Posted on 12/10/2004 9:05:07 PM PST by nanak
OK. This time they mean it, really. Economists in San Diego and around the country are saying the biggest housing boom in the region's history is slowing and may be finished by the end of 2005.
"The phenomenon of doubling your money in three years is over for this cycle," said Jim Teak, a San Diego-based economist with Prudential Realty of California.
A lot of people agree with Teak. The influential UCLA Anderson Forecast says in a report out today that 2005 could be the year that "reality and reason" finally cool off the housing market.
Higher interest rates will keep overall price increases in the single digits, and may force small price drops in the more expensive neighborhoods, the report said.
Although most homeowners will be able to weather the slowdown, it could be bad news for first-time home buyers and speculators who have bought in recent months.
"If you locked into a great long-term rate, then you are OK," Anderson economist Edward Leamer said. "But people who think they are going flip – get in and get out in the next several years – are the people who need to rethink their strategy."
Of course, some economists have been saying the housing market is overpriced for the past year or longer. UCLA's economists said a year ago that they were starting to worry about a housing bubble, but prices have continued to rise.
The median price for existing single-family homes in San Diego County reached $489,000 in October, up nearly $100,000 from a year ago and a 44 percent increase from October 2002.
Leamer said the elevated prices are more the result of easy-to-get financing than robust economic growth. In the end, economic growth is needed to support the prices, he said.
There are indications all over the county that the market is already softening. Houses that in April would have sold in six days are staying on the market for 90 days, Teak said. Owners of higher-priced homes are being told to prepare to have their homes on the market for as long as six months.
"Six months ago, if you had a house at $900,000, you would have gotten it," Teak said. "Now you're lucky to get $850,000."
The housing slowdown won't be limited to Southern California and could shave as much as a half-point off the growth in the country's gross national product in 2005, Leamer and others said.
"Housing will be the one sector driving the anticipated slowdown in economic growth next year," said Bill Strauss, a senior economist with the Federal Reserve Bank of Chicago.
Beyond 2005, economists are concerned about the large number of adjustable-rate mortgages being sold and what would happen if the rates go up. Several are concerned about the growing possibility of a housing-led recession.
Leamer said the only reason a housing bubble didn't burst in the recession of 2001 was aggressive cuts in short-term interest rates by the Federal Reserve.
The Federal Reserve worked to keep mortgage rates low by cutting the federal funds rate from 6 percent to 1 percent from January 2001 to June 2003. Those low interest rates helped push home prices to the point where the ratio of prices to rental rates has reached record highs.
Leamer likens this ratio to the price-to-earnings ratio on a stock. And as anyone who studies the stock market knows, inflated price-to-earnings ratios are often a sign of a coming bust.
"We are in very uncertain times," said Robert Shiller, a Yale economist who studies economic bubbles. "Some of the adjustables (mortgages) people got in a couple years ago are already losing their interest-rate protections."
Shiller sees the possibility of a long, slow slide similar to what happened in Southern California in the 1990s. Los Angeles home prices dropped more than 30 percent from 1991 to 1997, and prices in San Diego dropped nearly 10 percent from 1991 to 1995.
It could get ugly if prices drop and consumers are unable to handle the increased mortgage debt on top of all the installment debt they have piled up in recent years.
"It may well be that the big win for reality and reason will come in 2006," Leamer wrote in his report. "We are talking a recession driven by a plunge in consumer spending on homes and durables."
Also, what could really start a collapse are interest only loans being done for homebuyers that use this product because it's the only way they can afford to buy homes at inflated prices. They may be (barely) able to afford the payment now, but in a few years there could be a double whammy. First, (assuming a 5 year interest only loan), now a loan becomes payable in 25 years rather than 30, and second, the rate that was in the low 5's is now in the 7 and 8 range (the rate could go as high as 10% or 11% depending on the ARM terms). Assuming a $200,000 loan at a starting rate of 5%, someone with an interest only payment could see their mortgage payment go from $833 per month to $1413 at a 7.00% rate, or $1817 if rates go up to 10% during the next 5 years. You could have quite a few foreclosures along with a limited number of buyers because they can't afford the home prices, even with interest only financing. I blame the mortgage investors for lowering the qualifying standards. They have made it too easy to qualify for financing. People making $25-30k a year in salary really shouldn't be buying homes 5 - 6 times their incomes. Personally, I plan on renting for a while and whether the upcoming storm.
I remember getting some unplanned upon money in 1999. I remember I wanted to get in on the tech stocks so I ended up buying a couple of tech/internet sector funds when the NASDAQ was 12,000. I believe both of those funds are now worth about 30% of what I paid for them. I definitely got in at the wrong time. I think people that have been buying homes after the big run up in home appreciation might have the same experience. I hope they got a fixed rate and a good home, because it doesn't look like they'll be going anywhere for the next few years.
I watched a similar report on the Nightly Business Report on PBS
[Excerpt and link: http://www.nightlybusiness.org/
2/07/04:Real Estate Meets Irrational Exuberance
PAUL KANGAS: Part of the reason consumers have been in the mood to spend this year is a strong housing market. Home prices have continued to soar, despite rising mortgage rates. But now some experts say American`s passion for real estate is becoming irrationally exuberant. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Imagine a situation where home prices plunge 10 to 20 percent over a few years, where houses languish on the market for months, even as sellers desperately slash their asking prices. Some economists say that`s not out of the realm of possibility. They warn the U.S. residential housing market is a bubble ready to burst.
IAN MORRIS, CHIEF US ECONOMIST, HSBC SECURITIES: There are warning signs flashing. Firstly, prices have nearly doubled in many states right across the U.S. over the past five years. Also, valuations are extremely rich, particularly if you look at prices relative to income or prices relative to rent.
MILLER: Morris is also troubled by what he sees as a bubble psychology among homebuyers. He says many assume that because real estate prices have skyrocketed the past few years, they will continue to do so. Another concern is rising interest rates, because they make borrowing more expensive. The Federal Reserve began nudging up rates over the summer and is expected to keep raising rates next year.
MORRIS: It typically takes more than just one or two rate hikes as well. You need usually a good series of them, say, over a year, before people see the monetary tightening having an influence on their asset price expectations for the future. So, difficult to say, but we suspect that by the middle of next year, the party will be over.
MILLER: But not everyone buys those arguments. The housing bulls point out that although interest rates are rising, they are still at historically low levels.
DOUG NAIDUS, CEO, MORTGAGEIT: Notional interest rates are still relatively low. If they rise by a percent or 2 percent over the next couple of years, they`ll still be relatively low. And if they continue to rise in a manageable way, the way they have in the past year -- most particularly the last six months -- that is something that will be absorbed into the market.
MILLER: Plus, optimists say the popularity of adjustable rate mortgages has made borrowing more affordable for many Americans. And some say the longer there`s talk of a bubble, the less likely it is to actually happen.
NAIDUS: The mere fact that we`ve been talking about a bubble now for a year and a half has added duration to what people would call a soft landing.
MILLER: A downturn in housing-- if it comes-- could have serious implications for the overall economy. Some economists predict that if home prices fall 5 to 10 percent nationwide, the economy`s growth rate could be cut in half. Erika Miller, NIGHTLY BUSINESS REPORT, New York.]
I think the report was slanted as you watched the video toward the bubble bears from the liberal think tanks (true real world experts/sarcasm)
I'd like to note that your article focuses on local markets affected adversely by federal, state, and local zoning issues with high environmental controls and prohibitions on building that inflates the prices of real estate to unrealistic levels (eg. San Diego and all). Note that NJ real estate prices have sailed through the roof with Gov McGreedy's control on housing growth/taxation measures. Real world house costing $250,000 in 1994 costs over $400,000 because of NJ's environmental, judicial, and governmental intrusion into the free market.
I don't quite find the connection between this biased pseudo-economic report mirroring the 1920's?
can you explain what's driving the short-term rates?
Telecommuting already took off...the jobs went to India.
Kleenex and Puffs Plus will be lucrative stocks when the debt hits the fan.
Yes,the market BUBBLE of the mid '20s (America was actually in a recession in the early '20s and the stock market hadn't zoomed yet!)-'29 and the TECH BUBBLE of the mid '90s,which broke in March of 2000,have similarities a plenty;however,that has less than nothing to do with the supposed real estate Bubble that "experts" have been calling for for years and years now.
The last two real estate BUBBLES,were in 1873 and 1890. Real estate,like most things,go in cycles and has ups and downs;however,BUBBLES are something quite different.
Exactly so! :-)
Correct!
Have you looked at prices in Florida.....in the RED counties? It's just as bad.
Florida real estate bubble mid-1920s
I was referring to actual,historical real estate BUBBLES that had nothing at all to do with the stock market,which the '20s Florida land cons did.And once the market crashed,lots of things,including real estate fell apart.Whereas the properly named real estate BUBBLES of 1873 and 1890,where separate and distinct BUBBLES on their own.
Today's real estate prices have been tied,more or less, to the market and the stock market hasn't crashed.:-)
In the meantime, this is not on FR as its own thread. But check the article date and the source
I am so sick of the doomsayers and liberals around here.
http://www.nbnnews.com/NBN/issues/2003-03-24/President%27s+Message/2.htmlDon’t Believe Everything You Read in the Papers
Week of March 24, 2003
Don’t believe everything you read in the Wall Street Journal — at least if it’s about housing. On the editorial page and even in its news coverage, over the past year or so this venerable newspaper has launched a steady barrage of attacks against the industry: Housing is the next big financial bubble that will burst. Fannie Mae and Freddie Mac are the nation’s next Enron. Housing is setting the nation up for a major economic tumble.
These inflammatory stories are being published by the most respected, most widely read financial newspaper in the country. But that doesn’t make them true. Underlying the Journal’s coverage is the assumption that housing values are speculative and prices are headed for a big fall. That assumption ignores a mountain of evidence that the fundamentals for housing are strong and likely to remain strong for years to come:
- Today’s housing market is not overbuilt. As Federal Reserve Board Chairman Alan Greenspan sees it, “There is little indication of a supply overhang in newly constructed homes. The level of overall new home construction…appears to be well supported by steady household formations.”
- Demand for housing is climbing in tandem with population growth. The U.S. population is expected to expand by at least 30 million during this decade, producing, on average, more than one million new households per year. Factoring in the number of units that are lost from the housing stock, as well as second homes and other vacancies, more than 1.8 million new housing units (including manufactured homes) will be needed on average each year to meet the demand. That is about the level of today’s pace of housing production.
- The underlying cost of building a home will continue to rise. Finding land is by far the biggest problem facing home builders. The cost of a developed lot now accounts for about 35% of the sales price of a home in fast growing markets, and the upward spiral in lot prices isn’t expected to change. As Chairman Greenspan sees it, “Local building and land use restrictions continue to constrain the supply of buildable land in many areas, whose price increases also tend to outstrip the rate of inflation.” Over the last 50 years, home prices have increased about 1% faster than overall inflation, he said, and the differential definitely has increased in recent years as land-use controls have proliferated.
- While stocks have plunged more than 30% in a single year, existing home values have never shown an annual decrease on a national basis.
- “There is no national housing market,” according to Alan Greenspan, and any bubbles in home prices “that might emerge would tend to be local, not national, in scope.”
- Families need a place to live and their confidence in the value of their homes is well founded. The market value of America’s single-family homes is more than $13 trillion. Home equity is more than $7 trillion, and is continuing to grow despite record refinancings during the past year. History has shown that housing prices can experience some cyclical stagnation or even declines, but over time home values are likely to rise, without the extreme gyrations of the stock market. The tax benefits afforded home owners also bolster the market.
Perhaps the Wall Street Journal is too close to the stock market to realize that Americans don’t buy and sell homes the same way as they invest in stocks and bonds. People live in their homes and leaving them is not a snap decision. Or as Chairman Greenspan has concluded, “Any analogy to stock market pricing behavior and bubbles is rather a large stretch.”
True real estate BUBBLES are usually,though not always,not centered in just one city/area/state.
I'm not an expert,by any means,and I'm not all that familiar with real estate prices and its history in California.But for a BUBBLE to burst,it really has to cover more than just the highest end of the market.Sounds like just a downturn to me,though.
B-b-but that fine Mr. Ponzi was a player in the real estate crash of the 1920s. He would never get involved with anything dubious...
I've had this discussion with others here. My theory is that certain home owners are the next Argentina. The market crashes, but the banks will hustle to do work out agreements -- re-structuring the loans -- as to not take a loss. Some people may walk away from a $500,000 mortgage on a $275,000 home, but not many.
I vote troll since we haven't heard from the poster since its conception.
Very interesting article! Thanks for posting it and the link. :-)
to be fair should I trust the NBN to give me fair and balanced info on house buidling :-)
err...housing markets..not buildings
I'd like to add another factor to the mix before I join the boss in bed. I see a trend in our area to three income purchases. Grandpa or grandma moving in with a working husband or wife. Or working kids in their 20s. Loans being based upon three incomes.
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