Housing Bubble Bursting?

[Randolph Kinney]

Don't Worry, Housing Declines Should Be Moderate

http://www.ocregister.com/ocregister/money/homepage/article_1361000.php

Q. Is this a bubble bursting, or just a natural, cyclical easing after a decade of grand performance?

A. It depends on what you mean by the latter vs. the former. If you think the late '70s run-up in prices was a bubble, and the late '80s run-up was a bubble, then this is a bubble bursting. The same market characteristics that defined the cooling starting in 1979 and 1989 are what we are seeing today. If you think that what we have seen in the past is just a normal cycle, then this is a normal cycle. The key point here is to remember that a bubble is simply a market mispricing an asset due to excessive speculation. I do believe that houses are substantially overpriced relative to their real value. Housing markets seem very prone to these problems – probably due to the fact that unlike other asset markets such as in stocks and bonds, the amateurs tend to dominate sales and the brokers in the markets are not required to understand anything about assets, what they are and how they work – unlike the relatively stringent licensing requirements for bond and stock traders.

 

[Randolph Kinney]

Housing prices expected to drop more

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/11/21/HOUSING.TMP

Housing prices expected to drop more
Berkeley economist says recovery will take 3 or 4 years


The median price of an existing home in California will fall 4.8 percent next year and 2.9 percent the year after, Ken Rosen, chairman of the Fisher Center for Real and Urban Economics at UC Berkeley, said Monday during a presentation at the center's annual real estate and economics symposium.

"This is not a one-year event and this is not a six-month event," Rosen said. "It's going to take three or four years for incomes to catch up to housing prices."

"We are at the beginning of the correction in the housing market in terms of prices," said Stephen Levy, director of Palo Alto's Center for Continuing Study of the California Economy. "The prices now are way out of line with the income and income prospects of people and they are way out of line with the kind of house you can buy in comparable western cities like Phoenix or Denver or Portland or Las Vegas."

Appleton-Young, like Rosen, said that sellers who are refusing to drop their asking prices are dragging out the decline. Sellers will need to readjust their expectations -- and lower prices -- in order to get the market moving again, she said.

 

[JSmith43]

"This is not a one-year event and this is not a six-month event," Rosen said. "It's going to take three or four years for incomes to catch up to housing prices."

I want to add some perspective to Mr Rosen's comment (above):

Let's assume a buyer needs a $300,000 mortgage @6.5%, but is about $10,000 per year short of annual income to qualify. If the rate falls 1/2%, which it has done recently, he will now qualify (assuming decent credit, etc).

Looking at it another way, if he qualified a few months ago for $300,000, he would qualify for roughly $70,000 more given the 1/2% interest rate reduction, or $70,000 less if the rates popped up 1/2% I used a 50% DTI, so, if they wanted to dedicate all their "extra" effective net income (savings via reduced interest rate), they could afford even more assuming they otherwise qualified.

These are quick and dirty calculations, since I am running late & have guests, but they are close enough to make the point!

Happy Thanksgiving to all of you! I hope the coming year is not a turkey

 

[Randolph Kinney]

In the article, the median price of a home in the Bay area region was $614,000 in October 2006. Lets assume he can buy at 100% financing with a 6% 30 year fixed rate mortgage. That's $44,174.88 a year in mortgage payments. Using your 50% DTI ratio, he has to be earning roughly $88,350 a year with no other debts.

If house prices drop at 4% a year for 4 years and incomes continue to rise, lets say 4% a year for the next 4 years, it demostrates how more buyers could afford to buy that same house.

Despite a cooling housing market where prices have fallen slightly, affordability continued to worsen in most California markets during the third quarter of 2006 as reported in other sources.

Coming in 14th in the nation on the unaffordability ranking was the San Francisco-San Mateo-Redwood City area, where 6.8 percent of the homes were affordable for the median income.

 

[moh malekpour]

Roger,
I agree with your assumption that the lower rate would increase the buyer's purchasing power but this is only one side of the situation. The other side is that as the rate goes down, the property value goes up. It appears that the rates and property values go in opposite directions and for that matter, the buyer can never catch up with housing prices. by lowering rate, the cost of borrowing would be less but the cost of buying the same home would be more.

 

[Randolph Kinney]

The other side is that as the rate goes down, the property value goes up.

That is exactly how the homes became unaffordable.

 

[JSmith43]

The other side is that as the rate goes down, the property value goes up.

That will be a news flash for the local market. "Buyer's market" people are a bit spooked & there will be a significant time lag before excess inventory is cleared out. Absorption rate stuff For all the buyers and sellers know, the interest rates will have spiked up 1/2% by then.

In the long run, the market tends to move toward equilibrium, but it sure can be in a herky jerky fashion.

Edit: I was only arguing the guy's velocity of change pontification anyway

 

[Randolph Kinney]

Oct. Median sales prices fell a record 3.5% year-over-year

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B553B8779%2D45AD%2D4616%2DB20A%2D17CF6BA8D90C%7D&siteid=mktw

Median sales prices fell a record 3.5% year-over-year to $221,000, the third decline in a row. Since 1968, when the Realtors began collecting the data, prices had never fallen three months in a row on a year-over-year basis.

Falling prices are "a good thing," Lereah said. "Sellers are cutting their price enough to encourage sales," said Pat Vredevoogd Combs, a Realtor from Grand Rapids, Mich., and president of the NAR.

Inventories of unsold homes increased 1.9% to 3.854 million, representing a 7.4-month supply at the October sales rate. It's the largest months' supply since April 1993.

 

[Pamela Crowley (Florida)]

What if they removed all those grossly inflated, way above the listed price sales that I have documented from all over the nation???

Where would those stats be now?????

 

[Randolph Kinney]

What if they removed all those grossly inflated, way above the listed price sales that I have documented from all over the nation???

Where would those stats be now?????

When you read the statements put out by NAR, they focus on saying "bad news" is really good news. Nationally, the median sales price declined 3 months in a row on a year over year basis, which has never happened in their recorded history. And, to top it off, it was a record 3.5% decline! That's good news! And inventory is rising! Oh but the volume went up on existing home sales, which they interpret as falling prices are producing increasing sales volume! Using NAR logic, just think how much sales will increase next month when prices decline 5%!

Yes Pam, in my market, short sales and foreclosures are showing what the true price is because the seller is not going to credit buyer with $20,000 at COE. And, you have to check the declining box too!

Had the seller concessions not been rolled up into the sold price and financing, the price declines coming would not be so severe.