Housing Bubble Bursting?

[Randolph Kinney]

Favorite Months To Layoff Someone

Layoffs loom .... How safe are you?

By Jeanne Sahadi, CNNMoney.com senior writer
August 31 2006: 3:52 PM EDT

The situation is better than it's been for awhile, but cost cutting still tops the corporate agenda.

Typically, the heaviest months for layoff announcements have been October, December and January, according to John Challenger, CEO of outplacement firm Challenger, Gray & Christmas.

But, because of a slowing in the economy and increased energy and payroll costs, Challenger said he expects to see somewhat of a jump in the fourth quarter. Over the past 10 years, 9.7 million jobs were cut, 38 percent of which were announced in the last four months of the year.

One indicator to watch for will be weekly reports of initial jobless claims. They've been trending between 300,000 to 325,000, he said. So if they start to come in consistently above that range, that may indicate layoffs are increasing in the fourth quarter.

And the unemployment rate - currently 4.8 percent - is likely to cross 5 percent by year-end, he predicts, although he doesn't expect it to top 5.5 percent.

Put into perspective, he said, the possibility that you or someone you know may be subject to a layoff won't be as low as it was in 2004 and 2005 pre-Katrina, but it won't be nearly as high as it was in 2001 or in the early 1990s, when weekly jobless claims were hitting half a million.

 

[Randolph Kinney]

Intel Corp. to Cut 10,500 Jobs

Intel Corp. to Cut 10,500 Jobs

By JORDAN ROBERTSON , 09.06.2006, 12:23 AM

Intel said Tuesday it will eliminate 10,500 jobs - about 10 percent of its work force - through layoffs, attrition and the sale of underperforming business groups as part of a massive restructuring.

The Santa Clara-based company said most of the job cuts this year will come from its management, marketing and information technology ranks, and will expand in 2007 to include manufacturing, design and other segments.

The cuts are expected to save the company $3 billion per year by 2008. Severance costs are expected to total $200 million.

About 5,000 of the affected positions have already been cut or will be eliminated this year through a previously announced management layoff, the pending sale of two businesses, and attrition, said Intel spokesman Chuck Mulloy.

The company plans to cut about 2,500 more jobs by the end of the year. The remainder will be shed in 2007, when Intel's head count will settle around 92,000, Mulloy said.

Many analysts and investors were expecting higher job cuts and a better-defined strategy for dealing with problem business units, said Nathan Brookwood, analyst with research firm Insight 64.

"This is not nearly as deep or as broad a cut as many had anticipated," he said. "They aren't talking about cutting back any substantial programs. They're saying, 'We can still do everything we were planning to do, but now we can do it with fewer people.' And I'm not certain that's a workable plan."

 

[Brad Ellis]

Moh,

Your question: "Your answer is very broad. The specific question is why and how much correction is needed?"

I can only answer the first part. A correction is needed to any market because no market is perfect. Prices go up more than they needed to and they come down more than they needed to. As to the specific amount- you'll have to consult Randolph's crystal ball.

Randolph,

So you think this is spin or semantics? Go back to the beginning of this string-or early on- where I kept asking anyone and everyone to define a bubble.

While you were kind enough to delve into the FDIC site to find their definition- a 15% drop in average selling prices over a 5 year period (if memory serves), neither you nor anyone else (but me) offered an actual definition. In fact, the ONLY other definition I have ever seen is contained in the MBA monograph on the housing markets from about a half year ago- and it pretty much jibes with my own. It is based upon irrationality.

Like everyone else I saw the rapid increase in prices. For almost 5 years Bob Schiller has predicted it will crash since incomes did not keep up with housing costs and rental levels did not increase dramatically at the same time. But, just this last June, he changed his tune. Why? All of a sudden, rental prices began to rise rapidly.

I asked him- face to face- if he thought we were in a national housing bubble. His response? NO. However, certain markets are overheated (duh) and will come down. Smith and Smith of Claremont Colleges attributed the rapid run up to a starting point in prices that was well below where it ought to have been. They dismiss Schiller's premise by saying it is not overall incomes that rule this but the actual mortgage payments that are the measure of affordability.

So, what is the measure? What differentiates a correction from a bubble?

We do have some historical basis on this- from the dot.com crash. It happened because "investors" (I call them traders) were paying such high prices for tech stocks that had nothing to back up the price. PE multiples well over 100, etc. for firms that had never made much money at all. Greenspan called it irrational exhuberence. Note the inclusion of irrationality.

So, I'll go out on the limb for you here.

A correction in this market will become a "burst bubble" when and if the national average selling price of homes exceeds about 15-20%. On a national level I do not believe that will occur because I do not believe we actually have/had a bubble. Please do remember that I have always said that there are local markets that could be in bubbles so I am talking nationally.

Here are some other predictions that you may not have:

Dr. Chris Cagan of First American (Chief Economist) predicts that foreclosures will drop overall equity- nationally- by 1%. Dr. Jim Pollian, formerly of Fidelity, predicts a generally flat market for the next year. Freddie Mac is not commenting upon the national average but did tell Jim that they are still bullish on SoCal prices- that's right- bullish. Dr. Robert Schiller (aforementioned) provides graphs that indicate the rental to house price disparity has closed substantially by 50-75% in many major markets. Dr. Bill Rayburn (Ole Miss) and CEO of FNC notes that borrowers will NOT sell their homes just because prices have dropped reducing their equity to zero, or even into negative territory, unless some other "life changing" event (loss of job, illness, etc.) also occurs.

But- foreclosures are way up. True- but from what level? In CA, I dealt with no more than about 30 of them over the last 3 years- now I have a lot, by comparison. However, they are not even now at the typical levels we saw 5-7 years ago.

You asked in an earlier post if we did Option ARMs. Yes, we do. And we still do and we will continue. Why? Default rates on these loans are actually lower than on the more traditional ARMs and Wall St. really likes them. They are underwritten on a fully indexed basis, i.e., to get it you must qualify for the loan as if it was being made at the lifetime cap level. And our LTVs on them are lower than on regular ARMs.

So, I read all these horror stories about folks losing their homes and am left wondering if there is not something else happening in combination with the increase mortgage payment? Did they run out and buy a new car because their current loan payment was cut? Did they get sick or lose their jobs? I believe that is true in some of the cases but have never once seen a reporter ask the question.

If you choose to believe these stories that is up to you. For me, I have seen reporters (and others) ignore the big picture whenver they can portray something more sensational. And now, the housing "bubble" has become the "conventional wisdom". Witness the Senate's planned hearings. And, please, if you think these guys and gals are actually concerned, do make note of the elections set for about 2 months from now.

Oil prices reached over $70/barrel. Now they are down 10%. Were we in an oil price bubble?

Conventional wisdom is often wrong. I contnue to believe that we are not in a bubble.

Brad

 

[Karl]

BUBBLE: Different definition for different sernario's; IF you have RE That is NOT selling, you see a "Slow Down" in the Market IF you have RE that you need to sell at a loss, cause you need whatever money you can get, you see a bubble. IF you sold your RE at the right time & made a profit there is NO bubble. IF you bought that RE & can not sell it for more than you paid for it You see a bubble. IF you have Rental property with good Renters & pay on time & no problems, there is NO bubble. IF you own Rentals that have no tenants or every time you get tenates you get problems. You see a bubble. IF you have a job & got a Raise you see no bubble; IF you got an E-Mail saying your no longer employed You see a bubble.

Due to the word IF this thread can continue for decades

 

[Greg Bell]

This not a bubble , it's a crash.You can spout all that gobbly gook about 5% here and 2% there and professor know it all and the smiley face economist babbling nonsense..Ive been in RE for 25 years and have seen these "Soft Landings" before , better you were a helmet for this landing because to may land on your head. This is going to really get ugly in about six months.So sell those cheapy rentals quick and refi as soon as possible...

 

[Steve Owen]

Lots of different potential "bubble" definitions, since it is not really a proper economic term. I believe that the first people who started talking about a "housing bubble" were primarily discussing the rapid rise in value in certain markets... in their view, the bubble pops when prices quit rising or starts to decline. That will cause those who bought high to lose, just as in every other market. From information posted here, it is clear that the bubble has already popped in most of those markets.

However, many people have defined the bubble somewhat differently, making it analogous to a depression in housing. Generally, that is what Mike seems to be railing about with his diatribes. Under that scenario, it is relatively clear that the bubble has not popped anywhere... except perhaps in relation to home builder's stocks.

In my market, there have been some indications of downward price pressure and slightly longer marketing times. However, there never was a bubble (first definition) and therefore there can be no bubble pop. That does not mean we could not see a decline in house prices or a rapid slowdown in the market here... that could certainly happen and there are some signs that it may be getting ready to.

 

[moh malekpour]

Brad,
I expected to get more than that from you. You say the correction is needed because no market is prefect and prices go up more than they needed to and come down more than they needed to but you cannot say how do you know that they have gone up more than they needed to and since you don't know that, you cannot say how much crorrection they needed. It is like you returning my appraisal and saying it needs correction because no appraisal is perfect but you don't say correction on what, how much and why it needs correction. Of course no appraisal is perfect but there are some imperfections that you can live with them and you don't send them back,however there are times that the impefection is so critical that you cannot accept that appraisal and you have to send it back for correction and you should be specific on your requirement.
Nothing in this world is static and everthing moves but we have normal and abnormal ups and downs . Your body temperature goes up and down but there is a point of up and down that may cause death and needs an immediate correction. in summer time, you can live with 90 or 100 degrees but if it gets to 120 degrees, you better do something about it. Your blood pressure goes up and down but there is a point that you may need an emergency care. Your car speed goes up and down but there is a point that is danger and needs correction. your speed can go up to 75 or 80 mph on open freeway but if you got to 100-120 mph, you are going to kill somebody. The market goes up and down but there is a point that needs immediate correction otherwise it will explode. It is called bubble.
You are in Southern California market and know its current and past market. Do you think an increase of +/- 100% to +/- 125% in residential real estate value between last quarter of 2001 and first quarter of 2006 is a normal increase or a bubble and do you think an increase of +/- 25% to +/-30% in residential real estate value between last quarter of 1995 and third quarter of 2001 was normal increase or was a bubble?
You can see that the market went up between 1995 and 2001 and also went up between 2001 and 2006 but they are two different ups. Which one of these two periods needed correction because it got to the critical and dead end point?
If you compare these two 5-year periods, you will see which one is abnormal and which one is normal. Which one needs correction and is called bubble and which one is a typical market increase because it is adjusted to the rate of inflation.

 

[Randolph Kinney]

Brad, I believe there is a problem with semantics or defining what constitutes a "bubble" and what constitutes "bursting". Even the FDIC had a big problem defining a bubble so that it would not encompass many bubbles over time and also then when bubbles burst. FDIC chose a number out of its arse to fit a predetermined frequency.

Terms like "correction" are nebulous because they too have no standardized meaning. However, everyone will agree a correction means declining prices in stock markets, housing markets, bond markets, commodities markets and even tulip markets.

Pundits and experts do not make or break what will happen over time. Most explain the past, not the future, and even the past for causation and magnitude of change will be disputed. You pointed that out with the recession of 2001, it didn't happen according to the revised data the government has. How much of the 2001 recession was caused by the dot.com crash or in general, equity markets correction?

From my reading and study of economics, assets are interrelated. There is a rationalization and allocation based upon a risk adjusted rate of return. Sometimes the rate of return does not reflect the risk or alternatives. That has been termed, "irrational exuberance". Japan went through a long period of time where their stock prices were just plain nuts and the same with their real estate. Today, you have had a 15 year correction in both markets. Some would even characterize those markets as bubbles and they did burst.

One of the classic definitions of "over bought" in a given stock is looking at the institutional ownership percentage. If more than half of the stock is already owned by institutions, what sort of demand can be left to continue purchasing at rising prices? As the institutional ownership continues to rise, so does the risk of a price collapse. Why? If there is any news that disappoints or conditions that affect institutional ownership, they all head for the door at the same time with a sudden sell off and large price decline.

Real estate is not liquid like stocks and residential housing has not been owned by institutions. However, you can get into overbought markets. Simply, what percentage of population already own a home and how many are left that can afford to buy a home.

Let me quote, again, a pro who believes prices are not even close to reality:

With an estimated one-third of Southland properties currently "wildly overpriced," according to John Karevoll, chief analyst at DataQuick, a La Jolla-based real estate research firm, patience could be a home shopper's best virtue.

Did you see the power point data from NAR I posted in this thread?

I believe the pundits you quote on foreclosures have no clue how big the problem is going to be. They all look at the past market cycles. They are not looking at the quantity of new mortgage products and new risk levels created by those products.

They are underwritten on a fully indexed basis, i.e., to get it you must qualify for the loan as if it was being made at the lifetime cap level. And our LTVs on them are lower than on regular ARMs.

Your bank may have higher standards, but the stuff I have seen is junk. There are too many loans now with 100% financing, with HELOC seconds or ARM seconds. Your bank does not seem be serving the B and C loan market.

I am looking at layoff statistics. I am forecasting a rising unemployment rate. There are also a slew of people who gambled on rising values and falling interest rates, maybe even their income rising. I expect to see more headlines about short sales and foreclosures. I don't believe the housing market is going to recover from quite some time. I am reading about the shock to the economies that serve the auto industry and semiconductor industry. Intel is the major employer in New Mexico. I suspect that there is going to be a flushing of the toilet on real estate values in Rio Rancho. Some of that A paper is going to get blown away along with a good percentage of the B and C paper.

 

[Randolph Kinney]

Forecast calls for Increases in delinquencies and foreclosures

Forecast calls for Increases in delinquencies and foreclosures

By Amy Hoak, MarketWatch
Last Update: 4:36 PM ET Sep 13, 2006

According to the survey, all adjustable rate loans had higher, seasonally adjusted delinquency rates compared with the first quarter.

The delinquency rate for prime ARMs increased to 2.70% from 2.30% over the quarter and was up from 2.19% a year ago. The rate for subprime ARMs increased to 12.24% from 12.02% over the quarter but was up substantially from 10.04% a year ago.

"It is not surprising that subprime borrowers are more susceptible to these changes," Duncan said, referring to the changing economic and housing climate.

Also, MBA data has found over time that homeowners with ARMs have higher delinquency rates than those with fixed-rate mortgages, he said. Duncan expects ARM delinquencies to be a factor in the modest increases of overall delinquencies and foreclosures to come.

Fixed-rate mortgages fared better. The delinquency rate for prime, fixed-rate mortgages held at 2%, unchanged from the first quarter and went down from 2.02% a year ago. The rate for subprime, fixed-rate loans decreased to 9.23% from 9.61% over the quarter; the rate increased from 9.44% over the year.

 

[Randolph Kinney]

Pinched homeowners turn to 'short sales'

Pinched homeowners turn to 'short sales'

By Jim Wasserman -- Bee Staff Writer

Published 12:01 am PDT Sunday, August 27, 2006
Story appeared in Business section, Page D1

Sam Webber had it all during the real estate boom. The former accountant bought old houses, fixed them up and resold them for more than he paid. It was a good independent living until four months ago when the bottom fell out of his game.

Now as home prices have declined 5 percent from last year in Sacramento County, Webber is what analysts call "upside down." He owes banks more than his two remaining fixer-uppers are worth. He's missed mortgage payments on each. Worse, he's tied up his entire savings and previous profits in remodeling the houses.

Webber has one last hope to avoid foreclosure -- selling the houses for what he can get and persuading his bankers to accept less than he owes.

Elk Grove real estate agent Derek Kirk recently counted 264 short-sale listings in El Dorado, Placer and Sacramento counties compared with fewer than 50 six months ago. Lenders, too, are noticing.

"Short sales are on the rise because foreclosures are. They go hand in hand," said Cari Kerns, spokeswoman for Calabasas-based Countrywide Financial Corp., a leading national home lender.

Although mortgage bankers and federal agencies offer few statistics on the phenomenon, its re-emergence shows how hard, fast rules that normally govern the real estate game can become flexible as buyers and lenders alike teeter on the edge of declining home values.

Agents say many banks are being stern and even resistant as they gauge the depth of the slowdown. But most believe short sales will increasingly become a safety valve for sellers -- and source of better deals for some buyers -- as more investors or homeowners end up in Webber's shoes.

Across the region, say 1990s-era short sale veterans, homeowners are facing serious financial setbacks from illnesses, divorce, job loss, and car or home repairs. But this time many also have risky financing because they borrowed to the very edge of their ability and took out home equity loans. In Watkin's words, they have an "albatross that's dragging them under" at the same time their home values are falling.

It's little wonder many are stressed. Last year up to 77 percent of capital-area homebuyers used riskier adjustable-rate financing to help them buy homes they couldn't otherwise have afforded. Many are falling behind on mortgage payments. In April, May and June, Sacramento, Sutter and Placer counties showed some of California's biggest increases in missed mortgage payments, according to La Jolla-based researcher DataQuick Information Systems.

Williams expects the game is just getting started. Recalling the 1990s, he said: "Twenty percent of the homes in Sacramento then were short sales. We had a five-year downturn. Prices dropped 25 to 30 percent, and a whole lot of people had no equity."