Housing Bubble Bursting?

[Randolph Kinney]

NAR: Second Home Sales Hit Another Record in 2005; Market Share Rises

WASHINGTON (April 5, 2006) – Vacation- and investment-home sales both set records in 2005, with the combined total of second home sales accounting for four out of 10 residential transactions, according to the National Association of Realtors®.

The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16.0 percent from an upwardly revised total of 2.88 million in 2004. The market share of second homes rose from 36.0 percent of transactions in 2004 to 39.9 percent in 2005.

Vacation-home sales increased 16.9 percent last year to a record 1.02 million from a downwardly revised 872,000 in 2004, while investment-home sales rose 15.7 percent to a record 2.32 million in 2005 from an upwardly revised 2.00 million in 2004.*

David Lereah, NAR’s chief economist, said all the factors at play in the second home market were favorable in 2005. “To begin with, the baby boom generation is driving second home sales – they’re at the optimum point in life when people become interested in second homes, they’re at the peak of their earnings, interest rates remain historically low and boomers want to diversify investments,” Lereah said.

Lereah said there are significant motivational differences between vacation-home buyers and investment buyers. “Vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment,” he said. “Investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification.”

In listing the reasons for purchase, 41 percent of vacation-home buyers said to use for vacations, 31 percent to use as a family retreat and 28 percent to diversify investments. For investment-home buyers, 55 percent said rental income was the primary factor for buying, and 35 percent wanted to diversify investments.

The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24.0 percent from $148,000 in 2004.

NAR President Thomas M. Stevens from Vienna, VA., said not all second homes sales are necessarily a “second” home, particularly for investment buyers. “Some of these purchases may be a third, fourth or fifth investment property, showing that housing is a good investment,” said Stevens, senior vice president of NRT Inc. “The lion’s share of investment homes is actually the primary residence of a renter. Most investment owners are seasoned buyers who understand the long-term benefits of ownership, but not everybody is cut out to be a landlord.” Four percent of all homeowners hold three or more properties; 11 percent own two properties.

Typical vacation-home buyers in 2005 were 52 years old, earned $82,800, and purchased a property that was a median of 197 miles from their primary residence; however, 47 percent of vacation homes were less than 100 miles and 43 percent were 500 miles or more. Investment-home buyers last year had a median age of 49, an income of $81,400, and bought a home that was close by – a median of 15 miles from their primary residence.

More than three-fourths of vacation-home buyers have no interest in renting their property, and 21 percent said it would become a primary residence on retirement compared with only 2 percent of investment buyers. Fourteen percent of investment buyers and 6 percent of vacation-home buyers purchased a property that their son or daughter can occupy while in school.

In describing characteristics that vacation home buyers value about their property, 40 percent said close to an ocean, river or lake; 34 percent close to family members; 27 percent close to preferred recreational activities; 27 percent close to their primary residence; 26 percent close to mountains; 24 percent close to a preferred vacation area; and 17 percent close to a job or school.

Activities of interest that affected the decision to buy a particular vacation home include beach, lake or water sports, cited by 37 percent of buyers; golf, 29 percent; theme parks, 18 percent; winter recreation, 16 percent; hunting or fishing, 12 percent; and boating, 9 percent. Smaller categories included gambling; biking, hiking or horseback riding; and tennis.

The largest concentration of vacation home buyers are in the Midwest, accounting for 33 percent of vacation home sales, although the property may be located in another region. Buyers in the South accounted for 30 percent of vacation home transactions, the West, 20 percent, and the Northeast, 17 percent.

Most investment home buyers are in the South – 38 percent of the total. Buyers in the Midwest and Western regions each purchased 24 percent of investment property, and the Northeast, 15 percent.

One-third of vacation-home buyers and 36 percent of investment-home buyers said it was very likely that they would purchase another home, in addition to properties currently owned, within the next two years.

Lereah said it is difficult to project where the market will go in 2006. “Vacation-home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of a lifestyle purchase,” he said. “Discretionary purchases of that nature are more likely in a healthy economy, and that is looking positive as well.”

“On the other hand, investment home sales are likely to decline this year, in part because of higher interest rates,” Lereah said. “There are fewer incentives to speculate in the market with price appreciation cooling in much of the country, and more oversight is being encouraged in the mortgage market. It’s hard to say how much speculation there may be in housing, but it’s probably a single-digit percentage of total home sales.” NAR survey data shows only 2 percent of homes are sold in one year or less, but investment homes likely are under-represented in that particular reporting sample.

Lereah expects a soft landing for the housing sector in 2006 with existing-home sales declining 5.7 percent to 6.67 million, the third highest on record. “Long term, the outlook for second homes is favorable because more people will be moving into the prime years for buying a second home,” he said.

Currently, there are 36.0 million people aged 50 to 59. However, there are 45.2 million people aged 40 to 49. “That younger segment will become a driving force in the second home market over the next decade,” he said.

The second-home report is based on two surveys. One, to determine market share and to extrapolate sales data, was conducted in March 2006 of a panel of recent home buyers. That survey captured data for 3,406 home buyers in 2004 and 2005, with roughly equal samples for each year; data were weighted to correspond with demographic findings in an earlier mailed survey.

To determine median home prices, most of the demographics and buyer preferences, NAR mailed an eight-page questionnaire to a national sample of 145,000 buyers who purchased their homes between mid-2004 and mid-2005 based on county records. It generated 7,813 usable responses; the response rate was 5.4 percent. Data in this report only includes data from respondents who indicated that they purchased a vacation home or investment property.

A more extensive study, The 2006 National Association of Realtors® Profile of Second Home Owners, currently is under way and will be released in late spring. This study will be based on a large sample of existing owners and will update NAR’s benchmark study of second home owners that was published in 2002.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.

# # #​

*Clearer definitions of the differences between vacation homes and investment property largely account for revisions in sales totals for 2004 from data published last year in NAR’s annual second-home buyer report.

Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the News Media section. Statistical data, charts and surveys also may be found by clicking on Research.

 

[The Warrior Monk]

RE value is created by 4 factors - scarcity, purchasing power, utility and demand. Demand is still high, utility has not really changed much, land is still becoming less available. What you are suggesting is that the purchasing power decline due to higher rates will impact everything else. I do not see that.

What if the purchasing power is dependent upon increases in RE value?
This is increasingly the case.

My brother bought a second home a few years ago. How did he do it? He did a cash-out refi; he lowered his interest rate and bought the second home (in West Virginia, much cheaper prices than here) cash. That's purchasing power.

My wife and I put an in-ground pool in, built a horse barn, put wide-plank wood floors in the house, and adopted two children from China. How did we do it? We sold our other house. Once again, purchasing power due to increasing real estate values.

I've noticed that on many of these cash-out refis people have done others in the recent past. Two or three years ago it didn't matter; prices were increasing faster than people could take money out. More recently, more and more people are maxed out; less people are getting their money.

 

[Randolph Kinney]

Bear Stearns, Lehman Mortgage Growth Crimped by Housing Market

Brad, it seems that Wall Street is concerned about the slow down in mortgage lending. See the link:

http://www.bloomberg.com/apps/news?pid=email_us&refer=top_world_news&sid=aBG6_z_WH1a4

The U.S. Federal Reserve's fight against inflation is taking a bite out of one of Wall Street's biggest money-makers: the $6.5 trillion market for packaging millions of home loans into tradable bonds.

Lehman, the fourth-biggest U.S. securities firm, is cutting almost 200 jobs at two home-lending units in California. Bear Stearns Cos. Chief Financial Officer Sam Molinaro said on a March 16 conference call after the company reported first-quarter earnings that he sees ``weakness'' for new mortgages across the industry.

Since June, home sales fell 10 percent, coinciding with the last five of 14 interest- rate increases by the Fed.

Investment banks most exposed to the housing market ``typically suffer during these periods, and I think that will continue,'' Bill Gross, 61, chief investment officer at Newport, California-based Pacific Investment Management Co., said in a March 15 interview.

``Results in our U.S. residential mortgage business declined due to a slowdown in the U.S. housing market,'' Lehman Chief Financial Officer Christopher O'Meara, 44, said on a March 15 conference call to discuss first-quarter earnings.

``We expect home sales to drop by 8 percent in 2006,'' because investor demand is falling and homes are too expensive for some first-time home buyers, said Daniel Mudd, 47, chief executive officer of Washington-based Fannie Mae, the largest U.S. provider of mortgage financing, on a March 13 conference call. ``There are clear downward trends that have emerged.''

Fannie and Freddie

Average U.S. home prices are stagnating after rising for five straight years. They declined 3 percent to $261,000 in January from an all-time high of $269,000 in August, according to a report from the National Association of Realtors in Washington.
Wall Street firms also are facing increased competition from Fannie Mae and Freddie Mac, the nation's two biggest providers of mortgage financing, which plan to increase their buying and packaging of home loans that don't conform to insurability standards. Those include loans to people with low credit scores and mortgages to borrowers with good credit but with little documentation of their income.
Until now, Fannie Mae mostly ceded that part of the market to Wall Street, the company said in a filing with the U.S. Securities and Exchange Commission last week. Fannie Mae is creating a wider range of mortgage finance products, such as fixed-rate, interest-only loans, to capture share.

 

[Pamela Crowley (Florida)]

Hot Homes Get Cold

Hot Homes Get Cold

http://online.wsj.com/public/articl...8Wc4fYsGIdGap8hwvqSfmw_20060418.html?mod=mktw

MIAMI -- Todd Linsley, a 37-year-old investor, bought a three-bedroom house in Stuart, Fla., for about $318,000 in late 2005. His original plan was to quickly flip the property -- which is in a new housing development about 40 miles north of West Palm Beach -- by selling it for as high as $425,000. But when he saw that the market was turning, he decided to list the home for $379,900. It's been on the market since early January with no takers.

Mr. Linsley says home builders keep discounting unsold houses in the neighborhood -- sometimes axing as much as $100,000 off the original asking price. He says he can't afford to go that low. "If I got in a jam I would have to drop the price, but I am not at that point," he says.

So now he's renting his investment house out for $1,000 a month, while paying a $2,045 monthly mortgage and a $108 monthly homeowner's association fee. "My Plan B was always to rent it out. I am not going to lose my shirt," says Mr. Linsley, a salesman for a medical-products company.

Mr. Linsley is far from the only housing-market investor who has been forced to go to Plan B in recent months. Many cities that experienced fast run-ups in home prices during the past five years are now seeing sales cool the fastest.

"You could consider Florida to be ground zero for the housing market," says Mark Zandi, chief economist at Moody's Economy.com, an economic consulting firm in West Chester, Pa. He says the factors that caused the housing market to overheat nationwide -- such as "creative financing" offered to credit-risky buyers -- were exacerbated in Florida. "There were more lenders, more realtors, more foreign investors," than anyplace else, he says.

Another factor that may be affecting sales is the appearance of some investor-dominated housing developments, some of which were built with minimal landscaping next to highways, cemeteries and mobile-home parks. Several of the housing developments snapped up by investors now look like ghost towns, with "For Sale" or "For Rent" signs in many windows. In some cases, the builders "were building for investors, not for homeowners," says Mr. Morgan, who is trying to resell several investor-owned homes with mixed success.

About a year ago, when the market was stronger, Mr. Morgan sold homes to several out-of-state investors, who never saw the property in person. "It's really no different from the dot-com [bust]," Mr. Morgan says. "The people who bought the [low-quality homes] got clobbered." He says he refused to sell poor-quality homes to his clients. "If I didn't have any ethics, I could have made a million dollars last year."

Despite the current turmoil, some Floridians remain bullish, including Stuart Miller, the chief executive officer of Miami-based Lennar, one of the largest home builders in the U.S. But Mr. Morgan, the broker, says for him the market has slowed considerably. He wrote in an email late last week that "we went three days this week with not a single showing. That's incredible. I have 35 listings. We usually get 2-6 showings a day....I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their 'life savings' if they sell the homes in today's market."

 

[JSmith43]

There goes your chances for a back-up career with the chamber of commerce:new_rofl:

 

[Brad Ellis]

Randolph,

Thanks for both posts. Obviously, my memory was a tad off but not that much and such minor differences are irrelevant to the discussion.

The second post is revealing as well. 3% drop and Fannie's projections of 8% drop for 2006. Seems to fit right into the parameters of a classic correction, if they bear out.

David,

Of course the purchasing power will be tied to prices; they walk hand in hand. If prices are too high for the purchasing power they will come down- as we appear to be seeing, at least for now.

Brad

 

[Randolph Kinney]

Brad,

What was news to me is that Bloomberg reported that there was already a 10% drop in home sales from June 2005 and they expect another 8% drop for all of 2006. 18% drop in home sales for 18 months from June 2005 through December 2006 is a serious reduction in volume. Couple that with falling mortgage refinancing and there is going to be a big drop in the number of mortgages. That means layoffs in the businesses associated with loan production and repackaging for sale to investors.

The other part I thought was significant is Fannie is getting into the sub-prime mortgage business and interest only mortgages. That is risky. But, it is also symptomatic of a weakening home purchase market too.

I am reading now that the job growth is unexpectedly high. That is causing interest rates to climb in fear of the FED raising interest rates in response to a perceived wage inflation problem. As we both know, mortgage interest rates are a reflection of the expected inflation rate.

Pam,

Here is a link that talks about a decision point: Should they hang on and rent or should they bail out, possibly at a loss?

Selling an Investment Property In a Cooling Real-Estate Market

http://www.realestatejournal.com/buysell/tactics/20060413-clements.html?rejpartner=mktw

It would appear that the investors where you are, are feeling the pain of an alligator property. Lets hope they can sustain the negative cash flow drain for more than a couple of years. Otherwise, there is going to be one heck of a lot of foreclosure business in your area!

One side thought, with more of the investor's disposable income going to feed the alligator, that means spending in the discretionary area is going to drop. No more vacations, no more buying new cars, etc.

 

[The Warrior Monk]

David,

Of course the purchasing power will be tied to prices; they walk hand in hand. If prices are too high for the purchasing power they will come down- as we appear to be seeing, at least for now.

Brad

A few years ago purchasing power in my area (second home market) was coming from increases in tech stocks; i.e., outside of the real estate market. I thought the market was going to crash a few years ago. There were signs of it too. There were several homes that were dumped after the NASDAQ crashed for less (I'd guess 20%) than what they were bought for less than a year earlier. But these homes were bought with large down payments. I was amazed at the number of multimillion-dollar homes being purchased with 50% or more down. The owner's took a hit, but they walked away owing no money.

Since then, prices are probably 3x higher. We're back up to putting only 20% down again. Where's the money coming from? Real estate. Real estate money is fueling real estate prices. That is not a good sign. The same thing happened with tech stocks a few years back; it was fueling itself. Obviously they are different, due to liquidity issues, but all signs point to that we're at the top of the hill of the continuous cycle (for the market as a whole).

 

[Brad Ellis]

Randolph,

No doubt volume is down for most due to both lower sales volume and higher rates that preclude many refinances. Layoffs began about a year ago and continue. Not all are impacted, though.

David,

Not sure of your market but I think assumptions that all RE activity is being fueled by RE activity is a narrow view. Second home purchases are somewhat fuled by income increases as well as higher prices for the primary residence and some of those are paid off.

About 2/3 of the US mortgage market is in fixed rate 30 year terms and about 2/3 of the market has a loan balance that is below 70%. I think what will happen will revolve around the other 1/3 for the most part.

Brad

 

[moh malekpour]

Randolph,

No doubt volume is down for most due to both lower sales volume and higher rates that preclude many refinances. Layoffs began about a year ago and continue. Not all are impacted, though.

David,

Not sure of your market but I think assumptions that all RE activity is being fueled by RE activity is a narrow view. Second home purchases are somewhat fuled by income increases as well as higher prices for the primary residence and some of those are paid off.

About 2/3 of the US mortgage market is in fixed rate 30 year terms and about 2/3 of the market has a loan balance that is below 70%. I think what will happen will revolve around the other 1/3 for the most part.

Brad

Brad,
Could you please define the “income”? Is the equity build up on your home that you can cash it out would be considered an income? Is the availability of borrowed money from your credit card or your bank based on your good credit would be considered an income? What is an income in economic term?