Housing Bubble Bursting?

[hastalavista]

Moh,

This is anecdotal. It does not represent the full market- simply one complex in that market. I'll grant you there are others but 20-30% and thousands of such complexes?Brad

Brad-

I'm looking for the exact data, but last year I went to an AI conference in San Francisco. At the conference, there was a representative from The Ryness Company- you may be familiar with them, they do marketing research for developers in California and (I think) Nevada.

Anyway, they said their survey of new development SFRs in Sacramento/San Joaquin valleys showed up to 25% of the homes were being purchased by non-owner occupants; the assumption was for purposes of speculation.

I believe this makes sense, since at a time, these homes were selling for $250k-$350k when the median price in the Bay Area was close to $600k. People were taking out equity loans for the 5% down payment, getting an ARM, and buying a new house on speculation. Some did make money (a good chunk of it), but those who practiced this strategy in the last 6-9 months are going to have a tough time breaking even (IMO).

Now, I do not see the same speculator activity in other markets where the entry level to "play" is higher. Not a lot of speculators in my area where new homes go for $850k. Still, plenty who have purchased on the 5% down ARM with payments increases ready to kick-in, and no significant appreciation (equity) to tap into since their purchase.

 

[OCApp]

don't know if the bubble is bursting (yet) in orange county, ca but the sales volume (resales per MLS) has sure dried up:

jan 1 - feb 28 2006: 3,736 sales

jan 1 - feb 28 2005: 5,149 sales
jan 1 - feb 28 2004: 4,917 sales
jan 1 - feb 28,2003: 5,113 sales
jan 1 - feb 28,2002: 5,303 sales
jan 1 - feb 28 2001: 4,454 sales
jan 1 - feb 28 2000: 4,352 sales

average (mean) prices are still increasing somewhat, but not like during the previous several years.

 

[moh malekpour]

Brad,
It is real and I blame the banks for that shenanigan because they had the mean, tool, and expert to study the market trend and the reason for it. The banks didn’t do it because they knew they were not going to keep the loan themselves. Homeowners and appraisers were also responsible but not as much as the bank. Homeowners, under a false assumption propaganda and advertising, got an idea that housing prices will go up forever. Appraisers by their profession were not in prediction business, they appraised the current market value and gave the factual information to the lenders but there is no doubt that some of them pushed the value either explicitly or implicitly. If the banks had to keep the loan for themselves, they would have been more cautious in their lending practice. They didn’t have to be a brain urgent to discern a speculative market.
Consider this scenario:
Suppose you lived in that condo complex in 2003. You knew, your condo was worth of 30K and you had no equity at all. All the sudden, a speculator came in and bought three condos there for 40K and three other similar condos in the neighboring complex for 40k. Right away, you got 10K equity that you could cash it out. You spent that 10k to buy a new car and you paid your monthly mortgage. Next year, there were another 5 condos in your complex and your neighboring complex sold for 55K, again, your friendly mortgage broker called you and let you know that you had another 15k to cash out. You got your 15 k and took your dream vacation with it and also bought some fancy stuff. In the third year, your condo was worth 70k and you cash out another 15 k and spend the money as if you had an investment, which was generating an income for you. The bank loved that scenario because over and over made the money out of you and you loved it because you got money out of nowhere. Now if the price of that condo goes back to 30K or 40k , what is going to happen to you and the bank? Whose fault was it that you kept cashing out and the bank kept giving it to you? There is going to be some money lost here and some body got to answer some questions sometimes.
Regarding the data, I didn’t print it because I didn’t need to. I could see and read with my eyes. I can give you the tract number but you got to search it yourself. I am not going to give you any name because I don’t want to put a finger on one particular person because it is not only one person. In the data source, the owner of the property always shows up either as the first owner or the second owner of those 25 units. It is not too hard to search; it needs a little time and critical thinking.

 

[Joshua Fookes]

Number of active listing at this time last year 600+/-
Number of closed sales from Jan-March 27 last year: 637

Number of active listings as of earlier today:1351
Number of closed sale from Jan 1st to today 3/27:434

Supply is up, number of sales is down.

SOMETHING is going to change.

Last two months of closed sales were the lowest number in 6 years. My bet is that we are gonna have some hungry RE agents trying to get sellers to lower prices so they can earn some money.

Thankfully I've been able to stay busy. Praying and thanking God for His provision.

Very interested to see what happens in spring when sales usually start to pick up.

Josh

 

[Brad Ellis]

Moh,

Your quote,

"The banks didn’t do it because they knew they were not going to keep the loan themselves"

Moh,

You are aware that, when a loan goes bad- into default- everyone in the process starts to do az post mortem on it, right? And, when they find that the borrower did not occupy, did not have the actual income, did not truly qualify for the program, etc. that the bank will have to buy that loan back.

You are aware of that, right? You did know that all these loans that get sold are sold with representations and warranties- right down to the fact that you got the number correct, right?

If you did not know that, would it change your tune a bit now that you DO know it? Would you modify your statements knowing that the regulators watch all of this stuff?

And Moh, are you aware that the bulk of the non-prime stuff does not go thru banks; rather it goes thru non-regulated firms like Ameriquest, Argent, Option One and those guys?

Brad

 

[Brad Ellis]

Guys,

May I remind you all of some things?

First, we have been seeing this "bubble" talk for 4 years now. I wrote an article for the NAIFA e-gram about it in mid 2002 and it was re-run in Appraisal Buzz. Many of the same guys saying the same things back then AND the appraisers bought into it back then.

NOW we at least have declining prices in some markets- but I still have not yet seen signs of there being a bubble. In order to burst, it first has to exist.

I have no problem with anyone calling what we just went thru a boom market. But, unless you can demonstrate that a material number of sales occured outside the realm of what is "rational", sorry but there is no bubble.

While standing waiting for a teller this morning, I watched the Bloomberg Channel- a chart appeared on Mortgage rates. I was immediately struck by the fact that rates are still not as high as they were at the same time in 2001.

What we have had is similar to a bull market on Wall St. And just like the stock market, we will have pockets that go down just like an individual stock can go down. Sometimes even entire sectors go down just like an entire state could go down.

We are seeing the correction right now. Many markets are declining. Many others already declined and are starting to go back up. Many others will stay stable or continue upward but at more normal rates of increase.

So, for those of you who just cannot refuse to use the word bubble, why don't you define what a bubble is? THEN, we can debate the definition and see if we had one, if we still have one, if it is bursting, already burst, etc.

OK, I'll go first: My article used these words:

"A housing bubble is an economic circumstance in which prices begin to escalate so rapidly that the underlying economic forces that drive prices are overwhelmed to the extent that they no longer become the basis for buying and selling decisions. (or, more simply put, "irrational exuberance")."

Chime in folks...

Brad

 

[Scott Kibler]

Here's a couple quotes I can agree with.

Now, I do not see the same speculator activity in other markets where the entry level to "play" is higher.

"A housing bubble is an economic circumstance in which prices begin to escalate so rapidly that the underlying economic forces that drive prices are overwhelmed to the extent that they no longer become the basis for buying and selling decisions. (or, more simply put, "irrational exuberance")."

Anybody care to guess the kind of neighborhoods most at risk during a general market downturn? I wonder what the legislative ramifications of that might be in say...2009?

 

[moh malekpour]

Brad,
As far as I know, most banks are doing Sub-prime. That is where the money is. Interest only loans, hybrid loans. Can you name a bank who doesn’t do sub prime at all
I know that banks don’t keep the loan themselves. They either sell it to investors or to Fannie and Freddy. Fannie and Freddy don’t keep those loans either. They package them, make a portfolio out of them, put a security stamp on them and sell them to global investors.
By bank, I meant lenders. What is the difference?

 

[moh malekpour]

Guys,

NOW we at least have declining prices in some markets- but I still have not yet seen signs of there being a bubble. In order to burst, it first has to exist.

I have no problem with anyone calling what we just went thru a boom market. But, unless you can demonstrate that a material number of sales occured outside the realm of what is "rational", sorry but there is no bubble.

So, for those of you who just cannot refuse to use the word bubble, why don't you define what a bubble is? THEN, we can debate the definition and see if we had one, if we still have one, if it is bursting, already burst, etc.

OK, I'll go first: My article used these words:

"A housing bubble is an economic circumstance in which prices begin to escalate so rapidly that the underlying economic forces that drive prices are overwhelmed to the extent that they no longer become the basis for buying and selling decisions. (or, more simply put, "irrational exuberance")."

Chime in folks...

Brad

Brad,
You are asking for an example right? Didn't I give you a scenario in my previous post that how a 30k condo goes to 95k in 3 years. this is about 250% increase in 3 years. Is this rational to you? Did you read my post? This was real Brad, I didn't make it up. Whatever you want to call it but don't call it rational or typical. How much air do you want to get in that market to call it bubble?

 

[Scott Kibler]

By bank, I meant lenders. What is the difference?

Equity and debt investors; foreign and domestic, individual and institutional.

Federal deposit insurance.

American taxpayers.

The full faith and credit of the United States government.