Housing Bubble Bursting?

[Couch Potato]

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

Read again, Brad. The article says 23% of purchases were "investors" and 13% of purchases were "vacation homes". That is 36% on homes purchased nationwide in 2004.

The percentages were significantly higher than the national average in areas like Las Vegas, NV, Southern California and Florida in 2004 and both percentages increased nationwide in the first half of 2005. Plenty of room for 20-30%.

 

[Brad Ellis]

Greg,

Yes- you are right. Forgive me for not having the article at hand when I responded.

I will still take out the pure vacation homes leavng 72.1 owner occ and 38+/- investment properties. That is about 34%.

Nonetheless, these are still not speculators.

Sure there are going to be a small percentage within those that are, but clearly most are not.

Another interesting part of the article (thank you Dee Dee- yes I DID miss it) is this:

"Ninety-two percent of all second-home buyers see their property as a good investment. In addition, 38 percent said it was very likely they’d purchase another home within two years, breaking down to 47 percent of investment buyers and 16 percent of vacation-home buyers."

So, using 38% of 34% (a tad higher if we count pure vacation home folks), we see about 13% of ALL residential property owners with plans to keep on buying.

May I suggest that this is a very material portion of the market?

Now to Dee Dee- did you say that there is 2 years of inventory out there? I do not seem to recall seeing that. Most reports I saw indicated about 5-6 months worth. Or are you referring to your specific market?

Allow me to summarize.

I am saying that there is not a bubble bursting now. I am agreeng that many markets have seen declining prices over recent weeks. Others have been increasing.

I will not classify investors as speculators; they are different animals. Investors typically hold their investments; speculators turn them over hoping for quick profits.

The most reliable price projections that I believe are out there now are these:

1. NAR projects a 5% +/- increase nationally over 2006. From David Lereah statements.
2. Freddie projects a 8.6% increase over the same period. From the recent A la Mode newsletter (no- I do not call David Biggers a journalist).
3. Kiplinger Washington Letter ( I do call them journalists) project a 6.6% increase over the same period. I cite them because they seem ot have their ears to the ground and do not typically participate in hype.

I believe that most speculators have been reading all the reports and articles and there is a pretty good chance that most of these folks have their properties already on the market. IF they did represent any significant portion of the market (and I still doubt that), the increase in inventory may be due in part to that. IF SO, we should not see an unusual number of new listings over the near future.

Further, and this is a guess, IF the speculators have been taking losses over recent weeks, some of the price declines may have been caused by that.

I believe that, in order for there to be some drastic market downturn, at least one of two things must happen:

A) a significant economic downturn or event, and/or
B) a drastic increase in mortgage rates to 7.8-8%

Frankly, I have not seen enough such data to indicate either being a liklihood.

In my view, this has been a classic market correction and not much more.

Brad

 

[Tim The Enchanter]

I believe that, in order for there to be some drastic market downturn, at least one of two things must happen:

A) a significant economic downturn or event, and/or
B) a drastic increase in mortgage rates to 7.8-8%

Frankly, I have not seen enough such data to indicate either being a liklihood.

In my view, this has been a classic market correction and not much more.

Yes, and now all we need is a bump in the road. Or a bad pothole.

 

[Dee Dee]

Brad,

I will not classify investors as speculators; they are different animals. Investors typically hold their investments; speculators turn them over hoping for quick profits.

Though I agree with you, the surveys didn't ask or discern a difference between the two. I've never met a 'speculator' who doesn't call themself an investor.

Many 'speculators' tell their lenders that the property they're buying is going to be owner-occupied, when in fact they have no intention of ever living there. Same with second homes. The interest rates are higher for buyers who admit that they are buying to flip or use the property as a rental, so they lie. It stands to reason that the survey may underestimate the number of 'investors', as many won't tell their true story, lest they be busted. Here's an article on occupancy fraud:

http://realtytimes.com/rtcpages/20050930_feignedoccupancy.htm

Feigning occupancy to land a mortgage is the most common type of mortgage fraud encountered by a leading fraud insurance company that also trains lenders in loss mitigation.
More than half -- about 53 percent -- of claims filed with the Novato, CA-based Prieston Group during the first half of 2005 contained some level of occupancy misrepresentation.

And no, I didn't say that there is a 2-year supply of homes on the market, though some areas seem to be headed in that direction with their rapidly growing inventory.

 

[Karl]

I believe that, in order for there to be some drastic market downturn, at least one of two things must happen:

A) a significant economic downturn or event, and/or
B) a drastic increase in mortgage rates to 7.8-8%

Going to DISAGREE with B: When You do some Refi's ask the Borrower what the Intrest rate they'll be paying is. Most I seen lately is anywhere from 7.25 to 12.5. (The 12.5 bought his house a year ago withh 0 down & NEEDS to Refi to consolidate debt) Betting I'll see that one next year for REO. YES!! there are those still getting a LOW Refi Intrest rate but, MOST are not. At least in my particular area.

 

[Brad Ellis]

Tom,

Good to hear from you again, although we disagree.

I guess the las time I saw you was in St. Louis when you won NAIFA appraiser ofthe year. I recall the next year you were very vocal in your opposition to the use of AVMs.

Not troubled over our disagreement; it is nothing new and you are entitled to your opinion. I simply think that it is based upon assumption rather than statistics. All you said is correct in its theory except that none of us know the percentage of the loans that are based upon overvaluation, unafforably high rates, the percentage of speculators in the investor portion of the market, etc.

Time wil tell. I will say that the increase last month in the resales of existing homes might have been an aberration based upon my early returns for March. But time will tell.

Dee Dee,

I based my question on the unattributed quote you posted and your response that it might take more than 2 years to market all the properties. But without context, I am left wondering.

Karl,

If folks are paying those rates they are either non-prime borrowers (and then the rates would really not be much differnet from what we have seen over the last few years- plenty of non-prime deals carried those high rates) or they are just plain dumb.

Freddie's last report showed interest rates for 30 year fixed at 6.39%- a week ago.

Brad

 

[Dee Dee]

Denver Foreclosures

http://www.rockymountainnews.com/drmn/real_estate/article/0,1299,DRMN_414_4578247,00.html

"We still expected to see increases in 2006, but this is larger than what I would have expected. At this point in our economic recovery, we would have expected to have seen a smaller increase in foreclosures," said Silverstein, principal of Development Research Partners.

She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments.
"A lot of people have taken out these different types of mortgage products during the past couple of years, and now people are discovering that their payments are starting to ratchet upward with rising interest rates," Silverstein said.

 

[Brad Ellis]

Dee Dee,

Thanks for that post. BTW, yes I was aware of what is going on in Denver- a tough market and I think it really has been for some time now.

Anyway, I am very interested in the notion of how many foreclosures might result from the new loan programs- I/O, hybrid ARMs, etc.

We all assume that rising rates will trigger this. However, what is still unclear is the borrower intent. Credit analysis is composed of two factors- ability to repay and willingness to repay. Scoring an underwriting appear to have some handle on he first part but I do not know of any empirical study that shows the second part. Not sure one could be done.

But, let's look at mortgage cost increases vs. income. Let's also assume that an average mortgage is about $250,000. To qualify for an interest only loan at 7%, yearly payments are $17,500 and monthly about $1460. To qualify, let's also assume a gross income level of $60,000.

So now the rate goes to 8% and the monthly mortgage payment goes up to $1667- about $200 more. I think I read on the commerce dpeartment page that income rose 5.8% thru February '06, year over year. That would mean that the same borrower will earn about $290/month more.

On an after tax basis, that is pretty much a wash after considering tax deductions.

So, now we are left with the question of will the borrower default?

Pretty clear that the ability to pay is unaffected by much. Of course inflation in other areas will take some of it, but not all. And, if the borrower now makes $63,500, is it a foregone conclulsion that they cannot or will not find say $100/month more to pay their mortgage obligations?

To know that I think we would have to be able to measure the willingness to repay. I am not sure how to go about measuring that or if it is even possible.

We do know that defaults are up- about 2-3 times last year. At the same time, the overwhelming percentage of defaults do get cured, so the resulting actual foreclosures that occur, while they will go up, may not be a terrible drag on the national market. Locally, it will affect some markets for sure.

But again, I do not see the data universe telling us to panic.

Economists are predicting two more Fed rate increases= another half point. We are already in an inverted yield curve. Will it close? Will it become a bigger gap? If it gets bigger, mortgage rates will hardly budge.

So, while I am not doubting the theory or the local anecdotal data, I see llittle of it nationally to cause a major national worry.

Mr. Bush might have to attack Iran for that to happen.

Brad

 

[Mike Garrett RAA]

Guess most of you don't remember the 80s...interest rates for single family residences peaked at 18%! We have had record low (40 year low) interest rates for the past several years.

All of Colorado is not like the Denver market. Colorado Springs has experienced steady, if not rapid, growth and appreciation (market wide) was 6.8% for 2005 as compared to 2004. That ranked Colorado Springs 159 as compared to Denver-Aurora at 225. MSN Moneyline 3/6/2006. Other Colorado cites...Boulder 220, Fort Collins-Loveland 245.

My market shines...others pale in comparison.

 

[George Hatch]

Brad,

I'm not buying into the national bubble, either. Every market is local, even if many of them are interconnected. In order to be vulnerable to significant losses, a market would have to have experienced a sizeable amount of volume and sizeable price increases far in excess of the local historical trends, and many RE markets in the nation don't fit either of those criteria.

However, the market you live in and the one I live in not only fit both of those criteria, they personify it. 300+% increases in values over the last 7 years as opposed to a near loss in per-capita income. Parts of Colorado also fits the two crieria, only to lesser degrees, so I don't think their current pains should go unnoticed. Denver has always been a canary market - they are the first in and the first out of all RE trends so far. I wouldn't dismiss what's happening there as being irrelevant to our markets here. Considering the volumes and the sheer dollars that we're speaking of, a catastrophic SoCal market could easily sink most of the big lenders that are doing volume here and cost the taxpayers a lot of money.

Q: How many $100k principal losses does it take to wipe out a lender's reserves?
A: Not that many.

I read somewhere that 80% of all mortgages in SD in 2004 involved some form of ARM, with smaller percentages in 2003. Many of those entry-level teaser rates are coming to an end in the next 18 months, at which point those payments will be reset to include principle and interest and in some cases additional principle.

Putting aside the continued availability of interest-only loans in a soft market - that availability already being in decline - why wouldn't we start our analysis at the beginning? The loans that are subject to payment shock are those that started out with ARMs with payments in the 5% range and below. Take someone who had to stretch to get into the $500,000 purchase here, did a 100% loan with an ARM and a honeymoon payment based at 4% and see what happens when their rate gets adjusted to 6.5%, or 7% as is predicted for the end of this year. That household isn't making $60k a year, they're maybe making more like $80k, but so what? Your 6% average annual raise (of which I have never heard any worker bees getting in the last 10 years) would only net that person another $4,800/year in gross and probably less than $3,000/year in net income. Even if they spent every dime of that on their mortgage they would still come up short on the payment if/when the rate resets to 6.5%, let alone the 7% P+I rate that's forecasted by the end of this year. More than a car payment's worth short. You still want to call that far-fetched?

I'm already seeing some desperate borrowers coming up short on their annual mortgage-ATM hit. These are folks who need the cash to pay off the credit card bills they've been using to subsidize their salaries because even their entry-level ARM payments were so high they could barely afford them. A larger percentage of the reviews I'm doing are coming up far short of the desired results and the differences are not small.

Sorry, but I'm just not seeing the rose petals in this scenario unless that worker bee all of a sudden starts their own consulting agency to cash in on the growing trend of outsourcing their job to India or Bangaladesh. Or we decide to devalue the dollar enough to strip the equity from everyone's investments.