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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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Signs when its a good time to buy again.
Simmssays…weirdest jewelry ever
http://www.americaninventorspot.com/weird_jewelry
How about when people stop asking that. You’re not even in the right decade for that to happen.
txchick
What do you think the Fed meeting on June 29th is going to do to the stock market? If they raise rates market goes down? If they keep the rate the same market goes up?
I think there could be a short squeeze above S&P 1260 & am positioned for that with stops. My main focus for the rest of the summer is timing of restocking a full set of fall index puts.
I’m waiting for a short squeeze. Too much lowering the bar with gossipy speculation about a 50 bp hike. The last time that happened was May 2000, and the last time before that was Feb 1 1995.
They’re setting up the shorts for a bear trap and a huge “relief rally” IMO.
Summary of Federal Funds Rate 1990-2006
http://library.hsh.com/?row_id=88
p.s.: If all the major indices seem to be slowly sinking to the low of the day just before the meeting ends, that usually means a huge run-up is about to begin.
Exactly. Forget about RE for ten years.
Christmas 2006.
If things continue to unfold the way they have been, the 3rd quarter of 2006 is when (assuming they play it straight) the NAR will be reporting significant quarterly declines in existing home prices in metro areas throughout the U.S.
Assuming the typical data lag release, that information will hit the press — in mid-to-late November. Just before the Christmas shopping season.
Perhaps Christmas will be celebrated as a religious and family holiday this year. Time for the woman’s magazines to break out those “joy of a simple holiday” articles again.
Christmas 2007 will be a religeous holiday, 2006 - Chrismas will be celebrated with garage sale Hummers, Sea Doos, Bass Boats, Big screen TVs for everybody!
I don’t think we’ll have to wait until Nov for Joe Sixpack to have gotten the memo about the economy/housing. We’re seeing doom and gloom articles on housing daily. We see all markets declining daily, interest rates rising steadily, ARMs resetting…oh yeah and Iraq and Katrina. Dare I go on?
So the economy is rapidy declining right before mid-term elections. All I gotta say is Jul - Nov ‘06 is going to probably be a doozy!
“I don’t think we’ll have to wait until Nov for Joe Sixpack to have gotten the memo about the economy/housing.”
The info is printed but is it being absorbed? I still see too many people around me planning big purchases and denying the stock market and housing slowdown is anything but the usual cyclical blip.
“Time for womens mags to break out ‘joys of a simple holiday’ articles again”..
OMG that would be awesome. Tend to think we won’t get anywhere near that til Xmas ‘07, ‘08 though, no matter WHAT happens to RE this summer/fall.
Gotta leave a little room for the “We’re in a dazed/shocked phase” to pass. Americans have goten so far away from even realizing family/friends/community are there, it’ll take them a while to start noticing other people again.
For a weekend discussion (selfishly posted because I don’t know any meaningful facts), I would like to hear opinions on the impact of the eternally “upcoming” tightening of the Fed Lending Standards. Questions I have are: what are the key new stardards/rules, will they actually be enforced (or are there big loopholes), and most importantly, could this be the nail in the coffin?
They are doing it slow.
Kind of like a heroin addict going to a methadone clinic.
You don’t want to see an entire culture of FBs go cold turkey.
Let’s see,
Sales are plummeting at mortgage companies. They’re not about to turn away any deal that walks through the door, no matter how stupid or risky. As long as the seconday market keeps buying the risky loans, they’ll still be selling them. The only thing that will tighten the market is for Fannie, Freddie, and the like to tighten.
Will the foreign investors holding our loans have anything to say about the delay in the tightening of lending standards?
I second this one!
Doesn’t it seem like, at some point, the foreign holders will “force” us to do something, even/especially if we won’t go there ourselves?
“Canaries in the Coal Mine”.
Opinions on RE-related job losses.
Bubbles create artificial demand and cannibalize future sales. Therefore, IMHO, all of the RE-related jobs created during the boom will eventually be lost, as well as at least 25% of pre-existing RE-related jobs.
Of course, those still employed will be making a lot less money, too.
Not exactly, during the last downturn I had a real good run. Vets will make money
Hard-working true professionals are always the exception!
any idea when Dustin Diamond loses his house? Picture of the sheriff escorting him out?
Won’t Zack come out at the last minute to save him like he always does?
predictions of the big one ready to strike the San Andreas fault in SF Bay. What effect that may have (if any) on the housing market.
“predictions of the big one ready to strike the San Andreas fault in SF Bay. What effect that may have (if any) on the housing market. ”
The prediction? none.
The prediction has been around forever, people know it, but just go about their business anyway.
If the big one hits a lot of townhouse values will be going from 900K to zero in a few minutes. No way insurance companies will be able to handle anything significant. Either insurers don’t cover earthquakes, or if they do they’ll go out of business before they can pay 5% of the claims.
How do REITs do in a residential real estate downturn? In the early 90’s they did not do too badly. I assume this is because the rents stayed strong. In rececnt years REITs have exploded. Are they as likely as individual to have bought wrong? Are there REITs you know of that have anticipated and prepared for the downturn? How does/did commercial property differ from residential in previous corrections? Would love to hear what people think of REITs in general and specific REITs.
Surprisingly well, because rents increase during the initial years of a collapse.
“Surprisingly well, because rents increase during the initial years of a collapse.”
I’m looking for a 3 bedroom house to rent and I have noticed that asking prices for rentals are pretty darn high. I suspect the supply of rental homes have been reduced due to people cashing out and selling their rental properties. I’m seeing quite a few flippers who are resorting to Plan B, rent it out to cover the payment. Some even wish to keep the home on the market while you are renting. People see Joe Flipper asking 1900 to 2100 for his little 3 bedroom tract home and think they can get that too. I think some landlords don’t see the difference between asking prices and the reality of what you can actually get for your place. How many people can actually pay what you asking? If they could pay or even wanted to pay that much, wouldn’t they have bought a house? I think after a few years into this crash rents will fall and there will be a shortage of credit worthy renters.
Urban legend, a persitent, wishful-thinking, sort of urban legend that rents go up during a housing bust. How many times must it be debunked? Rents fell 40% during the last downturn in Calif. if I rember the stats correctly.
Suzanne, I researched this (BTW great SN)
I’m out there looking right now in San Diego and I can tell you that asking prices are way up. I should be able to find a 3 bedroom in a decent neighborhood for between 1500 and 1700 and it’s extremely frustrating. I’m not looking for anything fancy. Just a run of the mill tract house that takes pets.
Suz - Could not agree with you more - after the first 2 years of realestate price drops, this is not a regional collapse. This is world wide.
Asking prices are up. Check Craigs List, SDReader.com and the UT Classifieds. Will rents fall? You betcha but right now people are asking for a lot of money for rent.
Posters keep saying that “asking” prices for rents are up. Yet we have seen a few bloggers on this site who fight back, citing the weakness in the overall market, and winning!
I’ve seen posts where intelligent bloggers have gotten $300 per month reductions.
Knowledge equals power. Potential renters need to inform themselves and utilize that power.
I’m backing Wickedheart on this one. We’re in SD and rents have most definitely gone up. In our area, homes for sale languish on the market for a few months. Homes for rent are gone within a couple of weeks, at most. They are renting for quite a bit more than going rents in 2003/2004 — I’d say about 30% more.
I do, however, believe rents will go down **eventually** as empty homes are released on the market. But for now, rents are going up, no doubt about that. This is also what hoz is trying to say, IMO.
Suzanne, do you have those Cali rent declines graphed out by any chance? I was wondering how long (# mos) into the bubble before the rising rents changed direction.
I should have asked: how many mos into the bubble “burst” before rents started to decline? I did see the 2 year comment, thank you hoz!
For several months I have been invested heavily in puts on HB stocks and my account is up 150%. I am also starting to invest in puts on lenders, which have begun to decline recently. My biggest position is Corus Bankshares, which has > 90 of its loan portfolio in condo developers with Florida and Las Vegas its biggest markets. Its lending seems to have plummeted in the last two months—no loans reported for June so far on its web site, compared to a long term average of about $400-500 million per month.
There are many kinds of Reits. Reits that focus on rental properties might be good investments, since the decline in home buying is increasing the demand for apartments. Mortgage Reits should go down, however, as the mortgage system goes down.
I am up about 89% on put positions in Accredited Lending (LEND) bought about 4 weeks ago. My strategy is to buy moderately long term puts (3-6 months to expiration). The market will show bounces and volitility, but my expectation is that the housing industry will be in much worse shape by fall and early winter. I am looking for banks on the coasts that have high exposure to real estate. Several west coast banks are declining on high volume today, according to IBD. Perhaps investors are starting to worry about their RE exposure. These banks had been high fliers until very recently.
For a weekend topic, how about: What is the best way to profit from the falling housing market?
I have been selling short homebuilders and subprime lenders. I also have some puts on both.
Can we discuss the trade-off between limited liability but time limits of options versus greater capital required and lesser return of short sales? And the risk of market manipulation at expiration time for options vs. short squeezes? How does one balance these?
How about the better vehicles? Banks? Subprime lenders? Home builders? Real estate sales companies? Other?
You guys are wwwaaayyy braver than me.
I don’t try for profits in a falling market of any kind, my aim is not to lose.
Are there any moral implications for selling your home at the top to someone who can’t afford it?
Are there any moral implications for selling your home at the top to someone who can afford it?
Did you warn the person you sold your house to about the housing bubble or the disadvantages of too much leverage?
My scenario is not that the buyer is not some flipper, but is a younger couple with kids who were scared by the rising costs of RE and bought.
It is your duty to sell to the least qualified buyer. Why wouldn’t you want to be the smartest person at the table?
The very fact that you are willing to sell a house for X number of dollars shows that you believe X dollars is worth more than the house, any analysis beyond this is the responsibility of the buyer.
David has the best point. Although there are still some moral issues inside of that point of view.
I think it is a very important topic, it really shows who we are. For some people, money or desire to be the best is the only value in life.
I don’t know how I would behave if I was a seller. Seeing a greedy flipper is one thing, but what about a new family? Is an extra $200K worth breaking lives?
The greed of the average person will astound you.
Why do you need to know?
That’s a serious question by the way. In 5 transactions outside my own family, I’ve only once met the people I’ve either bought from or sold to. Things might be different in the US, but in Australia the Real Estate Agents make sure the sellers are absent when they conduct open houses.
The one time I did meet the buyers, it was because they were so committed to the purchase that they wanted their grandfather (retired tradesman) to repaint it before settlement so they could move in smell-free.
I agreed on the basis that I approved the colour scheme, and if they couldn’t complete that was their problem, not mine.
Now this was in 1992, which was in my (correct) opinion indeed a market peak in my area. So did I feel guilty? Not at all; the young couple were burningly eager to buy in that specific area for family reasons (grandparents as child-minders so the wife could go back to her part-time job), and had in fact been outbid at above my selling price twice in the previous fortnight.
I don’t know how to answer this. I would have felt HORRIBLE to sell to an underqualified buyer in 2003 when I really felt the market was going to collapse. I would have cost them two years of incredible gains. So was I moral or not?
As a buyer I really don’t think it’s the seller’s right to know anything about me except whether my offer is legit or not. As a seller I don’t want to know anything but can the person keep the contract. I’m a bleeding heart who paid too much for my last two houses because I wanted to help out the sellers. And I know that if a young couple like the one described tried to buy a house from me now I would try to discourage them - just for sound financial reasons if nothing else.
I’ve advised several clients not to buy homes right now and 90% listened. It keeps me up at night wondering what if I am wrong and my clients lose money because of it? What if I tell the couple not to do it - show them the stats why it’s going to crash and burn but housing goes up for the next ten years? (Like almost everyone here I believe it’s going to drop slowly but significantly. But we could be wrong. We just don’t know no matter how logical our positions are.)
There’s no easy answer. I’m not sure it’s even legal to refuse to sell to a qualified buyer no matter how moral the reasons. I would probably just do everything I can not to meet the new buyers or learn anything about them. On the other hand, if I owned a house right now it would be priced to move and even 10% below comps someone is going to get screwed somehow.
Guess that makes me a happy renter!
Maybe why we have “arm’s-length transactions,” Has a particularly ugly ring to it now, don’t you think? How long will ARMs last and kill the futures of those who need it most and can least understand it?
Subprime may enable me to sell my house at a good price to someone who has no possible way to realize their dream, much less meet the minimum payments for the next 5 years unless they win the lottery.
Is anyone in charge? Does anyone really care? You do, I do, my wife does, most of us on this blog do. Must we mandate education in home economics or finance in high school?
Maybe not a bad place to start.
“My scenario is not that the buyer is not some flipper, but is a younger couple with kids who were scared by the rising costs of RE and bought.”
To the broker working for a commission the speculator and/or the young family are nothing more than “the chow”; the goal is to bring them to the table regardless of the fundamentals.
How many of us in a selling position nowadays would ask that the squirrels be cared for, right to approve paint colors, etc.?
Presently, IMHO, sellers are lucky to get out at a reasonable price including roof and carpet or flooring allowances, and covering closing costs.
If they were a young couple with kids, I’d probably advise them to rent for a while. I’m not selling now, but plan to in the near future.
Interesting comment earlier alluded to, but didn’t directly state the outcome for older homeowners. If my valuation drops by $100,000 and I buy a higher or equally-valued property in the same county in the OC, where my property taxes will remain unchanged, I will be able to buy that property at a $100,000 or greater discount.
Please tell me if I am wrong, and I have no clue for the young family, except to recommend Austin, TX while it’s still cheap but perenially hot. Sacramento and environs are equally hot, but far worse, IMHO. The Inland Empire will dump soon. Where to go?
For peace of mind, let them know you are selling bcz “in your opinion” prices are heading south…from that point, it’s their responsability.
Just got back from the Jersey shore (Long Beach Island). I’ve been vacationing there all my life. I have NEVER seen so many For Sale and For Rent signs as I did this past week. (Wanted to take a great picture for your photo site, Ben, but it wasn’t like there were multiple signs in a row ~ it was more like 1 to 2 on every single block of the 17 or so mile long island.)
The For Sale signs I get, but why so many For Rent? Down there for rent means seasonal rental (i.e. by the week, month, or summer). So my question to throw out there is this - does anyone else see signs of people cutting back on vacations this summer? And why is this? High gas prices? Can’t afford it with all the high mortgages, car payments at home? It was curious, for sure.
Interesting article re: the shore homes - http://www.philly.com/mld/philly/business/13095333.htm
We had the reverse situation in Northwest Florida where beach residents on Pensacola Beach and Navarre Beach were exempt from property taxes which allowed them to utilize the public school system including busing for free. Essentially you had people living in million dollar houses obtaining a subsidy from poor crackers living in a shotgun house paying property taxes.
The reason that the beach residents didn’t pay property taxes was that they leased the land and were not owners. Of course the leases were for 99 years with automatic renewal for another 99 years so basically they were the owners. The other hilarious point was that the lease fees were set fify years or so ago to the initial beach lessor at like $100 a year which have been passed down to today.
The exemption from property taxes didn’t really become a bone of contention until recently due to the low level of development at Pensacola Beach. The beach was for the most part undeveloped (thirty years ago) and what development existed was simple low key middle class houses or even more simple three room concrete block cottages. However development has changed dramatically in the last ten to twenty years with massive Miami/Palm Beach style housing. In addition access to the beach has been reduced and is more restrictive with “day trippers” from the mainland reduced to having their beach fun at “reservations”. IMO, the prices have priced out locals so today the majority of beach residents are not natives.
Recently the county property appraisors began assessing property taxes on beach residents on Pensacola Beach and Navarre Beach which of course those people living in their million dollar beach houses have appealed.
How is this related to the Housing Bubble? Well, the addition of a new and unforeseen property expense (property tax) is another straw on the camel’s back.
Court Says Beach Tax Okay
http://www.pensacolanewsjournal.com/apps/pbcs.dll/article?AID=/20060203/NEWS01/602030328/1006
In regards to that LBI thing, what’s weird is in the Kindergarten Park Press (someone left a copy on the train and I was bored), I read that supposedly the deep south shore is like completely rented out and its the best summer ever…. but then again the paper isn’t exactly noted for its journalism…
A weekend topic:
Fact: The Bubble is bursting or has burst
Conjecture: I can think of several items that will accelerate the decline.
e.g. World Wide Pandemic - like Bird Flu; Mutual Assured Economic Destruction (MADE) with China; Russia cancelling Gazprom contracts; Earthquake in California or even worse the New Madrid Earthquake in Missouri occurs; Hurricanes in Long Island, Cape Cod, Washington D.C. as well as in the gulf; Global oil risk (”If terrorists took out the sulfur-cleaning towers in northeastern Saudi Arabia, as described in the beginning of Robert Baer’s book, “Sleeping With the Devil,” crude oil prices could easily top $150 a barrel and stay there for more than a year”, former CIA Director R. James Woolsey said Monday during a visit to Pittsburgh.); Complete loss of confidence in the Dollar by the international community; A sigma 5 event in the 870 trillion dollar derivative market; Etc.
Question: Since I am biased and have lost my objectivity - Are there any arguments (rational or not) that can prolong the asset bubbles?
Thanks
Or put it another way, what would permanent $150-200 oil do to the housing market? Would Bakersfield hold its value because of the refinery there? Would whites start moving back to inner Detroit, or would Detroit completely collapse with the auto industry? Et cetera.
Oh, something else. You mentioned a Sigma 5 event… the crash of 1987 was a sigma 15 event. Black-Sholes does a really bad job of pricing in extreme moves, hence the existence of volatility skew.
Personally, I do not believe the hedge funds can actually handle a sigma 2 event.
I got a couple. Here’s one:
“Office condos”. Anyone seeing these all of a sudden? They’re starting to sprout up in Chicago. Presumably they’re space in an office building that you buy, sell and pay taxes and maintenance on just like an ordinary condo.
Who buys these things? Business owners? Really? Say your business grows and you need more space, or you want to move the office somewhere else, or you hit tough times and want to dump some space. Under a normal office lease, you just go to the manager and work something out… you sublet, or you move to an empty floor, or you strike a deal with the guys in the next suite over, tear out their walls and move in.
But with one of these “office condos”… well, you’re not just in the business you’re in, you’re in RE as well! And good luck transacting with the folks around you if you need to adjust your space.
Seems like the majority of people who get into these would be flippers.
Hot damn, you just gave me an idea thanks.
I can’t imagine a situation in which a sane businessperson would get involved in a deal like this. The only sure thing in business is change.
I have not seen anything like this in the WLA market.
Hopefully MrIncomeStream will share his brainstorm with us, because I can’t think of a way to short office condos. Of course, if I had a commercial building sitting empty (which I don’t), I might have plans drawn up for a build-out and try to find some insane flippers to buy them pre-build-out - essentially get them to pay for the TI *and* take the risk of finding business renters….
Would I be that evil? Depends on how long I had been sitting on that empty commercial building and how much it was costing me.
We have these in Australia, and in general the business people themselves do not own them.
The office units are usually pretty small; I think they’re aimed at the 1-2 person business, where someone that grows to any size is going to go elsewhere.
As more people work from home, I can see office to condo conversions become a viable business.
I’d like to see some statistics showing some sort of correlation between sales slowdown month-to-month and the number of ALL CAPS POSTINGS ON CRAIGSLIST.
One of Yahoo News’ picks for today: Lenders set to launch the ‘five-minute mortgage’
http://biz.yahoo.com/ft/060623/fto062320060821484061.html?.v=1
I won’t even try to hide my incredulity or lack of sophistication in trying to parse this. What - are lenders planning for a market in which agents can sell the idea again and again that a bottom has been hit, then hurry up and ram through the paperwork before seller sees evidence of continuing depreciation? Is there anybody in the supply chain who might have incentive to balk and put a stop to this? Or does it just all explode at the final load-off point, like in the retirement account mutual funds that are heavy with mortgage paper?
This is nothing new, just a little faster. The approval states “subject to acceptable appraisal” and so forth. Loan officers can currently dial in on their laptops and get basically the same approval
I doubt banks will start doing purchase transactions without full appraisals..especially going forward
This is nothing new, just a little faster.
A little? Sounds like a recipe for disaster, because these are unconditional offers, as it says in the article. memphis is right - this garbage will end up in the bag of the general public.
From the same article:
“Groups such as BM Solutions, Gmac and Mortgage Express already have advanced technology systems in place that enable borrowers to make online mortgage applications if they are going through a broker. These lenders can then make conditional offers, known as ‘decisions in principle’, which are subject to a full valuation of the property.”
“‘Lenders could develop their existing systems as electronic information becomes more available and reliable. It is a matter of lenders being comfortable enough with the technology to rely on it to make an unconditional (emphasis mine) mortgage offer,’ said Boulger.
I know that “pre-approved” is the most misused word in the English language. Is “unconditional” next?
We haven’t seen much lately on the “south of the border” insanity. Where I vacation nice houses could be had for $80-$100,000 on the beach in the late 90’s, they are now $300,000 to $1m. — BUT not selling. I’ve seen inventory stagnate in just the past 4 to 5 months. Most were bought cash from home refi’s from say Californians.
May New Home Sales: Monday June 26, 10 AM EST
May Existing Home Sales: Tuesday June 27, 10 AM EST
http://www.thestreet.com/_tscnav/markets/databank
In looking at some of the Florida numbers, I expect 2nd quarter we will start seeing some negative yoy numbers in some cities. I expect Sarasota/Bradenton to be down 5-10% yoy (even if April median stays where it is). For a topic, how about discussing how the Realtors are going to deal with these negative yoy numbers. How will they be able to spin this? They have been able to tout positive yoy numbers even though the market shifted quickly. I just got an email from a desperate Realtor telling me how the area is still up 10% from last year. What she failed to mentioned was that the median is down 15% from January ‘06!! My guess is there will be some new calculation where the result is multiplied by a (-1).
I have been thinking about valuation of residential houses, and how to determine if historically they are good. I think that in theory a reasonable amount of interest on a home should be 3.6%. Based on 3.1% inflation (historically over 100 years) and 0.5% interested based on historical real inflationary rates of real estate over the past 100 years. I might theoretically be a bit high on this assumption. It maybe more like .375. So in practice take 1996 (pre-bubble prices) selling price (available on Zillow, or if possible the sale price of comps in 1996) and figure out what the value would be after a 3.6% APR inflationary rate over 10 years. For those without a financial calculator take 1996 value times 1.424287. Does anyone agree/disagree this valuation?
Bill,
Yes, I’ve done some back-of-the-envelope calculations like you’ve mentioned, and think there is some merit to it. Interestingly, according to some of my calculations, whether you look at home price-to-income ratios, rent/own ratios, and “take a number and add X% per year” — even 10% per year in certain areas — I still come up with a drop of around 35% to 50% just to revert to the mean. IMHO, it may well overshoot this if there is a severe recession/depression.
I live in Ann Arbor MI, and calculating this is approx. I calculate in Ann Arbor that there should be 35-40% drop for most houses. There is definately a significant bubble in Ann Arbor, but nothing like CA.
http://heraldtribune.com/apps/pbcs.dll/article?AID=/20060624/BUSINESS/606240580
Above link: SHT front page article by a housing cheerleader. Up until a couple of weeks ago this rag has pretty much ignored the “bubble”. Now regular and prominently placed articles. I guess it’s to big to ignore any more.
Any way to measure percentage of foreign owners in US top cities, impact of weaker dollar in RE market?