Oddly enough I find myself back in the position of warning that the housing market may be heading to a terrible crash in the near-future. The bubble mentality has not changed at all and appears to be restarting in the very places where the bubbles were the worst. This is probably because people got used to unaffordable prices and think that a drop from unaffordable to just really, really expensive is a buying opportunity. Meanwhile government and the real estate industry are trying to “reignite” the market — hoping that starting another bubble will put off the reckoning.
People still think that what we are going through a temporary “correction” and that real estate prices are going to “go back up,” that houses are “cheap” now, that they should “snap them up” before they are “priced out.” They still think real estate is the path to wealth, instead of somewhat of a burden that should only be undertaken under certain circumstances. Namely, when you plan to live there for a long, long time, and you’ll pay less (including closing costs, taxes, insurance, maintenance, possible price depreciation, etc.) than rent.
Here’s what I am talking about. Combine this,
As of March 1, investors can now buy 10 homes (up from four) with Fannie Mae-backed mortgages. That’s also stimulating demand.
… the ad offered a mouthwatering menu of claims on “How to cash in on the biggest real estate liquidation sale in our entire United States history” and “how to maximize your profit with lucrative foreclosures.”
Option ARM rates are going to be recasting soon and in increasing numbers. That’s the magic moment when people can no longer make minimum payments, when they can longer make interest-only or neg-amortization payments.
When that magic moment comes, all of those people are going to look at how high their now unaffordable mortgage payments are. Then they’ll look at how much their house is actually worth relative to how much though owe. Then, maybe, they’ll try one of the various initiatives to modify their mortgage terms. And then, quite likely, they’ll jut walk away. [. . .] as the chart tells us, hasn’t even really started yet.
What that chart shows is that the foreclosure problem is about to get a lot worse. Two more huge waves of “resets” are coming. Many, many, many more homes are about to reach a point of unaffordability for a lot of their owners, one way or another those homes will also be for sale, on top of the huge inventory that already sits unsold, and this will drive prices down even further, which will trigger even more problems.
Here is what I am saying: As long as a house is considered an “investment” instead of a place to live for a long time we will continue to be in a world of hurt. Real estate does not always go up.
Here is why prices can’t go up any time soon: There is a huge inventory of unsold houses. The houses that were built in the last decade are too big for regular people to be able to afford to heat and cool — and energy prices are going up. The water for the lawns will cost more and more. The gas to get to the malls and any jobs that might exist (good luck) will cost more and more. The “boomers” are retiring and selling their houses. The median price in many areas is still way above affordability by a medium-income family. You won’t get sufficient “positive cash flow” over your payments from the rent you’ll receive if you are renting the house.
The psychology of this is just like the stock market bubble. Things won’t get better until the bubble mentality of “it always goes up” is shaken out of people. Like I said the other day
In 1999/2000 I had a bunch of stock in a dot com. It made its way up to $35 a share. When it fell to $30 then $25 then $20 I held on because it had just been $35. When it hit $12 I thought it was really cheap but when it hit $.50 I thought that was too high. It landed at $.05 but then the company went out of business.
Think about the psychology of this. When it fell to $12 I thought it was cheap because of how high it had been but when it hit 50 cents a share I thought it was too expensive because I had left the past behind and I could finally see where it was GOING. And that is where it went.
Unemployment in my area is 11.2% and people are “snapping up” houses that are “cheap” at $580,000 because they were at $850,000 a year or two ago. But the median income here can’t support that. It couldn’t even support $350,000 before unemployment went up.
Here’s the thing. After the stock market crash the Fed intentionally created the housing bubble to prop up the economy for a few more years. Now the consequences have arrived. If you are thinking of buying a house as an “investment” ask yourself who is going to buy it from you at a higher price, and how they are going to get that money. Will that housing demand come from a healthy job market in which people are getting raises?
Don’t bet on it.
There is an old saying: If something is unsustainable it can’t be sustained. Our economy is starting, just starting to show us what happens when you continue unsustainable practices to their conclusion.
The day will come when instead of habitually saying, “How can I make money off of this” as things happen, they will say, “Is this really sustainable?” Unfortunately we are only at the very beginning of the kind of pain that is going to teach us as a society that this is the correct way to evaluate what appear to be opportunities.
Let me explain:
We have learned that it is a good idea to store explosives in special bunkers with thick, concrete walls. Think about how we learned that it is important to require this.
We have learned about clean, safe drinking water. Think about how we learned that this is a good practice. We have learned to build sewer systems instead of dumping bedpans into the street. Yes, we used to do that and now we don’t. Think about how we learned not to. Along the same lines we have largely learned to wash our hands after we go to the bathroom and before we eat. Think about how we learned that this is a good practice.
We have set up building codes that prevent fires and collapses from earthquakes. At least in California we have. In other parts of the country they don’t require buildings to be earthquake-safe. We do, they will. Think about why we do and they don’t but will. Think about why we have fire codes for buildings across the country.
Are you getting my drift? These are things that people didn’t know to do, but now they do know. But people seem to have to go through terrible, devastating, tragic shocks before they learn. And finally we learn, and routinize safe practices. We had been through severe economic shocks and then the Great Depression and there were some things we as a people thought we had learned. Think about how bad the depression was and the things that we set up to try to prevent it from happening again: regulations, oversight, a strengthened democracy with citizen control of public resources, strong unions to serve as a counterbalance to corporate power, high taxes on the rich and corporations so income would be more fairly redistributed and the benefits of our system shared widely — only to gradually let most of that slip away. So the control of our country’s decision-making had reverted back to the wealthy and predatory capitalism was reinstated. We, the People were harvested for every last dollar and hour of labor and when we were finally tapped out the economy had to collapse.
There is every sign that this economic collapse could be worse that any before it.
So, like I said, the day will come when people look at events and instead of saying, “How can I make money off of this” they will say, “Is this really sustainable?” But I fear that we are going to have to reach the bottom before we learn this.
Hale "Bonddad" Stewart: The Housing Market Is Nowhere Near Bottom.
Go see his chart of housing prices, to see how far prices have yet to fall.
A house near us was offered at $800,000, after several months only one offer came in for $500,000, and they accepted it. But all I can think of is some sucker just spent $500K for a 3 bedroom house that is going to be worth about $300K next year. Another in our area, asking $750K, sold at $450K. Still way too high.
The bloggers were calling it a few years ago, talking about how this was a bubble, and that it would lead to a dramatic collapse. The professionals weren’t seeing it. The lenders were acting like prices alway go up. (Remember the same thinking with the stock collapse?)
And now here we are. Housing in ‘deepest, most rapid’ decline since Great Depression,
“Housing is in its “deepest, most rapid downswing since the Great Depression,” the chief economist for the National Association of Home Builders said Tuesday, and the downward momentum on housing prices appears to be accelerating.
The NAHB’s latest forecast calls for new-home sales to drop 22% this year, bringing sales 55% under the peak reached in late 2005. Housing starts are predicted to tumble 31% in 2008, putting starts 60% off their high of three years ago. “
And this is just the beginning. Prices always revert to the mean, and the mean is going to be mean.
If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision’s proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss.
That’s fine, but what happens if house prices fall further? I didn’t hear this scenario mentioned in Market Place’s discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal.
Answer – if prices fall further, the taxpayers get to hand even more dollars to the banks. Republicans bail out big business and let the rest of us pay for it. Always. The branding is that Republicans are anti-government and fiscally responsible, but it’s just words. Look at what they do, not what they say. They get into office, destroy the government, destroy small businesses, and hand all of our tax dollars to their cronies. Did I leave out the part about getting rid of all oversight (regulation and law enforcement) so the big corporations can rob us blind?
Government buying bad mortgages? Great, just great.
New home sales posted the biggest drop on record in 2007, according to the government’s latest look at the battered housing market, as a year that saw a meltdown in the mortgage market and a drop in home values ended with yet more signs of weakness.
December sales came in at an annual rate of 604,000, the Census Bureau report showed, down from 634,000 in November, which was also revised lower.
The reading was well below the consensus forecast of 645,000, according to economists surveyed by Briefing.com.
. . . No bottom yet Adam York, an economist with Wachovia, said the report confirms fears that the housing market won’t bounce back anytime soon. “We’re expecting sales to decline into at least mid-2008,” he said. “We think housing still has a long way to go.” [emphasis added.
What is there to add to that? I keep hearing that “we’re at a bottom.” I got yer bottom, right here.
There is a discussion over at Calculated Risk on whether it is “smart” to just walk away from a house that is worth less than you owe. Many states allow you to do that, without owing the difference. In those states, giving the house back pays the loan in full if it is a first mortgage. (Yes, it ruins your credit rating, but you could save hundreds of thousands of dollars.)
What about the moral question? Aside from whether it is smart or not, is it moral? I wonder if a better question is, when dealing with a big corporation, should you ask what the corporation would do if the shoe was on the other foot? I’m thinking about corporations that use the bankruptcy laws to get rid of union contracts and pension obligations, and that always do the “smart” thing at the expense of the employees, customers, public and even shareholders…
What do you think? Especially our conservative commenters?
[. . .]Like the real estate industry in general, banks believe and tell their customers that home values never go down. Their internal models are predicated on this assumption. Everything communicated to the consumer tells them that their home is a piggy bank of ever-increasing value. Withdrawing cash from the piggy bank is made as easy as possible. Consumers are given loans allowing them not to pay any interest at all and build up a balloon balance, which will assuredly be taken care of down the road by market appreciation. These option characteristics allow the banks to charge even higher points up front and stick penalty clauses into mortgages forbidding the homeowner from paying off the loan until the bank receives all fees due them.
The problems of the housing bubble are catching up to us. The real estate crash has started, bringing big losses to the big financial firms — over $100 BILLION in write-downs so far!
And in the past few weeks the stock market has been catching on that things are not so great anymore. But today – with markets closed in the U.S. in honor of Martin Luther King Day – stocks have been plunging around the world. Markets in Asia down as much as 7%, even more. Europe as well. Canada down.
Dow futures are down dramatically – 540 points, more than 4% – which could mean a very bad day tomorrow – or not. Stocks Plunge Worldwide on Fears of a U.S. Recession – New York Times,
“There is indeed some panic,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “What we’re seeing, in Europe and Asia, is that the markets are pricing in a recession.”
The sell-off was evenly distributed from West to East, with indexes plunging in London, Paris, Frankfurt, Tokyo, Hong Kong, Seoul and Bombay. The Frankfurt Stock Exchange’s Dax index plummeted 7.2 percent, its steepest one-day decline since Sept. 11, 2001. The 7.4 percent drop in Bombay’s Sensex index was the second-worst single-day tumble in its history.
Remember what I said about money market funds. Make sure that your money is in FEDERALLY INSURED ACCOUNTS.
Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.
We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit — and a sign that the market had been pumped up beyond reason.
. . .But at the time, a lot of people thought we had sold too early. To stay on course, I adopted a personal anthem. It was a Public Enemy song that hit big in 1988 during the previous real estate run-up: “Don’t Believe the Hype.”
Sold too early. And now they’re saying “We’re at the bottom.” Right.
So far we have been hearing about a “problem” with “subprime” mortgages that went to people with bad credit. Then we heard about problems with “adjustable” mortgages where the payments go up after a period of time and mortgages with no down payments and mortgages where the borrower didn’t have to verify how much income they really had. You can readily see where there could be problems with all of those.
My prediction for next year is that the problem will spread to regular mortgages given to regular people with good credit. The reason I think this will happen is that I think housing prices are going to fall quite a bit. If prices go to where they should be according to historical norms, or according to the historic ratio between rents and prices,or according to what always happens when bubbles pop, then they are going to fall as much as 40-50%. Maybe even more. (And never mind that the “boomers” are starting to retire and will not need the houses many of them have further increasing inventory and decreasing demand…)
So next year we’re going to see a LOT of regular people with regular mortgages go “underwater” — meaning they will owe a lot more than the current market price of their houses. In many states the regulations allow people to get out of their mortgages by giving the house to the lender and not have to make up the difference if the mortgage is for more than the house can sell for. And many will do exactly that. (Which will even further increase inventory and put pressure on prices.)
So next year I predict the credit crisis is going to get a LOT worse.
A bulletin arrived in my e-mail this morning with the headline, “U.S. new-home sales fall more significantly than forecast in November” All I could think to say was “NOT”
No, everyone who actually learns about what is going on with housing is surprised that ANY new homes were sold, and that ANYone is stupid enough to buy ANY house until the price reverts to the mean. This is a popping bubble, people. If you buy a house now it will be worth a third less in two years. ANY house! Remember how many stocks went to zero after being “golden” for so long? This is what HAPPENS when bubbles pop. DUH!
Sorry. U.S. Nov. new-home sales fall 9% to 647,000 pace – MarketWatch
Sales of new U.S. homes fell by a more-than-expected 9% in November to a seasonally adjusted annual rate of 647,000, the Commerce Department reported Friday. Economists surveyed by MarketWatch were expecting new home sales to drop to a seasonally adjusted annual rate of 710,000 in November. Meanwhile, October’s sales rate was revised downward, to rise by 711,000, or 1.7%. They were previously estimated to have risen to a seasonally adjusted annual rate of 728,000. In the past year, sales of new U.S. homes are down 34.4% nationwide.