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Monday, March 13, 2006

Housing: A Fizzle, A Twitch, A Pop, A Crash

All over the country, housing sales and prices are dropping. Whether you are in for a fizzle, twitch, pop or crash in your area depends on the local market, new demand in that market, whether there is an oversupply in that market and how many speculators were in the market. After that it depends on the uncontrollables such as interest rates and fuel costs, which affect all markets similarly. However many markets deemed immune (such as the DC/MD area) will experience a significant correction.

Mish of Global Economic Analysis did
some research on the housing sitting vacant in the Phoenix area, and the numbers are staggering. Go read.

Now as for new demand, several factors are forcing that down. For one, the regulators are worried about unsustainable lending and are pushing lenders to be more conservative. Investors are starting to get worried about higher default rates in housing security and bond issues, so the market is going to be exerting the same force as the regulators. Interest rates are rising. Fuel costs are higher, and are cutting into consumers' ability to spend. Jobs really don't look that hot in many areas either. About half the workforce is facing stagnant or declining earnings in an era of significant inflation. Demographics don't favor new demand. Many people who were retiring in the next five years or so have already bought that second home, and will now be looking at selling the first.

But what really spells doom for many of these markets is the speculators getting out and the mortgage resets hitting. According to Moody's Economy.com, approximately 1/4 of all mortgage debt outstanding is due to reset in 2006/2007. See this
WSJ article:


In the hot housing market of recent years, many households took advantage of "affordability" mortgage loans -- heavily promoted by lenders -- that hold down payments for an initial period. Now the initial periods are coming to an end on many of these loans, leaving borrowers to face resets of their interest rates that can cause monthly payments to shoot up between 10% and 50%.

More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody's Economy.com, a research firm in West Chester, Pa.

Don't believe it when the economists say that most people will be able to cope. It's a flat-out lie. If their mortgage payments increase by more than 15%, most will not be able to cope. Very few of these people made much of a downpayment. If a borrower had equity of less than 10% in his or her home last year in a hot market, the odds are that the borrower will end up "upside down" (owing more on the home than the home can be sold for) by the end of this year.

Many lenders will be worried about a continuing trend, and will be reluctant to refi more than 90% of the home's current appraised value. To make things worse, proposals by regulators to increase capital requirements for high LTV RE lending is going to tighten the credit market considerably. The Fed has really screwed this up. The time to institute these measures was several years ago. Now they are just making a bad situation worse.

The people who bought using the interest-only and option ARM loans generally got into them with very little downpayment. Even homeowners with standard mortgages who bought a few years ago and did not make a substantial downpayment (the majority of first-time homebuyers) may find themselves upside down for a few years. But they are not forced to sell - they can usually wait it out.

Not so for those facing resets. At least 10% of the homeowners will have to sell in some markets and will not be able to bargain for the price they want. That will continue to push prices down, thus reinforcing the cycle, and pushing those with reset at a later date deeper into the hole. In many of these "hot" markets prices are now dropping by 2%-4% a month. This happened because of overbuilding to meet the speculative demands of the market, followed by the speculators getting out and demand sharply dropping.


It is the resets that will produce the disaster, because they are a rolling wave of new forced sales. Worse yet, many of these are recourse loans. The hapless homebuyer can't hand back the house and walk away from the balance of the loan. Instead they have two options - either bankruptcy or a debt that must be paid off. These people will not get back in the market for years, further forcing down demand. Add to that the demographics of an aging population which will jump on the bandwagon looking to sell while prices are still relatively high, and the skeleton of a historic correction is evident.

That historic correction is going to push us into a recession beginning in 2007, and worsening going into 2008.


Comments:
That historic correction is going to push us into a recession beginning in 2007, and worsening going into 2008.

Well, I rode out the last housing crash here in SoCal and I can ride out another. I was able to buy my current place at the rock-bottom of the last crash (1997), so I doubt I'll lose much this time around. Might even be a lot of repos hitting the market for real cheap. (Prices out here are 2-3 times what I figure a realistic price should be, and last time that happened, we had a lot of defaults and repos within two years.)

My worry is that 2007-2008 is just the right timing for a "perfect storm" of recession, bird flu, and nuclear war with Iran.
 
Nope - you are safe. If you bought in 1997, you have at least 30% book equity and are in the paydown phase.

We are going to see a lot of defaults and foreclosures. We haven't historically had this large volume of loans in which people aren't building equity and/or don't make at least a 5% downpayment.

There is a perfect storm coming, and it won't be pretty. We can skip the bird flu, and it still won't be pretty. The US budget and many state budgets are so out of whack that we are in for a massive, deeply unpleasant surprise in about a decade when the whole house of cards is exposed.

The housing bubble is very similar to the debt bubble enveloping our entire economy. Perhaps the same psychology is driving it.

We have to eliminate most energy imports to even have a chance at a decent life for the next generation. And we'd better teach them a few things about basic economics too.
 
Nope - you are safe. If you bought in 1997, you have at least 30% book equity and are in the paydown phase.

More like "accelerated paydown phase" on top of a 15-year loan. Coincidentally, I should have the place paid off and in the clear by 2007 or 2008.

We have to eliminate most energy imports to even have a chance at a decent life for the next generation. And we'd better teach them a few things about basic economics too.

Unfortunately, decency and basic economics suffered the same fate as that "Great Big Beautiful Tomorrow" we once looked forward to -- man on the moon, the planets, the stars:

We threw them all away so we could screw in the mud at Woodstock.

--same "anonymous" as above
 
I'm with anonymous. Cash is king.

I', looking to purchase office condos, 1,000- 3000 sq feet. Perfect for startup, perfect for the downsizers.
 
Anon wrote: "Unfortunately, decency and basic economics suffered the same fate as that "Great Big Beautiful Tomorrow" we once looked forward to -- man on the moon, the planets, the stars:

We threw them all away so we could screw in the mud at Woodstock."


That's worthy of being the first two paragraphs of the first chapter of a book, because it is so absolutely and devastatingly true.
 
It's actually a variant on a dedication for an SF novel I'm working on:

"To the future we threw away, so we could screw in the mud at Woodstock."

Pass it on.
 
Well everyone I know had to come up with a 20% downstroke; many then went out and got a second loan to make it. I just got back from the South and I talked with one RE broker who had seventeen listings and not one nibble.
 
Howard - an awful lot of people were making no or almost no downpayment. The 80-20 package is done so that the 80% can be sold on the secondary market. Even FNMA was offering 1% downpayment loans.

It's still the same effect for the borrower. Five years down the road, you have made little inroads on the loan principal. From reading around, I see that realtors are bailing in some of these once-hot-now-cooling markets.

So what do you think is going to happen in SoCal, since a huge part of the employment there has been related to the building frenzy?
 
God damn it. I gotta stop reading this blog. I get depressed every time I come here.

I'm being kicked out of my apartment when my lease is up because they're converting it all to fucking condominiums like every fifth apartment complex in the Valley, and I want to get a house or at least a townhome because I'm sick of paying for a space I don't actually own, and now I don't know what the fuck to do...

God damn it God damn it God damn it.
 
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