Housing Bubble Bursting?

[moh malekpour]

Moh,
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?
Brad

Brad,
Yes, I am aware that, when "a" loan goes bad- into default- everyone in the process starts to do az post mortem on it.
But are you aware that, when thousands of loans go bad-into default what would happen? Does saving and loans in the 80th ring the bell?

 

[moh malekpour]

Guys,
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.
Brad

Brad,
Doesn't it tell you something? The rates are not as high as they were at the same time in 2001 while the housing market is decling significantly. Why? Can you imagine, what kind housing market would be there if rates were 2% higher. It should give you an idea what kind of market is out there now in comparison to years past.

 

[Brad Ellis]

Moh,

1. Finding one condo complex that has that high non-owner occupancy is not any sort of proof that the entire market is comprised of such situations. I do not doubt your data on that complex at all- and there are others and I have seen them personally. However, it is still anecdotal. You are talkng about one complex of under 100 units, and even when combined with those I found and others that are surely out there, it all combined does not represent a drop in the full bucket of millions of condo units.

No- I did not ask for an example. I already have examples and probably more than you do. That is not the point. The point is that, before we claim that the investors have tied up 20-30% of all properties as you first suggested, you had better have some data backing that up. And you will not have it because, even admitting that there may be a market or two in which this actually occured, the markets in general are very far from that number.

2. Sure, banks do sub-prime loans. We call them non-price (same thing, just a less explosive word). However, I do not know of a single one that has this type of lending as the bulk of their production. The big players are the ones I named. There are many many smaller ones as well. And adjustables and I/os go to all segments of the market.

3. I sure do differentiate between banks and other lenders. Banks are regulated; those other guys are not. Wall St. does do a bit of this as a natural offshoot of its buying loans but it is not any sort of national mandatory thing. Depends upon the individual investor.

4. Assumptions that banks enter into non-prime, I/O, adjustables, etc. by trying to ignore trends is simply bunk. They must answer not only to the regulators but to their own boards and to their investors as well. Not a single one makes it a practice of intentionally doing bad deals. They know they will have to buy back those bad deals. It does not matter at all if the loan gets sold to Fannie or Freddie; ywe get to buy those back too- and it matters not if it is already securitized.

Furthermore, if it is a brokered deal, lots of those guys get to buy them back too. I work on them every single week.

5. On rates. There is not doubt that higher rates impede the market and impede value gains. I've said that over and over. But, it is the level of those high4er rates that matter. Freddie has said publically that borrowers do not typically feel mortgage payment pain until rates get to 7.8-8%. We are not even close. And, if Mr. Bernancke does what I suspect he will do with the other fed governors, and if economic stats stay steady, I do not expect rates to rise that high. Nor, for that matter, does Wall St.

Perhaps that is why Freddie said that they expect price gains for 2006 to be 8.6% nationally for 2006. ( just got that in the A la Mode e-mail newsletter).

Let's give this firm some credit, shall we? They are, after all, about 12% of the entire secondary market. Dontcha think they have some qualified number crunchers doing these projections? (Don't bring up the accounting stuff- THAT was due to UNDER-reporting profits- it is different).

So, if they are anywhere near correct, just where is this bubble? If prices continue to escalate, how can there be a bursting bubble? BTW,. their info is from Feb 2006. Heck, even housing starts for that month . while down vs. January are still ahead of Feb 2005. (Same article).

If we, as professional analysts of RE markets, are out there crying gloom and doom, we only feed the idiots in the press who do not bother with getting the data right.

My biggest fear is for the homeowner. If they believe all these stupid articles it mighht actually become reality.

Do we really want to be part of cause?

Brad

 

[OCApp]

Here's a condo project in Orange County that looks bubbly. It's the Marquee Park Place on Michelson in Irvine. Orange County's only completed high rise condo project with approx. 232 units in two 18 story towers. the developer began closing units early Jan 2006 and is probably nearly closed out now. Of the units closed (max 232) 60 are now listed for resale in the MLS. Of the 60 available for sale, 56 are identified as vacant. and there are also approx. 28 available for rent. (also identified as vacant).

this project has an approx. $1,100 monthly association and if you have a pet, you can't live here. units are available from $775,000 to over $2,000,000.

 

[George Hatch]

Brad,

With respect, why is it criticized as fear mongering when appraisers engage in it as the market subsides but it's lauded as forward thinking when realty agents and investors engage in it as the market is increasing?

One more thing - if we (correctly) anticipated long ago that this would happen, how are we now the cause of it or even part of the cause of it? I notice that the market seemed to have no problems ignoring our very vocal concerns when it was on the way up. If we had any influence at all it would have never gotten to this point in the first place.

There are 20,000 active listings in San Diego right now (and they're not all owner-users). Obviously not many of them are compelled to sell but there are always a few. In the face of such a supply/demand imbalance what possible result could occur other than the one we've been anticipating?

 

[hastalavista]

I think it would be helpful to define what constitutes a "bubble"? A definition I haven't seen published with any consistency.

It is also important to define where such "bubbles" may occur.

As I posted earlier, I do not predict a housing collapse. I do predict some significant corrections (5-10% from previous highs, as measured by a median price index over a quarterly (90-day) time period).

Where this becomes significant (IMO) is in areas where they were MANY new home buyers all at the same time. Why do I say this? Because it is intuitive (anecdotal) that many of the buyers purchased their homes based on the same underlying assumptions (loan product & appreciation forecast).
In markets where it is not feasible for the builder to cancel out or delay construction, new units will come on the market. In a declining price environment, they will be sold for less. In a market where homes were purchased on relatively small equity margins (90% LTVs or higher), the trend will erase much and sometimes all of any purchased equity from the down payment; there's a declining price trend, so the result will be zero or negative equity (upside down). Factor in again those that went for the ARMs and the payments start to kick-in. Some will be able to ride out the storm, some won't.

It could be that Moh (in Southern California) or myself may sound like "Chicken Little". I'm not. There is always the possibility of a "soft landing" or no real decline at all. Cassandras have been predicting the housing collapse for the last 3-4 years. I have a concern, however, that the data I personally see and can interpret does not bode well for the "soft landing" scenario (again, which should be defined).

Brad, you state that you know of no institution that makes ARM or I/O loans the bulk of their loan product. I'll take that statement as fact. I do know of plenty of MBs that specialize in this type of product, and do 100% of their loans with that product.
The fact that the "risk" is spread around various players may minimize the risk to the individual player, but the overall risk remains the same in the marketplace.

Now, here's one more anecdotal piece of information: When I put my comps on the sales comparison grid, I'll indicate the type of loan (if that data is available) the sale was based on. In the past, "conventional/fixed" was the norm. Now, almost all are "Variable". What does that mean? All I can say is it means that most of the properties I'm using as comps have ARMs, and since most of my comps are closed sales in the last six-months, I can make an educated extrapolation of that data to my general market.

 

[Dee Dee]

Surprised you missed it...

Brad,

Where have you been?

http://www.realtor.org/PublicAffairsWeb.nsf/Pages/SecongHomeMktSurges05?OpenDocument

WASHINGTON (March 1, 2005) – A new study shows sales of second homes surged in 2004, and that investment property and vacation homes make up a significant portion of the overall housing market, accounting for more than one-third of residential transactions, according to the National Association of Realtors®.

The new study, based on two surveys, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes. In addition, there was a record of 2.82 million second home sales in 2004, up 16.3 percent from 2.42 million 2003. The investment-home component rose 14.4 percent to 1.80 million sales in 2004 from 1.57 million in 2003, while vacation-home sales rose 19.8 percent to 1.02 million in 2004 from 850,000 in 2003.

Many believe that the number of investment properties may be greater than what the survey's show, since many investors try to get lower rates by claiming the property will be owner-occupied.

 

[hastalavista]

Many believe that the number of investment properties may be greater than what the survey's show, since many investors try to get lower rates by claiming the property will be owner-occupied.

Good point!

I should amend my Hypothetical lawsuit posted earlier to include a category where the allegations are that the appraiser knowingly misrepresented the facts to the lender by indicating "owner occupied" on the appraisal report.

In this "I am a victim" litigious society, I think one could find a sympathetic jury to buy into "Had the appraiser correctly indicated that I didn't occupy the house, I couldn't afford the payments for this new loan and would have had to sell that second home before the market went bust".

 

[Karl]

Gotta go to a libary & look in ths archives to find this same debate prior to the 80's ADJUSTMENT in the market. 1st there is a difference between speculators & investors 2nd And more important there is a MAJOR difference between EDUCATED & WISHFUL thinking speculators & investors.

Those that did speculation with education can NOT see a "Bubble" or decline or adjustment cause they have moved on, Those that did it through wishful thinking do NOT want to know of a Bubble decline or adjustment.

Investors that bought in on the low & sold high are happy. Investors that are buying now are NOT going to be as happy.

Pinal County 7th fastest growing County in the country. 40% is the amount published in the NewsPaper as Investor owned as of Feb 1 2006.

90 NINETY licesed RE Agents in a 5.25 Sq Mile unincorporated area of Pinal County 245 Houses on the Market (Not including FSBO last count I found 32) 200 more with minimum of concrete pad poured 200 more permitted, 42 Builders trying to beat each other to a finished home. Yet people STILL believe the the Market is going to continue to be as it was.

I personnally want to thank them for this strong conviction as I have FINALLY closed on my last lot March 10th 2006. Buyer has already cried that he paid to much for it cause he doesn't think he'll be building on it for a LONG time, I agree, that is why I sold when I did. Had no intension of having a home built next to mine.

Speculation: Activity involving SERIOUS RISK in the HOPE of large profits.

Investing: To a use EXPECTING to yield a profit.

 

[Steve Owen]

I Never Predicted...

One more thing - if we (correctly) anticipated long ago that this would happen, how are we now the cause of it or even part of the cause of it? I notice that the market seemed to have no problems ignoring our very vocal concerns when it was on the way up. If we had any influence at all it would have never gotten to this point in the first place.

I've been accused of being a doom and gloom, bubble-predicting, idiot many times on this Forum. For the record, I have never predicted that a bubble was happening, bursting, or doing anything else... I have frequently pointed out the causes of bubbles and the market realities that can make them burst. Whether or when that will happen is beyond my soothseeing powers.

However, we do have some cause for concern. Nationwide, "New home sales fell by the biggest amount in almost nine years in February." (Source: Home sales, prices fell in February, The Associated Press, Joplin Globe, Saturday, March 25, 2006, p. 7B.) The article did point out that sales of existing housing actually increased in February, so, at the moment the signals are mixed.

As I said before, there is no strong indication that the market is weakening here.

However, there is some cause for concern. The Fed raised rates anothe quarter point today... now the highest in five years. Mortgage rates have not followed at the expected pace, but are sure to follow eventually. What happens then, to all the people who bought more house than they could afford using ARM's? The answer to that question is simple. the more difficult question is whether there are enough of them (and of other negative factors) to bring the housing market down significantly (bubble burst).

Actually a bubble bust could be good for my business, in a way. I have virtually quit doing mortgage appraisals because of the pressures from sleazy MB's. If the bubble bursts, a lot of those losing investors will probably need good appraisals of their holdings, and I might get back into the residential market. On the other hand, commercial properties would probably follow the slow down, and I like doing them better than houses.