Monday, May 02, 2005

FDIC: "Boom Criteria" Markets Up 72% To 55

The FDIC put out a paper today which reports the boom is the largest ever recorded. "The number of individual markets that met the boom criteria increased by 72 percent in 2004, to 55 metro areas. The last time the United States saw a large number of metro areas experiencing housing booms was in 1988. At that time, 24 markets were experiencing a boom."

"Of the 24 boom markets added to the list in 2004, only 6 have ever previously experienced a boom in their history. If national factors are coming more into play, then clearly the most important factors to look to would be the availability, price, and terms of mortgage credit."

"These trends suggest that highly-leveraged borrowers are increasingly taking on interest-rate risk as they stretch to afford high-cost housing. Another evolving trend that has not been tested in a housing market downturn is the increasing market penetration of innovative mortgage products, such as interest-only (I/O) and option ARMs."

"Heightened investor purchases of homes could also be signaling a higher degree of speculative activity in housing markets during 2004." Alternate Link, look in left corner, May 2nd.

40 Comments:

At 7:45 PM, Blogger Ben Jones said...

The alternate link is the FDIC home page. The link is in the Left-top corner under FYI May 2nd. Don't miss the charts down page.

 
At 7:58 PM, Blogger TulipsAllOverAgain said...

The data indicating such an unprecedented boom in multiple metro areas leads me to doubt their conclusion. The nearest comparison is to 1988 when the number of "boom" areas was 24, now its 55.

"One conclusion of this study was that a housing boom does not necessarily lead to a housing bust. In fact, boom was found to lead to bust in only 17 percent of all cases prior to 1998. Moreover, when busts occurred they were typically preceded by significant distress in the local economy."

Given the more than doubling of the areas experiencing a boom, and the current fancy financing pointed throughout the report, I'd say we're in unchartered territory, and the changes of a bust are now much greater than 17%. This is history in the making.

I wonder what percentage of the population resides within the 55 metro areas? Can we doubt the bubble has gone national?

 
At 8:01 PM, Blogger goleta said...

This comment has been removed by a blog administrator.

 
At 8:14 PM, Anonymous bob r said...

"Another evolving trend that has not been tested in a housing market downturn is the increasing market penetration of innovative mortgage products, such as interest-only (I/O) and option ARMs."

This is the key sentence - and there's every reason to believe that the bloodshed will be worse than in previous busts. With little or no equity in their houses, tons of people will walk away from their houses and the foreclosures will pile up. The whole house of cards is dependent on low interest rates and continually appreciating property values. If either one falters, the structure will collapse.

 
At 8:18 PM, Anonymous Anonymous said...

Is this kind of talk typical of the FDIC or is this huge ?

 
At 8:30 PM, Blogger Canadian Capitalist said...

Ben,
I've concluded that there is no housing bubble in Ottawa, where I live. You can find my analysis here.

 
At 8:36 PM, Anonymous Rob said...

I love this one.

"However, little is known as yet about the effects these credit-market changes might have on the dynamics of boom-bust cycles, making them promising areas for future research."

What government dribble, they talk like they are sitting on another planet looking at the situation through a telescope.

 
At 8:47 PM, Anonymous Anonymous said...

In my neck of the woods, rural Union County in north carolina, we have seen the price of farmland go from $3k to over $90k in the span of 4 years.

directly across the street from my farm, a developer is building 140 homes on around 200 acres.. each home is.. wait for it.. $1 million to $1.5 million.

three years ago, you would be hard pressed to find more than one or two houses in the entire county that cost more than a million bucks.

now, literally across the street from me, there will be HUNDREDS.

btw- around 50 of the houses have been built already, with for sale signs in the yards. each one built by a different custom homebuilder that i've never heard of before.. and these houses are gigantic.. around 9,000sqft apiece.

the problem? only 2 of them have anybody living in them.

this is not going to end well. every day i have developers knocking on my door trying to get me to sell my farmland. the price seems to go up on a daily basis.

 
At 8:55 PM, Anonymous Anonymous said...

btw, that price was per acre. :)

 
At 8:55 PM, Blogger TulipsAllOverAgain said...

Rob, what a line! Best laugh I've had in a long time.

Unfortunately, I think little IS known. We're in totally unchartered territory.

I don't know why the FDIC cranks out these analyses, but the tone of the report has dramatically changed since the report issued only three months ago. Basically, it seems to me, they are laying the ground work to issue the report that says "told ya so."

 
At 9:35 PM, Anonymous Anonymous said...

Fed Chief Alan Greenspan suggested homebuyers take adjustable mortgages out even though fixed interest rates were lower than they ever had been.
Why would he do that ?
Did he notice about housing bubble?

 
At 9:41 PM, Anonymous Anonymous said...

I live in the Seattle area, I'm still clearing out our current debt so we can be in a position to own within 2-3 years. It frightens me to think what the housing market might look like by then.

Great blog, by the way - keep up the nice work!

 
At 9:45 PM, Anonymous BoyInTheBubble said...

UNION FREAKING COUNTY? My family lived just over the line in Mecklenburg for a few years. We bought in 1988 for about $280K and sold in 1993 for about $265K, after putting on a new screened-in back porch and making a bunch of other improvements. That got us seven bedrooms on a full acre and nice little foresty area in the back, btw. No, real estate never goes down, ever.

There might well be jobs that support the income needed for a $1.5M house, but they're all in Charlotte, and that is a PAINFUL commute up Independence Boulevard. I'd rather live on Queens Road for that much.

 
At 10:12 PM, Anonymous rodin said...

"Heightened investor purchases of homes could also be signaling a higher degree of speculative activity in housing markets during 2004."

Ya think?

 
At 10:19 PM, Anonymous richierich said...

---There might well be jobs that support the income needed for a $1.5M house, but they're all in Charlotte---

With a traditional mortgage at today's rates, a $1.5M home means an outlay of almost $10K a month, plus another $1K a month in lost income from the $300K 20% down payment. That's $11K a month or $132K a year.

If you want to keep housing costs at 30% of net income, you'd have to have a houshold income of nearly $700,000 to afford these $1.5M homes.

Guess this country is richer than I thought.

 
At 10:20 PM, Anonymous Anonymous said...

the Joint Center for Housing Studies of GSE has published a study arguing that the housing market is sound, and that there is little basis for concern about a housing bubble.

The study makes four points to support its case that there is no housing bubble:

1) over the years 1994 o 2004 household income rose almost as rapidly as the home price index;

2)it is rare for home prices to actually decline in nominal terms, more typically after a sharp price run-up homes experience modest declines in real prices, as their price does not rise as rapidly as the overall rate of inflation;

3) there continues to be a rapid rate of household formation (estimated in the paper at 1.2 million annually) due in part to high levels of immigration; and

4) the country is experiencing a low interest rate environment, which is likely to persist for the near future.

It is easy to show that none of these four points should provide any reassurance to homeowners about the future value of their property.

 
At 10:48 PM, Blogger goleta said...


"3) there continues to be a rapid rate of household formation (estimated in the paper at 1.2 million annually) due in part to high levels of immigration; "


Don't expect skilled workers in those immigrants.
I have several Silicon Valley, New Jersey, and Boston colleagues and friends leaving top technology companies because they have been waiting for green card for over 5 years and still see no hope of getting one and have to leave the country. Most of them are at the top of their fields of wireless and computer networking. I believe it's the same for bio-tech and other fields as well.

Since 911, home land security has become top priority and now skilled foreign workers are completely ignored.

Both RE bubble and immigration policy are hurting technology companies and force them to move jobs overseas or simply stop development due to shortage of talents.

 
At 11:18 PM, Blogger TulipsAllOverAgain said...

Some interesting thoughts after looking at the data a little harder, esp the hyperlinks to the PDF charts which show the period ending in 2004. The prior run up periods of a real estate bubble, those are shown as green schmears across the page, seem to have uniformily happened in the mid to late 1980s and especially on the coasts. Those runups ended in 1988 or a few years later in some cases, the same year, to no surprise, that our friend FannieMae was added to the Financial Services sector of the S&P 500; Fannie Mac was 4 years later, and now the Financial Services sector of the S&P is the largest of all the 10 sectors that make up the S&P 500). Is the cause of the run ups to circa 1988 due a combination of easier financing due in part to the markets FNM and FMAC created and also due to the creation of formed homes due to the baby boomers forming households? Those prior booms were when I'd suspect that the baby boomers were forming their own homes and were entering into their higher earnigs years. Or that phenom together with the yoking of humans and technology to drive unprecedented gains in productivity which lead to rapid productivity gains and higher wages. What fundamentals are currently changing so quickly as to justify the recent boom? Immigration? Is chinese produced clothing so cheap that we can devote a significant amount of our wages to housing? Of have FNM and FreddieMac creating an even larger monster?

What seems to be clear is that a bubble is defined as an unsustainable run up in prices where there's no similar run up in other fundamentals.

To really understand these two different bubble periods (then in 1988) and their outcomes (in 2005), we have to know what is fundamentally different about them. Is it just the 360 EZ-Mortgage-Payments (er, 720 maybe-not-so-EZ-ARM-IO-Negative-Equity-Mortgage-Payments which were present to such a great extent, if at all. And what will the impact be, if you had a 20% down and a payment tied to a fixed interest rate, it would be much easier to stay living in your house and wait it out. Now, with no down adjustables and i/o, there could well be a much bloodier herd lying at the bottom of the cliff.

I know there are others on this board who experienced the 1988 boom period (where busts were attributed to local economic conditions, e.g., the aerospace industry getting wiped out of Southern California, etc.), and the one now, where it seems like most of the people of this great country actually live. I only experienced the one now. Could you share with us some of the differences in the fundamentals?

Comparing the fundamentals that drove both periods, and their consequent leveling off or busting, is central to this board's theme.

History never repeats itself. But it often rhymes. What's going on here? Is history really a haiku?

 
At 11:23 PM, Blogger Ben Jones said...

Rob,
Great find.
(little is known as yet about the effects these credit-market changes might have on the dynamics of boom-bust cycles, making them promising areas for future research)

Guinea pigs, anyone?

 
At 11:28 PM, Blogger Ben Jones said...

Tulips.
Great questions, thanks.

 
At 5:05 AM, Anonymous semper fubar said...

With a traditional mortgage at today's rates, a $1.5M home means an outlay of almost $10K a month, plus another $1K a month in lost income from the $300K 20% down payment. That's $11K a month or $132K a year.

Does this number include the RE taxes too? In my area, taxes on a new $1M - $1.5M house are in the range of $18k -$20k/ year. I've seen some that are upwards of $40k/year (for a 10,000 sf mega-McMansion). Try adding THAT to your mortgage payment every month! No way to re-finance your way out of that puppy. Ouch.

 
At 6:21 AM, Anonymous BoyInTheBubble said...

richierich, I hope you didn't miss my point. I was NOT arguing that $1.5 for McMansions in Union County, NC was reasonable.

There are enough banking/executive jobs in Charlotte that it's not uncommon to have a two-earner family bringing home $250k+/yr. If they roll a few hundred grand of equity from a previous house, sure they can afford seven figures. But they have much better options than a 25-mile commute on surface roads, which is the only place their high-paying jobs could be.

 
At 7:03 AM, Anonymous Anonymous said...

This is absolutely amazing... especially the part about the ARMs... i believe just 1 year ago Greenspan was praising the flexibility of them... anyway... as i said before, Greenspan will spin his way out of this... he's a pro... this is nothing to the old maestro... he will just continue to raise rates by a 1/4-point til the end of the year... and then he will say some things about the housing market, again noting how some local markets fall... just as a CYA thing... and then in january, he retires to award speeches and book tours... it's a done deal... greespan will not be pinned down to this housing bubble...

 
At 7:27 AM, Anonymous boulderbo said...

Just a quick view from inside the mortgage lending arena. It's common knowledge that the majority of the borrowers are looking for either interest only or "pay-option" (read neg am)arms. I had a rep from Countrywide contact me to tout a great new program for their brokers. If we can stick the customer for a three year pre-payment penalty, they will pay us 3.5% of the loan "on the back". Talk about setting someone up for a fall, not only will the customer be in distress on the payment, but they won't be able to get out of the loan if they wanted to. The rep made it sound like it was some great marketing tool. Jeez.

 
At 7:32 AM, Anonymous Rob said...

Tulips

"Unfortunately, I think little IS known. We're in totally unchartered territory."

Absolutely we are. In every way possible, with every economic unit of measure, we are past those points of reference pertaining to the late 80's runup in prices, and additionally we have the previously unexperienced effect of this level of creative financing in housing.

What cracks me up, is that they think these curious conditions might qualify as future subjects for research as if they intend to do it in a petri dish.

 
At 7:37 AM, Anonymous Rob said...

boulderbo

I just read your post and wondered if you could comment.

A friend of mine told me that his son just used and 80/20 to buy a house in LV. It's adjustable, but I don't know what kind. But he told me that he was locked in in the sense that he could not refinance for two years. Is that possible?

 
At 8:00 AM, Anonymous richierich said...

---There are enough banking/executive jobs in Charlotte that it's not uncommon to have a two-earner family bringing home $250k+/yr. If they roll a few hundred grand of equity from a previous house, sure they can afford seven figures.---

Let's say these savvy bankers put down $500K on those $1.5M homes. The mortgage then is $1M. A 30-yr fixed at 5.85% means a monthly $5,900. Add another $2,500 for tax, fees, insurance, upkeep. Now you have a monthly of $8,400 or $100K a year.

Remember, too, that the $500K down payment is real money that isn't earning anything. If the buyer had instead chosen to simply put that money in a safe Treasury at 4.5%, it would earn $22,500 a year (and more as the years go by via compounding.) So you have to add that to the mix, giving the buyer an annual "real" cost of $122,500 to own the home.

Since these are high earners, the tax benefit and equity build would be about $20K a year for the first 5-7 years of owning the McMansion. Net/net, the cost to carry these homes is about $100K a year.

If you figure the gross household income is $250K, the rough net income (at 35% federal rate and 5% state rate) is $155K. This means these buyers would be spending 65% of their net household income on housing expenses. And this assumes they will not be spending anything on major improvements or repairs.

Seems to me these buyers would need to have a gross household income over $500K to get their housing costs down to roughly 30% of net income.

Maybe i'm missing something.

 
At 8:47 AM, Anonymous BoyInTheBubble said...

Maybe i'm missing something.

You are.

I am trying to say that:

(1) Although relatively few families can rightfully afford seven-figure houses, such people DO exist. I was around a lot of their kids growing up, and that was years ago.

(2) They have FAR better options than living so far away from decent jobs, schools, etc.

Some of these folks have so much money precisely BECAUSE they have jobs at banks that have ridden the bubble for so long.

 
At 8:57 AM, Anonymous Anonymous said...

rob,

most 80/20 financing is done with a first mortgage with 2/28 terms (fixed first two years then becomes adjustable) and an onerous fixed second (8-12%). depending on the terms received from the lender, he may or may not have a prepayment penalty, he may be referring to the fixed period as being "locked" or both may be true.

 
At 9:09 AM, Anonymous Anonymous said...

"To get their housing costs down to roughly 30% of net income."

Isn't the guideline 30% of GROSS income, not net?

If it were net, I'd never be able to afford a home, even after a 30% decline in prices. I bring home $3600 net per month (even though I make $7100 gross per month).

Health insurance, FICA tax, Medicare tax, 401k savings eat up 50% of my salary! And to top it all off I get no gov program aid, since I'm not considered "poor."

So even if homes in my area drop from $450K down to $300K...I still would not be able to own.

 
At 9:11 AM, Anonymous Anonymous said...

Instead of investing in technologies that creates new fortune or research that finds better ways to cure or treat diseases, most investment now goes into the zero-sum game of RE market. In the next 3 to 15 years, the majority of 77 million boomers will retire and we're losing precious time not putting enough money to take care of that problem.


Can't the FED do a better job of making sure the easy credit goes into research and technology development instead of RE bubble?

 
At 9:18 AM, Blogger desi dude said...

Anon 9:11

Lots of people have commented and I agree that FED can only make the CREDIT available and cheap. IT cant direct it to a particular industry or asset class.

 
At 10:14 AM, Blogger deb said...

boulderbo,

what's the typical prepayment penalty these days? do all these new fangled products have prepayment penalties?

 
At 11:01 AM, Anonymous accountantboy said...

---
---Isn't the guideline 30% of GROSS income, not net?
If it were net, I'd never be able to afford a home---

I don't know what the guideline is...but it SHOULD be 30% of NET income.

Figuring out a monthly budget based on gross income makes no sense. You don't spend your gross income, you spend your net income.

Let's say you make $100K gross. If you are spending 30% of your gross income on housing, then you are likely spending over 50% of your NET income on housing depending on what state you live in.

The way prices have run up, buyers today are using creative finance to bring down the monthly. But they are fooling themselves. Just because they don't feel the pain right now doesn't mean they aren't setting themselves up for a negative surprise a few years hence.

There are two ways to look at money: the P/L and the balance sheet. Interest-only loans, short-term ARMs, etc., make the P/L look OK but throws all the bad stuff onto the balance sheet. Without continued asset inflation, this balance sheet deterioration will prove costly in the longer run.

 
At 11:11 AM, Blogger deb said...

When selling homes in the early 90's we used to use 28% of gross as a guide for max TOTAL housing costs (PITI + dues, etc). Then, some more agressive programs could take borrowers up to 33%. Now, I understand you can do just about anything. Even "stated income" loans, for those who prefer not to try to document how much they say they make. I love the new taxpayer funded programs to help people who don't have tax returns. Now why on earth should we taxpayers fund a program designed to help tax cheats???

It WAS always based on gross though.

 
At 11:47 AM, Anonymous BoyInTheBubble said...

You don't spend your gross income, you spend your net income.

But you deduct mortgage interest against your gross.

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

---
---But you deduct mortgage interest against your gross.---

Fine. Then just use net housing costs against net income. The whole point of the exercise is to determine what the real costs are. It's one thing for a company to play earnings games in the stock market. But for an individual, you need real numbers.

 
At 1:59 PM, Anonymous Anonymous said...

desi dude said...
Lots of people have commented and I agree that FED can only make the CREDIT available and cheap. IT cant direct it to a particular industry or asset class.


True but the federal government can use taxation policy to influence investment allocations.

The federal government should immediately repeal the mortgage interest tax deduction and the 500K capital gains exemption for residential RE.

In a recent article, the Economist pointed out that such distorting tax policy has led to the misallocation of over one trillion dollars (10% of US GDP) in excessive RE investments instead of productive investments.

 
At 4:16 PM, Anonymous Rob said...

Anon 1:59

"In a recent article, the Economist pointed out that such distorting tax policy has led to the misallocation of over one trillion dollars (10% of US GDP) in excessive RE investments instead of productive investments."

Excellent point. I am a small manufacturer, and although I have reinvested profits in maintaining updated equipment, I wonder how much good it has done. I have many times over the last three or four years, as more and more of my business moves to China and Mexico, wondered if I would be better off dumping the machinery, letting everybody go, and flip houses for a living.

I wonder how many have done just that, In San Diego, there is about 1/10 the number of companies that do what I do. The US is transferring its industrial soul to China and elswhere, meanwhile they loan us the money to buy the nooose that we put around our own neck.

 
At 5:15 AM, Anonymous Anonymous said...

13 May 2005
I don't see dates on any of these posts, only time. Anyway, I think you folks are assuming a bubble simply because we have been trained to think everything that goes up has to come down. RE has appreciated globally; U.K RE has aprreciated over 200%, AUS over 140% and USA comes with a national average of 70% over the last 6 years. I think we have a lot more left before this slows down. Historically, we had the stock market providing better returns (10% year over year) and now that market has been completely decimated and its going to be a while before it can even get close to that kind of returns agani. Though the NASDAQ is at 2000 now, its still up 400% from Jan 1, 1990. How come no one is complaining about that bubble? Compared to that RE is probably up only 100% and its a far more tangible asset and you get to live in it too.
- REM

 

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