Housing Bubble Bursting?

[The Dog]

Local observation

I am in Grants Pass, OR, just north of Medford (same MLS). Th Grants Pass market is dead at the present time for anything over $375,000. The rest of S. Oregon is stable to slight decline right now. Not much selling over $400,000. I do not see the S. Cal moving up much this year. I think we are going to have a very flat market, which is really not all bad. We have had areas that have 50%+ increases in the last two years. I ran an analysis about 2 months ago and less than 2% of the listed properties were affordable to the average income in the market. We are way to spendy for what we have to offer in corresponding wages. There is almost no industry or jobs, all service and retired people with mostly minimum wage jobs ($7.50 in Oregon) . Average income is around $29,000 per year. No way could you afford the home prices in this area on that money alone.



The small increase in interest rates has had a tremendous impact on sales. Until October of last year, almost no price reductions and everything that was listed sold, usually with back offers and often over list price. Now, on a typical day we have around 40 to 50 new listings, close around 15-20, pending 15-20, Expire 10+, and price reductions on 25-35 per day.(I have seen price reductions up to $200,000, with the average around $30,000) Presently, out of our market only 355 properties are listed under $250,000 and only 106 under 200,000. All the builders are building to the $400,000+ market (houses that two years ago were ine the 200,000 range). Now our market over $1,000,000 if built right and price right is still very good. (87 properties listed in that price range and usually selling close to listing price).



And we still have appraiser marking this market as increasing strongly and applying 15%+/year time adjustments.(I have no clue what they base it on, because resales do not show the increases after October 2005). We also had a slew of interest only loans, negative amortization loans on variable rates etc. They are all coming due in the next year to two years and I think our market has the potential to get bloody. Long term, we will be fine and for those that can ride out about 2-4 years, will be fine. Our market runs directly with the S. Cal market and from all my friends in the LA area and San Fran area, that market is cooling considerable at least at this time. Fortunately, that market seems to run in 2-3 year cycles, so we are pretty well off up here for the long term. On top of that, this has to be one of the prettiest areas I can imagine to retire too. Maybe that is why it is picked every year as a retirement heaven.

 

[Couch Potato]

I had a discussion with a local top producing broker last week in which she said she could remember the last house she sold with the buyer putting any money down. "Everyone is doing 80/20 loans." I doubt that everyone is doing the it, but I do not doubt that most homeowners have very little equity. In an owner occupied property the homeowner will likely keep making payments even if they are upside down on the loan; they have to live somewhere and most people hate to move. Investment properties and second homes are a different matter. Few people would continue payments on a property that is a second home or investment if they were significantly upside down. Given more than 30% of the recent market was second homes and investors, even a modest decline in value could have disastrous effects in some markets.

 

[Karl]

If all was Peaches & Cream WHY?? Is it there isn't a day going by where there isn't ads for people to get OUT of Debt. Articles constantly about negative savings, Most conversations turn to lack of money, the month foer many folks is getting shorter & shorter, Refi sounds good BUT!! most lenders want that 20% equity that they hadn't cared about when intially financing the home. Being upaside down on the car is bad enough but upside down on the home that not so good.

BUT WAIT I didn't put a dime into the financing of the home, Saturday we'll leave go live with friends; Bank can have it back no sweat off me, we'll use the wifes credit next time.

Investors here are now starting to "Walk Away" or voluntary turn house back to bank.

 

[Sean Wagle]

Out of the Blogsphere

This was posted by a Phoenix owner. I don't know what development he's talking about, but if there are more of them, it would be hard to call this situation anything other than a speculative bubble:

-----------------------------------------------

I bought a McMansion 9/04, and it took 15 months to build. I got it 12/05. I now note that 25% of the subdivision is listed for sale, although signs are prohibited. The giveaway is the lock boxes on all the doors and gas meters.

Walking the neighborhood and peering in window after window of vacant houses further confirms that most buyers were speculators.

I went down there for the past two weeks and did some research. I went to several open houses and asked the agent if anyone had showed up. Not a single genuine buyer had shown in any case. In one case, the only other person who had come was, like me, an owner of another house nearby, a speculator, checking out the competition. I asked if the open house was "a spec, trying to flip, out of state owner". The agent said yeah, then chided me for calling it "a spec" and saying he preferred to say "an investor home". I then asked how many others does the investor own? "3 doors up, 2 doors from that, across the street, the guy owns 4 in this subdivision. And his sister owns the one across the street, the one on the corner, ..."
I got the picture. Half the subdivision was owned by out of state non-resident specuators.

Finally, as I listed my house yesterday for sale, $50K under what I thought I might get for it, and realizing that I may be forced to keep this for the long haul, my realtor told me a story. The day before he got a call from a builder's sales office in Queen Creek. The deal was, $100K off today on any of these specs we have we are trying to move, you should call any investors you have, this is a great deal. So he did. His buyer was from Seattle and scooped up for $205K a house builder priced at $305K the day before. 1650sf, new, and will be used as a rental. 33% discount. He did some research in the county records and found there are recent closings from the builder to other buyers as high as $352K for the same house. So within the past few months, someone paid $352K (and got financing), and today someone paid $205K for the same thing. He said the price published by the builder is meaningless today, discounting is prevalent and basically is a secret, unannounced price decrease, because they don't want to anger people who already bought.

He said there were 44,000 listings counting pendings on the MLS. Excess inventory like no one has ever seen before.

With price discounting of this magnitude, I'm wondering how soon until a lender crisis. This has all the magnitude of a S&L RTC type event.

3/26/2006 8:03 AM
Anonymous said...
PS forgot to tell you about rental as an alternative. Many of the speculators bought with contractual restrictions. They can't sell for a year. Some of them are trying to rent to defray their holding costs. I looked into it myself. Problem is, the market rents are atrocious.

Here's an example. 4100sf house, 6br/3.5ba. $550K "value", who knows what the market might bring today. $500K? $450K? $400K? Impossible to say because there have been no resales, not a single one, despite all the listings, ever. The only sales are builder to buyer sales at builder prices.

OK this guy is offering this gem on these terms: $950 TOTAL MOVE IN COST. Rent to be $1200/mo after first month. NO DEPOSIT.

So this investor is offering, just to get someone in to help with costs and pay the utility bills, to rent this house to anyone with $950 in his pocket, no deposit. Oh yeah, one more thing: 3 MONTH LEASE MINIMUM!!!

I couldn't believe it. The wear and tear of having anyone living in there and moving furniture in/out will cost the owner more than all the rents collected.

But I guess it beats the other alternative I saw down the road. Nice lawn/landscaping installed is dying. Weeds growing everywhere but lawn dead. I asked the builder rep and he said the owner stopped paying utiltiy bills. No water, no power, so landscaping will die. Presumably this will go to foreclosure now. Brand new, 4000sf house, probably made 1 or 2 payments on the loan only, may own 10 or 20 of them, and decided let them all go.

Based on what I saw I think it could take 2 years to work off the inventory, this could be a 2 year correction.

 

[Dee Dee]

Based on what I saw I think it could take 2 years to work off the inventory, this could be a 2 year correction.

I'd say that's being very optimistic.

 

[Brad Ellis]

Dee Dee,

With respect.

What started this part of the string was Moh's statement about speculators- not investors. To wit,

"The bust hasn’t started yet and is not going to start with typical unemployed homeowners as we saw in last housing fall in the 90th. This time, it is going to start by speculators who have bought 20-30% of residential properties in the last 3 years mostly in hot market states like California, Nevada, Florida, New York and may be Arizona."

That is not what he article was talking about. The article covered both investment properties and second homes that people use for recreation/vacation, etc.

In many cases the owners have future plans for the properties. Some rent them for investment income. In many cases, both occur. But these folks are not speculators- they are investors. Investors hold property for long term gain and in some cases, for rental income.

Speculators buy to resell for quick profits. This is similar to stock market players- some are traders and hold the asset for hours or maybe weeks but then sell. Investors hold the stocks for longer term gain- and often for dividend income.

So, we have 71% owner occ and 29% investor and second home properties.

Doesn't leave much room for the speculators, does it? Oh sure, they are in there somewhere, but 20-30%?

Really

Brad

 

[Brad Ellis]

George,

With respect back, I'll grant your point that our collective musings are not more than a pimple on the proverbial bear's butt.

I guess it just frosts me a bit when we, otherwise hopefully professional analysts, start to believe press reports without so much as looking at the available data. I am not talking about reading news articles; rather I am referring to statement after statement from those who would appear to have heavily vested interests in this market. And who are they and what do they say?

Freddie Mac predicts an overall 8.6% increase in housing prices for 2006. NAR predicts a 5% overall increase for 2006.

Are there pockets where decreases will happen- yes. They appeared even during the great boom. Look at the Bay area. But it recovered very quickly. A very well known appraiser up there told me she was seeing competing offers again above list.

No, I do not expect that for your market. BTW, the San Diego County situation was predicted by Freddie at the PMC conference in SoCal in 2002. No surprise here- said so myself right here on this forum some time ago.

But, not a bust as yet. Declines- sure. Maybe a correction. And, if an economic situation developed that can always cause a crash. But that has not happened and is not anticipated.

So why are we crying wolf? Residential real estate tends to be a very organized, albeit illiquid, market. It has a very sticky downside.

Brad

 

[Steve Owen]

In an owner occupied property the homeowner will likely keep making payments even if they are upside down on the loan; they have to live somewhere and most people hate to move.

That might be true... but only if the payments are affordable. In a house purchased with an ARM, they might not be affordable anymore. I believe that may be the real problem nationwide. The main question is whether there are enough of them to cause disruption in the market as a whole.

And, as a matter of fact, that is the same question about speculators and investors. If the numbers some posters have indicated are accurate, then that does not bode well for those markets. But, are there enough of these to affect the nationwide market?

Remember that an investor who has a vaction home that is rented out to vacationers on a week by week basis may not necessarily get hurt if the speculation is similar to that described for the Phoenix subdivision. Likewise, in investor with half a dozen rental properties in Southwest Missouri might not really be affected by a bust in Southern California.

 

[George Hatch]

With the mortgage affordability issue I'll refer back to an example I saw back in the mid-90s. There were a lot of apartment properties that were built in the mid-late 80s. When the 5-year mark on their respective mortgages came around, a lot of them were unable to refinance because they didn't have the cash flow to justify a new loan on the existing principal. The supply/demand situation was out of control - vacancies were up because of overbuilding and while rents had not declined they also hadn't gone up.

There were so many foreclosures on apartment properties that they literally were the market. We had properties that sold at that point for less than $10,000/room, whereas now some of those same properties are more recently selling as high as $50,000/room. The 4% and 5% cap rates of the late 80s soon gave way to 10% and 11% cap rates as investors bailed out of RE.

Now that example has some differences with the SFR market in that it was 100% investors. But when the average happy homeowner is looking at their property as a wealth building system and they have little or no equity, I question how distinct that line between owner-user and investor really is. I also question an assumption that it takes more than about 10% of the owners out there to set the market when considering any reductions in activity.

When volumes drop and inventories rise, the first thing that happens during the trasnsition is that a larger share of the sales that do close are on the better properties - the inferior properties just don't sell except at a discount. That makes it pretty difficult to really pin down what the pricing trends are because the combo of fewer properties and the mix of superior properties skew the averages when compared to previous and more active markets.

Here's an example, our local newspaper ran an article talking about pricing trends and reduced volumes. Then they came out with a statement that prices had increased 28% in one zip code between 2004 and 2005. Now I've been reviewing appraisal reports in that area and I know that there's a difference in the mix. I went back and analyzed the data for the mix and found twice as many pre-1990 properties in 2004, and almost twice as many post 1999 properties in 2005. So while the average of 28% may be correct, the conclusion it implies is very incorrect. It would not surprise me to see similar examples in many areas in my region.

 

[Tom Fryer]

Just a correction?

Brad, how have you been? Common sense would indicated more than "just a correction" is forthcoming.

Low interest rates, easy money, excessive competition, non-traditional suppliers of financial services, excessive risk to compete, pressures to contribute, an out of order reward system, discarded ethics, abandoned underwriting standards, all have added up to a perilous situation of overappraised homes.

The harmful effects of overappraised homes (inflated mortgages) are far-reaching; embrace all sections of the county, since all (for the most part) have been under the same faulty underwriting philosophy, reward system, power structure, and appraiser selection process. The problems of overappraised homes will expose itself in regions of the country at different time intervals as economic bases and area-housing markets weaken. The eroding wind of the aging cycle of home appreciation, and the law of diminishing returns of interest rates are now beginning to uncover the irregularities and abuses that contribute to overappraised homes.

As a result, many of the major players and accomplices to overappraised properties are beginning to see their negligent actions eroding our financial foundations are now rehearsing their arguments of justification. Many in the appraisal profession, after more than a decade of accommodating are pointing the finger at the lending community and crying, “lender pressure made me abandon my ethics and ignore my standards of professional appraisal practice”. Many in lending community, who control the appraisal selection process, appraisal review guidelines, and quality control programs, after more than a decade of discarding sound underwriting principles, are pointing the finger at the appraisal profession and lamenting, “appraisers are the culprits”. The Real Estate community who intimidate both the appraisal profession and the lending community into “covering” home purchase prices seem suddenly concerned about the enormity of the problem and are beginning to run their: Realtors have ethics “ campaign. Many borrowers who after a decade of easy money and loose lending have their backs strapped with debt to the financial wall are pleading for the appraiser to cover one more financial fix in the property refinance inflation spiral. The Federal regulatory agencies that regulate and oversee mortgage lending and appraisal practices after over a decade of passivity are now forced to become active in these emerging matters that are affected with a public interest.

As interest rates rise I believe there will be more than just a correction.

Tom