The Housing Bubble ‘Ripple Effect’
The Arizona Republic looks at the housing bubble ‘ripple effect.’ “Metropolitan Phoenix’s housing slowdown is bad news for more than home-building companies and the investors who hold their stock. The region’s economy is unusually dependent on housing, so a lot of livelihoods rely on it.”
“The housing market is slowing across the board as buyers rebel against rising prices and higher mortgage rates. Sales of existing homes were down 34 percent last month compared with May 2005. And home builders pulled 21 percent fewer building permits in April than the year before.”
“Housing accounts for at least $1 in every $3 generated in the Valley’s economy. When housing hits the skids, the effects ripple throughout the economy.”
“Marshall Vest, an economist at the University of Arizona, said Arizona’s real estate industry ‘took a dive’ in the late 1980s and early 1990s and the rest of the state’s economy fell, too.”
“He doesn’t expect that to be the case now. ‘This time around the economy is growing so much that less of a slowdown is expected,’ he said. ‘(But) the construction industry, mortgage brokers, real estate brokers and other industries tied to housing will all feel it. There are going to be a lot of new real estate agents who go back to being schoolteachers.’”
The Dallas News interviews a bond expert that has a similar take. “Mark Kiesel may have gotten fat from the sale of his home in Newport Beach, Calif., but he’s no longer in danger of getting slaughtered like the proverbial hog. Three weeks ago the portfolio manager at Pacific Investment Management Co. sold his house and moved into an apartment.”
“Mr. Kiesel’s specialty is corporate bonds, which he says have given him a unique perspective on the U.S. housing market. ‘Rising home prices have been the key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads,’ Mr. Kiesel said.”
“Because housing has driven the economy for so long, the slowdown will bring, among other things, tighter lending standards, less willingness to take risk, lower asset price appreciation outside housing, less liquid financial markets and rising volatility.”
“Many homebuilders are reporting a 30- to 35-percent year-over-year slide in new orders. Add to this the frenetic pace at which builders have acquired land in the past few years and prospects dim further. ‘Over the next few years, homebuilders will either flood the market with additional inventory or be forced to write-down the value of the undeveloped land on their balance sheets,’ Mr. Kiesel said.”
“‘Anything that has to do with outfitting a house is a candidate,’ Mr. Kiesel added. ‘Housing will have a multiplier effect; that’s why it’s probably the leading indicator on the economy.’”
“Once homeowners wise up to the fact that the ‘For Sale’ sign has become a permanent fixture on their next-door neighbor’s front lawn, other industries such as luxury retail and travel and leisure will follow.”
‘other industries such as luxury retail and travel and leisure will follow.’
Which leaves us where, Arizona?
I’m guessing we’ll see some hefty discounts in the travel and leisure industry. Good for those us that kept our powder dry.
Although the weak dollar limits the choice of destination for your travel and leisure!
I am consistently amazed at the people who insist that the Phoenix area is economically “booming”. Puhleeze. As it has been noted before, $1 out of every $3 dollars of our economy is Real Estate related. Now you can factor in another $1.5 out of that $3 for entertainment / travel related industries.
People don’t move to Arizona for the wonderful jobs! We have Real Estate and Retirement, hotels and timeshares, golf, etc. Once the Real Estate dollars dry up, Intel (who is rumored to be laying off between 10k - 15k employees) isn’t going to save us.
We have Google now working out of the ASU building in Tempe, but even they aren’t going to prop up our sagging economy.
No Real Estate money = no leisure money = the other half of our economy in a serious crunch.
With Phoenix so dependent upon Real Estate and Tourism / Retirees for growth, the coming crash is going to hit twice as hard as everyone thought it would. That’s saying more than a lot since it was going to crush us without factoring in the other industries that relied so heavily upon it.
Sounds like Naples Fl. Nice place, but no real industry except touurism and retirement.
“The housing market is slowing across the board as buyers rebel against rising prices and higher mortgage rates.”
Friggin’ rebelous buyers. Just knock it off and get back to buying overpriced homes, damn-it! You have no right to stand on the sidelines and wait it out as these poor homeowner’s equity melts away in the scorching Arizona sun. This is an outrage!
Yeah you dame buyers. You are supposed to spend your weekends camped out in front of new housing developments with the hope you may be able to buy house.
I went camping this weekend, but at a campground and had me a few beers.
Only female buyers? How many beers?
So PIMCO’s bond traders bail out of US Real Estate, I am not surprised since PIMCO is divesting from US dollars. A PIMCO bond trader makes a nice salary plus bonus - this is not an individual that had to sell and probably coul have paid cash.
I put Kiesel’s entire comment in a link on one of the weekend threads. Here it is again
http://www.pimco.com/LeftNav/Regional+Market+Commentary/Global+Credit+Perspectives/2006/Kiesel_For_Sale_06+2005.htm
Here it is in tiny url format
http://tinyurl.com/jht5o
Sure, when you’re in a 5m+ house, you can sell and clean up and the transaction cost (broker fee, moving) don’t eat away most of your profit.
But when you’re in a 1m house, it may not make as much sense to move and rent to safeguard your gains. Assuming you have gains.
Just another point of view…
PIMCO is smart.
No Sh*t! I will fade Bill Gross on a daily trade, but never for general direction.
I broke my word and posted over at OCR’s RE blog run by Lansner.
One of the posters there asked Lansner to talk to the PIMCO guy.
My post went like this:
“This is just too delicious. The OC Register is scooped in its own backyard by a Dallas paper. Ouch!”
I then pasted the link. Let’s see if the comment gets posted. I don’t think it will.
I am shocked, they posted it.
EVERYONE WANTS TO LIVE IN ARIZONA. It will be different here.. HAHA ur all toast.
There is one thing Arizona can do, and it may well come to it; there is plenty of land. If the economy is soft enough, look for initiatives to tear the property out of the hands of the various govt. entities and put it up for development. If the future for the state is retirees, then we need $80,000 houses again.
C’mon Ben, there’s already tons of empty $80K houses around Arizona. The only problem is the owners of those houses want $250K for them!
As a graduate of ASU class 1979, and would not live in Phoenix for a 6 figure salary, woulkd somebody explain to me where are the jobs that keep attacting all these new citizens of phoenix. I don’t get it? You can quote median income of Phoenix to LA or San Fran all day long, but I know of jobs and people making $100,000 and $200,000 and $300,000 from the entertainment, finance and legal professions in the California cities. Who is making that kind of money in Phoenix? At least when I go to Vegas, I see construction cranes all over the place builing 2 billion dollar hotels.. Where are the construction cranes in Phoenix and what are they building? If the governer of Arizona every gets tough on illegal immigration, just like Georgia did, Phoenix will return to the dust bowl of the 1920’s.
Not to take anything away from your reasonable post, David - I appreciate the “Jimmy Rogers” observation (I like his stuff), but - all over the place (in Vegas)? C’mon? For how much longer?? There are several projects there which have been tabled.
It’s nice to be able to see what one is buying and then act on it, yet it’s even more pleasant to have a greater assurance that what you are buying is still appreciating in value. LV has had its run, IMO.
The Phx RE market will subside and or restore value - I agree - even in the face of optimism by most; we have not yet seen any “fear” by investors/speculators/troubled owners (Econ 101). It will come around. I was here in ‘87 when houses could not be easily sold. I paid a mortage here from ‘93 until April of ‘05. I am willing to be a renter now - why sell and then have to re-buy at a top?
Many will get hurt here ala CA twice in the past 25 years (now 3 times??). I know a lot of people who have arrived here in the past two years. Cycles do happen, and so do bubbles.
In typical markets (annualized):
Cash appreciates at 3%/year
RE appreciates at 6%/year (as does fixed income)
Commerce and equities rise at 9%+/year
The cheap money available for the past 6 years will be the undoing of many ill-informed people. In all markets.
Renting is not all that bad… … …
EVERYONE WANTS TO LIVE IN ARIZONA. It will be different here.. HAHA ur all toast.
http://weather.cnn.com/weather/forecast.jsp?locCode=PHX
Is that the forecast for Phoenix or for Hell?
Same difference this time of year, although evenings do cool off. However, dew point will change that beginning next month and it will fell like Hell at night, tood.
We also have a season of envy that runs from November through April–can’t beat low humidity, 70 - 80 degrees in the winter.
Yeah, evenings in July and August ‘cool off’ to about 95. If you want to walk or run outside, you have to get up at 3 a.m. to survive. Hell looks good by comparison…
Phoenix?…. Hell?
It’s all the same..
You clearly have never visited Tucson.
or Houston
At least its… only moderately hot at midnight.
Yes!
The ripple effect across the economy, along with price trends in markets that didn’t have a bubble run up, are the unknowns here. For the coasts, it’s just 1987 to 1994 all over again.
The X percent of the economy that would have to disappear for the U.S. to live within its international means, the soaring price of energy for which we will be outbid by places with stronger currencies, and the massive unfunded liabilities for retirement and health care are probably bigger problems beyond a year or two. Bu the bubble hasn’t helped.
Argentina.
“Marshall Vest, an economist at the University of Arizona, said Arizona’s real estate industry ‘took a dive’ in the late 1980s and early 1990s and the rest of the state’s economy fell, too.”
“He doesn’t expect that to be the case now. ‘This time around the economy is growing so much that less of a slowdown is expected,’ he said. ‘(But) the construction industry, mortgage brokers, real estate brokers and other industries tied to housing will all feel it. There are going to be a lot of new real estate agents who go back to being schoolteachers.’”
IN SHORT, THIS TIME IS DIFFERENT…
—————————————————————————–
“This time, it’s different” are the four most expensive words in the English language.
-Ludwig von Mises-
“There are going to be a lot of new real estate agents who go back to being schoolteachers.”
Teaching is a noble profession, it is highly doubtful that RE types have the qualifications or desires.
>it will be different here
seems like everywhere I go people make this comment. When I lived in Tampa in 2003 people were saying the market was going to stay strong due to all the northerners seeking warming climate and lower cost housing.
I lived in San Diego from 2003-March 2006, and the argument there was that they “aren’t making any more land” and that San Diego was protected because it was borded by Mexico to the South, mountains to the North and Desert to the North-North East.
Now that I’m in Seattle, everyone is saying that we are protected here due to our strong economy, job base (microsoft and boeing) and all the californians coming up here for less expensive land.
The answer to all this is simply that this recent housing cycle, 2000-today has been a NATIONWIDE event, fueled by a 6 trillion dollar loss in the stock market.
Therefore, it is reasonable to expect that the slide will also be a nationwide event. Is it not?
“The answer to all this is simply that this recent housing cycle, 2000-today has been a NATIONWIDE event, fueled by a 6 trillion dollar loss in the stock market.”
I suggest one refinement to your statement: “fueled by the *economic policy response* to a 6 trillion dollar loss in the stock market.”
I would refine it even further:
1. 6 trillion dollar loss in the stock market;
2. the economic policy response to that loss, and;
3. 100’s of billions of foreign official investment in government secured housing. (See Ben’s Money and Metals Blog. Oh, yeah… what ’til those people start pulling their money out of a crashing US economy, then we’ll know what a busting bubble really is.)
“Now that I’m in Seattle, everyone is saying that we are protected here due to our strong economy, job base (microsoft and boeing) and all the californians coming up here for less expensive land.”
Good luck in Seattle. I think you quite possibly face the deepest, vastest real estate delusion up there. Seattle is so far behind the cycle–even California’s, which has been lagging the East Coast’s by many months–I think they believe they’re truly bullet-proof. They are not. Hang in there.
The answer to all this is simply that this recent housing cycle, 2000-today has been a NATIONWIDE event…
Right on. The fact that housing Price/Rent ratios climbed to dizzying heights almost across the map tells me that there is a national explanation to this. As with any bubble, the cause was easy money, in the form of new kinds of suicide loans, and greater use of those loans. As the Fed and othe bank regulatory agencies clamp down on this, watch demand dry up across the board, and watch house real prices plummet.
“‘Anything that has to do with outfitting a house is a candidate,’ Mr. Kiesel added. ‘Housing will have a multiplier effect; that’s why it’s probably the leading indicator on the economy.’”
And housing-sector stock prices are the leading indicator of where housing is headed. Ahem…
http://tinyurl.com/o7skt
Get Stucco…please ad Pulte (PHM) to your list of housing-sector stocks. It is either first or second to Horton in market valuation, KB Homes is #5. I am betting big time on Pulte Homes PUTS of Jan 2008. I expect a BK reorganization from them sometime in 2007, after they build every possible home on every possible piece of vacant land they own.
David, curious, why Pulte? My leading candidate for BK is WCI - they appear to sport the weakest balance sheet, and over-committed with condo towers in southern FL, where they do 90% of their business.
Don’t forget JOE!
another RE bubble myth bites the dust.
“AARP, the Washington, D.C.-based seniors advocacy group, found that as of 2004, just 20 percent of Americans reported receiving any inheritance.”
Don’t count on inheritance, warns AARP
Even foreclosure hawks hurt by sagging real estate market
Areas of Concentrated Construction Activities
From your second link:
“Historically, borrowers who run into trouble paying their mortgage tend to do so within the first three to five years of the loan period.
Currently, more than half of the nation’s $9.2 trillion in outstanding residential mortgage and home equity loans are less than three years old, said Doug Duncan, chief economist for the Mortgage Bankers Association. ”
Hmm….
And by “Hmm…”, I mean “wow.”
I often wondered what percentage of total home debt was incurred over the last 5 years. At first I thought it would be relatively small, since it’s only 5 years worth of purchases.
Considering how much more money new homeowners have had to pay the last few years, the rising (peaking?) percentage of people that “own” their homes, and the fact that people who bought homes before 5 years ago most likely have 20% equity from the start, this makes sense.
I think the ripple effect and housing bust may lead to a lot of construction workers and contractors out of work. As land prices drop it may be a good strategy to build your own home. This way you get the land at a reasonable price, and the contractors will be willing to work cheaper too. You eliminate most of the premium now built into housing without waiting for the market to come all the way down.
It’s a possibility.
“You eliminate most of the premium now built into housing without waiting for the market to come all the way down.”
Not only that, but who wants to live in a supersized tract castle which was built with a one-size-fits all approach? (I guess lots of folks, or else they would not sell for $900K in 4S Ranch).
Getstucco - I worked in Rancho Bernardo before they broke ground on 4S ranch and while they just started. I can’t even imagine how jammed I-15 is now near the lake.
I think many people reading this blog can’t even imagine the sheer size and density of that development and how expensive those homes eventually got. Acre per acre there are probably more over priced homes in that area in sheer dollar amounts than just about anywhere I know of.
It boggles my mind every time I look out across that vast sea of faux chateaus — it is almost as amazing as looking out across the ocean of recently-built housing in the Las Vegas basin. I truly feel badly for anyone who bought there in the past couple of years, because price reductions are evidently underway, and 5% off $900K really hurts when you make the median SD income…
“I think the ripple effect and housing bust may lead to a lot of construction workers and contractors out of work. As land prices drop it may be a good strategy to build your own home. This way you get the land at a reasonable price, and the contractors will be willing to work cheaper too.”
I would think that would depend on what happens to insurance for contractors/crew. Skyrocketing premiums were already shutting down crews around here the last few years….unless you want a crew w/no insurance working on your home. That’s a risk I couldn’t take.
Hard to do in he OC, but seriously thinking about doing it when we retire. Straw bales, “mini-homes”, and their ilk seem unproven now. Big hopes for the future!
“This time around the economy is growing so much that less of a slowdown is expected…”
People just don’t get it… the whole reason the economy is growing IS real estate.
Also, this statement should terrorize existing homeowners:
Doug Fulton, president of Fulton Homes Sales Corp., said the Tempe company hasn’t raised prices since late last year. Yet the company is dealing with a 30 percent cancellation rate.
“When people can’t sell their homes, they can’t buy yours,” Fulton said.
The company laid off about a dozen employees this year, but Fulton said it’s hiring again. It hasn’t slowed production, although sales are slightly below the goal of an average 1.5 to two sales per week at every subdivision.
Despite already massive inventory, these people aren’t slowing construction! And they won’t until they’ve completely crushed prices to the point of non-profitablity.
Terrorize current specuvestors, maybe. Not everyone with a mortgage wants to flip their property.
they probably will lose more if they stop building. construction materials, land and permits cost are mostly paid for already. They only need to add labor to convert them to cash.
The only thing paid for is land. The building materials and permits are typically only paid for as homes are built, usually in multiple phases (so permits and materials are paid for in multiple phases).
What happens if they stop building is that they stop collecting their fee, which is drawn from the bank, and generally pays salaries, overhead, and some profit for the builder.
Overall, building permits are down 15% in my area over the same time last year. Permits for just single family are down a whopping 50%. Its a small market, but the pace of construction since May 05 is painfully noticable.
I read somewhere that real estate was responsible for 1/3 of the GDP growth in the US the past 5 years. I would imagine that if you really looked closely at the growth, you would see that it is far higher than that. If someone goes out and buys $10,000 worth of crap on their credit card, and then eventually pays it all off with a refi, were those purchases counted? How about the new car? If people weren’t feeling richer because of real estate, how much of the purchases would have occurred? More importantly, now that the money has been spent, how many new purchases will not happen because of the debt associated with the previous purchases? How many people will say enough is enough?
JM - Your correct. How many times have you seen someone with an average income living in a nice house and driving his and hers Escalades ($50K ea)? When I lived in the San Diego area I saw it alot.
But there’s really no mystery about where the money came from anymore. I hope people enjoyed their fantasy, music video lifestyles over the past 5 years because the bill for all the goodies is coming due.
“Over the next few years, homebuilders will either flood the market with additional inventory or be forced to write-down the value of the undeveloped land on their balance sheets,” Mr. Kiesel said. “In this environment, bondholders should be demanding covenant protection as well as higher spreads on homebuilder bonds.”
He worries about homebuilder bonds; stocks are subordinate to bonds. Where will the stock prices be at the point when bondholders are wishing they had demanded covenant protection?
“someone goes out and buys $10,000 worth of crap on their credit card” -
And that is usually all these sheeple have to show for their $10K - A BUNCH OF CRAP. After buying it, most of it is virtually useless. But the payments and interest aren’t. And will be a heap o’ trouble when they can’t HELOC it away. So, many folks will be underwater on their home debt, and maxed out on credit cards, buried with car notes (now going 7 yrs), etc. Maybe Disneyworld will be less crowded next year. Good time for the non-debtors to go.
Excellent point! My wife wants to go back to Disney this October, but I think we’ll try to put it off for another year!
My wife is lamenting the fact that she purchased plane tickets for a trip to Hawaii later this summer a few months back; I had advised her to wait, as I have been assuming that FBs would be cancelling summer vacation plans, reducing pressure on airline ticket prices. The tickets just dropped $300 in price from where they were a few months back, despite escalating fuel prices…
If you look at LCC’s (formerly America West) May traffic release, it was down 7.5% yoy. Transports have been and will continue to be the recession canaries and we’ll know the tsunami is here from the transports before we even see it in retail or housing. I say this is the summer. Each airline reports traffic within a few days into the new month and the important number to watch is the RPM (revenue passenger miles). That’s butts in the seats…period. Disregard talk about yields, average fares, etc.
September is when the pain becomes intense. By December the pain will be excrutiating - so much that even the chirping happy talk from Fed governors will be drowned out. The airlines, real estate and retail will be tanking. Look for a very un-merry Christmas.
not walmart. they will be the beneficiary.
Normally, airlines expand their schedule in the summer months, this year, most schedules are staying the same.
RASM (revenue available seat mile) will paint a better picture.
Call and gripe at the airline/agent demanding the new price. Works most of the time.
I friend of mine, his family owns a townhoue type thing in Sea Isle City they rent out. This is the first year it hasn’t bee rented for the whole season. In fact they try to rent all 12 or 13 weeks, never been a problem. This year only 7 rentals scheduled as of June 1. Usually it’s book by June 1.
What great deals can you get? We haven’t been to Hawaii since our honeymoon 6 years ago? Prefer Maui.
“someone goes out and buys $10,000 worth of crap on their credit card” -
And that is usually all these sheeple have to show for their $10K - A BUNCH OF CRAP. After buying it, most of it is virtually useless.”
———————————————————————–
that’s why mini storage has been such a growth industry. Once the garage is filled (almost no one parks their car in them anymore) serious consumers have to rent a mini storage to keep all their useless stuff. They usually end up paying more in storage rent than the stuff is worth. Selling it all off cheap would force them to come face to face with how much they have wasted, storing it lets them hold on to the illusion that it’s good stuff and still worth something and they will actually use it some day. The Chinese are laughing all the way to the bank.
OT but related to your topic about storage units. My FIL moved from Sacramento in 1993 and put all his stuff in storage. He had been paying storage fees all the way up until Feb 2006 (13 years) when my wife and I went over with a U-Haul and pulled all his crap out. It was filled with junky rattan furniture, old magazines, clothes, oil on velvet paintings, etc. Useless stuff from the 80s. The only thing we saved was a small chest with all his important papers that we now keep in our garage. I don’t know what his beginning rental payment was but when we closed it out it was over $60 a month. Talk about the time value of money!
My father has my parent’s bedroom furniture in a storage unit at $70/month. He’s paid $700 now. I listed it on Ebay for him. He wanted $2500 but made me list it at $3000 because he needed to make back the money from it being in storage. Needless to say, it didn’t sell.
No, I don’t say anything. He’s 68 and therefore always right.
“No, I don’t say anything. He’s 68 and therefore always right. ”
LOL! I hear ‘ya ….
My blessed father is 81, still kickin’, has plenty o’ advice on investments as of Father’s Day, and ya know, most of it was very sound. He thinks something bigger than a major recession is coming — ” maybe another depression “. He said, ” Hang onto your money, Krissie “. I think I will.
Bubblefucious say:
“Wisdom of father always right, except when he pay $15k to store GoGo albums and Star Wars action figures.”
“Maybe Disneyworld will be less crowded next year. Good time for the non-debtors to go. ”
Yeah! I’m for less crowded vacation areas! Being low debt and renting is great. I just sold some of my winning stocks that look like they’ve peaked and am sitting on lots of cash, but my priority is to find a good quality dividend stock which has bottomed and will do well in the inevitable stock crash the next couple of years. Got too much work to do (and get paid overtime) to take any vacation. But I like the idea of going down to Costa Rica in December. Just a dream but I’ll lose a lot of opportunity cost by being away from the job!
Not to worry, folks, because “this time it’s different,” but…
————————————————————————–
ECONOMIC REPORT
Housing market index falls to 11-year low
By Rex Nutting, MarketWatch
Last Update: 1:10 PM ET Jun 19, 2006
WASHINGTON (MarketWatch) — Sentiment among U.S. home builders fell for the sixth month in a row to an 11-year low in June, the National Association of Home Builders said Monday.
The housing market index dropped four points to 42, the lowest since April 1995. May’s reading was revised up to 46 from 45. Readings over 50 indicate most builders think business conditions are good or fair.
The index was at 68 in October and peaked at 72 in June. The index declined in all four regions of the nation, but still remains positive at 61 in the West after a one-point dip in June. The index fell by two points to 49 in the South, by seven points to 40 in the Northeast and by four points to 25 in the Midwest. All three subindexes declined in June.
The index for single-family sales dropped to 47 from 50. The index for expected sales dropped to 50 from 55. The index of buyers’ traffic dropped to 29 from 33.
http://tinyurl.com/oswfu
Speaking of ripple effects, it is turning out to be another day when the best possible investment would have been money under the mattress. Whatever happened to all those reassurances that business investment would pick up to carry the economy through the housing slowdown? It appears the Wall Street faithful are beginning to express serious doubts…
http://www.marketwatch.com/tools/marketsummary/default.asp?siteid=mktw
The best investiments is put options on home builders. I own puts on 7 of the national builders and my options account is up 100% in the last 6 weeks. I have started to buy puts on some lenders and overextended banks.
These puts seem fairly safe if one believes that housing sentiment, builders earning, and housing starts will continue to come in below Wall Street estimates
How do you buy puts?
If you have to ask, you probably shouldn’t be doing it. Try a bear fund instead.
“If you have to ask, you probably shouldn’t be doing it. Try a bear fund instead.”
I disagree. It’s always a good time to learn, as long as you start with a little bit of money that you can afford to lose. The good thing about options is that your loss is limited to the cost of the option.
I started out buying puts on the HBs back in September ‘05… Some were puts, others LEAPs. The LEAPs are paying off quite hansomely now (have Beazer Jan 70’s… woohoo!) But I did lose a couple thou earlier this year… I figure it paid for a real world investment education, so in the long run was worth it.
I think GGP and NDE are still close to their all time highs. GGP is an REIT with P/E of 128 and NDE is a lender to the construction industry.
Some long term puts on FNM, CFC, LEND …, any more suggestions?
Yeah, I saw that 1 p.m. release. If you look at a long, long-term chart of this indicator, there’s really only a couple months in early 1995 (At the end of the 1994-95 Fed tightening cycle) with readings in this area. If we drop below 40, you have to go back all the way to 1992 to find a worse reading.
I’m getting sick of all the for sale signs that pollute almost every tract of homes . It just seems like the whole world is for sale and its only going to get worse by the end of the year regarding inventory .
Nobody thought that everybody would be unloading at the same time . The herds/flippers timing is always the same .
> I’m getting sick of all the for sale signs
Why? Non-vanishing signs should make it clear to everybody how the market looks like. I want the market down, and I want it soon. At some crossings, however, they are so many signs that traffic signs might get less attention - there’s the limit for me.
I’m with you Peter, I want to see even more signs. More signs = panic pricing!
Off-topic:
Is it possible that some of the most severe impacts of the deflating housing bubble may actually occur in “non-bubble” areas? Conventional wisdom seems to hold that the regions which will be impacted the most by a real-estate bubble will be the ones that saw the greatest price appreciation in the last 10 years.
However, I notice that some of the biggest upturns in foreclosures are occuring in fly-over country, like Denver and the mid-west. It makes me wonder if even these supposedly “rational” real-estate markets haven’t been impacted by lower credit standards and toxic loans. I have heard anecdotes that option ARMS and 100% interest loans have even become popular in Pittsburgh and Arkansas. Who knows, without the easy money, maybe some of these regions would have already seen big price declines in the past few years. This means they could be sitting in a virtual bubble (i.e. because prices didn’t drop), but don’t even realize it.
Further, all the money pouring in from the coasts to Texas, Idaho, etc, may actually be exporting the bubble to the WHOLE country.
So here’s the question: could these non-bubble regions be hit even more severely than the coastal bubble zones? It’s not as if the job prospects in rural America are significantly better than in the bubble areas.
I said before that places like Atlanta/midwest and the rest of the flatland will be hammered. They are all hugely overbuilt and they make more land there.
Been saying that for months about TX. People here are probably tired of hearing me say it. People in Dallas especially make living way beyond their means an art form.
it will be interesting to know how and why. thanks.
People in Dallas have always lived beyond their means, mostly because Texas is such a debtor-friendly state.
We were well ahead of the curve on the debt trend. The big difference is that the rest of the country started running up debt as a result of loose lending policies, not as a result of a forgiving legal policies. Texans can walk away from debt and still hang on to their homes and some bank accounts, but Californians have to give it all up. Low FICO scores have historically not been a significant obstacle to ownership in Texas because they are just so commonplace.
I agree about the overbuilding — it is surprising in a state that is nationally famous for a being dependent on a dying industry and having the highest unemployment rate in the nation ( I do believe ) to see how many $ 400K & up subs are being built out of the good farm land. So many people lined up to buy — zip. Yesterday, we wanted to get out of the house and we took a drive into the former ” country ” nearby — stopped at a couple of new developments to look at the $ 380K plus models. One that was supposedly open according to the sign actually had no one staffing it, and the models were locked.
Mississippi has the highest unemployment rate at 7.3%.
Texas and California are equal at 5%, but if you look at it county by county, California appears to have vast areas of high unemployment, whereas Texas’ unemployment is concentrated in a few western counties and near the Louisiana border (probably related to Katrina).
http://tinyurl.com/eko8v
http://tinyurl.com/zybcn
Georgia’s unemployment is 4.9%.
Rural areas should be hit first and hardest. The bubble bursts from outlieing areas to cities. Lower qual to higher qual. (just like stocks and bonds bubbles bursting ).
Yes, that may be true but when a midwestern homedebtor goes into foreclosure the lender loses maybe 10, 20, 30k per house. When the Cali crash comes lenders will lose ten times as much per house. They are doomed! Just an opinion. Interest rates and inventory to the moon! As a side note, I bet those ARMs will be a lot slower to adjust down than they will be on the way up. Bwahaha!
I agree that less desirable areas will get hit first and hardest. In SoCal, this means that the mcmansions in Palmdale and Lancaster will be the first to go.
I picked up the recent “homes for sale” guide at the supermarket (which was as big as a phonebook) and it was loaded with brand new mcmansions in Riverside County, San Bernardino County, the high desert, etc… listed for outrageous bubblicious prices (mid 400s and mid 500s very common, some 700s, 900s and even million plus). If you like living in a murderously hot barren desert surrounded by strip malls and miles of cookie-cutter stucco homes, why not move to Phoenix? I hear there are some deals to be had…
These homes will easily drop by at least 50% IMO. As the market cools, people will choose to get more for their money in LA or OC (even if prices are only down 20-25% in those areas), rather than move out to Apple Valley or Coachella.
I predict that when the bust is complete, prices will be down, on average 25-30% in So Cal. But the impact will be disproportionate. The outlying areas (Riverside and SB Counties, high desert) will be absolutely crushed. The more desirable areas (LA, OC, SF, SD) will get hit hard, but will eventually recover.
Same logic applies to people who gambled on buying in “up and coming” urban neighborhoods in the hopes of gentrification. There is a substitution effect that will occur as affordability returns and people (1) give up on “investing” in real estate by buying into potential turn-around neighborhoods; and (2) find that they can actually afford to buy in a neighborhood that they would want to live in.
I don’t think “flyover” areas will be hurt as badly, simply because we don’t have as far to fall. My house in a Dallas suburb was bought for 120k. If my market goes down 20%, that’s a 24k loss. I wouldn’t like it, but i could bounce back. A 20% decline in Los Angeles is a 100k loss, on average. That’s going to have a much bigger impact psychologically and economically.
Also, I do believe that there is a bottom to the housing market which correlates more closely to the cost of building materials and labor than to the cost of land. Homes in flyover states are priced much nearer to that bottom and our increases have basically followed the materials uptick, not the bubble/flipper trend.
Foreclosures have always been high in Texas, largely because people around here are just not very credit conscious. We are the most pro-debtor state in the union, after all. I wouldn’t look too closely at foreclosures as an indication of a bust here.
In general, people in flyover states are better able to afford their house payments. Our housing costs are still within just two or three multiples of our median income. Also, I don’t know any married couples on the coasts with a stay at home parent, while it’s a very common arrangement in flyoverville. That gives us a bit more breathing room. In short, I do think the bubbly areas will get hurt much more than the non-bubbly areas and flippers and new condo owners will get hurt most of all.
How old are you? My guess is you were in high school in 1989. What you have just written is either the product of utter ignorance or prime hallucinogens. Which is it?
I think he’s been watching too much of The Waltons on TVLand… unfortunately, economic ignorance is not exclusive to coastal homeowners, and my state, Ohio, has a horrid record of foreclosures in recent years. And that’s only one of, say, 25 ‘flyover’ states? But I’m sure they’re all the same… mmm, yeah…
I’m old enough to realize that ad hominem attacks are never very effective.
Has this been posted yet:
http://tinyurl.com/qux36
“NEW YORK - In 2003, Anita Britten refinanced her two-story brick cottage in Lithonia, Ga. using a hybrid adjustable rate mortgage, or ARM. Her lender reassured her that she could refinance out of the riskier loan into a traditional one when her interest rate started to reset.
Three years later, Britten can’t get a new mortgage and her monthly payment has jumped by a third in six months. She can’t afford her payments and may face foreclosure if her financial situation doesn’t change.
As more ARMs adjust upward and housing prices begin to dip, many Americans like Britten can’t refinance and are finding themselves trapped in too-high monthly payments. For those who can’t make their payments, foreclosure is the only way out.”
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How was this supposed to work? The FBs used ARMS initially to buy homes they could not have afforded with traditional (fixed rate) financing. Rising interest rates and resets drove up the payment on their ARMS to levels they could not afford to keep paying. Now how is it that they are supposed to refinance into a fixed rate mortgage, if they could not have initially afforded a fixed rate back before interest rates reverted back up towards historic norms? I am scratching my head trying to understand this…
If you want to understand an FB, I gottal learn to think like one. I’m taking a guess that she is referring to the times when a 30-year fixer was at 5% which was still affordable for her, and apparently, the lender simply made it sound like it’ll be there waiting for her to refinance. However, at the very same time, her ARM teaser was perhaps around 4%, so she chose to shave off some from her monthly payment. She lived happily, thinking she’ll refi, but unfortunately now fixers are around 6.5% and are going higher, so she got trapped.
This is a typical scenario that seemed so obviously doomed to happen, or so it seemed to me. And then one night in September of 2004, as a tipsy morgage broker tried to talk a tipsy me into applying for a mortgage with him, as he spewed acronyms that he himself didn’t even know what they stood for, I *knew* this was happening all around me!
So you get a low, low adjustable rate (back then), and hey, if by chance the payments go up, well “you can always refinance again”. I tried to point out to him that if rates soared, then probably the refinance option would be soaring as well, or so the history of the financial markets tended to show, but he couldn’t be convinced. Or wouldn’t admit it.
And so that’s exactly what’s happened: After the ARM’s adjust upwards, all those FB’s are finding that, well, they can refinance — but only at the same unaffordable, soaring rate as they find themselves already paying now! Doh!
I do note, though, that the sly broker I talked to never told me that I would be able to refinance at, say, 4%! He only said I “could refinance”, based on whatever the “1 year AMT” or (name-your-favorite-index) would be at the time. Yeah, right, I know that!
What really worried me is that he couldn’t/wouldn’t even tell me the margin I’d pay over whatever index they used for the loan he was trying to sell that day! Despite trying, I could never pin him any closer on any of this, getting only the promise that “let’s get the paperwork together and we can review it”.
And that’s what’s happened to a lot of these poor people, I imagine, trusting a snake salesman like that.
But for what it’s worth, he’s no hypocrite: The fool believes in his own snake oil and overbought a McMansion on an IO ARM that will soon be slaughtering his financial well being. I see him occasionally still, and he’s still in the field (soooo far) but… he sure doesn’t like talking mortgages anymore. At least not with me.
NoVa Sideliner ……This mortgage pimp did not discuss the margin and index on purpose . How do people think these loans adjust? The ARM’s are tied to a index ,with a profit margin above that index . If the index used is at 6% and your margin is 3.00 % than you will be charged 9 % interest until the next adjustment period . You will be charged in spite of the payment remaining the same for a year usually .
So I guess thats how a lot of these adjustables were sold to people: these no good greedy loan pimps didn’t discuss the loan details .
Everyone knew that interest rate was at all times low, and could only go up from there. She knew it too. Hope she enjoyed her stay , sorry that she couldn’t flip.
It worked because the mortgage broker made $$ off of the loan, as intended, by taking advantage of this woman’s ignorance and trust. Mission Accomplished!
“I am scratching my head trying to understand this…”
—————————————————————
wasn’t price appreciation supposed to be the key? just get in the door and the magic of “equity building” would fix any future money problems.
“equity building” is so-o-o 2005!
Unfortunately “Anita” is on borrowed time. She trusted a commisioned salesperson (loan agent) at their word without doing her own DD.
Anita wouldn’t understand DD, unless she was in the plastic surgeons office.
DD = Due Diligence
Dumb Debtor! Watch as they pile up.
And now “Anita” is in DD (deep doodoo) of her own…
Its because she,(Anita), got in on a no down loan by going adjustable .If she went on the fixed she would of had to put more money down and qualify .
I think that is the biggest attraction of the adjustables is that they had lower down payment requirements . My neighbors got a adjustable no down loan .
So lot’s of people who had very little money were able to get in on home ownership with the no down /qualify on the teaser rate adjustable or IO loans.
In addition you could have lower credit scores on these risky loans . Why the lender set the risky buyers on the loans that will go up in payments is beyond me . In fact,the adjustable should of had higher qualifying requirements and higher down payment requirements due to the potential for neg. amortizing .In fact ,on the adjustables the potential for default grows with time whereby on the fixed it go down as the loan becomes seasoned .
I know that the secondary market loves adjustable loans .
Would you go to the bank and tie up a CD for 30 years at 5.50% fixed rate ,or would you go on a adjustable CD that has the potential to go to 13% interest and ride with the market ? Same thing in the loan market, they don’t like fixed notes ,(they assume 60% will turn over in 7 to 10years ).The market was paying the mortgage brokers a higher commission to push the adjustables loans .
The sales pitch by lenders that “one can always refinance out of the adjustable down the road to a fixed note “,was bad faith . The market prices of homes would have to increase ,most of the adjustable have pre-payment penalty clauses making it costly to refinance ,and it was a set up to do future business by the lenders .
“Its because she,(Anita), got in on a no down loan by going adjustable .If she went on the fixed she would of had to put more money down and qualify .
I think that is the biggest attraction of the adjustables is that they had lower down payment requirements .”
I guess ARMs were not risky enough already, given that the mortgage market was seeing its lowest interest rates since the early 1960s, so they decided the added risk of no downpayment would not hurt much? Especially when doing so provided the financially challenged the means to purchase homes they never could realistically hope to ever be able to pay off? The next generation will look back at this period in financial history and ask, “How was that possible?”
As John T Reed puts it:
If you get an ARM, you are no longer investing in RE but an insurance company for your mortgage lender.
You have sold an insurance policy to the bank any positive cashflow experienced by doing this is an insurance premium payment.
I guess the new bankruptcy law makes that insurance policy enforcable?
Anita thinks DD is just here aftermarket bra size.
“Her lender reassured her that she could refinance out of the riskier loan into a traditional one when her interest rate started to reset.”
Hopefully this bubble will do to the RE complex what 1929 did to Wall Street - namely, force them to muzzle some of their more outrageous lies.
I know it is an anecdotal stereotype, but every person I know in Phoenix and elsewhere in the country who has done well in the real estate/building/remodeling/mortgage industries has taken on the classic “new money” mode of spending. A lot of these people were without a marketable degree, working in fairly low to mid paying jobs, who hit it big in the last few years and have pretty dramatically ramped up their consumption of goods and services. Mini mansions, but even more into rapidly depreciating things like trucks, jet skis, boats, expensive clothes also vacations to Vegas, etc., etc. I think when this group starts to get the rug yanked, they are going to fall a lot harder than most. I do not think many of them looked at this as a windfall or peak period in their careers and income, but rather that finally all their years of paying their dues somehow have finally paid off, and this is where they expect to be for life. Their savings rate was probably actually negative. If you increase income to people with a healthy attitude towards savings (like asians now and Americans 20 years ago) the actual amount of conumption increase is a lot less than 100% of that amount-people would maybe upgrade their lifestyle a bit, but also take the opportunity to save at a higher rate-farmers who succedded through the 70s and 80s are a classic example, when prices were high, the good businessmen stashed the extra cash, the bad ones financed sweet new tractors at 12%, and soon failed. I’m sure some of these folks were savvy enough to save a lot of this, fund their retirement, etc., but the stereotype of the 25 year old drywaller with a $30,000 truck and the real estate agent in a new BMW have some truth to them.
“the real estate agent in a new BMW have some truth to them.”
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2007 2008 2009 look for almost new BMW for sale cheap on craigslist, fast cash will be king
I agree with your point and I sort of disagree.
These people don’t buy, they lease, because they are no money down/payment centric. The same crap they spew to their customers.
You thoughts?
nah, you can have them. i’ll stick with an old civic.
The price will be cheap, but make sure you have a good mechanic who specialises in the marque give it a real careful lookover.
It may not have been serviced for a while, because that costs actual money. (And I wouldn’t necessarily trust a logbook entry unless the service agent confirms the work was done.)
“There are going to be a lot of new real estate agents who go back to being schoolteachers.’”
Good luck finding a vacancy, and most districts can hire a new teacher for less. WalMart or Burger King might have openings though as ex-realtors(tm) should have good selling (product spin) skills that they can bring to the table.
Homebuilder sentiment continues to plummet: down to 42. I don’t know what else to call a drop from 51 to 46 to 42 in 2 consecutive months. Let’s ask David Seiders:
“The index indicates a “reasonably orderly cooling-down” of the housing market, NAHB Chief Economist David Seiders said in a press release. New home sales are likely to fall 13 percent in 2006 from record levels last year, he said.”
Followed by:
Seiders said downside risks to NAHB forecasts include the potential for “large numbers” of canceled contracts by speculators and if the Federal Reserve raises its target interest rate after an expected quarter-point increase later this month, he said. Cancellations of contracts are “pretty darn high” and moving higher, he told Reuters.
Link:
http://tinyurl.com/ocyuu
I talked at a party to a lady who is a substitute teacher (teaches all grades from elementary all the way to the junior high) in the Elk Grove district, she says the competition for good teaching jobs is pretty tough. Most good positions are fenced and protected, and they prefer well-known and experienced local teachers.
In Anaheim, my teacher friends were on the full year school track where they work three months and then get one month off due to overcrowding. Now with school enrollment falling, they are going back to the nine month school calendar and summer off. Families are leaving because they can’t afford one of the more affordable (and less desirable) areas of OC.
Teachers here in Salinas just won a pay raise plus additions to their medical plan that call for no out of pocket expenses. This a city that continually has problems with budget and asked the voters to pass a specially issue to increase the sales tax for public services as the library, police and fire. We are at the top of the list (71%) for a downward adjustment, so what is gonna happen when property values readjust and the local government takes in less revenue?
In that situation, I hope homeowners in the area like paying for bonds and/or higher taxes. If you don’t have kids, too bad you get to pay for their school anyways because renters with lots of kids can out vote you and force you to pay a special assessment in addition to your property tax.
Affordable primary education is one of the classic examples of a public good.
People who don’t have kids benefit from having at least marginally literate younger people.
“Affordable primary education is one of the classic examples of a public good.
People who don’t have kids benefit from having at least marginally literate younger people.”
Absolutely true. Also, areas with good school districts invariably have higher home values than those that do not. Good schools benefit everyone.
First on ‘Realty Check’ CNBC NAHB reports lower than expected # lowest since 1995. Everey market is down. So much for NO National bubble.
Then Thurs.8pmE on CNBC : Realty emergency plan. How to protect yourself during the coming downturn.
Amazing how much the concensus has turned 180º.
Continued appreciation…
No slowdown…
Normalized market…
Some slowdown regionally…
No national bubble…
Nationwide slowdown…
Soft landing…
Harder than expected slowdown….
All what,? …in less than 2 months
This housing bubble reminds me to some extent of the beanie baby craze from a few years ago. People were scrambling to get collector items, selling them, and buying them for investment purposes. Of course, that craze ended, and now beanie babies are collecting dust in peoples’ attics.
But there are at least two things different about the housing bubble. First, beanie baby investors didn’t do much damage to other people, because not everyone needs a beanie baby. With housing, the massive run up in prices will hurt a generation of people who were simply looking for a place to live. Second, the government doesn’t provide huge tax breaks to beanie baby owners, and the government was unlikely to bail out beanie baby owners.
Were there a lot of beany babies bought on credit, or was it just a form of misplaced savings? I am not so concerned about housing’s up and down but the volume of credit that has been created for it.
Beanie baby buyers didn’t take out lunatic loans to finance their purchases, either. Neither, come to think of it, did most people who bought nasdaq stocks. Which is why the popping of this particular bubble is going to be so nasty.
Let me display my age - I remember the comics market of the late 80’s/early 90’s. People treated them as investments. Companies pandered to collectors in ways that were impressively sad. It, of course, went kerflooie.
If it seems to good to be true - it probably is.
Actually, you can register all your Beanie Babies for Social Security numbers and claim them as dependents. Thus, my “babies” are all a tax break.
(And before I get slammed - that was a joke and not legitimate tax advice. I do not own a single beanie baby. I do however have way too many dogs who eat more than kids do, so if anyone has any advice on getting them an SS# I would greatly appreciate it.)
“Don’t count on inheritance, warns AARP”
“Just count on paying back the national debt” is what it should have added.
The most repetitive phrase from that CNBC housing report a few minutes ago was “hard landing”. It’s finally catching on.
I’ll grant the “hard”, but I will not cede them a “landing” at all. It’s down hard, then grind down for a decade. Unless were are really lucky and we get a mythical massive crash.
“Why Paulson accepted the Treasury job
It is possible that Henry Paulson sees Goldman Sachs facing an uphill battle in the next few years as the US economy slows. Paulson has made enough money in the good years and may consider it smart to leave Goldman at the peak of the market - it’s no fun to run an investment bank in a down market.
Paulson is a banker. Bankers are interested in the state of the market, not the economy per se. In two and a half years, a treasury secretary can, with the full power of the Treasury behind him, have a chance of saving the market from imminent collapse from its current structural imbalances.
The formula is to accelerate the crash in order to gain a fast recovery later. The prospect of Paulson engineering a sharp correction in the equity market right after the mid-term congressional election is almost certain. The strategy is to remove the structural bottlenecks and to weed out the weaknesses and have the market resume its upward path by June 2008. This strategy is doable with a heavy dose of government intervention, but it will require a crash to create a serious enough emergency to make government intervention patriotic, possibly including massive bailouts of several troubled giants such as General Motors, General Electric and Fannie Mae (the Federal National Mortgage Association) and the big money-center banks that are up to their necks with credit-derivative exposures.”
**************
So, is the intention for Paulson to orchestrate a manageable crash?
Not only that but he gets to diversify out of $700M in Goldman stock tax deferred and gets an excuse to sell that much Goldman stock, he has to it is the law.
The government in Salinas is TOAST. I thought they couldn’t afford a library about 2 years ago and closed it down. Say goodbye to schools and those employed by the cities, counties, etc.
There was some fool on craigslist a few months back that stated he needed to sell his beanie baby collection that he had spent $50K on. He may have been the biggest beanie baby idiot. But his loss there won’t even make a blip in some of the losses a lot of fools in the housing market are going to experience. Break out the vasoline, and tell them to bend over. It is a comin’
They’ve got the “Ripple Effect” all wrong.
It really refers to the HELOC-heavy “investors”, who were drinking 1996 Chteau Lafite Rothschild Pauillac with their cracked crab, about to guzzle Ripple with their Top Ramen.
Don’t laugh. I guzzled Ripple w/Top Ramen. In college!
Why must all of you continue to make fun of Top Ramen eaters? I love the stuff! And the cheapskate bear in me loves being able to eat dinner for 8c!
check the trans fats on the label
0g Trans Fat in Top Ramen Chicken oodles of noodles.
Can’t beat Carlo Rossi’s Paisano jug wine — much tastier and drier than Ripple. Ramen is just empty calories. Gotta go with brown rice and lentils (healthy Starvin’ Marvin — and still CHEAP, CHEAP, CHEAP!). My Starvin’ Marvin days motto was: “I can eat for a week on $5″. Maybe I can hire myself out as a “Edible Commodities Cost Containment Specialist”??
Besides, anyone who eats cracked crab with `96 Rothschild Pauillac is a dyed-in-the-wool RUBE who deserves to eat Top Ramen.
I got to see a ripple effect when I lived in Ohio - the 2000-2001 downturn tore through the economy pretty handily, even in the good areas. There is unfortunately very little awareness of how interdependent “sub-economies” are in this country.
I’m in California now, and that actually seems to be an improvement. Not buying a house though
Just when I thought I’d be just another typical Monday, I open up CNN news and see “Consumer v/s Real Estate”…..the article that goes after the colluding RE industry.
Made my day!
test
HELOCs will adjust upward, as we all know. If family income is $120k, they may bite the bullet. If family income is $37k with 2 workers and one gets sick or pregnant (more likekly in that demographic) that HELOC looms larger. Add in the probability that their loan gave them unforeseen “options”, and we will have an effluent of FBs. Thanks all of you caring Realtors (TM) and mortgage guys and gals (except So. Cal. Guy)!