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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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what’s different in this decline vs. the 1985oil patch-1990 East Coat-1994 CA and West……………
How many areas are NOT involved?
in the last run up the midwest and much of the country we’re in the game………this time all in and now everyone trying to get out
what’s different ??
Leverage to marginal borrowers…….
What does the future offer as a result of the run up in prices-all assets since 2000? I would like to offer this suggestion. Anything costing more than $100 today will hyperinflate in costs. Anything over $100 will experience massive deflation. My suggestion? In the long run keep liquid-cash.
What do you think?
I think that you have to set your boundary higher than $100. The stuff that has been inflating like mad has been the stuff that can be used as principal for loans. People may borrow to buy an I-phone but the debt is not secured by the value of the item. As MEW disappears demand for consumer crap will decline. But this sort of stuff was never an “asset” whose value could be used to borrow more money. RE and Stocks however could be HELOC’d or used as security to buy more stock as their price rose. This put them into an unsustainable upward price spiral. Even cars don’t tend to appreciate.
I’ve frankly grown tired of inflation talk from the economic talking heads. When the indexs don’t include housing, energy & food they’re not relevent to me. I understand that those prices are volitale but they are also the core costs of every persons existance. I’m sick of hearing that inflation is in check when I’d have to over extend myself to buy a home, prices of milk, breead, eggs, chicken, meat and other dietary staples are skyrocketing and gas is most likely permenantly above $3 for me hear in the Chicago area. I don’t care if inflation is in check on 60″ flat screen plasmas, Mototrola Razr phones and SUV’s. There should be an inflation index that strictly covers housing, energy, utilities, food, health care & education. If they had an index like that they wouldn’t be saying inflation is in check.
Amen
Chicago,
Exactly, most folks drive a car a couple times a day, put food in their mouths 3 times a day (or more if your not in prison), pay ever increasing rent and property taxes. Who doesn’t look at the price of gas these days when driving by a station.
The fed claims these numbers are too volatile and ping pong around too much to measure so they’re not included in the CPI. I say why not use a 60 day or 90 day moving average? We have the technology, we have the algorithms!
Because that would draw the attention of the sheeple to the reality of the situation - inflation on the goods they actually buy is running, and has been for quite some time now, very, very high compared to wages, such that real incomes have been declining for years. The pols do NOT want you to know this.
This is NOT the rise of MSM and gov’t “pro business” Enterpreneural Spirit in America.
It IS the re-emergence of unregulated gov’t/corporate lobby sponsored business cartels, monopolies and blackmail by contract for goods and services to US consumers for outrageous higher prices using every available media spin, statistic and LIE as an excuse for their massive greed.
Like in their wonderful massive house shortage SCAM.
Last Home..Buy NOW…or YOU and your poor wife and little kiddies will be sleeping under the freeway bridges with the Renting Trolls..FOREVER !
I understand that those prices are volitale
While they are volatile, there is no doubt that the trend has been up, up and away. High and low points are higher than in the past.
Absolutely. Oil has been over $55/bbl for at least a couple of years, no? Healthcare costs have been rising steadily since the late 90s, IIRC. Food prices seem only to go up. Does “volatile” mean “goes up” or are they trying to convince us that these prices go up **and down** in a random fashion? I’ve not seen prices go down…anyone see things differently?
I don’t think these prices are “volatile” as much as they show clearly how Americans are steadily losing purchasing power — rather quickly, at that.
One for the Californians (plus anywhere else there’s legislation similar to Proposition 13).
I keep thinking one ‘emergency’ measure government could take to help the construction industry would be to modify the re-valuation rules for a set period.
Say the Prop 13 amount were only increased by the value of the actual construction for a rebuild (or extension). A long-time owner in an expensive land area could replace their existing house with new construction, rather than take the (much more expensive per sqft) option of renovating within existing space.
Benefits:
1. Government gets a (slightly) higher property tax base.
2. Residential construction industry keeps in work to some extent.
3. Same same Loan industry.
4. Owners get the opportunity to upgrade their accomodation without moving or incurring a huge tax hit.
Drawbacks:
???
(Maybe there would need to be a qualifying formula for the size of the new construction, if it were considered desirable to stop people replacing cottages with palaces and destroying street ambience.)
Just thinkin’ out loud…
Perhaps Ben it’d be neat to have an “end of the quarter wrap” highlighting all of the major occurrences and stats for Q2.
Or a predictions thread? Check this one out from the same time last year:
‘What are your housing market predictions at the mid-year point of 2006? Call any market; local, regional or global. This thread will be forwarded through the holiday weekend.’
Another predictions thread is a good idea.
Or perhaps one predictions thread and one thread for looking back at the predictions from last year. The predictions from the link you posted were quite interesting: On balance, the housing-price related predictions were in the ballpark and the stock market/mortgage-rate/oil predictions were wide of the mark.
housing market predictions ??
Local market opinions have the most value IMO….
(It appears the call I made late last year, of a y-o-y decline in June 2006 for national US median existing home sale prices, was incorrect (or premature ).
Right. I predict that the return to normalcy will take much longer than I would have predicted. Just like the bubble went on much longer than I would have predicted.
It may take another year before we get the big leg down in nominal median prices, as sellers continue to hold out and investors are no longer willing to lend people money they cannot afford. Sales volume REALLY drops (still high despite the year-on-year decline given prices), new construction starts fall below 1 million next year (an actual low number, not like what we have now), but median sales price fails to crash until a year or more from now.
Pretty good prediction from GH last year:
Comment by GH
2006-07-01 06:06:55
Inventory will continue to rise and the buyer seller stand-off will continue while both sides dig in fro the rest of 2006. Areas which have already experienced extreme appreciation will continue to slowly deteriorate, while outlying areas will continue slow appreciation as the outer reaches of the shock waves propagate outward.
I would not expect meaningful downward price action until the coming wave of foreclosures and much anticipated workforce reductions associated with building and real estate begin to have an impact. This will be the BIG news for 2007 thru 2011 and when the storm abates I predict the middle class will be a whole lot smaller, the poor poorer and the rich richer. Property prices may well decline below the 40 year trend line as lenders swell their inventory of foreclosed properties and are forced to begin dumping en masse.
Yes, GH called it (and I agreed with him/her last year).
I was wrong about the stock market I thought it would be down and we would be in a recession by now. It appears the stock market has made a soft landing? The housing market is holding up better than I thought as well. The future? Home prices down again, stock market flat and interest rates down, dollar down.
Given that a credit crunch is already underway, the recent runup on the stock market was fueled by debt financing and the Fed stands ready in the wings with liquidity fire hose in hand, I believe it is rather hard to predict how much longer the stock market can rocket into the stratosphere.
http://www.marketwatch.com/tools/marketsummary/
I think we’re already in a recession. There tends to be a lag time between the beginning of a recession, and the widespread acknowledgment of its existence. Don’t focus so much on the stock market, but on the retail numbers. Things aren’t looking too good out there, despite the decent job outlook.
Would like to see another predictions thread.
I’ll stick with my prediction from last year…YOY housing prices, nationally, will be down 10-15% by Dec 2007. There will likely be some type of (failed) bailout attempt, which will stem the foreclosures temporarily. Recession by Dec 2007. Foreclosures rise into 2008 & national prices drop an additional 10-15% by late 2008.
The credit markets will likely be volatile & I believe there will be periods when it looks like everything will collapse, then suddenly all will seem well as more money is injected into the system (from???). Each time the credit spigot gets turned back on, though, the loose periods will be shorter and shallower than before, IMHO. Very slowly, liquidity will dry up, but it will probably take years to totally unwind.
The bottom arrives no sooner than 2010-2012, with an emphasis on 2012 (or later).
It appears the stock market always goes up and the housing market has reached a permanently high plateau.
I’m curious to know who is buying S&P/Case-Shiller index futures. The volume on the contracts is really low, maybe 1 sold every few days, so not a lot of people/entities are buying. I would like to know who these people are so I can get my head around which way the futures prices may be biased.
The problem is that although the S&P/Case-Shiller index is superior from the standpoint of measuring quality control, it is nonetheless a lagging indicator of current housing prices (as opposed to, say, the spot price of a highly liquid commodity which is the underlying of a futures contract in that commodity). When prices are falling (as they are currently), there can potentially be a very wide gap between what the S&P/Case-Shiller index says prices are, versus the actual market value of the underlying, particularly when sellers are unwilling to drop their list prices to levels where their homes will sell (i.e., to the actual market value). This price uncertainty in a weak market will naturally tend to make those index futures rather illiquid, right in line with the underlying homes that are piling into inventory rather than selling.
quality controlquality-adjusted price levelsOK, but sombebody is buying some of the contracts anyway. Do you have any thoughts on who?
- Hedge funds
- Private equity investors
- People with buckets of money and boxes of stupid
We’re talking a total of maybe one or two contracts per week, though. Maybe I’m wrong, but that seems to me like it would be peanuts for hedge funds and private equity investors and not worth their effort given the tiny dollar amounts involved (tiny to them).
I don’t think a box of stupid is required, either. The prices on the futures correspond to declines in the housing market, which sounds un-stupid to me. Regardless, there are two parties in on the transaction, so even if one is stupid, the party on the other side of it could be wisely taking advantage of that.
Any index based on median prices is NOT working in this downturn. Location has a lot more to do with house values than the median for a city. My research shows Las Vegas has 30% of its pending sales in only 4 of the 60 zip codes in Clark County. What good is tracking the median for Clark County if sales are good in 4 zips, and not so good in 56 zips. Would you rather own in the 4 zips that are still active. The median price reports are worthless.
The S&P/Case-Shiller index is not based on median prices.
Now that it is common knowledge that these CDO’s are toxic and losing value rapidly, can a pension fund manager be sued for malfeasance for continuing to invest in them?
After repeated assurances that “subprime is contained” and ongoing evidence to the contrary, is BB doomed to become the Irving Fisher of his day?
There is a great short article on Irving Fisher on p. C12 of today’s WSJ, including an old photo of Irving. On the opposite end of the MONEY & INVESTING section (p. C1) is a hilarious caricature of BB surfing (but presumably not moving) on a calm sea. Unfortunately I cannot find an online link to the article, but here is a tasty little snippet:
Optimists: Beware Irving
Can Today’s Market Titans Avoid Bias That Blinded Yale Economist in 1929?
Does anyone on Wall Street remember Irving Fisher? Rosy prognostications from the securities industry’s top dogs certainly bring the Yale economist to mind. In early October of 1929, Mr. Fisher confidently predicted stocks “reached what looks like a permanently high plateau.” The market, of course, promptly crashed.
Mr. Fisher’s mistake stemmed from his biases. Because he was fully invested in stocks himself, he was blinded to the risks of one of the greatest speculative bubbles in history.
…
Today’s credit boom could end with a similar thump. Yet some of Wall Street’s titans appear unusually confident in predicting that this time things will be different. For example, on Wednesday, Merrill Lynch boss Stanley O’Neal stated that the turmoil of the subprime mortgage market is “well-contained” and “there have been no clear signs it’s spilling over” into other markets.
Liquidity is here and its here to stay. That being said, the ability to mask inflation, and pump money into the system is the solution. A solution that may not fit with the old school notion that debt is not wealth. So, the masses can take on as much “New Wealth” as they can possibly handle, all while chubby felines roll in catnip and only drink the really creamy stuff on top……
“Liquidity is here and its here to stay…”
I keep imagining that I hear a giant sucking sound of liquidity draining down the subprime sump pump.
Will these “rules” have any teeth?
Bank regulators agree on subprime rules: sources
Thu Jun 28, 2007 6:11PM EDT
Market News
By Patrick Rucker
WASHINGTON (Reuters) - Bank regulators have agreed on new standards for subprime mortgage loans and are prepared to release it Friday, several sources familiar with the matter said Thursday.
The five regulators released a draft of the guidance in early March, and have been consulting both internally and externally on how to refine the standards that will guide how depository lenders make loans to borrowers with damaged credit.
The draft called on mortgage lenders to take more care when dealing with less credit-worthy borrowers by assessing whether they can cover long-term payments and warning them about hidden costs.
It also asks lenders to weigh a “borrower’s ability to repay the debt by its final maturity at the fully indexed rate.”
That provision is tougher than many lenders had hoped, as qualifying borrowers at the “fully indexed rate” could put a crimp in standards that evolved during the housing boom.
http://www.reuters.com/article/ousiv/idUSWAT00782220070628
New subprime mortgage rules from regulators
By Ruth Mantell, MarketWatch
Last Update: 10:05 AM ET Jun 29, 2007
WASHINGTON (MarketWatch) — Federal financial regulators issued new rules Friday for subprime mortgage lending to address adjustable-rate mortgage products that can cause payment shock.
http://tinyurl.com/2hutk8
What exactly does that mean? If they have to qualify at the start of the loan for the monthly payment at the end of the loan, then doesn’t that provide an incentive to make the loan on a “steady state” payment schedule? Because the fixed rate fully amortizing loan will provide the lowest “highest payment”….won’t it?
When I worked at US Bank in commercial lending, our underwriters would qualify borrowers based on an 8.25% rate. The cash flow of the property would have to exceed 1.2 based on the 8.25% index rate. This was back in 2003/04. We had 5 year fixed programs at 5-5.5% at the time. It would piss all of us sales people off but they did it for a reason…risk mitigation. And none of our commercial loan programs were no or low doc. So every borrower had to qualify for the loan as well. Needless to say US Banks portfolio of commercial loans has a very, very low default rate.
(The draft called on mortgage lenders to take more care when dealing with less credit-worthy borrowers by assessing whether they can cover long-term payments and warning them about hidden costs.)
Great. As long as the going-in FICO is high enough, you can still nail-em with loans they can afford and exploding terms. Long live Alt-A (until the huge wave of defaults means no one will fund them anymore).
What exactly is the “fully indexed rate”? Is it the maximum it could adjust to? Is it the current fixed rate? What is it?
These rules aren’t rules at all, they’re guidelines. Rules, also known as regulations, are published in the federal register as such and must be promulgated in accordance with the Administrative Procedure Act. These guidelines are simply statements of policy. A bank regulator cannot take direct enforcement action against institutions that don’t conform to the policy (but can for violation of a regulation).
The way the guidelines work is if a bank adopts them, then the regulator will take the position that the bank is operating in a safe and sound manner. If the bank does not adopt them and the regulator wants to take action against the bank, the regulator would still have to show, with evidence, that the bank is acting in an unsafe and unsound manner.
Also, these guidelines only apply to subprime credits, loans to persons with a poor credit history. Teaser-rate, option-pay, and similar loans to persons with a good credit history (high FICO) do not fall within the guidelines.
Is part of the subprime containment plan to replace private residential construction with lots and lots of federal projects? This might be construed as a preemptory version of WPA. (My grandpa used to say WPA stood for We Piddle Around).
U.S. May construction spending jumps 0.9%
10:00 AM ET, Jun 29, 2007 - By Robert Schroeder - 1 minute ago
WASHINGTON (MarketWatch) — Spending on U.S. construction projects jumped 0.9% in May, the most since February 2006, the Commerce Department reported Friday. The gain was driven by a 4.1% increase in spending on federal projects and a 2.7% increase in outlays for private nonresidential construction. Outlays on private residential projects fell by 0.8% in May, following a decline of 0.4% in April. Analysts surveyed by MarketWatch were expecting construction spending to rise by just 0.1% in May.
How about a topic discussing “herd mentality”. My thoughts are that as more people start walking away from their mortgage obligations, it may trigger others to do the same thing, since “everyone else is doing it”. Thereby attempting to add justification to their actions.
Definitely agree with you. If everyone has a foreclosure under his/her belt, then there is no shame. IMO, they will walk (and their lenders deserve every bit of what’s coming to them).
How is the median SFR list price in your zip? Lately it has kept climbing in ours (92127) despite a May 2007 median sales price ($816K according to DataQuick) over $500K lower. The current median SFR list price is $1,434,500 — halfway between the two listings show below. Notice that these homes were only built in 2006 and 2004, suggesting that someone bought them as investments but is now trying to cash in. I am totally stoked for the day when everyone recognizes the stupidity of investing in $1m+ SFRs.
7959 ENTRADA LAZANJA SD - Rancho Bernardo, 92127 $1,430,000 - $1,520,000
Beds: 5 | Baths: 6 | Sq. Ft.: 4,731 | Lot Size: 11,000 Sq. Ft.
Year Built: 2004 | Listing Date: 06/26/07
Description: Davidson plan 3, with lots of upgrades. Casita with full bath. Beautifully landscaped with easy… more
Your ZipRealty rebate: up to $8,580*
Price reduced Listing has multiple photos
8176 PALE MOON ROAD SD - Rancho Bernardo, 92127 $1,439,000 - $1,439,000
Beds: 4 | Baths: 5 | Sq. Ft.: 4,021 | Lot Size: 14,810 Sq. Ft.
Year Built: 2006 | Listing Date: 02/12/07
Description: Brand new house at el encanto at the crosby..Spacious & elegantly upgraded..Master bedroom… more
The current median SFR list price is $1,434,500
I think that its around 200K in 80537.
Will this site soon be morphing from a housing bubble discussion group to a bust survival site?
I’d like to know if there is any way to predict what the developers with condo buildings in which none of the units are selling are going to do long term. For now in the DC area we are seeing a lot of announcements that they are renting them out as apartments.
OK, that works as long as you see a turn around coming soon, or does it? What profit margin do the developers expect on selling? If we use 50% as an example and they were planning to sell for $300K, their costs were $150K. People around here say that renting is a good business if the monthly rent is 1/100 of the purchase price. So is the developer OK if they can get $1500 a month for rent? Can they just do that (yeah, I know that if too many people do this there will be mega downward preassure on rents) for a long while?
There has been some talk about the covenants the developers are subject to. How does that affect this? What else in their business model affects their ability to do this? Are thy going to go bankrupt doing this?
We have discussed that they have an incentive to finish building out SFR developments because of the infrastructure they have to build at the start, and presumably this is even more true of condo buildings (you can shave a few stories off the project, but no one is going to rent in a building where the hallways aren’t completed).
Anyway, that is what I would like to see. How likely is a developer to go into a long term rental business with a building that they originally wanted to sell. They have started it around here. But how long will it last?
Last time (early 90’s) in NY, a lot of them just boarded them up and waited for the next cycle. Those that could afford it, that is. The banks did the same thing with the defaults.
O.K., what has happened is this: You’ve had millions of people buy “assets” worth +$100,000 /+ $200,000 / + $300,000 more than they are currently (& slowly declining) worth. Also, you had millions of people borrow (and spend) +$50,000 / +$100,00 / +$200,000 via their home ATM machine.
So now, in real time…Assets (are not going up in value) and Consumers ( are not able to expand (or extract) their credit)
So, what’s the next… liquidity distribution game? …and when does it start?
Perhaps this one’s been played but I’d like to know what people want/expect out of this housing downturn.
For example, in addition to a house at 2.5x income, I’d like to own a few multi-family properties to hold long term as a cash flow investment. So, I’d like to see enough lopped off of prices such that most people think RE is a bad investment and multi-family properties stop being seen as potential condo conversions and become income producing again.
I also realize for that to happen, it seems that this country would most likely fall into a very ugly recession if not depression.
Is it possible to ask for 30%-50% off of peak without bringing about economic depression?
I think housing and incomes *have* to come back in line, and I don’t think that this necessarily results in a despression. Credit is already tightening up, and the disengagement between incomes and housing prices can only exist as long as there are lenders out there willing to overlook such an obvious risk factor. It is worrying how deeply Wall Street has tied itself to sketchy mortgage practices, but in many ways it’s no different than how deeply they got involved with dot coms that didn’t even have a clue how to earn a profit. And we survived that.
Also, remember that a large majority of homeowners bought pre-2000 and are not HELOC’ed, and so are not directly affected by such a price reduction.
a large majority of homeowners bought pre-2000 and are not HELOC’ed
Add together new and existing home sales for the 7 1/2 years since 1/1/01 and you get over 50 million dwellings changing hands. Obviously there’s double (and triple etc.) counting in there, but add in HELOC’s and I reckon that majority might not be as large as you think.
Topic: should Realtors who have declared bankruptcy or been foreclosed upon be able to be licensed (to sell real estate)?
Same for Appraisers and Mortgage Brokers.
It appears that here in southern NM, a fair number of realtors are also flippers.
~Misstrial
2nd topic: should persons who are seeking home loans be required to prove legal residency in the U.S.?
LEHIGH VALLEY (ALLENTOWN, BETHLEHEM, EASTON) PA has almost a year’s worth of inventory. Our boom was over 100% in 5 years because commuters from NJ & NYC were bubbled out of their markets so what did they do? They commute 3-5 hours a day and try to maintain a life. The problem is they realized you can’t have a life working 8-10 hours and driving 3-5 hours. We have McMansion (SAMEVILLE) neighborhoods all over and 1/2 of them are sitting empty. The local realtors who control the local paper(MORNING CALL) always try and say prices went up because of commuters they never explain why the last 100 years or so people didn’t commute then. Here’s my rational thoughts on commuters. In rural parts of PA which are 1-2 hours from the lehigh valley you can buy a home say an all brick (not just the front like McMansions in sameville) with 1-2 acres for under 100k so why not commute and buy one? Because who in their right mind want’s to spend 15-20 hours a week commuting to and from work? The problem is soo many people bought into this myth but recently nobody is buying and houses that sold last year for 185-200k are selling for 130-150k (although the paper doesn’t like to talk about it). I think in the next few years are prices are going to get back to 2001 levels or before. I can’t wait because the average family income for a lehigh valley resident is under 80k so who can afford the 210k average home, nobody unless you want to be a debt victim. I think the economy is heading towards something close to a depression over this. Maybe then more young families will be able to buy a home in the area they grew up in. I always say to people who believe their home they paid 85k in 2000 is not worth 175k they think if they could afford to buy their home at that price, they always so know, that’s how I think you can call something a bubble price.