Housing Bubble -- or bunk?

Business Week ^

[VegasCowboy]

Average national home prices haven't dropped since the Great Depression. But with the recent frenzy in the real estate market, investors are wondering whether the market can keep up this pace. Residential property investors have seen bubbles rise and pop on local geographic levels in past years, but the debate continues over whether a nationwide bubble has materialized.

See more at the link.

[spetznaz]

Yep you're right. I remember the same bubble threads 10 times a day back in '99 but it dealt with the tech/stock market bubble.

I've decided that there is no need to be the mythical Cassandra, doomed to speak warnings that no one would listen to. I did the same thing just before the stock bubble, and the only person who really listened to me was this guy i was investing with plus one professor (my investment buddy and I got out at the perfect time). Just like then the signs of a bubble are present now, and just like then there are a bunch of people saying anyone who calls out a warning is a Chicken Little, and just like then there will be a bunch of people left flapping in the wind when things adjust.

Look at the following graph. This is the Nasdaq circa March 2000. Anyone with a brain could obviously see there was something afoot and that it was a bubble, but almost no one paid any attention. In fact more people were buying then, even though the PE ratios were ludicrous, with the expectation that stock prices will continue shooting higher.

The housing market is eeringly similar. In fact I was watching an interview with Bill Gross this morning (to those that do not know him he is the biggest individual Bond investor in the world), and he was talking about the housing market in a rather bearish manner. He was talking about the high probability of an adjustment in housing prices leading to a recession.

But anyways, enough of TV talking heads and all that stuff. No need to talk about market adjustments and flipping. All one needs to do is delve into common sense. Simply looking at the situation gives someone all they need to know. Just like at the point before the stock market bubble burst. And anyways Chicken Little doesn't look that stupid when he warns of something that actually happens, particularly when he has done so before (and managed to make a neat sum of cash on top of that). And once everything settles we'll see who will be clucking.

From a previous post I placed to answer some other freeper who thought I was delirious: The fact still remains that the current housing market firmness (particularly in Las Vegas in Nevada, and many areas in California and Florida) is significantly skewed. Profit selling may have happened for 200 years, and once the bubble bursts it may very well happen for 200 more, but the current situation will undergo a correction pretty soon. As we speak median prices in Miami (since you are talking about florida) have gone up 92% since 2002, and places like Cape Coral (Florida again) they have gone up 43% since last year! And much of this is due to speculators. Anyways, the realestate market has always been, and will always be, there. However the current situation will resolve itself very soon. And there will be a lot of Greater Fools left out there gasping air like a guppy out of water.

Anyways, let me reiterate. In the long term prices will keep going up. Even in California and Florida. However in the short term there will be a sharp adjustment that will make many of the small-fry literally get blown out of the water with a grenade. And when they look back they'll see all the signs were there all the time. The signs are always there, in everything and anything in life, it is just that most people waltz right over them. For example, prices going up 92% in some places, coupled with 61% of people taking interest-only loans, with the added effect of some properties being flipped 2-3 times in one day, and an ever increasing number of people doing the buying for investment purposes and not to live in them. Although no one sees this, and when they are told about it (just like the stock bubble) they never hear.

I call it the Cassandra effect (from the Greek myth of the Prophetess Cassandra).

[funkywbr]

Bunk!

[wtc911]

In NYC-LI things have reached an interesting point. My wife and I own a nember of rental properties. We have a plan to add another one every 6-8 months. We follow certain criteria before pulling the trigger on a property, One of these is that the rent must service the debt plus 15%. We have put our plan on hold because rents have not kept pace with prices. For now we will sit on the sidelines and watch. If prices dip we will try to pick up someone else's mistake. If not, we will look to other regions although I don't fancy the idea of long distance management.

[weezel]

This is probably the liberal dogs '04 version of the worst economy in 50 years, the lie that put klinton in office in '93. They hope that by saying it often enough, they can make it happen, so they can win an election.

[wolfman]

The moment of truth comes when interest rates rise from their currently artificially manipulated rates and the suckers with the variable rate mortgages can't make their payments.

[VegasCowboy]

The moment of truth comes when interest rates rise from their currently artificially manipulated rates and the suckers with the variable rate mortgages can't make their payments.

I totally agree. If rates stay low, which it now looks like they may, I think the market will hold. If rates rise, though, all bets are off.

[RegulatorCountry]

"If rates rise, though, all bets are off."

I'm no fan of added expense and government interference in markets. But, I'd be in favor of slowly phasing in some sort of temporary penalty on non-owner occupied, speculative real estate purchased in markets that are regarded as being overheated. Whether that would be points on the front end, tighter requirements for qualification or even a higher interest rate. It would have to be very slowly introduced in order to not end up causing what it was intended to prevent, though. I might even favor using the funds generated by such a scheme for rate buydowns in the event of problems in that local or regional market, to soften the blow, if and when it comes.

[ConservativeWarrior]

I found myself in an identical situation, trying to move up a notch house-wise.

Our market (eastern PA) is appreciating at 1% a month. We'd been in our old house for less than 2 years, and reaped a 65% net profit when we sold. (after closing costs)

We elected to use a realtor, simply because the market is so fast and furious in our area. We decided it was worth the commissions to be on top of every new listing. Our old house sold the first day it listed, and it was priced right.

Funny thing is, with a 90-day settlement, by the time we closed on our new home, the amount of appreciation on the house in 3 months was greater than the realtor's commission.

[THEUPMAN]

The RE thing is different from the tech thing; houses have intrinsic value. That value has a subjective component, but there is a floor, unlike tech stocks, many of which could and did go practically to zero. Right now, I'm selling one (house) and building another, and so I am really putting some effort into understanding what's going on. "


Keep in mind homes do have a "bottom line".
The cost to build a new one.
If/ when ... costs fall , the price of ones on the market will follow. Of course location comes in to play, as well as a dozen other factors.

I know of some people who got in new homes right as a building boom hit their area. They are sitting on homes 2 years old that can't compete with the new ones coming on the market.
There is no sure thing.

[RegulatorCountry]

"I know of some people who got in new homes right as a building boom hit their area. They are sitting on homes 2 years old that can't compete with the new ones coming on the market. There is no sure thing."

It does look as if there will be quite a few high-end "better" or low-end "luxury" houses built in this township over the next few years. That is something of a bother. The thing that those homes won't have is what has begun to be called "mini estate," horses-permitted acreage (LOL, three acres) with a lengthy, private lakefront. That's just not available there, for anywhere near what I'll have in it. One just sold nearby for not quite $700k. I'll have a smaller home than that (3000 sq ft give or take, vs 4300) with all the popular upgrades, for a little over half that. I'm hoping that I haven't made a mistake, but I'm committed now, went to contract in late March. I just can't foresee the implosion that would be necessary to even eat up my equity at this point, let alone go negative. It's already worth about $50K more than I'll have in it, in a years' time, and it hasn't even been built yet. And this is in one of the "slow" markets.

[Polybius]

Unless California has some huge natural disaster (God forbid) or goes broke resulting in large layoffs, I don't see home prices going down

Almost 50% of all home-buyers in California are now having to use the "Interest Only Mortgage" gimmick to afford today's inflated prices.

An "Interest Only" loan with today's low interest rates allows a buyer in 2005 to borrow much more money for the same monthly payment as I did in the 1980's when I got my 15 year fixed-rate loans because, for 10 years, they are paying NOTHING to bring down their principal.

Sounds great.

Except that, in ten years, the loans require repayment of the entire principal in the last 20 years.

Not only that, most of them are written so that, after 10 years, they revert to a variable rate.

IF the interest rates stay the same, the monthly payments go up only 50%.

If interest rates go higher, it will be on top of that %0% increase.

Once those "Interest Only" time-bombs begin to explode, there will be a massive rise in foreclosures and in buyers trapped in houses that they cannot afford and cannot sell anywhere near the price they paid for them.

The last time that Interest Only loans were widely used in the U.S. was in the Roaring 20's before THe Crash.

[A CA Guy]

Anybody want an outhouse offered for $355,000 here in CA. Get it before it goes up again!!!

[RegulatorCountry]

"If/ when ... costs fall , the price of ones on the market will follow."

I didn't get the gist of this the first time I read it... to my understanding, the only things that could cause new home construction costs to FALL would be: a severe reduction in overseas (China) demand for certain materials such as concrete, steel and lumber; an easing of restrictions on building materials from Canada, or a steep drop in demand in the US, causing builders to reduce margins in order to move existing inventory. I can't speak for other areas of the country, but home construction costs are already lower than they should have been, due to the nearly exclusive use of (probably illegal) immigrant labor, so materials cost and profit margin are the only other areas that have room to fall.

[jetson]

The bubble may burst in a way. With all of the illegals coming in and taking up the available housing I think may keep prices up. Japan is an example of too many people and not enough housing. Real estate is very expensive there.

[Polybius]

The moment of truth comes when interest rates rise from their currently artificially manipulated rates and the suckers with the variable rate mortgages can't make their payments.

See my Post 31.

Interest rates do not even have to rise for disaster to strike since almost 50% of all California buyers are now forced to use "Interest Only" loans to afford these prices.

These time-bombs explode after 10 years when the owner is then forced to pay off the entire loan plus principal in the last 20 years.

Even if interest rates stay the same, that guarantees a 50% hike in monthly payments. However, most of these loans have Adjustable Rate clauses thrown in after the 10 year grace period. If interest rates rises, these buyers will be be toast.

What amazes me is the stupidity of the lenders that are loaning out real money that they have a very good chance of never getting back.

That is exactly what happened to Japanese banks that traded real money for overinflated Japanese real estate. The Japanese banks have yet to recover from that disaster.

[superiorslots]

Quote: Even if interest rates stay the same, that guarantees a 50% hike in monthly payments.


Plus whatever the hike in property tax will be. My property tax has gone up over the last 10 years way more than my income.

[Bogeygolfer]

I disagree with this line of thought entirely. You are castigating interest only loans without a clear understanding IMHO. The great debate about lending philosophies has always been fixed or variable? That's all this is and it's been the same the last 40 plus years. The interest only loans bring almost nothing new to this argument and hardly any new risk. We have always had the risk of a 30 year variable loan with 10 years fixed. The only twist of the interest only is that my 500K note I now have will be 500K in 10 years or 430K. The 70K is an equity risk and that's it, not an interest rate risk as you are portraying it. It is a risk over the 30 year fixed but less risky than a 30 year variable 7 year fixed non interest only loan. The additional 70K in equity in 10 years is largely irrelevant to me in most financial scenarios and the negative is more than counter by the additional $600 per month I'd save that could be redirected to retirement, investments, spending, or additional buying power. That said, I don't have an interest only personally but I'm not opposed to them and I am a bit perturbed by the chicken little theory and we should all panic cuz we don't all have 30 year fixed loans and plan to live in the same house for the next 50 years.

[Bogeygolfer]

My post #37 should have been directed to Polybius. My apologies.

[Labyrinthos]

The "Housing Bubble(tm)" Pops... What does that mean to me? The Value of my house goes down? Check. Houses just like mine are selling for 30% or so less? Ok... What can I expect from your(or anyones) point of view?

It will mean absolutely nothing to you if you don't lose your job or the means to pay your mortgage; you don't plan on selling the house in the near term; and you're unconcerned about the lost opportunity on the additional money you are paying to service the debt for what has now become an overpriced house.

For example, suppose you buy a house for $500,000 with 5% down and the value of the house drops 10% within a year of taking title. The house is now worth $450,000, but you owe $475,000. That's not a problem if you plan to stay in your house and weather the storm and you are able to make your monthly payments. But if you lose your job, or have to sell for any reason, or the bank forecloses, you are personally on the hook for $25,000 you owe the bank and in addition, you lose the $25,000 down payment that you put up to buy the house in the first place. Thus -- and this is very important -- while the value of the real estate has dropped only 10%, you have lost 200% of your initial investment (the $25,000 down payment and the $25,000 difference between the value of the house and the amount you owe the bank).

[Labyrinthos]

Anyone with a brain could obviously see there was something afoot and that it was a bubble, but almost no one paid any attention.

I paid attention and I went 90% cash on 03.15.00, and went 100% cash by the end of August.