy, in that case, as liquididy slips away, gold prices will fall. Pretty much all assets have risen together during the last 4 years of low interest rates, even in markets that do not usually rise and fall together. It would not be surprising for them all to drop at the same time.
When the currency crashed in Argentina, nobody (or miniscule few) would accept gold or silver as payment.
I’m not super sure why, but some reasons:
1) how do you know if it is pure
2) most clerks don’t have accurate weighing mechanisms
3) how do you make change
4) how much is gold “worth” (or silver).
and so on.
When the currency crashed, regular joes couldn’t figure out the above questions, so gold was useless. (and silver too)
I have a small holding of physical gold/silver (small). But I’m not so sure it’ll help if we have monetary crisis. I use it more as a hedge against inflation… in the case of hyperinflation then gold will hold its value as the dollar plummets… but when I go to buy something, I’ll bet I’ll have to convert my gold to some other form of currency before buying stuff
my guess is that bartering would probably be more important in the case of massive crash of the $. (I trade my skills for yours, I trade this USABLE good for your USABLE good).
Goldbugs forget that the only thing making gold a store of value is that we all agree it’s a store of value. Not much different than fiat currency. The only thing making our dollar worth a dollar is that we agree on its value.
just some thoughts.
clouseau
True! And further truth is Germany in the ’20s - that we have not had a period of inflation since the ’70s (remember WIN from Gerald Ford) does not make us immune. I would rather convert a gold bar to a fungible currency (gold is fungible) than worry about a currency collapse. I also agree that gold is “a store of value”, IMHO the only thing of real value is OIL - but it is a tad difficult to carry (LOL). (I do not trade and have never traded in oil or oil futures and am too old to start now. This is a question for those of you who do trade in oil since the general world commodities and stock market collapsing in May except for oil, does that mean oil is going to explode on the upside?
I don’t trade in oil but my guess is that oil will not explode on the upside. In a recession or depression oil consumption should drop somewhat. Plus there will most likely be an increase in supply caused by the current high prices.
Gold if you enjoy catching falling knives (which many of those with nuts apparently do…)
or you can listen to Greenspan and believe in currency.
from 1997
Maintaining Financial Stability in a Global Economy
Alan Greenspan
Chairman
Federal Reserve Board of Governors
“Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance….”
When there is confidence in the integrity of government, monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit…
To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation…”
http://tinyurl.com/pea5b
Thanks - You can keep dollars I will take Gold (not silver, copper or iron).
“If buying house is not advisable then where would you park your savings? ”
T-Bills are better than CDs because there is no state income tax on T-Bills. 3 months and 6 months. If you saw this coming like me in 2001, you would have been primarily investing in Series I Savings Bonds (also not taxed at the state level) and municipal bonds (no state tax, no federal tax). I do gold and platinum too. The key to successful precious metals buying is to be patient, do not be greedy, and buy small quantities regularly, like an ounce or two every 2 months. I even get into treasury notes. You can buy from 2 years to 10 year notes. I’d stay closer to 2 years than 10 years for now. Park 6 months of living expenses in a high yield money market account like one of the posts in your thread here.
More personal stories of capitulation?
My brother (bought a 508k POS in bad area in ‘04) AND a work colleague (bought 3bdr in La Jolla in ‘04) just this week have confided in me that they are thinking of selling their homes. The friend says if he can get out with less than 30k loss, he’ll do it. Bro still thinks he’ll escape with a 10k “profit.” I guess he is overlooking the 60k in interest he has paid over two years.
IF…..??
I’d like to start a discussion about what renters need to/can do to protect themselves during the coming downturn. I’ve already seen a few suggestions on this blog (e.g., rent only from long-time owners, consider contacting the bank directly if the owner/landlord defaults). I would like to see much more discussion along these lines.
If even 1/4 of the events regularly discussed on this blog come to pass, it is to be a rocking ride going forward. Renters may be better able to hang on, but they will be tossed around just the same. I, for one, don’t feel I understand enough about the rental market to know what to do to prepare myself for the thrill ride. I’d love to see it discussed by those more savvy (e.g., just about everybody else who posts here).
It’s probably bad form to reply to my own post, but here’s a recent news article that gives some idea of how crazy things can get, both for the renter and for the new owner. Perhaps we could use this to start a discussion:
http://www.sptimes.com/2006/06/09/Pasco/Unwitting_landlord__t.shtml
Jeez Louise. Maybe I’m a bit thick, but, um, how could Martinez buy the house without figuring out somehow (say, when he went to look at it before buying, or during the inspection) that someone was living in it? As a renter, I do find that story a bit scary. As a potential future homebuyer, I have no sympathy. There’s this little thing called “due diligence”….
Jesus…
If it turns out that I’m the creator or creatress (valid word?) of this universe, I’m going to tell Roger and Martinez flat out, “When you die, you are going back for another life of learning.”
Martinez is an idiot for buying sight unseen, and Roger is an idiot for not getting his living affairs in order. Before anyone jumps on me for being hard on Roger, keep in mind that I am deaf, I have a mild form of Asperger’s syndrome, and I have a physiological disability that nearly destroyed my life 8 years ago. Today, I am a musician, I work part-time for a camping store (very public environment), and I run my own household, physically and financially. And I’m smart enough to rent. I was taught from an early age that I had to learn to be self-sufficient (my parents saw what was coming if they didn’t help empower me into taking charge of my own life). And there are people in worse conditions doing better than I am. Don’t forget that.
And the lender is an idiot for making a loan to Roger, who “seems” unable to work and doesn’t even get $800 a month from Social Security. On the one side you’ve got irresponsible borrowing, you’ve also got irresponsible lending.
For christsakes, please send that article to
http://www.newsoftheweird.com - it CLEARLY falls in that category. I’m sorry… I just had to get it out.
Stephanie
http://www.deafdrummer.org
We waited 3 months on a list to get into this 780sf one bedroom in Rancho Bernardo in the summer of ‘04. Very nice area. Now, there is a “Now Renting” sign at the entrance (first time since we’ve been here), and they just put a flyer on my doorknob yesterday stating that the company will pay a 300 dollar finder’s fee if we get someone to move in. Think my rent is going down this summer???
Why would $325K get you a crack shack in grimy SoCal, while the same money will get you this in ND:
http://www.prairieroserealty.com/windy.htm
NoBhere;….You see in that ad where it says “WINDY” ?? That may give you a clue…..
On a serious note, your point is well taken…If you reduce it down to basic quality of life issiues, food, health, family & friends we could pretty much live anywhere can’t we ??
Brrrrrr. I’d like to see some pics around January. Of course, with global warming, it could be like Phoenix real soon.
Dang…sweet! But (there is always a “but” right) you would really have to enjoy isolation to live in this house. I want my kids to have lots of friends to hang out with, good restaurants to enjoy, and entertainment, so I’m destined to be in the suburbs of a major city.
Or, spend just a little more (or low ball) and live safe as a hobbit in this dwelling “secretly” secured in Durango, Co.
http://www.ultimatesecurehome.com/secure_home.htm
What a cool pad….Everyone take a look….
Housing prices decline in three area jurisdictions
Zack Hall
Reno Gazette- Journal
For the first time since the housing boom began, Reno, Sparks and the North Valleys showed year-to-year declines in the median price, according to the latest sales data.
And the resale value for existing homes in Reno showed a second consecutive month of declines in May, according to a report released Thursday by the Bureau of Business and Economic Research at the University of Nevada, Reno.
The median price for a single-family home in Reno fell to $395,000 in May, down 4 percent from May 2005, but up from $388,200 in April, according to the report.
Donna and Robert Kizer of Sparks have been trying to sell their three-bedroom Springland Drive home for three weeks and haven’t been encouraged by the limited traffic.
“It’s really scary what’s happening here,” Donna Kizer said. “The market’s flooded. You drive down the street and there’s like three houses on every street.”
Reno’s April median price, the number where half the homes sold for more and half less, represented a 2 percent drop from April 2005.
Sparks prices fell 1 percent from May 2005 to $317,900. The North Valleys fell to $273,000 in May, down 4 percent from May 2005.
A glut of homes for sale have taken its toll on the once-booming local real estate market, said Nancy Fennell, president of Dickson Realty, the largest residential real estate firm in Northern Nevada.
“We’re looking at parts of our market with seven months to over a year in inventory,” Fennell said.
http://news.rgj.com/apps/pbcs.dll/article?AID=/20060616/NEWS10/606160400/1002
I have noticed that many larger newspaper websites now have comments sections under the article. Sort of like a crude blog. Not to take anything away from what Ben and others are providing, but a great way to spread the word on the housing bubble would be to post educated comments on these media sites. Think of it as a counter to realtor speak.
I did this today at Sarasota Florida online news article from a rah-rah developer - form what i see, there is no possible rah left in that market.
It was tried at OCR’s blog section by Lansner.
This is how it went down.
Articles start getting posted, bears post all of the good information.
The local RE industrial complex then swarms in with complaints that it is overridden with bears.
The editor allows bulls to flame bears and edits out bears defensive postings.
Now I am calling for boycotting MSM blogs on the housing bubble because there are way more underemployed realtors and LO’s to clog these blogs with meaningless nonsense and time wasting go get me this information.
You think that will work? I wrote several replies to the authors of some the RE articles they published and the bulk mail side of my email started filling up with spam mailings.
Does anyone have any data/information related to the second home market in the major ski resorts of Colorado, Utah, New Mexico, Canada, etc. Is there a bubble in the ski resort condo market like in the beach resort condo market? Any potential for a strong downside correction in the future?
Bernanke and the June Fed meeting. Maybe I’m overly obsessed but I think the results of the next meeting are huge in terms of the psychological effect. What signal does it send to Wall St. and all the whiners who don’t want their bubble taken away. What if he doesn’t raise?
Remarks by Governor Donald L. Kohn
At the Federal Reserve Bank of Boston’s 51st Economic Conference, Chatham, Massachusetts
June 16, 2006
…Although inflation is ultimately a monetary phenomenon, it seems natural to expect, as others have argued, that these developments would have exerted some downward pressure on inflation in the United States. The opening up of China and India, in particular, represents a potentially huge increase in the global supply of mainly lower-skilled workers. And it is clear that the low cost of production in these and other emerging economies has led to a geographic shift in production toward them–not just from the United States but also from other formerly low-cost producers such as Mexico, Korea, Singapore, and Taiwan.3 Trade surpluses in China and in other East Asian countries have increased sharply over the past decade, and from a U.S. perspective, the ratio of imported goods to domestically produced goods has accelerated noticeably in recent years….
http://tinyurl.com/m9vle
To answer your question, if the Fed does not raise rates - INFLATION >7%
“…Since the TIC report was the day’s most important release, the market tried to send the dollar lower, but traders were fearful of shorting the dollar too significantly in an environment where the Fed fund probability for a June rate hike is at 100 percent. …”
from Daily FX
http://tinyurl.com/mafzw
If BB blinks on the June rate hike, look for long-term Treasury bond yields to rapidly increase to above 6%, with mortgage rates considerably higher to price in a growing risk premium. The housing bubble might “decelerate” more quickly if the Fed stands pat.
Another reason why the housing bubble is toast no matter what BB does.
Re: Florida Condo insurance problems - I didn’t know it was THIS bad…
Here is a letter to the editor from today’s online edition of the Sarasota Herald-Tribune:
Condo insurance in crisis mode
I agree with your editorial “Premiums at a premium.” I am trying to sell a condominium on the bay and have just learned that our homeowners insurance has increased from $48,000 to $170,000 for the 29 units. Plus, the deductible has gone from $50,000 to $750,000. Our 10-story condo was built in 2000. It is certainly hurricane-proof, code-wise. Insurance companies are blaming reinsurance companies for these gargantuan increases. Perhaps the reinsurance industry needs to be investigated. Most of the companies are in the Bahamas or somewhere. They are not sufficiently scrutinized.
You are absolutely right. Florida’s economy will go further south than Florida is. We are indeed going to be in a full-blown crisis. The candidates as well as the legislators had better address this problem — pronto.
Beverley Albertson
Sarasota
Address this problem? What can they do? The depression is baked into the cake. All we can do is prepare for it. Reduce(and hopefully eliminate) debt, buy gold and silver, cut way,way back on spending, cut up credit cards, and stay as liquid as possible. Not much else one can do. It is coming so be prepared as best you can.
Does anyone else have the feeling that the US asset markets are a volcano about to blow? On days when the stock market does not sell off, the bond market does, and vice-versa…
As per CNY homes.com Syracuse market now up to 3700. The site showed a huge jump of listings in last 2 days. There’s some old stuff on there but I think we’ll break 4000 before June’s over. I wonder what will happen after August. It’s starting to feel real bubbly round here.
I do notice I could take some bubble photos for Ben in my little village area but they are in the “rental” neighborhoods in the older, less desirable areas. That and the million dollar homes on the lake are plentiful. Course, they’re spread out and often privately located so you can’t get them in one shot.