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Sunday, December 11, 2005

The Feds And The Street On The Housing Bubble

There's an interesting dichotomy between the conventional wisdom on the end of the housing boom and actual experience:
The nation's long housing boom will end not with a bang, but with a prolonged whimper as homeowners suffer through stagnant pricing that could last years.

That was the consensus of economists gathered in Chicago to consider whether a so-called housing bubble will end in a crash. Their (sic) say it won't.
The problem is that rising mortgage rates are putting an end to the easy money that underpinned increasing home prices, said Richard Brown, chief economist of the Federal Deposit Insurance Corp. in Washington.
Bullcrap. Here's some more from NAR:
Homeowners and buyers have been searching for any signs that the nation’s robust housing boom may be going bust – especially in light of recent reports that the market is cooling. But NAR’s chief economist, David Lereah, assures us there is no reason for panic. The housing market may be slowing down, but it’s still strong and healthy.
“Balloons don’t burst,” he says. “You can put air in a balloon and it expands or you can take air out and it shrinks. Various metro markets got real hot over the last four years. Air went into those balloons and the prices went up. But now, air is coming out of the balloons. We’re hearing a hissing sound not a pop…there’s a soft landing ahead.”
And then the truth:
The biggest risk in the housing markets today is speculative buying, according to Lereah. It’s highly concentrated in a few markets like Miami, San Diego and Washington, D.C. “If interest rates continue to rise, those speculators will sell. When these speculative purchases go on the market all at once, there could be a glut and prices could soften considerably,” Lereah says.
The problem is that in some markets over 20% of purchases have been speculative for a couple of years and at least another 20% have come from individuals buying in with interest-only hybrids, and when the music stops the market will be flooded with sellers trying to get out. Nor are these pockets confined to Miami, San Diego and DC. Add the demographics in some markets (older people trying to sell in markets because they need to clear equity and escape high taxes), add potential increases in longterm interest rates and add in forced sales by individuals who are facing sharply increased mortgage payments at the end of their interest only period or at their first ARM adjustment, and many of the inflated markets are going to see large price drops.

As for affordability, increased property taxes and homeowner insurance rates are going to be factors pushing prices down. Some insurance companies have stopped offering insurance in some areas considered high-risk, and many will be raising rates across the board in an attempt to recoup their losses from the storms. The litigation in MS and LA is not helping matters because actuaries don't know how to project risks. In the northern regions, fuel-oil prices and natural gas prices are another adverse factor.

This is what speculation has been like in Loudoun County, VA:
Jim Williams, executive vice-president of the Northern Virginia Building Industry Assn., knew the "feeding frenzy" had gotten out of hand when a waiter in a restaurant he frequents confided that he had bought four houses on spec.
People have been able to do this because of the rash of interest-only hybrid mortgages or ARM's with a big step up. Similar activity has occurred in Baltimore and Philadelphia. And in markets like Loudoun, San Diego and Long Island, you are already seeing falling prices:
Bob Semmens, a 60-year-old retired pressman, has heard that sound. After he offered up his 3,000-square-foot colonial, with three acres and a swimming pool, in early July for $759,000, he sat back to wait for the frenzied offers.... But "very few people were even coming out to look," Semmens recalls. After four months, he was about to take the house off the market until next spring. But then he struck a deal -- for $620,000, an 18% price cut.
By October, agents had 2,908 existing Loudoun houses on the market, an increase of 127% over a year earlier. The average time on the market had climbed 62%, to 42 days, since the fall of '04. And in just two months, from August to October, the median sales price for houses dropped from $506,100 to $480,000.
Last summer one of my brothers moved out of San Diego. He had trouble getting a mover - so many people were leaving the area that they were having trouble getting their trucks back into San Diego.

I wrote before about how condos and townhouses are the worst risks. They will be the first to fall and will fall the hardest. Take a look at these figures for San Diego in September 2005, versus September 2004:
Median Prices for Resale Single Family Homes
Central San Diego:
Median (04): $510,000; Median (05): $541,500; Change: 6.2%

East County:
Median (04): $465,000; Median (05): $490,000; Change: 5.4%
North County Inland:
Median (04): $525,000; Median (05): $560,000; Change: 6.7%
North County Coastal:
Median (04): $600,000; Median (05): $620,000; Change: 3.3%
South County:
Median (04): $542,500; Median (05): $571,750; Change: 5.4%

Now look at new Single-Family/Condos for the same period:
Central San Diego:
Median (04): $565,000; Median (05): $463,750; Change: -17.9%
East County:
Median (04): $767,500; Median (05): $443,250; Change: -42.2%
North County Inland:
Median (04): $557,500; Median (05): $471,000; Change: -15.4%
North County Coastal:
Median (04): $737,500; Median (05): $668,500; Change: -9.4%
South County:
Median (04): $536,000; Median (05): $610,750; Change: 13.9%

Developers are cutting their prices sharply to get out. This is the leading edge in most of these previously hot markets and a good predictor. If you are trying to figure out what to do in your area, look at the prices on sales by development corporations.


Thanks for the analysis. I'm within spittin' distance of Loudoun County, and have watched the bubble inflate over the past 15 years.

Folks are simply coming to their senses...sometimes, a condo in a garden apartment community just ain't WORTH over a quarter of a million dollars.

I reckon that the bubble was turbo-boosted by the suckers fleeing the stock market dot-bomb and Enron/Arthur Andersen scandals back in 2000. They think they're investing, instead they are speculating...and the herd chases the butt of the cattle ahead of it...right over a cliff.

I've long been expecting to see real estate ads saying:

"DC side of Akron!"

"sometimes, a condo in a garden apartment community just ain't WORTH over a quarter of a million dollars."

You said it! Especially when people are getting close to retirement and they have other options. And there are only so many stupid and/or reckless people. This had to run out sometime, and I think we will see money move back into stocks. We are also seeing a flight into gold.

"This had to run out sometime, and I think we will see money move back into stocks. We are also seeing a flight into gold."

I'm investing in 1(one)gallon of unleaded gasoline...

By all means, let us know how that works out for you. I find it hard to maintain my investment stocks of gasoline, even though I have, on occasion, purchased quantities up to 10 gallons. For some reason it seems to evaporate from my gas tank as I drive. Perhaps this accounts for the greater popularity of gold, which is pretty useless.

"By all means, let us know how that works out for you."

I'm trying to market it as a high-end perfume...sell it by the 4 ounce bottle in upscale department stores:

"Octane....it DRIVES me!"

Look for it, will ya?

BTW: Here in Loudoun's neighbor county, I've seen a considerable number of multiple residents of SFH's.

The morning and evening "tide" of cars give the game away that the neighbors are living 17 to a bedroom.

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