Housing Bubble Trouble: Have We Been Living Beyond Our Means?

The Weekly Standard ^ | 4/10/2006 | Andrew Laperriere

[ex-Texan]

The Weekly Standard now is proclaiming the housing bubble is real. This is not an editorial from the liberal mainstream media. It is a conservative publication considered 'must read' material by many White House staffers. [Yada, yada] Before this editorial was published, it was revealed that speculators may have driven up Nevada land prices in prime regions. Last month, Nevada land prices suddenly fell an average of 47%. But many here on FR would argue that land cannot go down in value and only the structures man erects on the land can go down. Yeah, right. I would argue that The Weekly Standard is behind the times. Just like cab drivers became great sources for stock tips in the 1990's. The buzz is all over the street. Millions of home owners with exotic loans are "about to experience significant payment shock."

[Alberta's Child]

I suspect that this issue -- and not cheap labor -- is the primary reason why this country insists on allowing a flood of illegal immigrants to pour across the border every year. A massive population increase is the single most effective means of propping up an inflated housing market during a period of rising interest rates.

[2banana]

Buy Low and Sell High - The easiest phrase to say and the hardest thing to do in real life. Housing - bubble or not - is very high. It could go higher but the phrase is not "buy high hope it goes higher." It is to buy when everyone else is selling (like today's US automotive stocks) and to sell when everyone else is buying (hello $500,000 1 bed condo in DC).

[ex-Texan]

Please excuse my stupid typo in line one and another slip in my opening comment. My comment should have said "last month it was revealed that land prices in Nevada fell 47% in the fourth quarter of 2005."

[pleikumud]

yada yada yada. Watch some of the major home builders' stock prices rise 30% this year. They continue to have strong sales and earnings.
The sky is falling!

[Dr. Frank fan]

I get so bored listening to/reading diatribes from people who want to speechify about how there's a "housing bubble". Maybe there is, maybe there isn't, but why the speechifying about it? (which accomplishes what?)

If you believe there's a "housing bubble", fine, put your money where your mouth is. If you're in one of those front-loaded mortgages, sell your house and start renting (which is the closest equivalent of "short-selling" on housing). If you have any investments in real estate, get out of them and into bonds. Whatever. And if none of that applies to you, so much the better (because there's a "bubble").

Either way, there's nothing to talk about.

[roaddog727]

I suspect that what we are seeing is a direct and inverse result of the FED continuing to bump up interest rates.

If the FED continues this trend for another 1/2 to 3/4 of a point, I further expect to see a precipitous drop in both new home sales as well as existing home turnover.

ARMs a great - until interest rates rise. Once rates start bumping up, they're killers. 30 yr and 20 year fixed rate mortgages are your friend.... (if you got them under 6%)

[Cedric]

People have been trying to talk this real estate bull market down for at least two years. Fretful, almost frantic articles such as this one suggest that we have another leg up ahead of us.
Bull markets "climb a wall of worry". {Joe Granville}

Show me the recent "this is different" {a la the internet bubble rationalization} articles. They could make me nervous.

[Centurion2000]

Consider the price-to-income ratio (above, right), an obvious measure of affordability. This ratio has reached an unprecedented level in the bubble markets. While this ratio hovered around its average of 4-to-1 for the past 30 years, it has zoomed to nearly 8-to-1

Are they referring to price to annual income as a ratio?

[caver]

"last month it was revealed that land prices in Nevada fell 47% in the fourth quarter of 2005."


Just what good is all that desert in Nevada anyway? Why did people pay an overinflated price? I don't feel much sympathy for these people who don't know what they are buying.

[Hermann the Cherusker]

What's worse, the vast majority of these loans were extended based on "stated income," which means the bank didn't verify the income of the borrower. Of course, consumers usually have to pay more if they don't provide tax and payroll records to the bank to verify their income. Common sense suggests many are fibbing about their income to qualify for a larger loan.

I've signed on for two car loans and four mortgages in my life, and every time I had to provide actual pay stubs and tax forms and the like to verify income, as well as documenting my savings and sources for down payments or potential money reserves.

What kind of places are just handing out money to anyone who claims to make X dollars?

[Crooked Constituent]

It all depends what market you are in. Here in southeastern Wisconsin, things are slightly over-valued, maybe by 5%. No biggie.

You are right, this correction began months ago.

[.cnI redruM]

I wish that thing would hurry up and pop already...

On the other hand, if it keeps going another 6-10 months, my wife and I will have a much bigger down payment saved up when we buy.

[ex-Texan]

I am recommending you go out tomorrow and buy this tiny 400 sq. foot cottage in Provencetown, MA. Keep telling yourself there is 'no bubble.' This beautiful house was listed for sale at $600,000. Just think: If you beat the seller down on his price by $ 100k, you may be able to pay cash for a brand new GMC automobile. And pay off all your credit cards. Yada, yada, yada.

[D-Chivas]

There's a "bubble" in certain locations around the US, but not everywhere.

Oh, and existing home sales are up...

[PittsburghAfterDark]

The one problem that I know is inflating housing prices are interest only mortgages.

Yeah, okay, great, you now have a $500,000 home that you can mortgage for $1,500 a month. You never build up equity. You never own anything. You're making a rent payment. You're floating your variable interest rates on LIBOR instead of prime. You still have to refinance or face a balloon payment in 10-15 years that you can never pay.

Interest only mortgages are what's driving ever rising housing prices. This is true in most "hot" housing markets where they are 33-50+% of financing in the DMA.

This is a bubble, no ifs ands or buts about it.

Liquidity is the key to financial well being. Interest only mortgages allowing you to have a home above your means is a recipie for disaster.

[SomeCallMeTim]

For the past five years, Americans have spent more than they have earned--last year, the net borrowing amounted to 3.7 percent of GDP, or over $500 billion.

I don't believe this. Based upon my observation of the world I live in, and my analysis of IRS "income" tables.... I conclude that "income" in this country is GROSSLY understated. Imagine that. We tax on income, but... somehow, it doesn't all get reported. I'm ready for the Fair Tax!

Anyway... the gist of the article certainly rings true. See my other posts on other similar threads. I'm not worried though... because, I asked my realtor neighbor about these negatively amortizing loans, and he said.. "Oh, those are only given to people with very high incomes who could easily manage a negative change". Ok... now I can sleep better. ;-)

[investigateworld]

Being in the construction biz I watch the rents to price ratio closely as it's been for me the most accurate indicator. It's starting to climb in Portland Metro, so I predict we'll see a 'market adjustment' before the other states.

We are not immune here as the largest single "group" of buyers are from out of state.

Incomes alone in Oregon cannot support these price increases. But I'll be working my business till the fit sits the fan. I've been to this rodeo a couple of times before. Ain't* no biggie.

*With apologies to Miss Barnett my 8th grade English teacher.

[I still care]

Have you seen all those TV shows on "Flip this house" etc?

The public is under the impression that if you want to make money, and you are handy, buying and selling a house is almost a sure thing. They are showing people on these shows making 30 or 40 grand for a month's work.

Lots of amateurs getting involved. Professionals know the ins and outs of the market, are usually prepared on what to expect and have a cushion in the bank or enough committed rental properties to see them through.

A guy bought my old house last August for about 10000 undermarket, and put in around 10. He's been trying to sell it since November for 30000 more. I've been watching....