Posted on 12/27/2006 10:46:40 AM PST by truth_seeker
When you start comparing a speculative tech bubble to a housing bubble you become a doom-n-gloomer. The dot.com bubble was pure speculation. Stocks that haven't shown a dime of profit went through the roof in value. Home prices were driven by real high demand and real limited supply. It is a ridiculous comparison. Certainly the housing market is cooling off (which is exactly what I expected and have been saying for the last couple of years). People need homes and people desire nice homes. To look at todays stats in which sales increased, prices increased, and inventories fell and conclude that we are still falling off the clift is silly. The housing 'bubble' has came and is in the process of leaving way short of the depression-type predictions of the doom-n-gloom crowd.
Uh, no speculation?
You should see the new housing markets here in Nevada (Vegas and Reno). The number of condo's being built "on spec" is a large part of what is causing the over-supply. Same deal in Florida. In many markets, the speculation are "flippers" -- people who buy a property, do some work on it, then put it back on the market. What drives speculation? It is always the same thing in any asset class: thoughts of quick, easy profits on "other people's money." In this case, the interest-only loan was the OPM for a long time when short-term rates were at historic lows from 2003 through mid 2005.
Today's report, as I pointed out earlier, is likely full of problems in the numbers. I'm taking all of the numbers with a large grain of salt until I see the revisions in next month's report. Further, if you studied the history of markets, you'd see that no market declines in a line that goes "straight down" -- they all have upward swings along the larger, overall down trend. This is true of all collapses of speculative bubbles, regardless of asset class.
I'm not saying we'll see a slump of 80% in housing prices, as we saw in some individual stocks from the dot-com implosion. What I am saying is that the era of easy money is has ended, which will cause some regional markets that have been inflated due to a large number of unqualified borrowers buying houses to see real decreases in median and average real estate prices. We're already seeing real decreases in prices in Reno and Vegas, and several speculative condo projects have flat-out been canceled by the developers. We're already seeing real decreases in several California markets. Florida markets in coastal areas are seeing real price decreases, again due to oversupply of condos built by speculators.
Oh, and remember this: Nevada is the fastest growing state in the US. There have been no real estate markets with better fundamentals of population growth than the ones here in urban Nevada.
People do need homes, but where economics is concerned, that is just a realtor's slogan. What the realtors can't avoid is the fact that the vast majority of people also need mortgages to buy a house, they can't just walk into a realty office, smack down a checkbook and buy a house for cash. The tail end of this boom has been driven by absurd financing deals -- low doc, no-doc, reverse amortization, 50+ year terms, no interest, etc. In the most frothy markets, like California, you see far too much activity in non-conventional lending for any comfort. Sub-prime lending has exploded from about $120 billion in 2001 to $625 billion in 2005. In places like California, the tail end of 2005 and into 2006 saw sub-prime, no-interest, adjustable, etc loans account for upwards of 40% of all lending for housing. The people who took these loans are now being hit with rather large upward changes in their monthly mortgage payments and will be hit further in the wallet if short-term interest rates keep climbing.
Lenders usually allow 2.0% of their loan portfolio value to be kept as a reserve for "non-performing loans." That's pretty standard banking accounting. As of October, 2006, nearly 4% of sub-prime loans originated in 2006 were 60 or more days late in payment.
Too many people keep reciting the mantra that "real estate is different." When combined with easy access to excess liquidity, no, it isn't. All speculative bubbles in history have been driven by excess liquidity and we've had plenty of that in the recent run-up in real estate. In the end, the trail of excess liquidity in both the '99-'00 stock boom and in the current real estate market leads back to the Fed. In September of '98, the Fed injected lots of liquidity into the market to deal with the failure of Long Term Capital Management and the currency issues around the world. In 2001 to 2003, the Fed injected large amounts of liquidity into the market because they were scared of a deflationary spiral. Same result both times: speculative bubbles.
Different asset class, but that's the only difference from a macro-economic perspective.
Oh puh_leeez. There is a world of difference between a spec house and the speculation of the dot.com stocks. A spec house may not be sold but it is a known value. It is real property with real value. The only 'speculation' part is when it will sale, what it sells for is a very narrow range. The dot.com stocks had no proven track record, no history of profits, purely unknown. The dot.com run up was pure gambling. There is a reason banks have no problem loaning 80 percent on speculation houses to someone with no other collateral, but would never touch loaning someone anything to invest in dot.com stocks. Two different animals, and trying to draw an analogy is a more than a stretch, it is a ridiculous waste of time that only the worst doom-n-gloomer uses. Certainly there is some risk in the real estate market especially in the markets that had a huge run up, but mostly real estate prices have been driven by local economies and real market forces.
Just wondering, are you a realtor?
Technically, yes I am licenced, but my only client is myself. I mainly use it so I can list my properties on the MLS.
You're still whistling past the graveyard of people who think real estate is immune to the depredations of easy ("cheap") money, ie, low-interest loans.
What is a house worth? Really, let's talk about what a house is worth. You seem to think a house has some intrinsic value. OK, let's assume that it does. Now, what is that intrinsic value? This is where too many people involved in real estate fool themselves. Absent any valuation insurance or other backstop (and such insurance is usually available only to lenders), real property is worth what someone else is willing to pay for it at the time it goes on the market. That's how free markets work.
Much of the spec real estate properties being built in Vegas (or Florida) are being built on pure, from-whole-cloth assumptions as to how many people want to own condos (or houses) in those locations. From what I've seen in realtor analysis in '03 to '05, much of this assumption was of snowbirds wanting to own a "second home." Many of the small-time speculators in Vegas were buying houses with no-interest loans to hold and flip them, based on the assumption that Vegas was land-locked by BLM lands, and private property for future development was going to be scarce or expensive, and therefore residential housing prices were going to keep going up. They didn't foresee Harry Reid unlocking more and more sections of land for Del Webb and others to build thousands of more houses upon, year after year after year. There is no shortage of building land in Vegas, and consequently, there is no shortage of residential properties. There is only a shortage of water.
You're clearly not recognizing the truth about the real estate market: banks weren't loaning "80% on speculation houses" -- they were loaning 100%. Only interest payments were required. Recently, I've seen loans of 103 to 105% being made, so that the borrower can have some extra money to close the sale and pay fees, transfer taxes, etc. Sure, the borrower is paying extra points. Sure, the borrower is getting screwed on the interest rate. None of that changes the fact that the bank has no equity cushion on the loan. When the value of the property goes down, the note is under water. If the borrower walks away, the bank has a for-real problem. And, as I'll NB in a URL for California below, borrowers are walking away in increasing numbers.
You need to start getting out there and start digging into the 10K's and 10Q's of some of these mortgage lenders. It is rather eye opening, to say the least. The mortgage lending industry needs some real reform in the area of qualifying borrowers. The lax standards for borrowers, coupled with the new bankruptcy laws, is going to result in some real ruination for some people who haven't thought carefully about what they were getting into when they signed up for some of these non-standard mortgages.
But, OK, don't believe me. Here's some items for your consideration:
1. Real estate developer in Phoenix, AZ, went bankrupt this summer. Too many back-outs by buyers. Five (5) developments went on the block (partially completed, fully completed, unfinished land, etc) went on the block for $29 million. A fire sale price:
http://www.auctionaz.com/121406.htm
Oh, yea -- the people who did put down deposits and didn't back out? They're screwed. They might get a dime on the dollar if they're lucky.
http://www.azcentral.com/community/pinal/articles/0919turnerdunn0919-ON.html
2. Vegas condo projects scrapped:
http://www.realestatejournal.com/propertyreport/newsandtrends/20060116-corkery.html
http://archrecord.construction.com/news/daily/archives/060131vegas.asp
BTW -- check out the last line in the previous URL: 107 projects planned. I'll go on the record now and tell you that 107 projects planned in Vegas is the product of speculator frenzy and possibly LSD. There simply are not enough affluent people in the whole of the United States and Asia who want to own that many condos in Vegas. Period, end of discussion.
The projects that are in construction or are finishing construction are taking a hit on price. The guys who bought land (many at inflated prices) to tail-ride on this boomlet are going to be taking a soaking either by tying up their capital, waiting for prices to come back, or they're going to sell the property for 50% (or less) of what they bought it and take the capital loss.
3. Reno:
http://dianecohn.blogs.com/
Check out the number of units on the market. The supply is very, very high for Reno. I used to live in Reno and know something about that market. There simply is not the wage growth there to support these real estate valuations. There never will be the wage growth there to support those valuations.
4. California:
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B1075F84E-0DCE-4484-B8D2-024F9E64D029%7D&siteid=google
Why am I concentrating on Nevada, Arizona and California? Because AZ and NV have the best organic growth numbers anywhere in the nation. We have a loony bin for a neighboring state (CA) that is driving people to leave the state as fast as they can. If we're seeing problems with demand not keeping up with supply, and we have the highest demand, well, other markets could be in for some rough times as well.
Now, here's something I haven't told you before: how I got so damned interested in this.
I have no desire to flip real estate. I already own and run a farm and have no desire to meddle directly in real estate beyond that. A square mile of land should be enough for just about anyone.
But by the by, I do invest and trade in equity and bond markets. One type of bond is known as the "mortgage backed security" -- these are bonds sold to investors by Freddie, Fannie or private banks like WaMu and others. In the past, this has been a wonderful bond for "coupon clippers" to own: it is backed by real property, the vast majority of people pay their mortgages, banks foreclose on property when people don't, overall MBS's are pretty good bonds for a coupon clipper to own; they pay higher than T-bill rates, with relatively low risk, etc.
This year, I started seeing disturbing alerts and "negative credit watches" coming out of Moody's, Fitch's and S&P about MBS's from some banks. And thus, I dug in and started to discover just how lax some banks had been with their lending practices. This is the source of the "easy money" I have spoken of. And some of the biggest originators of sub-prime loans are some really big banks -- like Wells Fargo and WaMu.
I would like the phone number of those banks, because banks around here certainly don't loan 100% on spec houses. And if I were in a market where that were driven by flippers, large condo projects, outside investors, I might be more worried. There will be people hurt and there will be markets that will continue to get hit by the downturn, but that will be the minority. In the heartland prices will start to rise and activity will pick up. We will continue to hear all these 'horror' stories, but that will not be the reality for the vast majority of homeowneres.
What you talking about. Let's all rejoice the housing boom is back. Bid up them house prices and pay with "interest only" ARM loans.
/sarcasm
Amble on down to Vegas, or over into California, plop yerself down in front of a TV and late at night and dial up the number of any of the lenders who claim "Bad credit? No problem!" and you're in business.
I had a link for you from the Financial Times from Dec 8th, 2006, on a California sub-prime lender with a loan portfolio of $5.5 billion that has filed for bankruptcy. Seems that too many of their clients got too far behind in paying their mortgages. Sadly, the URL as expired and you'd have to pay to access the archives.
If you're in the midwest, I agree you're insulated from the worst, perhaps even most, of this. The coastal regions... well, there is going to be some pain. Reno, Vegas, Phoenix and Tuscon? More pain. Boston? Pain.
You sound like a conservative and truthful real estate investor and you don't deal with sleazy lenders and shady hacks. Here's a shocker for you: there are lots of people out there who aren't as honest as you are. Your lenders won't lend you 100% on your spec properties because a) you're not a liar, and b) you're not dealing with shady lenders.
Here's the dark side of your business, for your amazement and/or amusement:
http://iamfacingforeclosure.com/
Click on the link "No money down" in his "About" box.
This guy, BTW, is for real, and not a complete statistical fluke. These seminars that he references are all over the place, and (again) advertised all over late-night national satellite TV.
Oh, and as for a lender: I rooted around quickly and this guy popped up in Arizona:
http://www.yourlenderforlife.com/
No income, asset or employment verification? Well, that's the type of lender who will lend you with a blind eye on the "owner occupied" verification too.
Here's some more info on sub-prime loans:
http://biz.yahoo.com/bizj/061213/1389419.html?.v=4
And the possible default rate on sub-primes in CA:
http://www.signonsandiego.com/uniontrib/20061220/news_1b20foreclos.html
How many people lie on stated income loan apps? Well, this makes it look pretty grim:
http://www.nysun.com/article/45441
Again, I'm not a doom-n-gloomer. Over the long term, residential real estate is a sound business and one that is part of America's future without a doubt. But I am also an experienced investor, and when someone starts giving out free money with few strings attached, the clear and repeated history is that bubbles result. And when Fitch, Moody or S&P starts taking down the credit ratings of companies or agencies who repackage mortgages into bonds and try to sell them to people like me.... I listen to Fitch, Moody and S&P.
Amble on down to Vegas, or over into California, plop yerself down in front of a TV and late at night and dial up the number of any of the lenders who claim "Bad credit? No problem!" and you're in business.
I had a link for you from the Financial Times from Dec 8th, 2006, on a California sub-prime lender with a loan portfolio of $5.5 billion that has filed for bankruptcy. Seems that too many of their clients got too far behind in paying their mortgages. Sadly, the URL as expired and you'd have to pay to access the archives.
If you're in the midwest, I agree you're insulated from the worst, perhaps even most, of this. The coastal regions... well, there is going to be some pain. Reno, Vegas, Phoenix and Tuscon? More pain. Boston? Pain.
You sound like a conservative and truthful real estate investor and you don't deal with sleazy lenders and shady hacks. Here's a shocker for you: there are lots of people out there who aren't as honest as you are. Your lenders won't lend you 100% on your spec properties because a) you're not a liar, and b) you're not dealing with shady lenders.
Here's the dark side of your business, for your amazement and/or amusement:
http://iamfacingforeclosure.com/
Click on the link "No money down" in his "About" box.
This guy, BTW, is for real, and not a complete statistical fluke. These seminars that he references are all over the place, and (again) advertised all over late-night national satellite TV.
Oh, and as for a lender: I rooted around quickly and this guy popped up in Arizona:
http://www.yourlenderforlife.com/
No income, asset or employment verification? Well, that's the type of lender who will lend you with a blind eye on the "owner occupied" verification too.
Here's some more info on sub-prime loans:
http://biz.yahoo.com/bizj/061213/1389419.html?.v=4
And the possible default rate on sub-primes in CA:
http://www.signonsandiego.com/uniontrib/20061220/news_1b20foreclos.html
How many people lie on stated income loan apps? Well, this makes it look pretty grim:
http://www.nysun.com/article/45441
Again, I'm not a doom-n-gloomer. Over the long term, residential real estate is a sound business and one that is part of America's future without a doubt. But I am also an experienced investor, and when someone starts giving out free money with few strings attached, the clear and repeated history is that bubbles result. And when Fitch, Moody or S&P starts taking down the credit ratings of companies or agencies who repackage mortgages into bonds and try to sell them to people like me.... I listen to Fitch, Moody and S&P.
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