Sunday, May 08, 2005

Prices Surge Above Economist Expectations

In little corners of the US, a there is a subtle realization that something is wrong. "The National Association of Realtors has predicted prices of existing homes in the United States will rise 5.6 percent this year."

"Average local home prices shot up 12 percent in the first three months of the year, proof that the predicted cooling of the real estate market hasn't arrived. That 12 percent uptick is ahead of the solid growth the region saw in the same period last year, when prices for existing homes rose 9 percent."

As in other areas, one bubble begets another. "Housing prices are rising faster than Lehigh Valley residents' wages, largely because of a steady influx of new homebuyers with higher incomes from costlier areas such as New York and New Jersey."

"'What we see is the local people not being able to make the move,' said Sam Ruta, of Coldwell Banker. Ruta said he held an open house last fall for a home that ultimately sold for $250,000. Nearly all the people who attended the open house hailed from New York and New Jersey. But one Lehigh Valley man came with his young son. 'He looked around and said 'I can't afford this house and I am from Palmer Township.'"

24 Comments:

At 1:17 PM, Anonymous powerofthepyramid said...

Classic pyramid-scheme behavior. Profits from bubble markets infect non-bubble markets. Non-bubble markets then get bubblicious squeezing out local buyers.

This ends when the most bubbly markets (NY, DC, Fla, Calif) turn down. When bubble-market owners can't sell, or have to sell for less, they don't have the means (or desire) to invade other less-bubbly markets.

The pyramid scheme collapses.

But as we have seen, when these pyramid schemes are in effect, they can be very powerful and very misleading.

 
At 1:40 PM, Anonymous Anonymous said...

Everyone is affected by this stupid bubble.

 
At 1:44 PM, Blogger goleta said...

I was in New Jersey last month and overheard a couple talking to a realtor about selling their house in New Jersey and moving to Allentown, a town in Lehigh Valley.
Moving from a big bubble area to a small bubble one is probably a smart move.

Houses in NJ are probably 40 or 50% overpriced and the ones in in Allentown are probably 20% overpriced . Even without the RE bubble, houses in NJ probably cost twice as much as the ones in Lehigh Valley. So the gain in selling the NJ house definitely makes up the little loss their Allentown home will have when the bubble pops.

 
At 2:00 PM, Anonymous Anonymous said...

Looks like Fox is going to make a sitcom where real estate agents are the central characters:


Hot Property

Premise: Workplace comedy about real-estate agents in Houston.

Studio: 20th Century Fox TV, Brad Grey TV

Production team: Gail Gilchriest ("My Dog Skip"), Peter Traugott ("Jake in Progress")

Cast: To Be Announced

Status: Pilot order

 
At 2:45 PM, Blogger Ben Jones said...

Speaking of RE in Houston.

"Prices flat here as housing in U.S. booms ; In 2004, rate of appreciation down 2.2%; the biggest declines were outside Loop"

http://www.chron.com/cs/CDA/ssistory.mpl/business/3172096

Happy Mothers Day!

 
At 3:15 PM, Anonymous powerpuffgirl said...

This is the first time I've seen anyone at Dataquick do a little CYA instead of just brazen cheerleading:

"DataQuick analyst John Karevoll expects appreciation of valley homes to slow from about 20 percent to the mid-teens this summer.

``That's what the real estate market does: It goes up and it goes down,'' he said. ``We do not expect prices to go down by much, not unless there is something almost cataclysmic in the economy soon.''

Hmmmm...that last sentence is almost telling. Somebody at DataQuick must realize there is another likely scenario developing aside from the hoped-for "soft-landing".

http://www.mercurynews.com/mld/mercurynews/11578741.htm

 
At 3:48 PM, Anonymous Anonymous said...

Were you people the same kinds of losers who made fun of the smart kids in school? Out of jealousy?

Because for the life of me I can't see why you would expend so much energy trying to poke holes in the american dream, and the wealth that homes create for everyone smart enough to join the wealth-building bandwagon.

Why do you people CARE if someone makes money buying a house and selling it for a profit? Isn't that capitalism? Don't you people have anything better to do than try and tear down the engine that is powering the american economy to greatness?

WHAT THE HELL IS WRONG WITH YOU PEOPLE. GET A LIFE! (to quote william shatner on saturday night live)

 
At 3:51 PM, Anonymous Anonymous said...

hahaha

"That is what the real estate market does: sometimes it goes up by 20% and sometimes it only goes up by 15%."

After 1929 it took 70 years to reach this level of idiocy again. Now the interval is down to 5 years. Guess it makes sense in a culture where the attention span is demarcated by incoming cell phone calls and commercial breaks.

 
At 4:00 PM, Anonymous Anonymous said...

Capitalism is not trading things for inflated prices. Capitalism is the creation of ASSETS which produce GOODS which are sold for a PROFIT which retire DEBT. A house is not an asset, it is a liability.

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

***

---Why do you people CARE if someone makes money buying a house and selling it for a profit? Isn't that capitalism? Don't you people have anything better to do than try and tear down the engine that is powering the american economy to greatness?---

I know this is a troll comment and the writer may or may not even believe what he writes. But since the sentiment he conveys is still fairly widespread, it's worth a response.

The best way to describe why I find the current atmosphere troubling is via a story from the dotcom days.

I was running a small biz in SF that benefitted in a tangential way from the dotcom boom. From my perch at Ground Zero, I knew the mania was unsustainable and would end in tears.

I remember a conversation I had with a colleague who ran a conference business. He was smart and jumped on the dotcom insanity in early 1998. Within a year, his tiny company had nearly 200 employees and was running about 15 successful conferences a year, all focused on e-this and e-that.

By late 1999, he was offered nearly $100M for his company. It was closely held, had very little venture backing, so he stood to realize most of that gain personally. He told me he wasn't interested in selling and that he was going to go forward with an IPO because he could get a lot more money and keep control of the company at the same time.

My company was far smaller and I was far less optimistic. Our conversation took place in early February 2000. The next week, while my colleague met with investment bankers to launch an IPO, I put my company up for sale.

I ended up selling my company for cash. Because of the Nasdaq crash in March, my colleague couldn't go public. Within a year, most of his conference business had dried up. He laid off most of his staff. By mid-2001, his company filed for bankruptcy.

I don't relate this story to pat myself on the back. But I saw this colleague turn down $100M only to have to file bankruptcy less than 18 months later.

This is what happens when you drink the Kool-Aid. Lots of homebuyers today are mistaking a once-in-a-lifetime boom with sustainability. And they are stretching mightily to get in. This too will end in tears. That is why I feel it is important to get the facts out so that at least some people won't make life-changing financial mistakes.

 
At 4:26 PM, Blogger Melody said...

1 out of 4 loans is now a liar loan
If the limited doc loans are included, it's almost 1 out of 3...

http://biz.yahoo.com/bw/050505/55960.html?.v=1

 
At 4:30 PM, Blogger Ben Jones said...

guynoir,
Thanks for your input. This blog has helped some people think the matter through; that's enough of a reason to continue.

I was in an internet startup in 98-99. I came to the conclusion that it couldn't work and got out. All those companies I worked with are gone. RE in Austin has been flat ever since.

 
At 4:42 PM, Anonymous Anonymous said...

Right on GuyNoir.

And the aggregation of all these life changing economic mistakes is going to reverberate not just for individuals in boom markets, but around the world. Our recent economy, based on unsustainable asset inflation/speculation with far too much capital in property and not enough in productive industries, is a house of cards and events outside anyone's control (terrorist event, Asian central bankers backing away from treasuries, earthquake, etc.) could send it tumbling like nothing we've ever experienced. Hell, even a slight slowing of property values or an uptick in the interest rate could bring about a hard landing recession. And all our oblivious "homeow(n)ers" may soon find their American dream quickly morphing into and American nightmare.

 
At 6:29 PM, Anonymous Anonymous said...

"But one Lehigh Valley man came with his young son. 'He looked around and said 'I can't afford this house and I am from Palmer Township.'"

I am a third generation resident of Marin County, CA, and I have now been priced out of the RE market here. My mom and dad raised four kids here in a comfortable 4 bedroom house, on a very modest middle class income. I had a great childhood. Now I can't give that same childhood to my son, even though I make a six figure salary. Bitter? You better believe it!

 
At 7:15 PM, Anonymous bob r said...

Here's another anecdote from the Dot-Com frenzy of the late 90's:

I was attending a technology investment conference in San Francisco at a large hotel. This was sponsored by a major, reputable banking concern.

One of the tech analysts was asked which Internet companies he would invest in. These were the days when Yahoo shares were going up $20 or $30 a day.

This guy, from a major investment firm, gave this answer: the future of the Internet is so unlimited that it doesn't matter which company you invest in!

I offer this as evidence that in times of mania, even intelligent, well-educated and experienced people can be stampeded into making foolish choices. I think of that guy when I hear "experts" say that this isn't a housing bubble.

 
At 7:29 PM, Anonymous Anonymous said...

Too many people forget that wealth cannot simply be willed into existence out of the void. Millions of Americans now feel wonderfully wealthy because of the huge increase in their equity.

But it's an illusion. The only way to get any real wealth out of that equity is for somebody to take on debt. Either the homeowner uses his equity as collateral and takes on debt directly or he sells out and somebody else takes the debt.

The real issue here is the mind-numbingly enormous debt load that consumers have taken on because they believe they have gained wealth in some magical way. Once a fair number of them fail to service the debt the whole great scheme will come tumbling down.

 
At 8:16 PM, Blogger Ben Jones said...

(third generation resident of Marin County)
Thanks for the comment. Good luck.

 
At 8:19 PM, Anonymous bob r said...

The real issue here is the mind-numbingly enormous debt load that consumers have taken on because they believe they have gained wealth in some magical way.

It's not just consumers. Take a look at how much debt the federal government is piling on each year.

We today have a culture of instant gratification. The concepts of thrift, saving and planning for the future have given way to the idea of i-want-it-NOW!

 
At 8:26 PM, Blogger deb said...

This comment has been removed by a blog administrator.

 
At 9:23 PM, Blogger deb said...

For those of you who have been following my number crunching about sales stats in my area, I thought you might find this interesting.

I decided to look at the appreciation with in the smaller sub areas (the San Feranado Valley MLS has 6 sub areas). The area where I sold my house is WS (west south). This tends to be the most expensive area, very desirable, low crime, good schools. From 4/04-4/05 the average price for a single family home in WS has gone from $724k to $740k. On the opposite side of the valley is EN (east north). This is the least expensive area, high crime, poor schools. The average price of a condo in EN has gone from $241k to $310k. So for a higher priced home with great fundamentals, we have 2.2% annual apprecitation. For the “affordable” condo with really lousy fundamentals, we have 29% annual appreciation.

What does it mean? I’d love to hear other’s thoughts. I think it is an indication of the really weak buyers at the bottom propping up a dying market by mortgaging their future for what they think will be their last chance to ever own a home.

 
At 10:24 PM, Blogger Ben Jones said...

Excellent Deb, thanks!

 
At 11:14 PM, Anonymous mortgagemonster said...

---What does it mean? I’d love to hear other’s thoughts.---

I think it means that the current fascination with creative finance is allowing very marginal buyers into the market. So the low end keeps advancing while the uppper end is stalling out.

I rent in Marin County, though I could easily afford to buy. But I don't want to pay more than $5K a month and the home I live in (valued at $2M) would cost me $11K net to own while the rent is only $4,500.

My landlord visited yesterday (he's a contractor) and he was telling me that the home I live in hasn't appreciated in 5 years. It was worth $2M in 2000 and it's worth $2M today. Yet humble bungalows down the hill from us have doubled in the same period. The cheapest home in town is now about $1M.

So it appears that the top end is flat as a pancake---at least around here. There are only so many buyers with that kind of dough. But at the lower end---because of all the clever financing---buyers are squeezing into $750K and $850K homes that were just $400-500K a few years ago.

The same thing is happening all over the Bay Area. My guess is that, now that the lower end around here is in the $650-$850K range, there will be very little appreciation from here on out. That $1M level is a big stopper. We've been through the ARMs, the lowering of interest rates, the interest-only's, the neg-ams. Short of 0% loans, there is nowhere left to go to goose home prices higher.

Even stretching out the duration is of little help. If you went from 30 years to 60 years, you could save about 15% on your monthly payment. But when you stretch from 60 years to 100 years, you save only about 2%.

The mortgage industry has created this monster, but I think they are just about out of tricks.

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

(Even stretching out the duration is of little help. If you went from 30 years to 60 years, you could save about 15% on your monthly payment.)

Remember too that the majority of buyers in Northern California right now are going interest-only. At some point, they are going to have to begin paying off the principal. In a typical 10/20 loan, the principal amortization is squeezed into 20 years.

The difference b/w a 20yr and a 30yr amortization period is 20%. So monthly payments rise at least 20%, assuming the interest rate stays steady. If the interest rate rises 2%, the monthly payments would increase 40% (factoring in the 20yr amortization period as well.)

 
At 7:08 AM, Blogger The Original Anon said...

"In a typical 10/20 loan, the principal amortization is squeezed into 20 years."

Of all the creative financing schemes, this one is not that abusive or particularly risky for the borrower. 10 years is a long time, and in ten years inflation will have made that 20% amortization bump very affordable. Think what salaries and prices were 10 years ago. The 10-year interest-only is better structured than the 30-year conventional if you want to even out the pain of payments over your earning lifetime (of course, the IO will cost you more and reduce your savings/equity, and on the whole it causes house prices to go up). The short-term ARMs and negative amortization loans are another story--that's just pure stupidity for both the banks and the borrowers.

 

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