Housing Bubble Bursting?

[George Hatch]

A "National Bubble" is not a view that is universally held on this side of the discussion. If the definition of a bubble includes large price gains that are not supported by the fundamentals then in order for the entire nation to be in a bubble the entire nation would have had to participate in the huge run-up and anyone can see that was never the case. That doesn't mean there aren't bubbles in some of the metro areas or that big losses in those areas wouldn't be of great damage to many of the people in those areas.

The 25% - 40% of "investors" (depending on whose numbers we use) only counts those people who are actively pursuing additional properties besides their domiciles to profit from. It doesn't count however many people there are who have been 'gaming' their domiciles into bigger/better digs as well as pulling cash from them for living expenses. Although not identified as 2nd home buyers, these 1st home buyers are still investing with an eye for short term profits and that does make them an investor to at least some degree. The point I'm trying the make here about who is actively investing has nothing to do with the merits of profit and everything to do with how those motivations affect a property owner during a down market. An investor who's banking on the short term profit isn't going to be inclined to hold if/when it becomes apparent to them that their investment is on a multi-year bleed.

The next point I'd like to address is the significance of investor activity in the residential market. We may make light of them being the minority and say that the actions of the minority are of little concern to the majority, but if you think about it almost all the activity that affects the trends occurs in the margins. It doesn't take 50% of the buyers having to actually book a loss to affect the values for the other 50%; I don't think I'm exagerrating at all to say that 10% of the players could easily run the table for the other 90%, regardless if the direction is up or down. Think about it - if a residential subdivision has 400 units but only 15 are listed for sale, 4 of those sales could easily establish the trend for the other 9 listings and the other 385 units not being marketed. Assuming the conditions requisite for a market sale, and that the same situation is happening in most other places at the same time so as to not discount these particular 4 sales as being an isolated pocket that has only occurred in just this one spot.

So what happens in the margins is of great effect because it is these people who drive the trends. Nobody would willingly book a loss by having to sell during a down market, but when the markets are down some people find themselves in the position to have to sell whether as a result of illness, retirement, job loss, divorce, job transfer and such. That's why there continue to be sales even when an otherwise stable seller would hold off. When enough of those listings come up the savvy buyer knows that all they need is a little patience to get one, meaning all the other listings can just rot.

I am located in a metro market where there were about 4,600 active listings at this time last year. There are now 20,000 actives with that number continuing to grow. The number of sales is in its 3rd straight quarter of decline. Obviously most of these actives will not sell because there just aren't enough buyers for them all right now, but some of them will; and those that do will be those that compete the hardest for the meeting of the minds. I would go so far as to suggest that the 5,000 or so (and that's me being optimistic) that do sell will include a goodly percentage of sellers who are in the margins and I would also suggest that their actions will set the price trends for the others who aren't.

I don't know how you soft landers read the data but I wouldn't just laugh how many of the owners are in the margins nor would I underestimate how their motivations can effect everyone else.

 

[Pamela Crowley (Florida)]

Of course anyone can interpret what I wrote about my market area any way they want to.

Additional information:

The majority of the sale I research for use as comps have 100% financing, many are ARMs.

A number of those were purchases as second homes with a second home addendum with their mortgage. A number of those have a for sale or rent sign on them when I drive by to take my comp photo. Many of these are new construction properties and are now sitting there vacant, for sale or for rent with a second home addendum, for over 6 months now - purchased 6 months ago for $200,000 and started out asking $300,000 - now asking $225,000.

Some condo projects are over 80% vacant and speculator owned - for sale or rent - with few interested.

When someone uses the "where are they going to live?" excuse for a market not being skewed, I can very easily use that same excuse to show that's not going to help the problems I'm seeing - at least in this market. Many of buyers in FL during these past few years never intended to live in the properties they bought, and bought, and bought.

Example: New house just finished. I appraise it for $370K end of January using the newest, nearest, most similar sales found. BUT... I included some stats on the fast growing number actives and their asking prices being reduced, rentals, etc. January was the beginning of where I could really start seeing the 'bubbles' breaking. Purchaser was a young newbie speculator that planned on putting it back on the market to sell for profit - or to rent it for profit expecting a positive monthly income. He was purchasing it as a 'primary residence' for the mortgage since he didn't own any real estate at all yet, but never intended to move here from CT and has never been here to look at properties let alone this one.

He is a LO at the mortgage brokerage that was my client, so I could talk to him. He told me his monthly mortgage payment would be approximately $2,200K, then the HOA is almost $100 per month. Similar rental properties are on the market and not finding a renter at $1,200/mo. This kid can't handle this and I see he managed to get out of his contract to purchase. He said it was going to cost him $17K to get out of it and I don't know what happened, but he didn't buy it. It appears that some other investor out of south FL bought it from the builder on March 24, 2005 for $308,700 (that's a drop of 16% from what I appraised it for 2 months earlier) - 95% LTV ARM starting at 9.124 for the first 2 years, 1-4 addendum so occupancy was not fibbed about. There is nothing in the MLS on this property at this time. I expect it has a FSBO or FRBO sign in front of it along with many others in that project and competing with other builder properties that are for sale now due to speculators backing out of closing - when 6 months ago you couldn't find a builder owned finished spec house anywhere. This builder is now offering 4.5% commissions to Realtors and they will make the buyers first 6 months payments in some areas here. I don't know how the speculator purchaser of this property is going to be able to compete price wise to make a profit let alone break even.

 

[George Hatch]

The idea that most of us have predicted a date and time for the turning market is another straw man argument, just like the idea that most of us on this side of the discussion are pulling for the National Bubble. It might help you to paint us all as hysterics but it is neither accurate nor fair.

Shiller didn't forecast a date for the dot.bomb but he did forecast the result, and that's primarily what we're working on here. If you guys don't think there's any merit in trying to understand the "why" of where we are right now and how it might affect where we're going that's your perogative. There's nothing wrong with that - appraising is primarily about reporting the "what" of right now. By the same token, I don't think it's unreasonable for some of us who want to look deeper to do that. If you don't want to particpate then don't participate. It would be nice if some of you would refrain from using some of these unnecessary stereotypes, and actually bring something of substance into the discussion.

 

[JSmith43]

I am located in a metro market where there were about 4,600 active listings at this time last year. There are now 20,000 actives with that number continuing to grow. The number of sales is in its 3rd straight quarter of decline. Obviously most of these actives will not sell because there just aren't enough buyers for them all right now, but some of them will; and those that do will be those that compete the hardest for the meeting of the minds. I would go so far as to suggest that the 5,000 or so (and that's me being optimistic) that do sell will include a goodly percentage of sellers who are in the margins and I would also suggest that their actions will set the price trends for the others who aren't.

Tossing statistics around is a bit too easy. It's timely that George presented a partial analysis of his local market, some of which is quoted above.

Basically, the quoted material illustrates why it is a good idea for ERC appraisers to put a little perspective to the utilized market statistics in their scope, since they are asked to disclose what ERC calls an "absorption rate" but are really asked to provide a snapshot of the ratio of homes sold/homes listed. The limits of the implied use of this ratio to predict marketing time should be fleshed out Full credit to Austin for standing his ground on this topic, in his own unique way, in the ERC thread.

 

[JSmith43]

He was purchasing it as a 'primary residence' for the mortgage since he didn't own any real estate at all yet, but never intended to move here from CT and has never been here to look at properties let alone this one.

I know 2 LO's at a former employer that got fired for writing a 2nd duplex loan in a short time period for a RE agent that was to be an "owner-occupant." The choice was get fired or get prosecuted, per my highly connected and reliable rumor mill.

If a LO is self-dealing and pulls that kind of caper, I fear the worst for him-good thing the transaction fell apart. Did you "scare" him, Pam?:icon_smile:

 

[Pamela Crowley (Florida)]

Yeah Roger, I believe I did scare him in more ways than just about the property he was purchasing. He was a newbie LO and his MB boss had talked him into taking over this contract to purchase from him. I would guess that young man no longer works there.

 

[Randolph Kinney]

Tossing statistics around is a bit too easy. It's timely that George presented a partial analysis of his local market, some of which is quoted above.

I live and work in the same market as George. His analysis and data reflects what I see and I agree with it.

 

[Couch Potato]

Example neighborhood.

There is a neighborhood in southern Melbourne (next to Palm Bay where Pam lives) where there are multiple sales of houses with the same floor plan, similar lot, usually easy cookie cutter residential appraising. Five sales of the floor plan in 11/2005 from $268,000-$275,000 and three sales in 3/2006 from $227,000 - $233,000. Currently there are 43 active listings in this neighborhood of about 200 houses with average time on the market 120 days and asking prices ranging from $232,000 to $285,000. (Some of the sellers will be waiting a long time if they don't lower their price and maybe even if they do lower the price.)

 

[Fred]

Pam

I could really start seeing the 'bubbles' breaking.

So, now it's not a bubble, but thousands of small bubbles that might burst (but will anyone hear them?). Could be all those folks who own three houses having Champagne Sunday Brunch.

How can you determine that a condo project is 80% vacant?

 

[Couch Potato]

Look in the windows.

PamSo, now it's not a bubble, but thousands of small bubbles that might burst (but will anyone hear them?). Could be all those folks who own three houses having Champagne Sunday Brunch.

How can you determine that a condo project is 80% vacant?

One way is to look in the windows as you walk each floor of the building and note that only one in five has furniture or any sign of life; just a For Rent or For Sale sign. (Not an uncommon sight in this area.)