Is The Party Over?
There is a limit to how high home prices can go. The stock market is realizing that in it's reaction to the latest record numbers from the home building sector. Is the multi-year party over?
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole. ATTENTION: Backup Blog at: http://thehousingbubble2.blogspot.com/
Thursday, April 28, 2005
Previous Posts
- Fannie Mae Continues Liquidating Portfolio
- Centex Sells Land, Mortgage Business Down
- Residential Activity "Now Behind Us"
- No Boom For Landlords
- Florida On Fire, But Not Miami?
- Home Builders Have Become Land Banks
- Land Price Boom Changes Economics In Florida
- Wealth Cannot Be Printed
- Repossessions Up, Sales Down In The UK
- Dutch Central Banker Concerned
Links
- HOME
- 10 Year US Bond
- Fannie Mae
- National Mortgage News
- Origination News
- Demos
- Mortgage Bankers Assoc.
- OFHEO
- Center for Economic and Policy Research
- Fitch Ratings
- Realty Times
- Inman News
- US Treaasury
- BlogKits-Building Blog Relationships
- House Price Crash UK
- The Money Files
- San Diego Real Estate Chrono-Collapsometer
- Bay Area Housing Crash Continues
- HouseBubble.com
- Vancouver Housing Market Blog
- housingbubble.com
33 Comments:
I think so. Time for a long overdue hangover.
I am renting for the first time in 30 years, in a "hot" area in North San Diego County. The home I am renting is a 3000sq ft house in a gated community and 6 months ago one like it sold for 730k. They sold about 4 years ago new for 450K. In this community, there are about 100 homes and about 10% have suddenly gone on the market, including the one I am renting. The approximately 28 year old gal I rent it from has 3 homes and is worried that the market will fall and wants to get out soon.
I went looking for another rental, and found a very young couple a few miles away that owned two beautiful new homes, both with for sale signs in the yard (asking about 750K). I asked why they are renting them if they are for sale. They said that they have not had any interest in 6 months and are taking them off the market and renting them both and moving in with mom and dad.
In my area, I think the tide began to turn a few months ago.
Dear Rob,
Your anecdote is interesting - but I was left wondering what your rent is. I'd like to compare it to the price of the house you're in to compute yields or P/E's. That is, if you don't mind sharing the info.
I should have included it. $2400 per month. I cover utilities only, they cover landscping, and HOA fees.
From looking around, I believe that I could beat that by $100 to $200. When I rented this, I was in a hurry beacause my house sold in 4 days and they wanted a 30 day escrow, so not much time to shop.
I sold my house in Nov. '04, pulled out some nice equity and am renting. My area of So. Cal has been white hot, but yesterday I had a TOP agent in my area tell me that what I am doing is the smartest thing possible. She said that prices are already flat and the tide is turning, that by mid-summer prices will have dropped significantly. She also said she is disgusted with the mania, very frustrating for her to show up with her client to find out a new listing already has 10 offers. She actually welcomes a cooling-off period. Normally agents are gung-ho, looking for the next commission check and will tell you everything is great, the market is still hot, etc., so it was refreshing to hear her give an honest assessment. Again, this woman is always one of the top earners in this area. She basically confirmed what I already knew.
To get a PE number that is comparable with a stock investment, the earning should be rent- property tax - expenses to maintain the home(home owner insurance, etc).
MikeMo...I think we are on the same page, but you may have wisely held on a little longer than I. I sold in mid 2003.
Rob,
Interesting story... too bad for that gal and the other young couple that is now living with mom and dad... but that is the reality of this real estate bubble... and i'm sure that this people are just starting to learn the lesson of, that there's no easy way out... everyone has to work hard...
In southern California, there are more realtors than available houses for sale, so the only way to survive is beating other realtors to show the houses to clients.
To get a PE number ........
I can guess on some of these based on what they sold for new, and my landlord is the original owner.
Annual rents 28800
property tax 4500
HOA 150
Landscape 50(they don't do much)
Insurance $500
I think there is a Mello Roos tax
but not sure how much. Maybe couple thousand a year.
This is an Edit
To get a PE number ........
I can guess on some of these based on what they sold for new, and my landlord is the original owner.
Annual rents 28800
property tax 4500 per year
HOA 150 per month
Landscape 50 per month(they don't do much)
Insurance $500 per year
I think there is a Mello Roos tax
but not sure how much. Maybe couple thousand a year.
dont know if this was posted
http://www.dallasnews.com/sharedcontent/dws/bus/columnists/all/stories/042505dnbusdimartino.43c01293.html
High stakes won't allow us to admit housing bubble
It's hard to overstate the stakes riding on the housing market.
The powers that be insist there's no housing bubble. They have to – mass delinquencies and foreclosures are simply not an option, not with the risks built into the mortgage-finance system.
My math suggests that the size of the entire mortgage market is more than $8 trillion, about double that of tradable Treasuries.
That figure incorporates more than just the $5.5 trillion mortgage-backed securities market. It also includes home-equity borrowing that's being securitized.
The assets backing those securities are varied. Mortgages that don't exceed about $350,000 qualify for backing by Fannie Mae and Freddie Mac, the government-chartered mortgage giants.
Then you have unconventional loans. Think of California, where the median home price is fast approaching $500,000. Think of interest-only, adjustable-rate, 125 percent loan-to-value mortgages – juiced-up debt that's being underwritten every day.
Add the plain-vanilla 30-year fixed loan and every last cockamamie thing you've seen advertised, and you get about $8 trillion, most of which is being sold to investors.
Rob,
Thanks for the first hand account. Please keep us updated on SD.
That house has a PE ratio close to 34.7
octave:2> 730000/(28800-4500-150-600-500-2000)
ans = 34.679
Someone buying that SD house that rents for $2,400 today for 750K would be looking at a monthly nut of over $5K on a conventional mortgage. With mortgage deduction and equity build (assuming they don't do an I/O), a buyer would be looking at $1,000-$1,500 in negative cash flow if they had to rent it. Not the worst I've seen, but pretty indicative of what's going on out there.
Here is another one.
I have an old friend who told me that his son, 25 years old, a waiter making gross $2500 per month, just bought a first new home in Las Vegas for 300K with an 80/20 loan and zero down. His loan is an adjustable. His total payment with Principle, Interest, Tax, Insurance, and HOA is roughly $2500 per month.
This is why I am short the housing market, by renting.
I can add to that Vegas story. The son of a good friend is 22, just out of college. He's working part-time for peanuts. He has no savings.
He and his stepbrother just went in together on an $850K home in NorCal. The down payment came from an inheritance from stepbrother's father. They could have rented the same place for less than half what it is costing them a month to own.
They see this purchase as an "investment" and plan to sell in a few years and make "a few hundred thou", according to my friend's son.
They had no problem getting a loan and didn't need a cosigner despite the fact that both of them are under 25 and neither have full-time jobs or savings.
Welcome to the LSD Economy.
I hear the same kinda stories here in LV as above poster....21 year old waitress purchasing 200000 conversion condo!? Thats all well and good but I don't think lending large sums of moeny to relatively young people in transitory jobs is a good idea. I make twice what she does and I'm frowned upon for being a renter. Fundenmentals have gotten way out of line, especially in LV where everybody thinks their rich. Guess I'm still of the thinking that around quarter million should get you a nice get up....not a 750 sq-ft conversion condo....!?
"His total payment with Principle, Interest, Tax, Insurance, and HOA is roughly $2500 per month."
That's a great story. Oviously this guy will be racking up the credit cards just to live and then will try to refi the house to pay down the cards. Sad, and dumb.
I sold my home in N. Orange County, CA back in 11/04 for 2X after 4 yrs and now renting. I've noticed thru MLS sent from my realtor that some houses in my areas are not selling fast and been repriced a couple of times. Perhaps they've priced too high but it's not an indication of a bullish market.
On the topic, the charts have said it all. The stock market is a forecast of the future. Home builders have topped. The charts are indicative of their upcoming business profits and hence the housing market in a larger scale. All you need is read their charts and forget any Hoo La from all real estate market participants.
Jason
Typical Las Vegas real-estate ad I ran across today: self-described "food server/realestate investor" wants to rent room in his brand-new house in a brand-new suburb. Obviously he's having problems meeting the mortgage, but of course he doesn't worry because he figures he'll make a bundle when he sells the place in a few years. I think he's in for a nasty surprise...
Pay caution to the RE market this summer. The perfect storm is here. You heard it here on this blog.
Jason
From the looks of it, the party is far from over. I don't understand how prices can be this high (Los Angeles area). The incomes do not justify these kind of prices. A starter home in L.A. is now $500,000+, for under 700-900 sq ft. I am so discouraged, I have been waiting for the bubble to burst for so long, but it looks like prices will go even higher. I give up, what ever happens, happens. No more thoughts of "The bubble is going to burst", I've been saying it for 3 years, now I look like an idiot to everyone I've expressed my opinion.
"I give up, what ever happens, happens"...
Oh come on now, it's not all that bad, we'll have an economic collapse soon, I am sure of it.
I sold my house mid 2003, but have only been relatively sure of a down turn as of three months ago.
Keep up the faith.
(I've been saying it for 3 years, now I look like an idiot to everyone I've expressed my opinion.)
Warren Buffett looked like an idiot for five years as he avoided the technology bubble in favor of investments with good fundamentals. Now he is the richest man in America. Learn from him. Avoid jumping on a hot trend, and instead learn to recognize value and be patient. Do you honestly think there is value in this housing market? If so go ahead and buy.
Here's the view from paradise:
We bought a 3br/2ba house in Kailua Kona on the Big Island of Hawaii in 5/03. Purchase price was $340k (including furniture).
Our realtor recently told us that she would price our house at $529k if we chose to put it on the market.
Real estate went nuts in this part of Hawaii last year - 40% gains in single family homes. A lot of buyers (including us) were folks who made a pile of cash from California real estate. Homes were being bought as vacation homes and/or retirement property.
But things aren't booming right now - more homes coming on the market, and more "price reduced" signs appearing. Our realtor says it's a more "balanced" market, with buyers able to negotiate price now.
My suspicion is that a slowdown in California real estate might have something to do with it.
We'll be fine - we bought just before the gold rush and even if prices drop 20% we'll still be ahead of the game. But I feel sorry for anybody who bought here in the last six months.
Aloha!
Anon in Paradise,
Thanks for the first-hand account. Please keep us up to date. I don't remember any other posts from Hawaii before, so it's a big help.
I like to surf, so catch on for me!
I said I was discouraged, not stupid. There is no way I would fall into the trap of buying in this market. I guess I just needed to blow off some steam. Thanks for the encouragement.
I have a couple of great first hand anecdotes to share:
Here's a good one...My friend (the mortgage lender) purchased an "investment" house in South Orange County CA last Spring for $650K. She rents it out for $1,500 less than here interest only payment. Today she might be able to sell for $699K. Less commissions ($31,000 = 4.5%) and Escrow fees ($2K - 5K) she will have realized a $16,000 return. Wait...less her $1500 monthly outlay brings her 1 yr investment total return to...a cool -$2,000. Of course this doesn't even include the cost of the initial loan. Her original plan was to make a "quick hundred K" and sell.
Brilliant!
Next is my friend who owned a nice 1,900 sq ft Orange County home built in 1999 but needed to keep up with the Jones and bought a brand new construction across the street that was 2300 sq ft. He stood in line all night and was picked in a lottery. Wrote a check for $40K (HELOC) and off he went to sell his old (1999) house. Unfortunately for him...he sold his existing house for 100K less than he thought he was going to get last summer (when the market got flodded) which forced him into an 1.9% interest only 3 year program. No worries...his new home will just keep appreciating at 20% a year and he will be a millionaire in no time. In the meantime...he's taken out a HELOC on the new home to make some improvements to his $900K house. Why would a $900K house need improvements...?
All this is madness and what kills me is that lenders keep giving money away. Who is going to pick up the tab for this insanity...the American tax payer. Me!
I own but have put off the "upgrade" purchase until this madness subsides. By the way...I purchased in 1995 when no one wanted to touch So Cal real estate. I am 3 years into a 15 yr fixed re-fi and have resisted the urge to take any cash out of my house over the years. Call me old fashioned...I get made fun of all the time by all the new real estate "experts" but I will survive and profit when this market turns. Incidentally, these were the same folks buying pets.com in 2000.
I hope it ends soon because people very close to me are going to get hammered!
6:01PM anon,
Excellent first hand account from OC. Please keep us updated.
I've got another story. About two years ago, the waitress at our local chain restaurant told us about the new house she was buying with her BOYFRIEND (don't get me started on the stupidity of this move). She was 20 years old and her boyfriend was about 24. He was also a waiter. Neither had second jobs or college/technical education. Their house cost over $400,000. Eventually, they had to move to thier parents and rent the house out because they couldn't afford the payments (duh?). They were keeping it as an "investment".
Hi everybody !
This is great blog. I would love to hear any comments from east coast RE market , particulary Conn. Anyone thinks it's also bubbly?
My personal story:
My family and I live in South Orange County, CA. We've sold our house in August of last year, pocketing about $300k after living in it for 2 years. We were lucky to sell (I guess pricing it right helped a lot), as our area was just flooded with homes for sale. Now, we are renting similar house in the same area for less than we used to pay for a house bought in 2002 (Price was about 50% less). It was relatively easy to find this rental. To buy homes in OC this days at this prices seems very reckless to me. Hopefully soon we will be able to use our cash to buy ourselves another house at the discount, although I don't even mind renting as I personally have a lot less headaches and bills to pay...
My personal story
My family just recently moved back to Southern CA in Oct 2004. We left before the RE boom (Oct 2001). My husband makes $100K a year. We have $200K in the bank, but we are sure the market will tank as it did in the early 90's (maybe worse). I (mom) left the engineering field with an income of $125K a year in 2001 and feel if we stay here and buy I will need to go back to work to afford a track home in Antelope Valley. We our currently renting and I feel as though I need to apologies and explain why we are renting to the moms at my kid's school. My in-laws who live in the San Diego area tell us we are being left out! These are the same people that I have to help set their cell phone option to vibrate and program their VCR. God is really paying some tricks on the college educated who use logic and reason! Being a mom I feel the need to nest like most women. I went to look at a model home for the third time and was about to go for it when in walks a man who could hardly speak english and worked as a landscaper about to purchase the same $400K home. It was a reality check for me!! He probably has no clue what a melo-roos tax is and I'm sure the sales rep didn't offer an explanation (he'll probably clue into what it all means at the closing when his escrow payment is $200 a month higher then he expected). Wages in the Antelope Valley just can't support these prices. What makes usually educated, rationale folks think it can go any higher?
Post a Comment
<< Home