Fall PMI Economic & Real Estate Trends Report

Many of you will know the initials PMI, even more so if you've had to take PMI on a mortgage. PMI Group Inc. is a one of the largest mortgage insurance companies around.

The Fall 2005 PMI Economic and Real Estate Trends Report is out, and boy is it a doozy!

PMI Economic and Real Estate Trends Fall 2005

I'm amazed at how quickly sentiment is changing. This report doesn't hold back any punches, it paints a bleak picture for the real estate market.

Here is some data that is sure to have you clicking..

NJ is in the Top 11 riskiest markets.

Edison, NJ - Overvalued 27.4 %
Newark/Union, NJ - Overvalued 25.6%
NY/White Plains/Wayne, NJ-NY - Overvalued 16.3%

Caveat Emptor,
Grim

Washington Falling

Well this is certainly a bittersweet moment for the housing bears. This is most certainly the first in a long string of we-told-you-so's. Washington, one of the hottest real estate markets in the Northeast is softening, and even more importantly, it's getting media coverage. Now, while I'm sure some will gloat in the news, realize that if the real estate market plays a significant role in our economy and no one really knows the extent of the damage a crash will cause. So while we all want a return to normalcy in the RE market, I'm not so sure we're going to like the pain that is going to accompany it. Even with that, I still believe the U.S. needs to suck-it-up and take the medicine.

Washington home market softens as investors sell

In the Washington D.C. area, once one of the strongest residential real estate markets, things are going soft, and that's becoming hard on home sellers and some home builders.
...
Too many houses are for sale, experts said. Speculators -- who last year bought homes, not to live in, but to sell or "flip" within a year -- are trying to cash in on the price increases now. "For Sale" signs are sprouting on lawns and depressing prices throughout the market, analysts and Realtors said.
...
Would-be landlords have discovered that they are not able to achieve rents high enough to cover their mortgages. she said.

"The rents aren't high enough to cover their mortgage so people are selling" she said.
...
"Things are sitting longer, and I think what's happened is that the buyers have kind of rebelled," she said. "They're not willing to pay these kinds of prices."

Caveat Emptor,
Grim

Mortgage Rates Tick Up Again

I seem to have missed posting the weekly mortgage update yesterday.

Weekly Home Mortgage Rates

Mortgage rates ticked upwards again this week, rising rather steadily and steeply. I'm expecting further quarter point rate increases by the fed on November 1st, December 14th, and January 31st at the minimum. The next fed meeting after these will be on March 28th, however, Greenspan will not be presiding over that meeting.. My opinion on where rates will move from there is based on who Bush appoints to the position..

Three quarter point rate increases three months will put significant upward pressure on mortgage rates. I can't imagine rates will stay low unless foreign entities significantly step up bond purchases to match.

Caveat Emptor,
Grim

N.J. Jobless Rate Up

Some news on the job situation in NJ across the AP wire earlier in the day..

Jobless rate in N.J. up a bit in September

The state's unemployment rate was up by a tenth of a percentage point to 4.3 percent in September, the highest level it has hit since February.

It was the fourth straight month the rate has risen by that much, according to state data released Tuesday.

...

"New Jersey's economy showed some strength in September, although strong job growth has not been as consistent as we hoped to have this year," Labor Commissioner A.J. Sabath said Tuesday.

-Grim

Weekly Inventory Update

It's Wednesday again. Here are the inventory updates for this week. I've also added a new statistic, the change over the last 'month' to illustrate any trends.

GSMLS
Bergen, Essex, Hudson, Morris, Passaic, Somerset, Sussex, Union, Warren
10/12 - 12646
10/19 - 12854
1.6% Weekly Increase

9/19 - 12089
10/19 -12854
6.3% Monthly Increase

NJMLS
Bergen, Essex, Hudson, Passaic
10/12 - 5675
10/19 - 5738
1.1% Weekly Increase

9/19 - 5239
10/19 - 5738
9.5% Monthly Increase

-Grim

Investors flipping over second homes

The last part of the series..

Investors flipping over second homes

Prashant and Dave could have done some good by illustrating some of the current risks inherent in real estate speculation, especially today.. Unfortunately, I think they have done more harm than good by justifying the current run up in prices and almost entirely neglecting to discuss the downside risks of a reduction in value..

I read a quote like this:

"I don't see how you can lose money," he says. "You might not gain a lot, but I don't think you can lose, especially the way real estate is going."

And think to myself, "This guy is an idiot, he's ignoring any warning signs and is nothing but a stereotypical speculator looking for huge short term gains".. However, I'm sure there are plenty of people that see a quote like that in print and see it as a rationalization or even use it as support for making a dumb decision..

These articles all seem to start on the same foot, Joe Speculator making a windfall. They then move on lightly tread across some minor risk, then finish up by saying it really can't happen here.

In this case, we've got the windfall, we talk about some minor risk, point to Miami and South Florida as risky areas, and end with a note on builder non-speculation clauses in NJ (Can happen there, but certainly not here).

Prashant and Dave, sorry if I'm being hard on you guys, I do feel that you've done good work, but you've got to understand our standpoint. We've seen nothing but cheerleading from the media filled with anecdotes about easy money and little risk. The conditions that fueled the boom are radically shifting, and new buyers are facing significant financial risks, and it seems that the media is more concerned with bragging about easy money. New and first time buyers have no where to look for real market information. Agents, brokers, builders, and lenders have a vested interest in the boom continuing. The media, while attempting to be neutral on the issue, seems fixated on the easy money, further fueling the problem. Nobody seems to care about the potential downside risks except possibly the Fed, and only as of very recently. This is why I have to be the bad guy, the doom-and-gloomer. I need to emphasize the downside as strongly as everyone else emphasizes the upside. If I save one new buyer from financial disaster, I'll feel my work was worthwhile.

Caveat Emptor,
Grim

Strongest Fed statement to date.

Fed President Janet Yellen, speaking at a gathering in Salt Lake City, put out the strongest warning against the housing bubble yet.

In addition to the uncertainties raised by higher energy prices, there are downside risks to economic growth relating to the housing market. This sector has been a key source of strength in the current expansion, and the concern is that, if house prices fell, the negative impact on household wealth could lead to a pullback in consumer spending. Certainly, analyses do indicate that house prices are abnormally high—that there is a "bubble" element, even accounting for factors that would support high house prices, such as low mortgage interest rates. So a reversal is certainly a possibility. Moreover, even the portion of house prices that is explained by low mortgage rates is at risk. There is a controversy about just why the rates have stayed so low. Over the past year, the Fed has raised the federal funds rate significantly. Normally, long-term interest rates also rise with increases in the expected path for the federal funds rate. But, long-term rates—such as those on 30-year fixed rate mortgages—have actually fallen over the period. This is what Chairman Greenspan has labelled a conundrum because there seems to be no convincing explanation for it. So, we can't rule out the possibility that they would rise to a more normal relationship with short-term rates. This obviously might take some of the "oomph" out of the housing market. My bottom line is that while I'm certainly not predicting anything about future house price movements, I think it's obvious that a substantial cooling off of the housing sector represents a downside risk to the outlook for growth.
(my emphasis)

Fed Bank of San Fran

I think these comments signify a real change in Fed behavior. These comments are much stronger than Greenspans 'froth' comments. While the Fed certainly can't come forward and say there is a bubble, these comments seem to be as close as you can get.

Does good ol' Al have one more 'irrational exuberance' speech left before retirement? Or did we already miss it?

Caveat Emptor,
Grim

Housing Sticker Shock

Part 3 in the Record Series on the Housing Boom/Bubble..

Housing Sticker Shock by Dave Sheingold

Another typical real estate cheerleader article. No merit at all to this. Is Dave bragging about the rapid price runups in Northern NJ just for the sake of bragging? Articles of this sort do nothing but justify the behavior of recent purchasers. Dave, thanks for telling us what we already knew, that prices have gone up astronomically with no justification at all.

This is nothing but an advertising piece on real estate.. This type of behavior is similar to why automobile manufacturers advertise so heavily. It's not to attract new buyers, which would likely be anyones first guess. It's to mitigate buyers remorse and make people feel good about their new car purchase.

Caveat Emptor,
Grim

Remember when the last big bubble burst?

Part 2 in the Record Series on the Housing Bubble by Prashant Gopal..

Remember when the last big bubble burst?

Here are some notable snippets from the article:

...

With all the enthusiasm, it's easy to forget it was only 1988 when the New Jersey market took its last hit.

"A lot of people investing in real estate are in their 30s and never saw a downturn. All they see is how much money they could have made," says Ingo Winzer, president of Local Market Monitor, a Massachusetts company that tracks housing markets.

"There really hasn't been a distressed real estate market in the U.S. in 15 years, so people think it's not going to happen again."

...

"This is not a normal marketplace," Gumbinger says. "It's fueled by cheap interest rates and the increasing availability of mortgage money. Basically, if you can breathe today, you can get a mortgage."
If interest rates go up and homeowners start defaulting on loans, lenders will tighten requirements, and fewer buyers will be able to get loans, Gumbinger says. This could increase the supply of houses on the market, while decreasing the pool of potential buyers, a combination that could force housing prices down.

And speculators, who have bought homes in historic numbers in recent years, might sell off at the first hint of trouble, accelerating a downturn, some economists warn.

...

I still think there is a slight anti-bubble/pro-boom tone to the series. While there are some warnings mixed-in, the promise of easy money still seems to gloss over any negatives. I hoped for more of a warning to consumers against overleveraging themselves, oh well. The fact that the bubble is getting serious coverage is a step in the right direction. I need to keep reminding myself that psychology doesn't change quickly, and the lure of easy money is not easily forgotten.

Caveat Emptor,
Grim

Bubblewrap?!?!?

The Northern NJ bubble made the front page of The Record this Sunday with the first in a four part series on the housing market. Writer Prashant Gopal took, what I thought, was a slightly anti-bubble stance on the issue, however, with 3 more parts to go, we'll see if Prashant is an unbiased journalist or just another real estate cheerleader.

Boom or Bubble

I only have a single comment on the article, I'll hold back until I can read the entire 4 part series..

Tkacz and other agents interviewed by The Record believe North Jersey home prices - which were up roughly 15 percent over the 12 months ended June 30 - are protected by a sort of "bubble wrap." These factors include proximity to New York City, a shortage of undeveloped land, environmental regulations that restrain development, a steady influx of immigrants and a strong, diverse job market.

This kind of argument is currently being used in every bubble market. You can say the bubble won't pop here because of the weather, because of the proximity to certain metro areas, because you think jobs are there, because of this, because of that, you can come up with 100 excuses for this area being different, but the truth of the matter is that there is a bubble.

The fact that Northern NJ is a part of the NYC metro area has always been reflected in house prices here. Go out into the midwest, why does a house 3x the size on 10x the property cost a quarter of what a home here costs? It's no secret, we've been paying a premium for a long time. All of these factors were priced-in long before the bubble and will still exist post bubble. The boom pushed our already high home prices even higher. The same article goes on to say NYC is a cooling market. Interesting, we stay hot because of our proximity to NYC, but NYC itself can cool? I don't get it.

Caveat Emptor,
Grim

Leave N.J., or go deep into debt?

Great article in the Asbury Park Press this morning..

Leave N.J., or go deep into debt?

...

But experts feared the foundation of a strong real estate market — well-paying jobs — is weakening. New Jersey, once a leader in high-wage employment in everything from pharmaceutical companies to telecommunications, is losing its grip on those jobs.

And the culprit might be the cost of living. The New Jersey Business and Industry Association showed the state has the third-highest cost of doing business when factoring in labor and energy costs and taxes. It trails Massachusetts and California.

...

New Jersey, for the first eight months of the year, added 25,200 jobs. The nation added 1.5 million jobs during that time. Since New Jersey accounts for 3 percent of the nation's labor force, it should have added 46,500 jobs so far this year.

The state has added jobs in sectors such as leisure and hospitality, which pay about $20,000 a year, less than half the average state wage of $48,402. And it hasn't kept pace with the rest of the nation in high-paying sectors. For example, the state's pharmaceutical industry in 1990 accounted for 20 percent of the industry's employment nationwide. In 2004, it accounted for 13 percent.

New Jersey's per-capita personal income, while still among the highest in the nation, hasn't kept pace with the rest of the country. It was 29 percent higher than the nation in 2000 but slipped to 26 percent above the national average in 2004.

...

"The concern is whether home buyers trading up will be able to afford the current price structure that current baby boomers are going to vacate," said Jeffrey Otteau, president of The Otteau Appraisal Group, a real estate consulting company in East Brunswick.

What would happen to home prices if interest rates go up and income growth continues to lag? For one, residents with interest-only financing won't be able to afford their mortgages, raising the specter of foreclosure."

If you want, you can paint a bleak picture from that," Otteau said.

...

Taken together, the high taxes, soaring home prices and comparatively stagnant wages paint a gloomy picture. College graduates might not make enough money to buy their first home in their home state. Residents who bought a home using unconventional financing could struggle to keep up with their mortgage payments five or 10 years from now. And baby boomers who want a smaller home that is easier to maintain might consider moving out of state — even if it means being farther away from their children and grandchildren.

...

The state's median annual household income of $61,359 in 2004 was 37 percent higher than the national average, but its median monthly housing cost of more than $1,700 was 52 percent higher than the national average, Rutgers University economist James W. Hughes said.

...

A new homeowner in Monmouth or Ocean county needs a household income of more than $100,000 a year to afford a median-priced house of $394,100. Those who don't make that much risk overextending themselves. The percentage of residents taking out unconventional mortgages with incrementally rising payments has risen sharply during the past two years, even though the average 30-year fixed mortgage rate has been near historic lows.

...

The Federal Deposit Insurance Corp. reported that 20 percent of all mortgages in New Jersey last year were interest-only loans, compared with 15 percent in New York and 11 percent in Pennsylvania. But some local mortgage brokers said that volume has grown this year.