How to tell if housing market has peaked

San Jose Mercury ^ | 8/13/2005 | Damon Darlin

[ex-Texan]

For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.

So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.

When they stop believing, prices fall -- and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. ``Economists looking at the macrodata will be the last to know,'' said Richard A. Brown, chief economist at the Federal Deposit Insurance Corp.

* * * In Boston, for example, the time homes are sitting on the market has stretched to 46 days from 39 days a year ago.

An analysis of price appreciation, done for the New York Times by the Harvard University Joint Center for Housing Studies, shows that price appreciation in communities including New York City, Austin, Philadelphia, and Providence, R.I., is decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.

Hit the link below for detailed report.

[ex-Texan]

I just got off the telephone with a very close friend that lives in a posh suburb in Los Angeles County. For those who know the area, he lives in a ritzy neighborhhood off Mulholland Drive, in Calabasas. His home is a short drive away from Malibu Beach. My friend is in the real estate biz in a big way. His wife is a major player with an investment bank and in charge of a national commercial real estate portfolio. In short, my friends are very major players in real estate.

He told me this morning that the real estate bubble apppears to be bursting in La La Land. Houses are sitting vacant and unsold for over 60 days. Speculators are starting to complain that they will be very lucky to sell homes for what they paid for them.

Read More About R.E. Bubbles?

[RegulatorCountry]

Oh, the humanity... houses "sitting" on the market for sixty days. We're thrilled with an average of 72 days here, having improved from 102 days last year. Appreciation is looking better, too, up to nearly 5% (gasp!) from around 3% last year.

Poor babies, might even have to actually DO something to sell their house. We're doomed.

[misterrob]

The talk of a bubble bursting is still a bit of hysteria in light of the current economy. Is it really a matter of the bubble busting like the NASDAQ did 5 years ago where you saw the index plunge by 40% in under a year or a case that prices are simply not going to increase any longer?

As an aside, when investors don't see any hope of making money then you will be left with people who want a place to live. If the place offers a good school district, safe neighborhoods and proximity to good paying jobs then you are going to see demand.

[Alberta's Child]

Home prices go up as long as people expect them to go up.

Exactly. One of my clients is a real estate developer who started selling off many of his assets last year. He knew it was time to cash out when he started hearing people suggest that prices "will always go up."

[USA-Forever]

R.E. In The D.C. Area Has Slowed A Little Bit---Talked To Top Real Estate Agent In Montgomery County---"It Will Peek Eventually, Maybe Slight Drop, Then Stay There For Awhile"--He Showed House In Our Neighborhod---17 lookers From 1-5 Sunday.$635,000.

[ex-Texan]

For the past year, houses were selling in two or three days. Buyers were automatically requested to bid over the asking price and even submit resumes for consideration by sellers. This is a very dramatic weather change in the local real estate market.

[Alberta's Child]

Is it really a matter of the bubble busting like the NASDAQ did 5 years ago where you saw the index plunge by 40% in under a year or a case that prices are simply not going to increase any longer?

I'd say neither. Real estate is not a liquid asset like stocks, so prices generally don't rise or fall as fast as the stock market does. The biggest risk that I see is the potential for mortgages to drive a decline in prices -- if the numbers of people with these adjustable rate or "interest-only" mortgages is high enough that minor changes in interest rates could force them to sell just because they can't afford the higher payments.

[ex-Texan]

"Lookie Loos" are not buyers.

[ER_in_OC,CA]

The latest fun indicator that a cool-off is on the way is that there are various TV shows, articles in magazines, etc. about average middle-class people flipping properties quickly for fun & profit.

Reminds me of all the articles about people dropping out of work to live on their stock windfall and do a little day trading on the side.

The core factor is that median home prices are far above what the median income earning family can afford here in my area ov California. As interest rates move up slightly, the creative financing angles to make such homes a possibility will shrink, thus reducing home prices.

The expectation for a drastic "crash" in home prices will probably not come to fruition. Homes are much, much, MUCH less liquid than stocks and other investments.

This article still has good news -- it says that home price increases have slowed. That still means the home prices are increasing. It doesn't mean home prices are yet decreasing in general (we all have a few examples in our neighborhoods where people can't get what they've asked). That phrasing is akin to congressmen saying the budget was "cut" when in actuality the rate of increase was simply slowed.

Certainly not all homes and areas will be affected equally. Nice neighborhoods with good quality construction with good services and little crime, surrounded by good economic base and no factors of external obsolescence will do fine. The "weakling neighborhoods" will suffer most -- those bordering on questionable areas, those with poor school districts (relatively speaking), etc.

[RegulatorCountry]

"Buyers were automatically requested to bid over the asking price and even submit resumes for consideration by sellers."

A move away from unsustainable speculative fervor, which is exactly what you describe, is a good thing. The sooner, the better.

[Zechariah_8_13]

We bought our home in the Austin area for less than than the sellers paid 2.5 yrs previously. This isn't uncommon around here.

This town lives and dies by the IT industry. The bubble already burst, and things are just beginning to stabilize again. I expect home prices to appreciate slowly, but continue to appreciate nonetheless. There's SO much growth here, and so many new highways being built, that demand will increase steadily.

For areas that are already overbuilt, I do expect a (small) crash.

[joyspring777]

You bet! I don't trust the realtor system.

Does anyone remember how Harrison Ford got caught in Hollywood Homicide in the deal?

There is a great book called Freakonomics. The author used statistical data to reveal that Realtors have extremely, extremely little incentive to get you that last $10,000 for your house. But...they wait and get it for theselves!

[HKMk23]

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[misterrob]

Of course they don't and that's not what I was saying. The NASDAQ from 5 years ago was a bubble that popped whereas housing prices that are not increasing like they were is not a bubble. When you remove investors from the market you cull out some of the factors driving rapid price appreciation. When you have some people who have to dump their houses due to unaffordability issue that slows it down even more. When the broader economy crashes then you have a real problem and given the run up in energy prices and Mr. Greenspan's need to strangle the economy I worry that there could be a domino effect.

[ex-Texan]

"Real estate is not a liquid asset like stocks, so prices generally don't rise or fall as fast as the stock market does . . ."

On, its doesn't ? Have you seen this before? This real estate market is not normal by any stretch of the imagination. Consumer spending is tied to credit, and, for the first time in memory, consumer credit has been bundled together with risky home loans. The price of homes has been inflated by 'get rich now' financing, massive Fannie and Freddie fraud, excessive greed and very risky speculation. This bubble is crazy beyond measure. When it collapses the effects will be felt more harshly than anyone can imagine. E.g. About 43% of all the jobs created in the past two years are real estate related. Get ready for the roller coaster ride of the century.

[durasell]

Real estate crashes happen in slow motion, which makes them all the more painful.

[Labyrinthos]

He knew it was time to cash out when he started hearing people suggest that prices "will always go up."

I take the same approach with the stock market and bailed out in the first quarter of 2000, when people were quitting their jobs to become day traders because the fundementals had changed and DJIA was going to 40,000.

I believe the bubble has already burst in many areas, but unlike the stock market where the effects are more immediate and widespread, real estate bubbles take time to roll through the economy. My belief is based upon my own personal observations in area where I live, which was a very hot market: Inventories are up, duration on the market is up, selling prices are coming in at 5% to 8% below the asking price (instead of at or above the asking price), the spread between the rental value and market value continues to grow, home builders are building fewer houses on spec, and closings are down.

[Ditter]

72 days?????? We had a house sit on the market for 2 years in 1979-8o. Of course it was located in the country and was more house than the area was used to. Then when we finally sold it we had to finance it for a number of years.

[nickcarraway]

This article was already posted here.

[Labyrinthos]

Is it really a matter of the bubble busting like the NASDAQ did 5 years ago where you saw the index plunge by 40% in under a year or a case that prices are simply not going to increase any longer?

Many people don't realize or understand that real estate transactions arer often leveraged, and as a result, the individual impact is greater than the percent decline. Suppose, for example, you buy a $500,000 house at the top of the market with 5% down and a mortgage for the $475,000 balance. If the value of the house drops a mere 10% and you are required to sell, then your loss is 200% of your initial investment.