Today’s Housing Bubble Post – Back To Issuing Warnings

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.

With this, Some of Us Still Think They Can Get Rich Quick from the Real Estate Bubble,

… 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.”

And this:

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.
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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.

Today’s Housing Bubble Post — When Will Prices Stabilize?

I’m hearing a lot of talk about plans to “stabilize” or “prop up” housing prices. Plans include cutting interest rates, providing tax credits, etc. in order to “keep prices from dropping too far.”
Here is a news flash: after a speculative bubble prices always revert to the mean. You can’t stabilize prices any other way except by letting them fall until they are back where they should be again.
Housing prices will “reach a bottom” and “stabilize” when the following occur:
Prices will revert to the mean. After a speculative bubble prices always revert to the mean. This is another way of saying they go back to where they should be. When there was a bubble in tulip bulbs prices went back to where they should be, which was not much above zero. Remember “dot com” stocks? They fell to reflect the actual value of the companies. Many of those companies weren’t worth anything.
Prices will stabilize when supply does not exceed demand. Currently there is a HUGE inventory of unsold, foreclosed, newly-built, unfinished or whatever houses on the market. There are speculators still sitting on two, three and more houses. And there is another supply of people waiting for a “better time” to sell. At the same time there is almost no demand, because people understand that prices are falling, and they will lose their future if they buy a house at these inflated prices. AND lenders are starting to want to know if the buyer can pay back the loan, which means fewer loans for buying houses. (Especially if they start getting honest appraisals again!)
Prices will stabilize when the price of a house reflects the local rents people are paying. That is when it makes sense for a landlord to buy a property. when they can make money on the rent.
Prices will stabilize when the average-priced house in the area is affordable by the average-income person in the area.
Prices will fall to the point where houses are worth what they are worth when purchased for what they are meant for. This means that a psychological change has to occur and people stop thinking of a house as an “investment” or a savings account, and merely as a place to live.
A house is a place to live. That is what a house is. When everyone involved comes to understand a house as a place to live housing prices will stabilize. Part of that understanding involves understanding that people should never pay more than 25-28% of their income on housing expenses. (That’s mortgage payment, insurance and property taxes added together. In some regions you should add heating and cooling costs to that.)
The bad news is that this means prices in many areas still have a long, long way to fall. In the San Francisco Bay Area, for example, two bedroom houses in bad neighborhoods are still being offered for $500,000. This means a $100,000 down payment, and monthly payments of $2400 PLUS insurance PLUS maybe $500 a month in property taxes. This means you have to have $100,000 in the bank and an income of more than $12,000 a MONTH to be able to buy a two bedroom house in a bad neighborhood. And this means that prices have a long, long way to fall.

The Housing Market’s Double Bubble: The Big One Still Has Yet To Pop

Look what the Republicans have done to our economy by following their core “trickle down” economic ideology, which really means borrow and spend. They have run up a massive debt which combined with no oversight, a near total removal of regulations on corporate conduct, and watched and let Neil Bush run a savings and loan (oh, sorry, that was that other Bush presidency — when S&L owners and Republican campaign contributors robbed us blind and bribed Senators like John McCain and then got a massive government bailout.)
We have all been hearing a lot about housing prices falling, and about the effect housing prices have on the economy. The impact to date, while real, is actually overstated. Why? Well, housing markets and their impact are the turtle of economics, they happen very very slowly. Prices have to fall and people have to sell, when they sell they, if they get less than they expected, may not spend as much as they would have if they had reaped a huge profit.
Of course, the lack of higher equity is hurting those home equity lines people were tapping like McCain at an open bar. But ask yourself, honestly, how many people do you actually know who have either been forced to sell or have sold and not made a profit? Not that many — yet. People are still holding out.
Unquestionably the economy is slowing. Consumer debt is massive, companies are cutting jobs, inflation is rising, unemployment is a full percentage point ABOVE where it was a year ago, and with a work force of 200 million plus, that’s 2,000,000 newly unemployed Americans.

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Today’s Housing Bubble Post — Home Prices Falling At Record Rate

Home prices fell at record pace in first quarter,

Prices of single-family homes plunged a record 14.1 percent in the first quarter from a year earlier, marking a pace five times faster than the last housing recession, according to the Standard & Poor’s/Case Shiller national home price index reported on Tuesday.
. . . Falling home prices have become the scourge of the housing market that is seeing its worst downturn since the 1930s. Home values since last year have been dropping below balances owed on many mortgages, leaving borrowers with no equity and more likely to succumb to foreclosure.

And this is before the ripple effects of recession hit. They will ripple out from this to construction, automobiles, etc. And then the resulting job cuts will ripple back to the housing market. The fallout from the housing bubble’s bursting is still only just beginning.

Today’s Housing Bubble Post — Here We Go Again!

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Haven’t had enough of foreclosures and financial crises? Don’t worry, there’s more to come. This pretty much guarantees it: Fannie Mae eases down payment rules,

Fannie Mae said Friday it is easing rules on down payments on home mortgages, replacing a policy that required higher payments in markets where home prices are declining.

Today’s Housing Bubble Post — How Low?

This morning I wrote,

We’ll see a bottom when the average person can afford to buy an average house – and wants to. We are a long, long, long way from that now — and keep in mind that we’re about to see a big reduction in what the average person can afford as the recession takes hold.

CNN’s Money.com today: No brakes on housing prices8

As housing price losses extend, he said, the fall-off in demand for homes will deepen. And Schiff expects to see a national price decline of 30% – and by as much as 50% in the worst hit markets.

50%? In my area a 50% drop from the peak would bring houses down to maybe $400K. Will the average person around here be able to afford a $400K house a year from now, after a year of recession and after a tightening of loan standards? Not a chance. The price runup here saw a tripling to quadrupling of prices. And then they build thousands and thousands of houses in areas surrounding the SF Bay. So prices will have to fall by more than 50% – and the recession will have to end, and loans have to be available, and gas prices will have to fall a lot so commuters can drive to these houses – before houses will start selling again. Sorry for the bad news.
Yes, I do understand the cascading implications of that. It means that pretty much everyone who bought a house (or borrowed money on their home equity) since about 2001 – at least in this area – is going to be owing more on their mortgage than the house is worth. In many cases they will owe a LOT more. And they will decide to either be “good consumers” and sacrifice to protect the bank’s profits by making payments for 30 years on a house that is worth hundreds of thousands less than they owe (while their neighbors move in to the foreclosed house next door with payments that are less than half what they are paying), or they will make an economic decision to “walk away,” giving the house back to the bank, and make a fresh start. What do you think most people will do?

Today’s Housing Bubble Post — Prices Down 12.7% Feb. Year Over Year

It’s just getting started and home prices dropped 12.7% in February from the previous year. Home prices fall record 12.7% in past year, Case-Shiller say,

The decline in U.S. home prices quickened in February, with prices down a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. “There is no sign of a bottom in the numbers,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. Prices in 19 of the 20 cities have fallen over the past year, with prices in all 20 cities falling month-to-month for six straight months. The biggest declines were in Las Vegas and Miami, with declines of more than 20% in the past year. Prices in Charlotte, N.C., are up 1.5%.

Remember, this is before the impact of a recession on housing sales.
When will we see a “bottom?” (The point where prices stop falling.) We’re nowhere near a bottom. We’ll see a bottom when the average person can afford to buy an average house – and wants to. We are a long, long, long way from that now — and keep in mind that we’re about to see a big reduction in what the average person can afford as the recession takes hold.

Today’s Housing Bubble Post — Sales Drop To Lowest Level In 16 1/2 Years

New home sales plunge to lowest level in 16 1/2 years,

Sales of new homes plunged in March to the slowest pace in 16 1/2 years as a two-year housing downturn extended into the start of another spring sales season. The median price of a new home in March compared to a year ago fell at the fastest clip in 38 years.
. . . The median price of a home sold in March dropped by 13.3 percent compared with March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

This made me laugh out loud:

Some analysts said they believe the slide in sales may be close to ending although they said any rebound is likely to be slow and anemic with prices continuing to fall, possibly until this time next year.

Listen, the problems we have seen so far have come about BEFORE the economic slowdown. Think about what that means. These foreclosures and people otherwise needing to sell their houses, etc., are not the result of a stressed economy. And we’re just beginning to have a stressed economy. So we haven’t even started to see the usual problems that come from layoffs, etc. So no, I don’t think we are at a “bottom.” Sheesh.

Today’s Housing Bubble Post – Foreclosures Up 57%

Foreclosures jump 57 percent in last 12 months,

Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.

This brings up something I have been thinking about. So many people are “looking for the bottom.” (Signs the bottom is behind us?) They think things are “leveling off.” Well guess what, all the problems, all the foreclosures, all the credit card debt, all developed before the economic downturn began. And now we are entering a recession. No question. And a recession means that people are going to lose jobs, companies are going to go under, etc. And those people and companies are not going to be able to make their payments.
So no, we are not looking at a “bottom.” We’re looking at the beginning.

Today’s Housing Bubble Post – Nowhere Near A Bottom

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.

Today’s Housing Bubble Post – “Deepest decline since the Great Depression”

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.