Housing Bubble Bursting?

[Pamela Crowley (Florida)]

http://www.youtube.com/watch?v=pLjo7-J1qho

 

[Randolph Kinney]

Brad,

Further, even though I lived in the midwest back then, I have heard and read many stories about the incredibly steep price declines in SoCal. BUT, when we look at this data, we see mostly, if my memory is good, single digit declines in the Pacific market in that period.

So, if So Cal went down so dramatically then, does that not mean that other areas of the Pacific region must have increased? Otherwise the data should show a much much larger decline. Now, since I used the word correction, I gotta live by the sword/die by the sword. So, yes, there was a correction in other markets.

I am going to labor the point, since I don't agree with how you characterize the housing decline in the 1990's. First, the OFHEO defines the Pacific region to be:

Pacific (PAC):
Alaska, California, Hawaii, Oregon, Washington

You can plainly see that we have 5 states that make up the data base for the Pacific region. Now let us explore the data as reported by OFHEO for the Pacific region, which is by percent increase or decrease, by quarter:

1992 4 -1.38
1993 1 -2.38
1993 2 -1.85
1993 3 -2.55
1993 4 -1.96
1994 1 -1.21
1994 2 -2.05
1994 3 -2.35
1994 4 -3.36
1995 1 -3.06
1995 2 -0.44

You can argue as you do that the decline is insignificant because it is single digit, or is it? How do you compute the total decline, for the average home price index? I say the price of the average home in the Pacific region declined from 4th quarter 1992 through 2nd quarter 1995 by 20.4% or saying it another way by the end of 2nd quarter 1995, the average home was worth 79.6% of the value it had in 4th quarter 1992. If you just sum the percent decrease, you would say the average home price dropped 22.59%. Either way, a 20%+ decrease in the average home price spread over 5 states is what I call, SIGNICANT! Now for your argument that the bulk of the decline occurred in So Cal and that pulled the 5 states down, I find that unbelievable and unsupported.

Is this just now boiling down to a question of whom we each believe? And are we now simply citing sources that support our own views? Looks that way to me.

I do not agree. You are not citing your sources or presenting the actual data from any source on prices of homes declining. In fact, what is really bogus about OFHEO HPI, it only measures home values where there are conforming mortgages. It is not the total market of homes, just the cheaper ones. As for the recession of 2001, you can cite the government and apply the definition of two back to back quarters of negative growth and claim there was no recession. However, the preponderance of the data and opinions do not agree with you. As for Japan, you can disagree all you want. There are many analyses and conclusions about what happened to cause their collapse of both stock market and real estate market. For one thing, it breaks the cardinal rule that the two markets are uncorrelated assets in general. But as you say, you have your opinion and I don't need to confuse you with data or conclusions that others may have.

 

[Randolph Kinney]

http://www.youtube.com/watch?v=pLjo7-J1qho

What a funny and

sarcastic​

play on words and quotes from 1929 and today, from the pundits then and now. Especially from NAR!

 

[moh malekpour]

http://www.realtor.org/rmodaily.nsf...cde2d55457ba1571862571e8005180be?OpenDocument



And here... where there never was any unrealistic run-up in prices, things are continuing to rock along, pretty much as usual.

Steve,
but those areas so called metro areas contain 75% of US housing market. The housing wealth is concentrated there.
Orange County is the smallest County in California
It has 948 Sqft land area and +/- 3,000,000 population

Currently Orange County has the following listings above $1,000,000
1- $75,000,000
1- $57,000,000
5- $25,000,000 to $30,000,000
5- $20,000,000 to $25,000,000
10- $15,000,000 to $20,000,000
25- $10,000,000 to $15,000,000
103- $5,000,000 to $10,000,000
2790- $1,000,000 to $5,000,000

This is only the smallest county, now compare this one to your total housing in your state and tell me the different of housing wealth.
Do you have these prices there?

 

[moh malekpour]

Good News for People Who Love Bad News

http://www.bullnotbull.com/archive/good-bad-news.html
Real Estate: Good News for People Who Love Bad News

by Michael Nystrom
September 14, 2006
Cambridge, MA

Please see Part I of this article, A Cautionary Housing Tale from Japan, here.

As I promised last week, I went next door to check out the house that is for sale, and I also gave my good friend Terry, who is a real estate agent in Seattle, a call to get an idea of what's going on with housing back in my old hometown. What I found was a tale of two cities that reinforces the idea that Mr. Alan "there is no national housing bubble" Greenspan gave us. While there may be no national housing bubble, there are a number of localized bubbles at various stages of development. I mentioned before that it seems like half the country wants housing prices to keep going up, because they're owners, and the other half want prices to come back down, so they can buy! This tale of two cities has some good news for both crowds. But first the bad news:



The chart above has been floating around on the net for a while now, and shows clearly that the stock market follows the NAHB Housing index nearly perfectly, with a one-year lag. The housing index has fallen by over 50% from its 2005 highs, and shows the signature sign of the bear: lower highs and lower lows. So naturally we should expect a general 50% market crash in the next year, right? Well, what the heck is this NAHB Housing Index (NHI) anyway?

Apparently it is:
...derived from a monthly survey of builders that NAHB has been conducting for nearly 20 years. Homebuilders are asked to rate current sales of single-family homes and sales expectations for the next six months as "good," "fair," or "poor." They are also asked to rate traffic of prospective buyers as either "high to very high, "average," or "low to very low." Scores for responses to each component are used to calculate a seasonally adjusted overall index, where any number over 50 indicates that more builders view sales conditions as good than poor. [Source]
So the NAHB Housing Index is a measure of homebuilder sentiment. A key theory behind the new science of Socionomics is that sentiment, or social mood, is the primary driver behind market direction, and not the other way around. The chart thus helps to confirm the Socionomics thesis. The Index is currently around 30, its lowest level since our last real recession back in 1991. As national builders expectations have fallen, look at what has happened to the stock prices of the large publicly traded homebuilders:



Most of them have already declined over 50%. (Interestingly, they are now starting to bounce, just as the news in the media seems to be the worst.) The homebuilders have led the general market up over the past few years, so it is reasonable to expect that, like the tech companies after the 2000 bust, they will lead the market - and the economy - back down. Don't forget that over 3.4 million jobs - home appraisers, inspectors, mortgage lenders, decorators, termite exterminators, real estate agents, furniture makers, etc. - are tied to the residential housing industry. As the mood turns down among these 3.4 million workers, the market is almost a sure bet to follow.

Boston

In my neck of the woods, near Boston, pessimism and falling prices are in full bloom. Median house prices in July fell to $361,000, from $375,000 a year earlier - a 3.5% decline. And houses are languishing on the market, suffering price drops and a lack of buyers. A case in point is the house next door to mine, a five bedroom duplex that was originally listed in June at $565,000 and has already seen two price cuts, first to $525,000, and now to $499,000. But judging from the condition of the house (it needs a lot of work), and the sparse crowd at the Sunday open house, there is still plenty of room for the price to fall. A year ago it might have been a canditate for a quick flip, but now buyers are waiting to see how low the price will go. Heck if the price comes down enough, I might even buy it!

Some realtors in the neighborhood have begun running open houses on weekday evenings to entice the neighborhood after-work crowd, because the traffic just isn't there anymore on Sundays. One of the problems with Massachusetts in general, and Boston in particular, is that the economy is stagnating while the general cost of living remains high. The once vibrant Route 128 high-tech economy has slowed considerably, and the state is experiencing a net exodus of young workers who just don't see the point in staying. So where are they all going?

One place that is seeing a net influx of people is Seattle.

Seattle

Terry Kildal is a real estate agent in Seattle, and a good friend of mine. We met over a decade ago in Seattle as new stockbrokers around the beginning of the great bull market of the 1990's. Today Terry is a successful real estate agent living on Queen Anne Hill, one of Seattle's most exclusive neighborhoods, home to mansions with the best views of the city.



I called him expecting to hear tales of gloom and doom similar to those here in Boston, but was pleasantly surprised to hear otherwise. It is true, he says, that in Seattle there are more properties on the market than last year, and sales have slowed somewhat, but that prices remain firm - at least in his neighborhood. Terry attributes this to a number of specific advantages that Seattle still has over the rest of the country: In contrast to Boston, people are still flocking to Seattle - many from California and other higher priced regions - because the city is still seen as a relative bargain. The general cost of living, and the cost of housing in particular, is still lower than "top tier" US cities such as New York, Boston, San Francisco, etc. The local economy, anchored by new-economy behemoths such as Microsoft, Amazon, and Starbucks - and the old-economy stalwart Boeing - remains robust. People seem generally more optimistic about the future. And Seattle is one of the most physically beautiful cities in the world.

Many long time Seattle residents are pessimistic about the market, only because they can't believe how high prices have risen. But newcomers see the same prices as bargains. Based on prices elsewhere in the country, and Seattle's economy and reputation, higher prices are not out of the question, and it is something Terry does not rule out. He has the cautious optimism of a seasoned professional, but he also knows anything can happen. He also sees danger signs developing: Prices are rising on lower volume, and the number of homes for sale is also rising dramatically, another bad sign. As a result, homes are sitting on the market longer before finding buyers. He also pointed me to this article (great graphic at the end) that says median prices for sales in the city fell last month.

But so far, he says, prices in his territory are holding, because Queen Anne is a special place. It is close to downtown (you can walk), has good shopping and entertainment (also within walking distance), good elementary schools, and there are simply a limited number of large, older, craftsman-type homes on the Hill. They just don't build them like that anymore, and the newer houses in the suburbs are simply no comparison. As a result, Terry expects prices and demand for homes on the Hill to remain more stable than in some of the newer developments. As he put it - "Michael, it is a market of homes, not a housing market."

I tend to agree that specific cities, neighborhoods and even houses will be somewhat immune to price declines simply because they are unique, and will therefore retain their attractiveness. There is simply no place else in the world like Queen Anne Hill, and I for one, hope to move back there someday.

The optimisim on Seattle is shared by Forbes/Economy.com which predicts that prices will nearly double over the next 10 years.



Is such a thing possible? After witnessing the bull market of the 90's, it should be clear than anything is possible!

* * *

If you're looking for an experienced, knowledgeable agent in Seattle to help you sell your house or look for a new one, feel free to drop Terry a line through his website, and tell him I sent you.

As always, comments and discussion on this article are welcomed and encouraged. Click here: No need to register to post.

Next time I'll write about a disturbing trend that Terry told me about - higher taxes that are straining the budgets of older residents on fixed incomes, and what they are resorting to in order to deal with it. If you would like to be notified please subscribe to my low volume e-mail announcement list.

Some excellent websites that were useful references in putting this article together:

Terry Kildal - Seattle Properties for Sale

Boston Bubble - http://www.bostonbubble.com/

Seattle Bubble - http://seattlebubble.blogspot.com/

Patrick.net - http://www.patrick.net/

End.




New charts, news and financial links -- both the bull and the not bull -- updated each day on the homepage.
If you would like to be notified of updates, and new articles, subscribe to my low volume announcement list

 

[Terrel L. Shields]

Love the video.

To be a depressed housing market requires nothing more than prices to go flat. To sell you then lose the commission...real cash outflow. Inflation marches on so housing prices would be falling at the exact rate of inflation. We don't have to see a large fall in prices because the result is that banks will not call in those construction loans but allow partial interest payments until the builder bleeds white and then they builder will skip town, file bankrupcty or otherwise 'flip' the house back to the lender.

 

[moh malekpour]

http://www.youtube.com/watch?v=pLjo7-J1qho

Amazing. after 77 years, market beneficiaries are saying the same thing to protect their own interest. I guess it is just the nature and instict of human being that never changes. The technology, media, communication, knowledge hasn't changed the human nature and instict and tendency to manipulate and spin.

 

[moh malekpour]

Liars' Loans

http://www.safehaven.com/article-5897.htm

The housing bubble in America is losing air; the papers are all over the story. While the evidence is mixed, cocktail conversation has turned from how much money people have made by selling their houses to how much money they might have made if they had sold a little earlier.

But while lips tell the stories, the message still hasn't arrived at the part of the brain that can add two and two. Homeowners are still borrowing and spending; they have not yet cut back in anticipation of harder times ahead. And financiers are paying big money for derivatives and the companies that produce them. While the credits creak and wobble, the creditors haven't seen so much M&A activity in 10 years. Merrill Lynch, for example, just paid $1.3 billion to acquire National City Corporation's mortgage origination business. And, judging by profits (Goldman's are up 16% over last year), bonuses, and prices - the masters of the financial paper shuffling business are in high cotton.

What is Goldman? Among people who package and sell debt in large volumes and at large prices it is the leading brand. Debt comes in many varieties and many forms - especially after Goldman gets finished with it. But the variety called "mortgage backed securities" is worth looking at more closely...if not for illumination, at least for amusement.

A mortgage-backed security is backed by a mortgage. But what backs up the mortgage?

We put the question to an Irishman. "These houses are so expensive...how can people afford to buy them?"

"Ah...you might wonder what the real source of this Irish Renaissance is. It is debt, pure and simple. We had interest rates of 10% or more - until we joined the European Union and got the euro. Then, all of a sudden, you could borrow money for only 3%. You can imagine what that did - the whole place went on a spending spree - mostly concentrated on property, because the Irish love owning their own houses. I think it is something left over from the British rule, when we weren't allowed to own property. Now, we can own it...and now, with these interest rates, we can afford it. At least, as long as the lenders will keep lending on favorable terms. Right now, they practically stop you on the street to try to give you money.

"That's the real secret. The Germans had worked and saved for decades...and developed attitudes about money and institutions...all these things that allowed them to have interest rates around 3% without going crazy on credit.

"Then, when that low borrowing rate was introduced to Ireland, it was as if the pubs were giving away free pints 24 hours a day. The party has been going on ever since.

"So you see, we have everything you have in America: a property bubble even bigger than yours...with interest only housing loans... new cars everywhere...new buildings...everything."

The one thing the Irish do not have - a property bust - we predict they will get soon. Good and hard.

So far, the property bubble has added $30 trillion to the "wealth" of the developed countries alone. Borrowers may have been inclined to stop spending years ago, many would have gone broke, but the lenders wouldn't let them. New ways of letting out money were developed...each one more exotic, and more tempting, than the last. Not only could the mark pay less-than-market rate interest on his loan, and make payments when and if he chose to do so, he was also allowed to borrow with no proof of income; in these "liars' loans" whatever he stated as his income was taken down for fact.

While, down low on the economic food chain, men in cheap suits sold ARMs to people with hardly a financial leg to stand on, up higher, better dressed pitchmen derived from these dubious credits highly leveraged "securities" which they offloaded onto supposedly sophisticated financial institutions.

It is one for the financial history books. Conditions for credit expansion had never been better than they were in the last quarter of the last century of the 2nd millennium and the first few years of the next. In 1971, the world's money lost all contact with reality. The dollar, completely freed from gold, could be stretched almost infinitely. And then, Paul Volcker crushed excessive inflationary expectations in the early '80s, while increasing globalization helped hold down consumer prices. And then began the great bull market in bonds...in stocks...in houses...in credit generally, and credit derivatives in particular. And now the whole world floats in the biggest bubbles ever - expanded, among other things, by $236 trillion worth of [notional value] derivatives.

"We have no idea what will happen in the next 12 months," we told our audience in Dublin. "No one seems to think these bubbles will blow up. And since they're not worried about it, insurance against a blow-up is fairly cheap. Put options, for example, are a bargain. Gold at less than $600 is a bargain too.

"Not that we expect gold to soar. Gold may go up. It may go down. But it won't go away. When the credit expansion turns into a credit deflation a lot of other credits will disappear."

That is when the liars default on their loans. And Goldman's bonus checks get smaller.

 

[Randolph Kinney]

So far, the property bubble has added $30 trillion to the "wealth" of the developed countries alone. Borrowers may have been inclined to stop spending years ago, many would have gone broke, but the lenders wouldn't let them. New ways of letting out money were developed...each one more exotic, and more tempting, than the last.

And now the whole world floats in the biggest bubbles ever - expanded, among other things, by $236 trillion worth of [notional value] derivatives.
"We have no idea what will happen in the next 12 months," we told our audience in Dublin. "No one seems to think these bubbles will blow up. And since they're not worried about it, insurance against a blow-up is fairly cheap. Put options, for example, are a bargain.

I believe that article has a grip on the situation worldwide; debt and derivatives make the world go round like musical chairs. And we know the music will stop.

 

[Steve Owen]

Love the video.

To be a depressed housing market requires nothing more than prices to go flat. To sell you then lose the commission...real cash outflow. Inflation marches on so housing prices would be falling at the exact rate of inflation. We don't have to see a large fall in prices because the result is that banks will not call in those construction loans but allow partial interest payments until the builder bleeds white and then they builder will skip town, file bankrupcty or otherwise 'flip' the house back to the lender.

So true. But, the thing the bubblers seem to keep missing over and over is that if you live in your house and can afford the payments, then price today is not of much concern. It is only if you must sell at a loss or can no longer afford the payments that it becomes a concern. A pundit once said something like "if you have a job, it's a recession, if you've lost your job it's a depression." That really goes double for the housing market.

Also, the quote about buying good, seasoned equities now. That quote is actually true. If you had purchased the right portfolio of stocks in 1929 immediately after the crash, you would have made money in every single year of the great depression.

those areas so called metro areas contain 75% of US housing market

FYI, Joplin is an MSA. So, it's part of that 75% inspite of a city limit population of only about 47,000. Just one more way the government skews the numbers.

So, really, why should I care what housing is doing in Southern CA? I don't plan on moving there.

Of course, the whole answer will be that if something starting in S. CA causes a nationwide recession, then I will also be affected. That could happen, but hasn't happend yet.