Housing Bubble Bursting?

[The Warrior Monk]

"Continually stating there isn't a housing bubble doesn't change anything either."

David-

We have arrived at the point of silly repetitive nonsense.

You're telling me the fact that Bubble Brains have carried on for years-n-years about an impending bubble, and the fact it's never materialized (and probably won't) doesn't change anything?

C'MON!

I haven't been here for years, and I don't consider what others have been saying for years not occurring as evidence.

If everyone states for years that the forest will burn down, and one person states that it will not and offers as proof that it has not, then I walk by as the forest is on fire, who do you think I'm going to believe?

 

[JSmith43]

I haven't been here for years, and I don't consider what others have been saying for years not occurring as evidence.

If everyone states for years that the forest will burn down, and one person states that it will not and offers as proof that it has not, then I walk by as the forest is on fire, who do you think I'm going to believe?

You saying those scattered brush fires are a forest fire?

 

[Randolph Kinney]

I believe Mike has a different concept of what a bubble is and also what happens when a bubble contracts.

So any discussion on the topic of a record rise in residential real estate prices that can be meaningful is lost. Mike cannot be convinced (not relevant to reality or discussion) because Mike has his own world of real estate and his own definition of what a bubble is and what constitutes a bubble popping.

One thing I have noticed is that real estate prices correlate with GNP. That has its own predictions because if the economy contracts severe enough and long enough duration, that will impact on real estate values. Housing markets do not instantaneously adjust to their long-run equilibrium prices after the market undergoes a demand or supply shock. The functions that determine house price appreciation are: (1) changes in the underlying economic determinants of long-run equilibrium house prices (e.g. changes in real incomes, real after tax interest rates, real construction costs and employment); and (2) the rate at which the market adjusts to equilibrium.

Abraham and Hendershott (1996) examine real house price appreciation rates for 30 MSAs over the 1977-1992 period and report that inland and coastal cities respond similarly to real income growth and user cost variables but have very different responses to disequilibrium. They report that house prices in coastal cities tend to exhibit price bubbles but inland cities do not. One reason why there is a disparity between inland and coastal is because of zoning, restrictions and availability of land.

Looking at the recent run-up in house prices, it is no wonder that the increases were so large and particularly where the hottest markets were. Real after tax interest rates were at record lows, construction costs in the beginning were low, employment was rising and speculation became rampant.

Today, interest rates have been increased over two years with more to come. Inflation is rising. Construction costs have increased. Incomes have stagnated. Speculators have abated. If that continues, there will be sufficient time for the housing market to adjust; downward. If a recession follows for any duration, there will be even more pressure on the weakest part of the housing market with declining prices in costal markets with the largest run-ups.

 

[George Hatch]

Talk about a credibility gap - The New Paradigm has already been thoroughly gutted, and the Soft Landing is on it's last legs. Losses in this market area and several other markets on some properties are approaching 6 figures. You guys are going to have to come up with some new ways to explain why pricing in these overextended markets won't return to the trendline.

 

[The Warrior Monk]

We have an interesting situation here. My area of expertise is a second home market, but it's only a relatively short distance from NYC. The very high end of the market is doing fairly well; the people with that kind of money don't seem to care what's going on in the economy.

The mid-level part of the market, say $1M to $3.5M, has slowed somewhat. If the sales volume at the very high end continues and the lower ranges continue to slow, the average prices of the market as a whole will show an increase even if prices remain stable overall, or even if there is a drop in the lower ranges.

 

[moh malekpour]

http://money.cnn.com/2006/06/22/real_estate/mortgage_rates/index.htm

Mortgage rate hits 4-year high
Signs of inflation drive 30-year loan to highest since late May 2002 in another blow to the housing market.
June 22, 2006: 1:02 PM EDT


NEW YORK (CNNMoney.com) - Mortgage rates jumped to a four-year high this week as worries about inflation led investors to believe that more Fed rate hikes are on the way, Freddie Mac said Thursday.
The average rate on the 30-year fixed-rate mortgage jumped to 6.71 percent for the week ending June 22, up from 6.63 percent the week before.
That's the highest level since late May 2002 when the 30-year loan rate stood at 6.76 percent, according to Freddie Mac's mortgage survey. A year ago, the 30-year mortgage rate averaged 5.63 percent.
Rising rates have contributed to the slowdown in housing market after a decade-long boom that sent sales and prices to record levels.
"Financial markets believe that the current rate of inflation is above the Fed's comfort zone, which will lead to more rate hikes in the near future," Freddie Mac chief economist Frank Nothaft said.
Investors' expectations that the Federal Reserve will raise short-term rates later this month and possibly further later this year "caused mortgage rates to jump higher this week," Nothaft said in a statement.
Further Fed rate hikes could push mortgage rates higher still, though home loan rates are more closely tied to the Treasury bond market than to the Fed's short-term rate target.
In its survey, the mortgage finance firm said the average rate on 15-year fixed-rate mortgages rose to 6.36 percent from 6.25 percent the previous week. A year ago, that loan averaged 5.16 percent.
Five-year adjustable-rate mortgages averaged 6.32 percent, up 0.09 percentage points from last week, Freddie Mac said. The five-year ARM averaged 5.05 percent last year.
The average one-year adjustable-rate mortgage (ARM) jumped to 5.75 percent from 5.66 percent. At this time last year, the one-year loan averaged 4.23 percent.
For homeowners using adjustable rate mortgages, a rise in interest rates can mean ballooning payments.
The Mortgage Bankers Association estimates that some $330 billion worth of ARMs will adjust in 2006 and $1 trillion worth will reset by the end of 2007.
With a $200,000 loan adjusting upward from 4 percent to 6 percent, the monthly bill would increase to about $1,200, from $955.

 

[Steve Owen]

people with that kind of money don't seem to care what's going on in the economy.

If "that kind of money" is in paper assets or overvalued assets, it can evaporate pretty quickly. Of course, people with "that kind of money" are often sharp enough to see it coming and take the needed steps to protect themselves.

 

[Mike Simpson]

"Mike cannot be convinced (not relevant to reality or discussion) because Mike has his own world of real estate and his own definition of what a bubble is and what constitutes a bubble popping."

That's not a bad observation. I'm contesting the so called Bubble portrayed in the popular media for some six years now, and the one that's so often depicted by the consistent doomsayers here on the Forum. This notion of an all encompassing housing disaster that'll bring nationwide devastation, and values dropping up to 80%, and stagnation lasting nearly a decade!

Sound familiar? One of resident Bubble Brains predicated just that...so long ago now I'd have to spend days trolling through the archives to find it. If memory serves me correctly...he's questioning my credibility now.

"Talk about a credibility gap - The New Paradigm has already been thoroughly gutted, and the Soft Landing is on it's last legs. Losses in this market area and several other markets on some properties are approaching 6 figures. You guys are going to have to come up with some new ways to explain why pricing in these overextended markets won't return to the trendline."

George...George...George...I'm the one that coined the phrase "new paradigm" to explain what was taking place the past few years. So let me (again) explain what I meant; a paradigm (according to Webster's New World Dictionary) is an example or model. An example of a declension or conjunction, giving all the inflections of a word. From Merriam-Webster's Collegiate Thesaurus; MODEL, archetype, beau ideal, ensample, example, exemplar, ideal, mirror, pattern, standard. You've apparently latched onto an anal definition of paradigm that I never subscribed to, or offered as an example; this notion that a point in time needs to "return to the trendline" to be considered a paradigm is not one I share.

I've always cited the Appraisal Principle of Change in my debates regarding a housing bubble, and the fact some Forumites seem incapable of grasping this concept. Neff, long ago, made the analogy of predicting an accident @ a busy intersection. Wimpelberg just made a similar analogy regarding forest fires. Those are prime examples of preconceived notions & not the viewpoint of an unbiased individual reading the marketplace (which appraisers are suppose to be). I've read quite a few "tipping point" theories offered here on the Forum over the years, but never once have I seen someone suggest the Fed might go too far & send the economy into recession. Continuously predicting disaster--even through the hottest housing boom this nation's ever seen--IS NOT appraising...it's paranoia...it's also what "chattering monkey's" do.

Regarding George's market...I've two clients from his neck of the woods who recently sold their homes. Both made a considerable profit. One, however, dropped his asking price significantly lower than his Agent recommended because, he'd purchased another home & was "worried" he wouldn't sell in time (his home then promptly sold in one day w/multiple offers). The other (friends of the first & in the same neighborhood) took their time, updated their home, and received $145,000 more than their friend. It took four days to sell, and they too received multiple offers.

Granted...some markets are experiencing growing inventory, while others remain steady & still others have less inventory than this time last year. But, be careful what you read; the sensationalist news media & consistent doomsayers will always cherry pick a story here, some data there and blow it out of proportion. It's what they do...they can't help themselves.

Someone...anyone...somewhere...anywhere...lowering their asking price six figures IS NOT a market loss! Perhaps their market peaked, and they and their Agent just failed to recognize the fact & overpriced the property. I'm familiar with some of the So.Cal housing markets (I'm flying in July 4th), and while it's definitely no longer a booming market, and hasn't been for quite sometime...and even though prices are dropping in some areas...it's still not the wasteland of disaster portrayed by some.

Regional bubbles? I've never debated that possibility. All out disaster...a second great depression (as some here have theorized)...UTTER NONSENSE!

-Mike

 

[Mr Rex]

Bubble or not, Underwriters have their panties in a wad here lately. Actually had one tell me day before yesterday that its because the investors are getting skittish with the weakening market in other areas. So they are busting my chops. Hell, the bubble burst here in 2000.

 

[George Hatch]

Mike, Mike, Mike,

Nice try, thanks for playing. If only history could be so easily re-written.

I'd like to know why it is that you automatically assume that my reference to that term attributes it solely or even primarily to your usage? How can you not recognize that a lot of people whom you don't know and who have never heard of you adopted this cute little buzzword even prior to your using it here? And while we're at it, why do you take personally every comment that's made on this forum?

The stock market losers were using the phrase "New Paradigm" long before they migrated into the RE markets. They brought it, and you (and a lot of other people) latched onto it to describe the same phenomenon in the RE markets. You didn't coin it and it was never your definition to spin. Likewise, "It's different this time" is another phrase that didn't originate in the RE markets. Maybe I need to inform you that you didn't come up with the phrase "soft landing" and you didn't invent the internet or global warming.

And you only wish we were talking about listing prices being reduced. We're not. If we were, that would represent almost 40% of our local market right now. Which should also tell you something about our market.

No, we're talking about matched paired sales on the same properties over a period of time, with the later sale prices representing net losses for the sellers, usually deep into the 5-figures. Get it? We're talking real losses of real dollars - seller is losing all or at least part of their downpayment and the lender still sometimes has to take a short sale or foreclose.

BTW, it's the novice investors who represent the majority of the losers right now, too. That's also something worth knowing.