Friday, April 29, 2005

It's The Gold Rush In Reverse

Everybody is pointing at Californians, now including Hawaii. "An unprecedented boom in the Kauai real estate market is being led by California buyers, according to a study by Data@Work, a Hawaiian resort residential market research firm."

"The study shows California residents as the largest buyer market for all resort properties (condos, single-family homes and vacant home sites) in Kauai, accounting for about 40 percent of all sales on the island."

17 Comments:

At 12:41 PM, Anonymous Anonymous said...

Big business selling off their buildings and becoming tenants...

http://slate.msn.com/id/2117674/fr/rss/

 
At 12:48 PM, Blogger desi dude said...

JJinSC posted in WJ forum.

Lets go "back in time" and see! It was Sept. 28, 1992 and Business Week wrote: Real Estate Slump? What Real Estate Slump?.

"Real estate still equals real headaches in most places. Although home sales are up nationally from a disastrous 1991, residential real estate in California and much of the Northeast remains a picture of despair. Price incentives haven't helped much. Mortgage rates are at 19-year lows (an average of 7.95% for a 30-year conventional loan). And some houses have dipped as much as one-third in price from the boom days of the 1980s."



The population back then left in the early 1990s and headed elsewhere. Drying out all demand! Mind you, no terrorism back then. Other "nonbubble areas" did very well due to stable and even growth.

"In the West, dismay over California's crumbling economy has been a boon to Boise, Idaho, and Salt Lake City. Thanks to the decline in defense contracting and other recessionary malaise, unemployment in the Golden State hit 9.8% in August, while housing prices tumbled 3.5% during the past year. In Boise, however, joblessness is a mere 3.8%. High-tech employment may be suffering in other areas, but not in Boise, where exploiting successful computer industry niches is an art. Hewlett-Packard Co., which produces its popular laser printers here, is expanding rapidly. Its plant employs 4,100 people, with 500 hires in just the past six months."



Also, from Banks Get Real About Real Estate Losses:

"In June, 1991, First Chicago Corp.'s top officers devoted their annual management retreat in Kohler, Wis., to the bank's troubled real estate loans. They considered the alternatives. Maybe it was best to bite the bullet: simply write off the loans and dump them. Or create a separate "bad bank" to handle the dirty work. Or perhaps hold on and ride out the real estate recession. Says W.G. Jurgensen, the chief financial officer: 'We all recognized that real estate assets were the single most negative influence on our earnings.'

For over a year, the bank rode it out. But the real estate recession has turned into a depression -- with no turnaround in sight. So on Sept. 14, First Chicago put up for sale $ 2.1 billion in troubled real estate properties and loans, after writing down their value by 46%. Many other banks are mulling the same choice. Two days later, Fleet Financial Group of Boston announced its escape plan. Wells Fargo & Co., Citicorp, and others may follow. 'First Chicago is just the first news to hit the ticker,' says Jon A. Fosheim, a principal at real estate research firm Green Street Advisors. "The fundamentals are in place for all the big institutions to own up to the diminished value of their real estate holdings."

 
At 12:58 PM, Anonymous Aaron said...

Ben:

Your blog rocks!

We sold in 2003 because it was a bubble and captured a good pile of cash.

We had doubts, bought another home in 2004, made some basic repairs over 1 year and sold for a net gain of 25% on the leveraged investment. We even sold FSBO and only paid 1/2 of the commission to the buyer's agent.

It feels good to know I won't be trapped in an underwater house for 15-25 years until wages and inflation catch up with home mortgages/prices at today's low interest rates.

Keep up the good work on the very even handed and empirically oriented blog. I am impressed by how few ad hominem attacks occur compared to other housing bubble discussions.

 
At 1:44 PM, Blogger John Law said...

they aren't making anymore island!!! ok, it hawaii they are, but very slowly.

 
At 2:04 PM, Anonymous Anonymous said...

They aren't making any more island in Japan either... and yet the price of RE has been falling there for the last 10 years.

 
At 2:09 PM, Anonymous Anonymous said...

Japan is volcanic too, so they are making land too...slowly...

;-)

-Generic

 
At 2:25 PM, Blogger desi dude said...

http://wallstreetexaminer.com/?itemid=795

Why the Real Estate Market Will Crash
by Theodore Mantle, Friday April 29 2005

Annual household incomes are not high enough to support home prices at their current levels.

Home prices in the United States, adjusted for inflation, have soared approximately 50% nationwide in the last five years, the biggest increase in history. In some areas, prices have more than doubled.

Since I assume incomes are not about to skyrocket anytime soon, I believe that home prices will fall. Since affordability is so extremely out of whack with historical norms, I believe that they will fall a lot.

Over the long term, median household income in a local area is perhaps the single most significant factor affecting prices of residential real estate, i.e. single-family houses and condominiums, in that market.

Don’t take my word on this point. I’m paraphrasing one of the top experts in the study of real estate cycles in the United States, Robert Campbell. He is the author of the book Timing the Real Estate Market and he also publishes The Campbell Real Estate Timing Letter. You can find more information from him at http://www.sandiegorealestatereport.com

I recently had the good fortune to attend a nearly 3-hour presentation by Mr. Campbell to a crowd of over 400 people who, like me, were very impressed by what he had to say. Just for the record I have no vested interest in singing his praises. In fact I don’t even know the man -- I’ve never spoken to him personally. But the analysis he presented was a real eye-opener.

Also for the record, Mr. Campbell stated that his technical indicators are still pointing up at the moment. While he discussed several possible scenarios where average home prices could fall by up to 30% or more, he did not state that he expects the market to crash.

Mr. Campbell’s research, coupled with my own personal observations, has driven me to the conclusion that the residential real estate market in the U.S. is about to collapse.

First, there is the strong historical correlation between median household income and home prices. Typically, prices swing in uptrends and downtrends above and below an equilibrium level. At market lows in the past, as many as 47% of household incomes were able to afford a median priced home. At market peaks in the past as few as 17% were able to. Today many markets have exceeded this historical extreme.

For example, in San Diego right now the median priced home costs approximately $580,000. This is typically a single-story 3 or 4 bedroom 2-bath 1500 square foot simple house with no basement or useable attic, on a small plot, often only 100 feet by 100 feet, fronting a street with neighbors within spitting distance on three sides (right, left, and back from the next street over). Driving down the streets you can see that due to the high cost of living and cramped conditions, many people spend much of their leisure time sitting at home on lawn chairs in the shade of their garages! The few scrawny scattered decorative plants and trees provide no cover. Lawns are postage-stamp-sized sprinkler-watered patches, if that. Some are just gravel or concrete.

Only 11% of households can afford these less than desirable homes based on current salaries.

Are salaries in the area about to improve? I don’t think so. In fact many of these garage-dwellers are about to lose their jobs. As many as half of the new jobs created in Southern California in the last three years are directly or indirectly related to the housing bubble -- bankers, real estate brokers, agents, inspectors, appraisers, title companies, landscapers, window installers, termite and cockroach exterminators, painters, construction workers, mortgage loan officers and clerks, radio advertising salespeople, Ditech customer service representatives and on and on.

People always believe what they want to believe, but anyone whose income depends on the housing bubble is vulnerable to losing their job and losing their home.

Private sector jobs are being sent overseas as fast as possible.

Government jobs are facing cutbacks at the federal, state and local level. The United States has spent $300 billion on Iraq. The federal debt is in the trillions. The state of California itself is tens of billions in debt, floating bonds to temporarily keep paychecks flowing to workers. San Diego is on the verge of declaring Chapter 9 bankruptcy. The mayor has resigned and the deputy mayor is on trial as part of a criminal strip club scandal.

It’s not a good time to be expecting the job market to improve.

Second, interest rates are only a partial factor in home prices. Continued low rates mean relatively higher prices, but they cannot overcome the affordability issue on their own. The interest rate trend serves only to accelerate or decelerate an underlying home price trend.

I believe that super low interest rates the last few years have added fuel to the fire of speculation causing a bubble in real estate prices. Now, the new trend of rising interest rates will at first decelerate the home price uptrend, then accelerate the downtrend once that gets underway in earnest. This will happen even if interest rate levels remain fairly low compared to previous periods.

Third, interest-only Adjustable Rate Mortgages (ARM’s) have become the financing vehicle of choice for many homebuyers in the United States.

After the teaser periods expire, interest rates will be jacked up without mercy. The result in some cases could be a jump in the monthly payment from $1,900 to $3,100. This is more than many proud new home owners will be able to handle. They will have to move their lawn chairs from the garage to the street when they can no longer afford their mortgage.

Fourth, many new homebuyers are over their heads in debt. They made little or no down payments due to loosened lending standards. They have no cushion when prices fall.

Those lucky enough to get in on the bubble early are in better shape, right? Wrong. In far too many cases these people have succumbed to the seductive siren call of the cash-out refi industry, borrowing against their future to spend recklessly today.

Giant gas-hogger SUV’s crowd the streets next to illegally parked showboats and rarely used monster motor homes. Spiraling gasoline prices have caught adult toy collectors with their pants down, and many of these burdensome bad decisions are now sporting For Sale signs.

The smell of fear is in the air. A real-estate broker friend of mine who for the last five years has been (correctly) wildly bullish on home prices and recommended multiple purchases per person, recently confided that even he expects a 20% drop within a year.

Some people choose to plug their noses, close their eyes, and dream on. But reality marches inexorably closer whether it is acknowledged or denied. The law of supply and demand has not been repealed.

But wait a minute -- demand is high, right? Well, at what price -- $600,000 or $700,000 or $800,000? How about one million dollars for a concrete driveway and a garage with a mini-house attached? Demand falls as prices rise.

What about renters? Surely they are all waiting in line to buy.

Not at these prices. They can’t afford to. Many will just choose to move from extreme home bubble areas to cheaper regions of the country.

Fifth, investors or second-home buyers made nearly 30% of all home purchases last year. Historically less than 8% of home purchases fall into these categories. These houses will be the first ones dumped on the market when it becomes obvious that prices have peaked. And there are a lot of them. People who borrowed against their primary residence purchased some as investments. These people will suffer a double blow when prices decline. Not only will they watch as their remaining primary home equity is wiped out but their investment house will soon be underwater as well.

Frankly, these are not investments anyway. An investment pays a return -- a positive cash flow. These are speculations, plain and simple. Leveraged bets that the price will rise and the house can be unloaded to a greater fool at a profit before the carrying costs eat away too much at the speculator. And the carrying costs can be high. Negative cash flow is the order of the day.

Some inexperienced new “investors”, caught up in the excitement of paper profits they will never realize, have purchased several houses, sometimes as many as ten or more, in what a detached observer could fairly recognize as a frenzy of foolish greed. These people will lose everything.

Finally, I believe house prices will crash, not just gradually decline, because real estate is not liquid like stocks or bonds. If homes were only marginally overpriced and almost all of them were owner-occupied, the real estate market could gently correct itself.

But with fundamentally ridiculous overvaluations and thousands of “home flippers” all hoping to cash in at the same time, this market will soon be harshly spanked.

 
At 2:47 PM, Anonymous Anonymous said...

desi dude,

Brilliant post, thanks!

My favorite piece:

"Second, interest rates are only a partial factor in home prices. Continued low rates mean relatively higher prices, but they cannot overcome the affordability issue on their own. The interest rate trend serves only to accelerate or decelerate an underlying home price trend."

This has been my thought for a while and it flies in the face of conventional wisdom that says interest rates must rise before there can be a market downturn.

 
At 3:32 PM, Anonymous Anonymous said...

Desi dude!
I am definitely with you on that. And I am familiar with Mr. Campbell book. I am a full time real estate professional for 10 years ( real estate broker and investor). Last summer I had to make decision if I suppose to build another 1.5 million 5300 square foot spec house or do something else. Because it was a big investment and land prices rose 50% over 2 years I had to make educated decision. I did some research and also have read mentioned by You book. I think it is a must read for all housing bubble bloggers.
Mr. Campbell: It is not Location, location, location. It is Timing, timing,timing. And I agree.
Mike C., Chicago.

 
At 4:06 PM, Anonymous ChrisH said...

[As many as half of the new jobs created in Southern California in the last three years are directly or indirectly related to the housing bubble -- bankers, real estate brokers, agents, inspectors, appraisers, title companies, landscapers, window installers, termite and cockroach exterminators, painters, construction workers, mortgage loan officers and clerks, radio advertising salespeople, Ditech customer service representatives and on and on.]

This is why I love this blog so much. There are people finally saying exactly what I've been thinking.

I brought this argument up while I was chatting with one of our salespeople the other day. I was telling her that I had a really strong belief that Orange County housing prices are about to plummet. She disagreed, saying there is just too much money in OC. She told me that the gym she goes to is full of people in their 20s and early 30s in designer clothes and expensive cars. I asked her what these young people do for a living.

Turns out a lot of them work in the mortgage industry.

I told her that she just proved my point. I asked her what happens when there is nobody left to lend to? Pretty much everyone who refinanced already has, rates are going back up and affordibility is in the teens.

Hmm... young people with lots of money and expensive things? Sounds EXACTLY like Tech-mania in 1999.

In two years I bet those gym members will be back home living with mom and dad.

 
At 4:15 PM, Anonymous Bob R said...

She told me that the gym she goes to is full of people in their 20s and early 30s in designer clothes and expensive cars.

Does she think those young people paid cash for those designer clothes and expensive cars? Those toys were most likely charged on their Visa cards - which are probably linked to a HELOC on their overpriced condo. Can anyone spell House of Cards?

 
At 6:11 PM, Anonymous Anonymous said...

I guess older people who got burned by the last RE bubble are more cautious this time around. The new law passed this year that makes it a lot more difficult to get chapter 7 will trap the 25-35 generation who buy into this bubble for many years to come.

BTW, I just read a news from China saying China's central bank is going to unpeg Chinese yuan for a few hours before most Chinese start taking the week-long May 1 holidays in China. Apr 30 is like the Friday after Thanksgiving in China that most traders and brokers are on vacation, so volume is usually very light and the best time to test the market.

 
At 6:18 PM, Anonymous Anonymous said...

The reason why the unpeg of Chinese yuan is important to the RE market here is if yuan is appreciated 20% this year, it will translate to more than 10% of inflation in the US, on top of the oil price increase. That will leave the FED no choice but to raise the rate.

 
At 11:19 PM, Anonymous Anonymous said...

The implications of stronger Yuen still need more observations.
IMHO, if Yeun appreciated 20%, means the US deficits will be smaller in dollar terms. Both the Stock (up 20 %) and RE will alure more foreign money. Therefore, the RE bubble might last longer.

I think this is what exactly Fed try to do here : Refi America one more time by shrink dollar.
However, China,Japan and Indea just keep buying dollars via GSE.
and there is no easy way for AG to walk away with clean hands.

 
At 11:43 PM, Anonymous Anonymous said...

Who's to say that CHINA won't have serious problems in the near future? So what if their currency rises--without US exports they won't sell much. Their profit margin may go down and US prices may not be affected very much.

All reports indicate their own economy is super bubbly and primed for a recession. On top of that the whole country is a political powder keg--Tianamen Square, Taiwan, corruption, religion, labor movements, etc. They've had several major upheavals in the last 100 years so another one may well be on its way.

-Generic

 
At 10:26 PM, Anonymous Anonymous said...

I had a really strong belief that Orange County housing prices are about to plummet.

Back to 1999, Cisco ,Lucent, Lexmark Ford and a few other key high tech company planning to move/create research center in OC, because the cost of living around 2/3 of San Jose.
Today, as far as I know, no Lucent, Cisco keep down sizing only sale rep ,Conexant down size to 2/5 and might be more in the near feature. AOL almost gone and a lot of high tech company have moved or just disappear.
The RE bubble is supporting OC now, that once intended high tech jobs, once the RE bubble stop growing, what will left in OC ?

 
At 1:02 PM, Anonymous Anonymous said...

As many as half of the new jobs created in Southern California in the last three years are directly or indirectly related to the housing bubble

Where is ITC (Irvine Triangle Center) ? the original scheme was to collaborate the three research centers: Spectrum, University Research park and Tech Research center to an once so called ITC to copy NC’s triangle center to SC,
Today instead once supposed high tech company moved in, the RE related
company taken some of those spots and for lease sign everywhere.

Given currently level living cost, it will accelerate high tech company move to other states or even just out sourcing to China and India.

At the end this will destroy OC’s once promised future.

 

Post a Comment

<< Home