Housing Bubble Bursting?

[Randolph Kinney]

Supply, Demand, Balance: How to Measure

http://appraisalnewsonline.typepad.com/appraisal_news_for_real_e/2006/09/supply_demand_b.html#more

How do you measure a Balanced Market in a suburban market area?

Conclusion: The local market area has reached a state of Over-supply.
Annualized statistics show slight price gains, but the last two months, prices have been declining even before deductions for Concessions are verified and adjusted. This has been occurring even before an oversupply condition has been reached. It is believed that the irrational exuberance of the last three years has impacted normal market behavior. Investors and speculators have left the market.

But what has happened is that prices started getting propped up by concessions, cash-back deals, 80-20 loans {100% financing), cars included in the sales, etc. Now, even with concessions, prices in the last two months show actual declines.




This phenomenon is being played out in many regions across the country. Essentially, all the areas that experienced the big price increases are subject to price declines now. And, all the regions that have housing prices beyond the affordability of 70% of their local households are subject to price declines now with rising interest rates, fuel costs, utility costs, unemployment and a loss of consumer confidence.

 

[The Bob]

Homebuilders Slump Deepens

Homebuilders' slump deepens

Shares of KB Home (KBH) fell sharply after the nation's fifth largest homebuilder cut its earnings forecast because of the rapidly deteriorating housing market. The news came as luxury homebuilder Hovnavian Enterprises said its orders had fallen by 26 percent and its quarterly net income had dropped by 36 percent. "Expect more pre-announcements, more lowering of guidance, more missing estimates, orders coming in below expectations, yada yada," said JMP Securities analyst Alex Barron. "It's just starting." (Reuters

 

[Brad Ellis]

Cannot believe how long this string is.

Anyway, Nightly Business Report had the aol analyst who tracks the builders on last night. She said most were alrady undervalued but that there is more downside risk to their stocks.

The ONE she said she would buy right now is Hovananian (or however it is spelled). HOWEVER, when asked if she owned any of these she said no.

Brad

 

[moh malekpour]

Cannot believe how long this string is.

Anyway, Nightly Business Report had the aol analyst who tracks the builders on last night. She said most were alrady undervalued but that there is more downside risk to their stocks.

The ONE she said she would buy right now is Hovananian (or however it is spelled). HOWEVER, when asked if she owned any of these she said no.

Brad

Brad,
The nice thing about this sting is that we can go back to 3 or 4 month ago and see who said what and whose opinion needs to be updated.
I am going to quote few of your opinion which are extracted from different pages and see if you are willing to change some of them now:

Austin,

But sales of existing homnes incrreased 5.2% last month.

Brad

Guys,

May I remind you all of some things?
First, we have been seeing this "bubble" talk for 4 years now. I wrote an article for the NAIFA e-gram about it in mid 2002 and it was re-run in Appraisal Buzz. Many of the same guys saying the same things back then AND the appraisers bought into it back then.

NOW we at least have declining prices in some markets- but I still have not yet seen signs of there being a bubble. In order to burst, it first has to exist.

We are seeing the correction right now. Many markets are declining. Many others already declined and are starting to go back up. Many others will stay stable or continue upward but at more normal rates of increase.

Freddie Mac predicts an overall 8.6% increase in housing prices for 2006. NAR predicts a 5% overall increase for 2006

But, not a bust as yet. Declines- sure. Maybe a correction. And, if an economic situation developed that can always cause a crash. But that has not happened and is not anticipated

So, while I am not doubting the theory or the local anecdotal data, I see llittle of it nationally to cause a major national worry.

I'll stick by my statements of an overall soft landing until and unless I see some solid empirical data that is convincing- to me. Clearly many of you have seen what you need to see. So be it.

Guys this is really fun. I had the very same responses in 2002 when I said there was no bubble- only from different people and they gave me some different and some of the same scenarios.

As I said, time will tell.

Brad

What does the time tell you now

 

[Steve Owen]

All you can do is report what you see now... appraisers don't have a better crystal ball than anyone else and I've always been wary of forecasting and very conservative when required to do so, making certain that all forecasts are based on known past facts and expressed as such.

Still don't see any sign of a bubble bursting around here. The market for residential has cooled slightly and there might be some downward price pressure, but that isn't what I would describe as a bubble burst. Of course, if I was in CA or FL I might be reporting something different.

 

[moh malekpour]

Steve,
It is not a matter of crystal ball or forecasting, it is a matter of seeing and accepting the market reality and mark signals and be rational about it. I don’t know about your market but if there were no outrageous price increase of 20-30% per year from 2002 to the end of 2005 and there were no speculators running around to buy anything and everything and there were not so many homebuyers who wanted not only a home for themselves but second, third or fourth homes while they were not even could afford the first one, then there are nothing there to burst.
What would be your state of thought if you saw all properties in your area that were selling for +/-100K in 2002 were selling for +/- 225k at the end of 2005 without a penny worth of upgrade?
A normal increase for that property should be +/-130K but 225K makes me wonder.
I bought my property here in 1987 for 125K, in 2001 it was worth of +/- 180K, at the end of 2005, it was +/-445K. I gained 55K in 15 years and 265K in 4 years. I thought something was not right because it was not only my property that went up that much; every property went up the same. When you see some irrational increase, you know that something is not just right and cannot go on forever. If you cannot see it, you are not in touch with reality of your maket. One of the groups who is turning around and singing a new song is the NAR. They used to say that market is fine and it is just a cool down, minor correction and a soft landing. Most people wanted to believe them because it was music to their ears but the NAR should know better. They are supposed to know their market and discern the signals. Why they didn’t want to do it? Because it was not on their interest. Now they have to eat crow and accept the reality month after month. Here is an article about them: http://money.cnn.com/2006/09/07/news/economy/housing_forecast.reut/index.htm?postversion=2006090713
You got to remember that about 75% of US residential wealth that has been created between 2002 and 2006 are located in CA, FL, NY, NJ, NV, AZ, OR COL and few other states because these states are heavily populated and have more homes than some other rural areas that have more land but not homes.

 

[Greg Bell]

I was R.E Broker once in another life and have seen these downturns before.The last big downturn was Oct 1989.Every one was buying and selling at feverish pace and then BAM...it stopped like a Hong Kong watch.One month turnaround and then a recession.This looks the same to me except this one is going to be bigger than Nancy Pelosi's ego. So fasten you seat belts , it going to be bumpy ride.

 

[Brad Ellis]

Moh,

I am well aware of what I said and NO- emphatically NO, I am not yet changing my mind. We are at the start of a correction and there is no bubble bursting.

A bursting bubble is going to take a substantial recession and I have not seen a single quarter of negative growth in this period since the one right after 9/11- the 5 year anniversary is but a few days away.

Exisiting home inventories are way up- but as compared to what? They are at around the 1997 levels when we had what most would call a normal market. The last NAR data also showed existng home prices actually went up $2K even in the face of the higher inventory levels.

Now, new home sales are way down (20% +/- if the data is correct), but we have not yet seen the average selling prices of the new homes. By how much have they dropped? We also do not know the state of new home inventories and how long they would last. And PLEASE ALL- no anecdotal data- PLEASE fcous on the whole picture.

I will simply tell you this: demand remains strong and will grow as the population grows. Even with higher rates, they existing rates are historically low and, if signs of inflation abate, that upward trend will ease.

We are in a soft landing mode, in my view, but perhaps Moh is right.

Moh if you write about this long enough maybe your predictions will become self-fulfilling prophecies! Of course, you might need a bigger audience- oh, come to think of it, prevailing wisdow is doing just that. Thank goodness prevailing wisdom is usually wrong.

Brad

 

[Randolph Kinney]

Nightmare Mortgages

http://www.businessweek.com/magazine/content/06_37/b4000001.htm

Nightmare Mortgages

Now the signs of excess are crystal clear. Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments. Most of these borrowers aren't paying down their loans; they're underpaying them up.

Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come. For one thing, banks can sell some of their option ARMs off to Wall Street, where they're packaged with other, better loans and re-sold in chunks to investors. Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities, says Bear, Stearns & Co. (BSC )Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.

The rest of the option ARMs remain on lenders' books, where for now they're generating huge phantom profits for some lenders. That's because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment -- the so-called fully amortized amount -- even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.

Camouflaged Losses
Risks or not, the accounting treatment is boosting reported profits sharply. At Santa Monica (Calif.)-based FirstFed Financial Corp. (FED ), "deferred interest" -- what an outsider might call phantom income -- made up 67% of second-quarter pretax profits. FirstFed did not respond to requests for comment. At Oakland (Calif.)-based Golden West Financial Corp. (GDW ), which has been selling option ARMs for two decades, deferred interest made up about 59.6% of the bank's earnings in the first half of 2006. "It's not the loan that's the problem," says Herbert M. Sandler, CEO of World Savings Bank, parent of Golden West. "The problem is with the quality of the underwriting."

In the middle of one of the hottest U.S. markets, Coral Gables (Fla.)-based BankUnited Financial Corp. (BKUNA ) posted a $14.8 million loss for the quarter ended June, 2005. Yet it reported record profits of $23.8 million for the quarter ended in June of this year -- $20.9 million of which was earned in deferred interest. Some 92% of its new loans were option ARMs. Humberto L. Lopez, chief financial officer, insists the bank underwrites carefully. "The option ARMs have gotten a bit of a raised eyebrow because we generate and book noncash earnings. But...it's our money, and we do feel comfortable we'll get it back."

Even the loans that blow up can be hidden with fancy bookkeeping. David Hendler of New York-based CreditSights, a bond research shop, predicts that banks in coming quarters will increasingly move weak loans into so-called held-for-sale accounts. There the loans will sit, sequestered from the rest of the portfolio, until they're sold to collection agencies or to investors. In the latter case, a transaction on an ailing loan registers on the books as a trading loss, gets mixed up with other trading activities and -- presto! -- it vanishes from shareholders' sight. "There are a lot of ways to camouflage the actual experience," says Hendler.

Hard Sell
To get the deals done, banks have turned increasingly to unregulated mortgage brokers, who now account for 80% of all mortgage originations, double what it was 10 years ago, according to the National Association of Mortgage Brokers. In 2004 banks began offering fatter sales commissions on option ARMs to encourage brokers to push them, says Gail McKenzie, assistant U.S. attorney in Atlanta, who is investigating mortgage brokers for improper practices.

The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It's easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.

Pros Go Unscathed
Why are hedge funds willing to buy risky loans directly? Because they can demand terms that help insulate them from losses. And banks, knowing what the hedge funds want in advance, simply take it out of the hides of borrowers, many of whom qualify for lower rates based on their credit histories. "Even if the loan goes bad, [the hedge funds are] still making money hand over fist," says Engel.

Eventually, some of it will go sour. But the Wall Street pros who buy option ARMs are in the business of managing risk, and no one expects widespread losses. They've taken on billons in iffy option ARMs, but the loans are no shakier than the billions in emerging market debt or derivatives they buy and sell all the time. Blowups are factored into the investing decision.

Public policy has yet to catch up with the new complexities of the lending industry. Comptroller of the Currency John C. Dugan, the banking industry's main regulator, wants banks to clean up their act. A source inside the federal Office of the Comptroller says Dugan intends to raise lending standards, as he did last year on credit cards, where super-low minimum payments made it improbable that cardholders would ever pay down debts. New guidelines are expected this fall.

 

[Randolph Kinney]

The last NAR data also showed existng home prices actually went up $2K even in the face of the higher inventory levels.

Brad, do you know how much of the recorded purchase price of NAR's data included seller concessions? My understanding of NAR's data is that they do NOT correct for, or account for how much of that purchase price includes seller concessions. Data I have seen suggests it is averaging 3% of the purchase price.

Now, new home sales are way down (20% +/- if the data is correct), but we have not yet seen the average selling prices of the new homes. By how much have they dropped?

Again, the reported data for new home sold prices do NOT correct for, or account for how much of that purchase price includes builder concessions. It is widely reported that builders are offering huge concessions to sell off their inventories. Builders can't sell new homes with out concessions.

With each economic cycle, there is a new "normal" level of inventory. You only know what that normal level of inventory was, after the fact, once you go through the recession.