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How do you define a housing bubble?
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7 Comments ::  :: Real Estate, Market Analysis |
How do you define a housing bubble?
If you are in the real estate business these days and/or a buyer or a seller, you owe it to yourself to checkout this collection of comments and articles on the current housing market, by Patrick Killelea at patrick.net/wp. (his bubble site offers a counterpoint to mainstream media coverage)
Here are some of his ideas taken from an interview with him on Inman News:
Q: What makes you a real estate bubble believer, a bubble debunker, or bubble neutral?
A: Owners and real estate businesses have a large vested interest in downplaying the bubble, no matter how real. Most renters are neutral, since they would probably rent anyway and don't really win or lose regardless of what happens to owners. But there is a small contingent of renters-by-choice who are adamant bubble believers and have made a big bet on it by renting. I'm one of them.
Q: How do you define a housing bubble?
A: Easy: when the monthly loss in interest, property tax, insurance and maintenance is larger than the monthly loss from renting, there is a housing bubble. Historically, it has been cheaper to own. That's how landlords can make a profit (duh). That's no longer the case in the San Francisco Bay Area. Since it's not only cheaper to rent now, but a whopping two to three times cheaper to rent the exact same thing than to own it, we clearly have the mother of all bubbles on our hands.
Q: Are there any common traits among the bubble markets?
A: Yes, in general the bubble markets are more affluent and on the coasts. The feeling was that it must be safe to buy on the coasts because they are wealthier, but the reality is that buyers were not looking at very simple predictor ratios, like percentage of vacant houses, the ratio of salaries to house prices, the fraction of ARM (adjustable-rate mortgage) loans that are about to adjust dramatically upward and so on. Even though the populations in these areas should know better, they are running purely on gut feeling and not on the numbers. The numbers are now overpowering gut feeling. Foreclosures are rising exponentially.
Q: What has motivated you to participate in the bubble discussion and what have you learned?
A: The sheer irrationality of the loans and relentless spin on the part of Realtors motivated me to write the things I could not find in the mainstream press.
Texas in general and especially the Texas Gulf Coast, really is one of the few spots in the country that can ride out the so-called housing de-cline, if only because we never has the housing in-cline! We are truly the story of the turtle vs. the hare:
Slow and steady appreciation, supply matching demand, increasing population, endless room for expansion, sunny climate, steady influx of immigration (who thought that could be a plus several years back?), huge state expenditures in infrastructure improvements, high property taxes that just got cut (talk to me about that one), and what can we say, we are half the price of California and Florida - so when they have to sell at a loss, they can still come down here and make out ok!
And let's not forget, we are right on the longest - most undeveloped - coastline, and the turtle always wins the race in the long run. The Texas Gulf Coast is now being called the [Third Coast].
Mike Stuart
Also see NAR Economist David Learh Watch |
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Thursday, February 15, 2007 3:57 PM | |
Texas' lower cost of living is drawing retirees from Florida and California," said Charles F. Longino Jr., author of Retirement Migration in America. "They're selling their $500,000 houses, buying $250,000 homes in Texas and putting the rest into their retirement nest eggs." |
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Sunday, February 18, 2007 7:30 PM |
Existing-home sales to improve, later recovery for new homes
Consumers are beginning to respond to more favorable housing market conditions, but new home construction will be dampened until inventories decline further, according to the latest forecast by the National Association of Realtors.
David Lereah, NAR’s chief economist, is looking for a steady rise in existing-home sales. “After reaching what appears to be the bottom in the fourth quarter of 2006, we expect existing-home sales to gradually rise all this year and well into 2008,” he said. “New-home sales should continue to slide, but we look for that sector to turn around later in the year. When you put it all together, home sales may appear weak in comparison with the record surge in 2005, but they will be sustained at historically high levels that are in line with long-term demand.”
Existing-home sales, after reaching the third highest total on record, 6.48 million in 2006, are forecast at 6.44 million in 2007 and 6.64 million next year. New-home sales, following a fourth best 1.06 million in 2006, are projected to decline to 961,000 this year and then rise to 971,000 in 2008.
Housing starts are likely to total 1.52 million in 2007, down from 1.80 million units in 2006, and then increase to 1.56 million next year. “When new home demand begins to catch up with supply, builders will slowly increase construction – probably in the second half of this year,” Lereah said.
The national median existing-home price should grow 1.9 percent to $226,200 in 2007, after rising only 1.1 percent in 2006. The median new-home price is expected to increase 1.8 percent to $249,800 in 2007, following a similar gain last year. Stronger gains are forecast for 2008, with existing-home prices rising 3.2 percent and new-home prices increasing 3.4 percent. |
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Monday, February 19, 2007 9:27 PM |
Texas Association of Realtors
Slowdown? Not here in Texas
There might be a housing slowdown in the rest of the U.S., but not in Texas. At housing conferences and industry events around the country, dire reports and predictions about falling prices, soft markets, and lost opportunities seem to be everywhere.
Everywhere, that is, except Texas.
No, while the East and West coasts are lamenting the demise of the residential housing market and mourning the times when everyone seemed to be making money hand over fist, Texas homeowners, investors, homebuyers, and REALTORS® are secure in the confidence that comes from a solid market.
Booms all over the state
Consider the facts. The new home market in Austin, for example, experienced record production levels in 2006 – with more home sales closed than home starts.
In Wichita Falls, the Hill Country, and other areas just outside major cities like Dallas, Houston, and Austin, the demand for acreage is also high.
For example, the median price of an acre of Texas land rose 18% in the first half of 2006 over the same time in 2005. And, these areas will likely benefit even more in the future. Millions of Baby Boomers will soon be retiring, and they’ll want to relocate someplace beautiful and relaxing that’s also still affordable. For many of them, Texas is ideal.
Jobs, stable prices, solid economy
While economists in Texas predict a slow start to 2007 for the overall housing market, prices are stable, the population continues to increase statewide, and jobs are still plentiful.
Those factors all bode well for real estate in Texas. Experts see some markets that are not only surviving, but also thriving, with positive home sales and appreciation in value – and Texas is one of them.
The Real Estate Center at Texas A&M University identified key factors that will contribute to a strong Texas real estate market in 2007, including relatively low taxes, housing that’s still affordable, and the fact that Texas is a great place to relocate and raise a family.
And, in Money magazine’s Best Places to Live 2006, Sugar Land (near Houston) was ranked third as one of the Best Smaller Cities to live; Austin was ranked second as one of the Best Big Cities.
Low interest rates, more financing options
The Texas real estate market also has interest rates and many financial options for homebuyers on its side. Interest rates have yet to rise sharply, with rates for both 15- and 30-year rates dropping again the week of February 8. Average rates on 30-year mortgages fell to 6.28% from 6.34%, and 15-year mortgages fell to an average of 6.02% from 6.06%.
As for financing options, they’re almost limitless when it comes to buying a home. Gone are the days where you had to have a sizable chunk of change to use for a 10% or 20% down payment. Now, many lenders are offering 100% financing, making it much easier to buy a home. (Be aware, though, that a 100% mortgage loan does have its risks; you generally can’t build equity as fast with these loans.)
There’s also the advent of the 40- and even 50-year mortgage. While not always the best option, it’s an alternative way of financing that gives prospective homebuyers a chance to get into a home for a lower overall monthly mortgage payment. Those who may not have been able to afford a home with a traditional 30-year mortgage can more easily do so with a longer-term loan. Interest costs over the long haul are more, but buyers can refinance later to a shorter-term mortgage. Talk to your Texas REALTOR® about options; he or she will be able to refer you to financial resources that can help.
Finally, don’t underestimate expert advice. Your Texas REALTOR® is an excellent resource for what’s hot, what’s not, where to buy, where to stay away, what you should pay, deals to be had, and much more. If there’s one person who has a handle on a market or a particular area – and what it’s doing or what the trends are, it’s your Texas REALTOR®.
The bottom line? Be glad you live in a state that has as much appeal – and as much stability – as Texas does right now when it comes to housing. It’s good for all of us, whether you’re buying, selling, looking, or just thinking about it.
By amy e.lemen, Consumer columnist |
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Monday, February 19, 2007 9:59 PM |
Fewer housing starts = good news for sellers.
If you have a house on the market or you're thinking of selling, the latest bad news on housing was actually very good news from a selfish perspective.
How's that? Because when construction slows down, it means fewer new homes are hitting the market to compete with your own listing. Less competition means quicker sales and higher prices. Relatively, that is—it's still an extremely soft market.
Clearing Out Inventory
The negative construction news from the government came out on Feb. 16. The Census Bureau announced a sharper-than-expected 14% drop in January starts on construction of private homes vs. the December level. That brought the seasonally adjusted rate of starts to the lowest level since the summer of 1997.
The localized recession in homebuilding—starts were down 38% from a year earlier—is bad news if you're a carpenter, a lumber salesman, or a real estate agent. It's even bad news for the overall U.S. economy, which was buoyed by housing activity over the past few years.
But it's good news if you need to sell your home this spring and you're worried about the overhang of unsold homes. As of December, there were enough existing homes for sale to last 6.8 months at the then-current rate of sales. That was up 50% from the 4.5-month supply as recently as 2005.
Growing Builders' Optimism
Some economists think that with the sharp reduction in construction, inventories could be back to normal by this summer. But the inventory adjustment could take longer if builders get itchy to go back to business and start ramping up the rate of construction.
On Feb. 15 the National Association of Homebuilders announced an improvement in the sentiment of builders. The sentiment index rebounded to 40. While that's still in negative territory (50 is neutral) it was up a lot from last September's low of 30, which was the most pessimistic since 1991.
Another factor that could postpone housing's recovery would be a tightening of mortgage credit. Right now, credit is easy, and mortgage rates are low. But default rates on subprime loans have soared, causing lenders in the segment to tighten credit standards
If some subprime borrowers no longer qualify for loans, a portion of the demand for housing will be knocked out. That will put further downward pressure on prices, which are already feeling the squeeze. The National Association of Realtors announced on Feb. 15 that prices fell in the fourth quarter of 2006 in half of all metro areas.
by Peter Coy BusinessWeek Editor |
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Sunday, February 25, 2007 6:58 PM |
Zero down lenders folding
About two dozen of the largest subprime mortgage lenders across the country have gone under or stopped making loans since December, according to the Mortgage Lender "Implode-O-Meter," a new Web site tracking closures in the subprime lending industry. The site tracks only large lenders, so there are probably far more closures.
"You're seeing 40 or 50 (subprime companies) a day throughout the country going down in one form or another. I expect that to continue throughout the year," Angelo Mozilo, chief executive of Countrywide Financial, told investors in a recent conference call.
The failure of so many subprime lenders is symptomatic of a larger trend - Wall Street's loss of appetite for risk. With so many mortgages going bad, investment banks have quit backing subprimes and are actually kicking bad loans back to originating lenders, forcing some of them to close up shop.
So far, subprime mortgages remain available, but the solvent lenders still serving the market are setting aside large loss reserves and warning mortgage brokers that stricter loan-qualification guidelines are on the way. One of the first products expected to disappear are zero-down mortgages, known as 80-20s, made without verification of income to borrowers with impaired credit ratings.
In the shorter term, a large block of potential buyers could be out of the market. The pain could be just beginning. The Center for Responsible Lending estimates that one out of five subprime loans made nationally in 2005 and 2006 will result in the borrowers losing their homes. |
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Sunday, February 25, 2007 7:22 PM |
How Expansions Die
By the Wall Street Journal
Since the current expansion really started to cook in 2003, any number of overwrought reasons have been offered to predict that disaster was imminent: the budget deficit, energy prices, the trade deficit, the "tapped out" consumer, and so on. The economy has weathered them all.
However, we finally have a threat that really does bear watching--namely, a potential credit crunch precipitated by the housing downturn and rising default rates. As Federal Reserve Chairman Ben Bernanke noted in his Senate testimony this week, the economic damage from the real-estate slide has so far been contained to housing. But in addition to the pain that homebuilders have experienced, banks and mortgage brokers are increasingly feeling the pinch, especially in the sub-prime sector. And in a perverse sort of populism, lawmakers are making noises about reducing access to credit for the riskiest borrowers, which would only exacerbate the crunch and could help take the economy down into recession.
The delinquency rate on sub-prime mortgages, now above 10%, is near record levels. Banks that bought up those loans for securitization are now demanding to be repaid, meaning that smaller institutions who thought they'd sold off their exposure are finding themselves on the hook, in some cases forcing them into bankruptcy.
This accumulation of bad loans represents a crack in the foundations of the recovery. Typically, a housing downturn and the credit problems that accompany it are a result of underlying economic weakness, rather than their cause. The economy slows, people lose their jobs and are forced to sell under duress lest they default. The distressed selling drives prices down. But in this case, it may work the other way around.
The Fed's remarkably easy monetary policy helped goose house prices over several years. In turn, a large number of first-time buyers took advantage of low mortgage rates, especially on adjustable-rate loans, to stretch their buying power in the hopes of leveraging their way up the home-buying ladder. But someone finally blew the dog whistle in late 2005, and the buying dried up.
Now the housing market is flat to down across most of the country and loans with adjustable rates are adjusting upward. So even with unemployment low and the economy still humming, marginal buyers can suddenly find themselves forced to sell. And if they had little equity to begin with, they may not have much money left after they sell--if they can sell at all. If they can't, they fall behind on their payments and the banks have to book the loans as delinquent.
Thus does a virtuous circle caused by easy money turn vicious, and interest rates aren't even all that high--at least not yet. The Fed's concern over housing's potential effect on the broader economy is no doubt one reason it has kept short-term rates at 5.25% for several months, despite signs that inflation risks remain. Notwithstanding yesterday's monthly inflation statistics (a function mainly of energy prices), gold has climbed back up to $665 an ounce, the dollar is weak, and "core" inflation remains above the Fed's 2% upper limit.
The unknown is how far the credit contagion will spread. While rising, overall delinquency rates are still fairly low. But if banks continue to be hit by defaults, it may constrain their lending in other areas. Credit spreads, which have remained remarkably narrow, could widen. Meanwhile, Congress's newfound preoccupation with "predatory lending" could, if it leads to changes in the law or in tough lending standards, increase the credit squeeze currently beginning to be felt. Decreasing consumer access to credit would in turn cast a pall over consumer spending and add another drag on the economy.
We aren't joining the partisans at certain newspapers who have predicted recession each of the last four years. The labor market remains healthy, the consumer resilient, business investment robust and equity markets buoyant. But this certainly is no time for Congress to add to the risks of a credit crunch by committing such policy blunders as raising taxes, imposing trade barriers or punishing foreign investment in the U.S. Secretary Hank Paulson has prudently been adding financial plumbing capacity at Treasury, and he will need it to limit any credit fallout.
As for the Fed, we hope the tale Mr. Bernanke told Congress this week about perfect "soft landings" was right. But we also suspect that the Fed chief has his fingers crossed that the rest of the economy, at home and abroad, is strong enough to withstand the housing credit woes that the Fed did more than its share to inspire. |
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Thursday, March 01, 2007 12:14 AM |
Hyper-inflated prices for any kind of real estate will come down where ever they are located based on government action, market forces, or a combination of both. To pretend otherwise is silly.
Fortunately in Texas, we never had Hyper-inflated prices - just slow steady growth. The only slow down we are seeing is with buyer hesitancy based on what's happening in all the other parts of the country.
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