Housing Bubble Bursting?

[Steve Owen]

For the "there is no housing bubble" and "home prices never go down" crowd, today's numbers should drive a stake through their hearts.

I don't know anyone in that crowd. Maybe they were all "staked" before I was born.

I think it's important to look at the big picture when looking at markets to try and analyze what is happening. For example, a lot of people who were really smart investors lost money in the tech stock bubble because they attributed actions resulting in the bust to be the same is in the bear market following the crash of 1987. But, there was a fundamental difference. The crash of 1987 was caused primarily by economic factors... the tech stock bubble bust was caused primarily by speculative factors. Those who treated the tech stock bust like an economic crises lost the chance to selectively jump back in and, as a result, suffered losses from from something resembling opportunity costs.

I am close to coming to some conclusions about what is happening in real estate markets, and that will provide some insight for what will happen next.

First conclusion: There is no bubble bust. That's right. Instead, there are multiple bubble bursts. Where bubble bursts exist, they are driven almost entirely by past speculative activity... something I tried, unsuccessfully, to warn Forumites about somewhere back in about 2002.

Second conclusion: Some areas of the country are suffering from underlying economic depression. In those areas, places like Detroit, there will be no housing price recovery in the short run.

Third conclusion: General housing cooling and downward pressures almost everywhere else have little underlying economic cause. They are mostly psychological. Whether or not those markets remain cool or begin to recover is highly dependent on outside factors, such as fed actions and interest rates.

Fourth conclusion: Recession is likely, probably in the fourth quarter, but is not a certainty. Partly dependent on fuel prices and fed actions. This could lead to some further cooling in housing markets.

Generally, I believe that real estate is fully valued. That does not mean that there are no more opportunities in this sector, but does mean that investments will have to be made carefully and selectively. I intend to do some remodeling on both of our houses... in one case, to remedy some deferred maintenance and in the other case to modernize functional utility. I'm pretty sure that both investments will pan out over the long run.

 

[Brad Ellis]

Randolph,

As you suggested, here is the link to that analysis:

http://www.realestateconsulting.com/usanalysis/usanalysis200705.html

I find the data very interesting, but they grade the overall market as a "C" indicating it is in average condition. If you look at the grades you will not one that is graded low but that is surely relative since that index goes back to only 2001- the start of the most aggressive runup.

But, all can draw their own conclusions.

Brad

 

[Brad Ellis]

Steve,

Forgive me for copying so much of your post, but I found it to be cogent, salient, directly on point:

"First conclusion: There is no bubble bust. That's right. Instead, there are multiple bubble bursts. Where bubble bursts exist, they are driven almost entirely by past speculative activity... something I tried, unsuccessfully, to warn Forumites about somewhere back in about 2002.

Second conclusion: Some areas of the country are suffering from underlying economic depression. In those areas, places like Detroit, there will be no housing price recovery in the short run.

Third conclusion: General housing cooling and downward pressures almost everywhere else have little underlying economic cause. They are mostly psychological. Whether or not those markets remain cool or begin to recover is highly dependent on outside factors, such as fed actions and interest rates.

Fourth conclusion: Recession is likely, probably in the fourth quarter, but is not a certainty. Partly dependent on fuel prices and fed actions. This could lead to some further cooling in housing markets.

Generally, I believe that real estate is fully valued. That does not mean that there are no more opportunities in this sector, but does mean that investments will have to be made carefully and selectively. I intend to do some remodeling on both of our houses... in one case, to remedy some deferred maintenance and in the other case to modernize functional utility. I'm pretty sure that both investments will pan out over the long run."

Conclusion 1: I agree and think you have honed in on the issue. Weaknesses and strengths are local.

Conclusion 2: Agree completely.

Conclusion 3: Agree and that will be tied in to your conclusion 4. The direction of interest rates will be tied to how close we come to recession or whether or not we get fully into one. And, things like oil prices, other energy costs including water in many areas will impact it.

Conclusion 4: above

I also agree with your generalizations but would offer that, in a normal market prices nationally can and even might get a bit higher (nothing dramatic) if both wages and affordability (by way of lower interest rates) increase. I do not think that necessarily conflicts with the notion of a fully valued market in the same way that full employment never actually reaches 100%.

Brad

 

[Randolph Kinney]

Randolph,

As you suggested, here is the link to that analysis:

http://www.realestateconsulting.com/usanalysis/usanalysis200705.html

I find the data very interesting, but they grade the overall market as a "C" indicating it is in average condition. If you look at the grades you will not one that is graded low but that is surely relative since that index goes back to only 2001- the start of the most aggressive runup.

But, all can draw their own conclusions.

Brad

Thanks for that link Brad. I believe this chart (taken from your link) is worth a thousand words:

[FONT=Arial, Helvetica, sans-serif]Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55% of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22% if you compare sales over the last 12 months to the prior 12 months. On a straight year over year comparison, the decline is much more.[/FONT]

they grade the overall market as a "C" indicating it is in average condition.

Brad, you have your way of spin.

Existing Home Market
NAR Single-Family Annual Price Appreciation D-
NAR Single-Family Median Home Price A
Freddie Mac Annual Price Appreciation C
Annual Sales Volume, SA B+
Purchase Mort. App. Index, SA B
Pending Home Sales Index, SA D+
Homeownership Rate A-
Homeowner Vacancy Rate F

You do notice the paradox on the NAR existing home data? A "D-" rating for the annual price appreciation and an "A" rating for median home price?

How does one rationalize a "C" rating of average Overall Grade with the statement from JBREC as follows:

In summary, we believe that the Fed should know that the housing market correction has been quite steep and is also not showing signs of bottoming out, as evidenced by all of the above information, as well as significant additional research we have conducted. While the Fed has far more to consider than housing, they should know that the housing market could sure use some lower interest rates to help achieve stability soon.

Spin, Brad, spin!!!

 

[Brad Ellis]

Randolph,

from that link,

"2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested. "

Well Randolph, you are the one telling us that NAR is cooking the books, but these guys, who you apparently choose to believe, say the opposite.

Boy, talk about spin! You are spinning around so fast that, even were I standing still, you could not tell!

Brad

 

[Terrel L. Shields]

Face it Brad
The builders are in trouble. The market is tanking. The isolated pockets of resistence are basically areas which benefits from local economic conditions (like the oil and gas producing areas) and no one can pick a bottom yet.
The volume of home sales is lower.
The average price of a home is under pressure and would be much lower if incentives were not propping prices up.
The Phenomena is not isolated to Florida, S. California, Las Vegas and Boston.
If things rock along for some time then get better, we can say it was a soft landing. But if things continue to deterioriate, and Foreclosed property begins to dominate the market scene, then prices could take a nasty fall downward in many many markets. Then we have a hard landing and if we have a hard landing, then you can dance around the lingo with terms like 'correction', 'adjustment', 'normal business cycle' all you want, the truth then will be that it was a bubble...a credit bubble, a housing bubble, a building bubble and it popped.

 

[Randolph Kinney]

Randolph,

from that link,

"2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested. "

Well Randolph, you are the one telling us that NAR is cooking the books, but these guys, who you apparently choose to believe, say the opposite.

Boy, talk about spin! You are spinning around so fast that, even were I standing still, you could not tell!

Brad

You know Brad, you have your way of looking at a quote and concluding that "intentionally misleading" means NAR data is not misleading. It is to laugh at your conclusion. HA HA HA!!!

What is intentional? Knowing that the credulity of your data can be challenged, contradicted by reality and not doing anything or explaining anything to resolve the unbelievability and contradiction?

NAR has been so tarnished by its own spin on its on data that most people who follow the real estate industry no longer put any degree of confidence or credibility with what they say or publish. I believe that is the stated conclusion by JBREC. Or can you make that JBREC statement into a spin of your own liking? h34r:

 

[Randolph Kinney]

Correlation of New Home to Existing Home Median Price

The Commerce Department data showed that sales of new homes jumped in the US, although prices fell. The data from the National Association of Realtors shows that sales of existing homes fell, although prices rose. Is there a relationship? Almost certainly, yes. The significant development there was that the median price of a new home fell below that of an existing home. Monthly price data for both new and existing homes goes back to 1975. In that period, there is only one brief period - from September 1981 to February 1982 (and only in three of those six months) - when prices of new homes were lower than those of existing homes. Are we about to enter into a more pronounced economic downturn?

Notice in the chart below that even as the backlog of new homes for sale dropped, the backlog of existing homes for sale is now over 8 months and rising.

It is one thing for builders to slash house prices in order to deplete their overhang of unsold homes. They may lose money or at the very least make smaller profits on those houses; but they can then begin to build and sell again. But it is a different thing when we talk about existing homes. If the owners do not get the price they hope for, their capacity to buy another (bigger?) home will be impaired and, above all, their enthusiasm to go out and spend will be diminished. But homeowners who need to sell cannot really afford to hang in there month after month without a deal. If homeowners want to sell, they will have to accept lower prices.

A Wall Street firm reported in May that the foreclosure "shock cone" is widening: while total foreclosures, at all stages, are up 60-70% over last year so far, foreclosure notices - the front end of the process, when a mortgage is typically 90 days delinquent - are 127% higher so far than in 2006. It said that foreclosed homes being resold by banks or lenders are hitting the housing market with an average price drop of 30% nationally.

With an even larger backlog of homes, it is likely that existing home prices are going to have to drop at least in line with new homes. A 10% drop in existing home prices will be a shock to many recent home buyers, and mean even more foreclosures as ARM (Adjustable Rate Mortgage) re-set to much higher prices. A 10% drop means than most of these owners will be "under water" in terms of the value of their homes to their loans. This will mean that an ever-increasing number of homeowners will not be able to keep their homes. This large overhang of homes coming onto the market from foreclosure is going to last for at least a year, as the foreclosures coming onto the market today are from defaults of last year.

The latest data from the housing front is hardly encouraging. It portends declining homes prices and consumer spending is likely to continue to deflate along with home prices.

 

[Steve Owen]

I also agree with your generalizations but would offer that, in a normal market prices nationally can and even might get a bit higher (nothing dramatic) if both wages and affordability (by way of lower interest rates) increase. I do not think that necessarily conflicts with the notion of a fully valued market in the same way that full employment never actually reaches 100%.

Brad

I'm not in disagreement with this. Fully valued means fully valued right now. Some other sectors I feel are fully valued include railroads and mining... that doesn't mean there can't be selective opportunities or nothing in any of these sectors will ever increase. I suspect that the correction in real estate will run for awhile... not sure when would be a good time to get back on. Mining, on the other hand, may begin to increase as early as the first of next year... depending partly on energy cost.

Real estate is unique because, for the average homeowner, the money is not really going into an "investment" it is an expense for shelter.

 

[Greg Bell]

This is a crash , pure and simple.No splitting hairs about how this part of market will help that part of the market.This is a national downturn like no other since the 1930's.Now many will say no big deal we all have a job , not for long , jobs always lag WAY behind the downturns and this will not any different in that respect.The bubble will take YEARS to pop due to Real Estate's position of being a non liquid asset with many time restrains to slow the process.Government meddling etc.So get ready for the recession all the experts tell you it's not going to happen , try the Fourth Quarter