Thursday, August 03, 2006

The Bubble is Real

From the Dallas News:

It hasn't burst, but the bubble is real

When it comes to bubbles, the ironies tend to emerge in hindsight.

Looking back, the book Dow 36,000 marked the top of the bubble hysteria in 2000.

For the housing bubble, the equivalent could be last year's Are You Missing the Real Estate Boom?, re-christened this year as Why the Real Estate Boom Will Not Bust – and How You Can Profit from It.

The biggest argument against labeling the housing bubble for what it is: It hasn't burst. Therefore, any who've suggested its existence must be crying wolf.

The fact is, there's a reason the bubble hasn't burst yet: Bubbles don't burst without a pinprick.

David Rosenberg, Merrill Lynch's chief economist, was the first on Wall Street to call it a bubble, in August 2004.

He predicts the pinprick will be oversupply: "That has inevitably unwound every bubble back to the tulips in the 17th century."
It's not enough to say that new and existing home inventories are at a record; that's been the case for a long time now. At 4.3 million units, the combined number of homes for sale is up nearly 40 percent from one year ago.

One year ago, as I wrote about the disturbing build in inventories, readers wrote to reassure me that buoyant sales would work to keep supply in balance.
Still convinced it's a matter of "crying wolf"?

"Just remember," Mr. Rosenberg warned, "the wolf showed up at the end of the story."


Blogger grim said...

Bank of England surprises with a 25 basis point hike to 4.75%! It was widely expected that the BoE would pause.


8/03/2006 06:23:00 AM  
Anonymous Anonymous said...

The top was when

8/03/2006 07:00:00 AM  
Anonymous Anonymous said...

Some good advice. Hopefully the husband doesn't just say, "Wow, I didn't know we could get an 80/20 loan and get a house now!"

Why you need a home down payment

Waiting until you have a sizeable down payment can save you thousands every year and provides a cushion a new homeowner might need.

By Kiplinger's Personal Finance Magazine

My wife and I just got married and we'd like to buy a house soon. We've been setting aside money for the down payment but we have quite a way to go -- we'd need about $70,000 to make a 20% down payment in our area. We're wondering whether we should just go ahead and buy a house now with no money down, or wait until we've saved the 20%?

Lenders are making it a lot easier to buy a house without the traditional 20% down payment, but you're going to pay a lot for that option. If you borrow more than 80% of the home's value, you'll usually have to pay private mortgage insurance, which protects the lender if you default on your loan. That tends to cost 0.5% to 1% of the loan value, up to $3,500 per year on a $350,000 home, or $5,000 on a $500,000 home. It's money that doesn't go toward your principal or interest and isn't tax-deductible.

Another option is to piggyback two loans. If you take out one loan for 80% of the cost and another for 20% (or for 15% and pay 5% in a down payment), you can avoid private mortgage insurance. The interest on both loans is generally tax deductible, but the rates on that second loan are quite high -- now running in the low- to mid-9% range.

If you wait to amass the 20% down payment, you can avoid these extra costs, qualify for a lower-rate loan and keep your mortgage payments much lower, which gives you a lot more flexibility in the future.

"Some couples can afford the house when they're both working, but if a kid comes along and one wants to stop working, then they have a problem," says Michael Eisenberg, a CPA and personal financial specialist in West Los Angeles, Calif. Even in his area, where starter homes cost a lot more than $350,000, he recommends that young couples "sit back, stay renting and save your money for your down payment." If your rent is reasonable and the housing market in your area has slowed, there's even less reason to rush into buying.

And in a slow housing market, it's particularly important to put down 20%, so you have some equity in case you do have to move earlier than expected.

"In the early years, you aren't building any equity with the mortgage payment," Eisenberg says. "If the market changes or your personal circumstances change and you're forced to sell, you could lose money" if you made little or no down payment. The equity in your home can also give you an extra source of cash in an emergency.

By Kimberly Lankford,

8/03/2006 07:06:00 AM  
Anonymous Anonymous said...

The Juggling act continues:

8/03/2006 07:06:00 AM  
Anonymous Anonymous said...

So with 20% down, who is buying these crapboxes for $500k?

How many first timers have $100 grand to put down?

Lots of sleepless nights across the coutnry.

8/03/2006 07:08:00 AM  
Blogger thatbigwindow said...

How many first timers have $100 grand to put down?

And the personal savings rate is in the negatives...go figure!

8/03/2006 07:12:00 AM  
Anonymous Anonymous said...

worth a read.

Toni and Paul paid $495,000 for their home in 2000. In the spring of 2005, they put it on the market with their first Realtor for $600,000 but had no offers. Then, three months later, they listed with their second Realtor at $575,000, again, no offers.

On December 1st we listed another home in the same neighborhood for $590,000 and by Christmas Day that house was under contract for $575,000. It closed in February. That is how we came to meet Toni and Paul; they were referred to us by their neighbor.

Surely, they thought, these Realtors can sell our lovely home also. We listed for $550,000 and got no offers, reduced to $535,000, and then got three offers over the next two months, but all for around $500,000. In their counteroffers, Toni and Paul barely budged, they made only minor concessions.

Were they, are they still, under financial pressure? They put their furniture up for sale too, with price tags on different pieces around the house. We suggested that might send the wrong signal to prospective buyers. One very hot day in July, as I was showing their home, the windows were open, the air conditioning off. At any rate, we could not get it sold, at least not for what they insisted they wanted. Our listing expired last week. They are back on the market today with Realtor number four. They will apparently continue to try to sell and continue to make their payments, for now. At least, that's my take.

The other house sold, at only a small price reduction, because it was a perfect home on a perfect lot. They owners had updated it, maintained it, in the years they owned it, plus they had a spectacular view of the lake from their back deck. On the other hand, the feedback we received on Toni and Paul's home was “it looked dated” plus the awful ravine in the back.

Sonnypage's Third Rule of Real Estate, unfortunately, means that Toni and Paul will only be able to sell their home for a reduced price and not what I suspect they owe. It's a tough spot to be in, especially in Georgia. We have what is called “non judicial foreclosure”, which means the lender does not need a court judgment to get the home back. Also, Georgia provides for “deficiency judgments”. This means, let's say, you owe $400,000 but can't sell for that. You hand the keys back to the lender. He sells your home, in a soft market, for $350,000. He goes to court and can get a “deficiency judgment” against you for the $50,000 difference and attach it to any other assets you may have. How many homeowners in America are currently “under water”? How many more will be if this soft market gets much softer. This is surely something our buddy Bernanke is contemplating as August 8th approaches.

But, silly me, after today my worries are over. For you see, earlier today Senator John B. Williams, esq., of Nigeria emailed me to thank me for my previous efforts on his behalf. Hmmm, I can't remember him, isn't that awful? Surely my mind is slipping under the stress of this real estate market. At any rate the good senator advises that in appreciation I need only contact his executive secretary, Vivian Obasi, and $475,000 U$ will be promptly wired into my account. Aren't they the nicest folks? In fact, if you guys will excuse me, I think I will get right on that.

Stay cool if you can.



Thanks to Sonnypage, for today's thought of the day.
I see that he is getting emails from Nigeria promising cash. I get one or two a week from various places, but typically somewhere in Africa. Is there anyone who is not getting them?

I also see that the real estate market is getting softer and softer and inventory keeps piling up. Most of it is debris.

I had to stop on the idea of putting "price tags on furniture around the house".
That couple is most likely underwater on their home with no cash to bring to the table to clear what is known as a "short sale". The 4th Realtor to take their listing did them no favors. Why take a listing that can not sell? It is a waste of time and expense for everyone involved.

Statutory Foreclosure vs. Judicial Foreclosure

Statutory foreclosure is no doubt one of the reason that Georgia leads the nation in foreclosures. Worse still is losing your home and still owing money on it. That is the last thing anyone needs.

Yet, unless otherwise prohibited by the loan agreement or by state law, mortgage lenders have the right to collect the full amount of their loan, even if the sale of the home doesn't cover the loan amount. Georgia seems particularly tough in this regard.

Mortgage States vs. Trust Deed States

In "Mortgage States" the property is taken by Judicial Foreclosure. In "Trust Deed States" the Trustee, a neutral loan service company, is empowered to sell the property and evict the "Home Owner" when the "home owner" doesn't meet their obligations to the Beneficiary (ie the lender).

Regardless of whether one lives in a "Mortgage State" or a "Trust Deed State", the lender may seek a Deficiency Judgment for the amount of the loan not covered by the sale of the home, depending on various state laws.

Some states have "Anti-Deficiency Laws" and/or there may be an Anti-Deficiency clause in the loan agreement itself. Anti-Deficiency means the lender cannot try to collect the amount of their loan not paid off by the sale of the home. But there are quirks.

California has an anti-deficiency law which covers the original "purchase money loan" on an owner-occupied home. The original mortgage is covered by anti-deficiency law, but as soon as someone refinances the loan that anti-deficiency provision goes out the door. In states like California, refinancing might be the last thing one would want to do to get out of trouble.

In some states the lender may have to opt for Judicial Foreclosure instead of Statutory Foreclosure in order to receive a deficiency judgment. You should by now be able to see where this is headed: Each state is different - very different. Unless one knows the laws of a particular state, it is tough to make more than general comments.

Enotes has an excellent discussion of Defaults and Foreclosures, Anti-Deficiency Laws, and Statutory Foreclosure vs. Judicial Foreclosure.

There is still one more major "gotcha" to discuss.

Bankruptcy erases debts, but not taxes.

In federal tax law, if a lender agrees to forgive the difference between what someone owes on a house and what the lender eventually sells it for, that difference may be considered income and thus subject to federal income tax. This is a potential huge "gotcha" for many people who think they can just hand over the keys and walk away from their troubles. Please consider the article Beware of the IRS If Your Creditor Writes Off or Settles a Debt.

I suspect that the IRS would be extremely unlikely to forgive back taxes, especially for someone that has a job. The time to figure out all of this is before foreclosure or before attempting to "hand over the keys" not after. I am quite sure that there are other quirks that vary from state to state that I am not aware of.

I believe I have accurately stated the facts but perhaps I have not. The bottom line is simple: Anyone in trouble should run away from lenders promising to "save their home" via a pay option arm or other refinancing strategies. Instead they should be talking to an expert in bankruptcy and tax law for their state, and the sooner the better. Advice from lenders may be suspect, particularly in states like California where a lender might be tempted to give advice just to negate Anti-Deficiency laws.

8/03/2006 07:27:00 AM  
Anonymous Anonymous said...

Look at this crack addict.


what do you think 200K or 225K at most?

8/03/2006 07:35:00 AM  
Anonymous Anonymous said...

Motivated sellers list.

I would be damn motivated to sell now unfortunately prices aren't reflected.

8/03/2006 07:41:00 AM  
Blogger Richie said...

Anon @ 8:35am

If they throw in that rust-box on the driveway, I'm game!!


8/03/2006 07:43:00 AM  
Blogger grim said...


8/03/2006 07:46:00 AM  
Blogger grim said...

ECB raises rates 25bps to 3%, was widely expected.

ECB, Bank of England Raise Rates to Temper Inflation

The central banks of the euro region and the U.K. raised interest rates to restrain inflation after economic growth accelerated. Stocks and bonds fell as investors bet borrowing costs are headed higher.

The ECB lifted its key rate a quarter point to 3 percent, as predicted by every economist surveyed by Bloomberg News. The Bank of England unexpectedly pushed up its main rate by the same margin to 4.75 percent, its first increase in two years, a move forecast by just eight of 46 economists.

``We're starting to see some of the central banks move into restrictive mode,'' said James Nixon, an economist at Societe Generale SA in London and a former forecaster at the ECB.

8/03/2006 07:59:00 AM  
Blogger BergenBuyer said...

From Goldman Sachs:

US Daily Financial Market Comment: Another Leg Down for Housing


August 2, 2006

While the equity market’s view of the US housing outlook seems to
have stabilized in recent weeks, the sector is still deteriorating
Two fresh signs of weakness have emerged recently.  First, the
Mortgage Bankers Association’s mortgage application index for
purchase—probably the best short-term leading indicator of home
demand—has started to make new lows.  Moreover, the average loan size
is also declining, consistent with signs that US home price are
starting to fall.
Second, the homeowner vacancy rate has surged over the past year and
now stands at an all-time record.  Together with continued increases
in inventories of new and existing homes, this suggests that the
demand/supply imbalance in the housing market is still growing.

Over the past two months, the equity market’s view of the housing outlook seems to have stabilized.  Perhaps the best gauge of this is the housing “wavefront”—a long/short equity basket designed to isolate market views of the outlook for residential investment--calculated by our Equity Trading Strategies group.  Since early June, it has been essentially flat, at levels roughly 35% below the all-time peak of July 2005.

It is possible that this stabilization simply means the market is very forward-looking and had already priced in a very large amount of further housing weakness by early June.  However, it could also mean that market participants expect the housing downturn to start to abate soon.  After all, the housing wavefront was basically a coincident indicator of the peaks in residential investment (measured as a share of GDP) and home price inflation, both of which occurred in the third quarter of 2005.

If it is the latter, we strongly suspect that market participants will be disappointed.  Virtually every housing indicator that we track continues to point to a steep deterioration, not just in terms of the level of activity but also in terms of the rate of decline.  In our view, this story still has considerably further to run.

The two most recent indications of ongoing deterioration are the weekly mortgage applications survey conducted by the Mortgage Bankers Association (MBA) and the housing vacancy data for the second quarter.

The first sign of weakness is the MBA survey.  After plummeting in the second half of 2005, the mortgage purchase index—perhaps the best short-horizon leading indicator of housing demand—stabilized in the first half of 2006 at index levels around 400.  Now, however, it is signaling fresh deterioration as both the seasonally adjusted level and the year-on-year change of the index have fallen to multi-year lows in recent weeks.  As of the July 28 week, the year-on-year change now stands at -23.9% on a spot basis and -19.9% on a 4-week moving average basis.

More as an aside, the MBA data also contain a less well-known series on the average loan size of mortgage purchase applications.  This too is pointing toward weakness.  As shown in the table below, the average loan size has recently started to fall on a year-on-year basis, for the first time since late 2001.  Historically, average loan size is a reasonable coincident or slightly leading indicator of home price inflation.

The second fresh sign of weakness is the housing vacancy rate.  Over the last year, the vacancy rate for homeowners has risen from 1.8% to 2.2%, which is not only the highest level but also the fastest pace of deterioration ever seen, in a series that goes back to 1956.  The rising vacancy rate is consistent with the ongoing increase in inventories of both new and existing unsold homes.  Some but not all unsold homes are vacant, and some but not all vacant homes are for sale, so the vacancy and inventory statistics overlap.  They are consistent, however, in pointing to a growing excess supply of homes.  Since excess supply is perhaps the most ‘leading’ indicator of market weakness, we would strongly caution against the assumption that the housing downturn is already entering the end game.

8/03/2006 09:09:00 AM  
Anonymous Anonymous said...

Vacant homes = double mortgage payments. [unless relo.]

Where IS intelligent consumerism?

8/03/2006 09:20:00 AM  
Anonymous UnRealtor said...

Great article posted earlier above:

"Helocs from hell"

Other borrowers, says Bitton, used Helocs simply because the loans were so cheap. "Many people who bought property a few years ago thought, 'Rates are so low, I'll just [buy it with] a HELOC.' Now they're going to pay for it."

The loans, says Gross, left borrowers with highly leveraged and with even higher rates. For those with loan values (including mortgage and HELOC) above 95 percent of the home value, the HELOC rate would be prime plus 2 percent. That adds up to 10.25 percent currently.

8/03/2006 09:23:00 AM  
Blogger Shailesh Gala said...

I wanted to find out how different NY area was from the rest of the country. Hence I got data from OFHEO and sorted in descending order for 5 year return.

5 year appreciation for all MSA

To my great surprise, none of the NE area come in top 25. The first one is at rank 39 for Atlantic City. The NNJ area comes at 56.

I can draw only one conclusion. Since psycology has changed, prices will come down, but may not be as much as many other areas of the country.

8/03/2006 09:26:00 AM  
Blogger skep-tic said...


great table, thanks for putting that together.

notice that all of the top areas are in FL and CA. DC, NV, and AZ are next. Boston and NYC metro areas seem to represent the third tier.

On the one hand, this shows that the housing situation could be worse here. But we are still in very extreme territory.

Moreover, the list as a whole is extreme. Take a look at Detroit. 20% appreciation since 2000. What has happened in Detroit to justify any appreciation at all?

The bubble is nationwide. There will be plenty of pain to go around, even if our area does not see the absolute worst of it.

8/03/2006 09:46:00 AM  
Blogger annamelbourne said...

Anon said: "Look at this crack addict.

what do you think 200K or 225K at most?"

Looks as if they are pinning their price on the top-rated Tenafly school district rather than that house.

8/03/2006 10:04:00 AM  
Anonymous Anonymous said...

Asking is one thing getting is another.

Best thing to do when a house price is so unrealistic is to not even look at it. why bother cuz they are not really ,looking to sell anyway.

8/03/2006 10:48:00 AM  
Anonymous Anonymous said...

Does anyone believe that homes in Tenfly will be selling for $200,000 if all your predictions come true. Let us hope not we will all be out of jobs and a home will probably be the worst place to put your money. Just look at Candem. you can probably buy a home there for $55,000 (bad investment). I think these homes in NNJ are over priced but to see valuations reduced by 40% will be a scary thing. Lets bring back the 80s were crime was rampid and houses were dirt cheap. Boy I cant wait.

8/03/2006 11:00:00 AM  
Blogger Flop that house said...

What is the logic behind listing your house in craiglist if you are a realtor?

Is it even a good channel to get to prospective buyer? (Maybe some realtor can chime in on this) I could understand getting more exposure when you are FSBO, but realtor listing?!

8/03/2006 11:01:00 AM  
Anonymous Anonymous said...

Anon 12:00:

No one's suggesting that houses will tumble back to their pre-1994 levels, just that after the market corrects itself, homeowners will be looking at annual appreciations more in line with other investments--say, 3%-7%/annum.

Somewhere on one of this blog's fora someone posted the formula for figuring out annual appreciations. I used this formula to figure out the worth of a home purchased for $235k in 1998. Adjusted for non-steroidal appreciation, it would now be worth for approx $275k-$300k. Similar homes are being listed now for two to three times the original purchase price. Somewhere between those two figures--gradually appreciated value and over-inflated sellers's wish-fulfilment--lies the real price of a home.

So, no, the houses in Tenafly aren't going back to $200k, but they're not going to sell for $500k+, either.


8/03/2006 11:23:00 AM  
Anonymous Stan said...

I recall that the runup in New York area prices started a few years before the rest of the country. Listings looked bubbly back in '99 when markets like San Diego and Florida were still very cheap.

Perhaps we look low in the spread because it only goes back to 2001, after a lot of appreciation had already occured here.

8/03/2006 12:29:00 PM  
Anonymous Anonymous said...

Am I old school or nuts ??
I'd be happy and ok with a 7 % annual appreciation.
The privacy and convience of a house is paramount in my opinion.
Purchased a new house two years ago and put 65 % down so I feel like I almost own it and no sweat with the monthly payment.

8/03/2006 01:15:00 PM  
Anonymous UnRealtor said...

Check out this desperate seller. They posted this house on Craigslist last month with a story of "this is my mom's house, we grew up here, it's wonderful."

No Greater Fools signed up.

Now today we have this:

People, what are you waiting for? It's time to buy this house. It's been substantially reduced for quick sale. Don't forget the school year is around the corner. Are you trying to move in the day before school starts?! Next thing you know it's gonna be September 1st and little Johnny and Sally won't know where they'll be going to school. They probably won't be able to sleep, will have nightmares about being abandoned, and end up leading very troubled lives. All because you wanted to look for a house until the market hit absolute rock bottom (which it has, by the way). But, if you buy this house now, you'll have plenty of time for them to adjust to their new digs before it's too late. Just a thought...

Anyway, back to what I meant to write: Sadly, my parents are finally selling the house that my brother, sister, and I grew up in. I hate to see it go, but since we've all moved out, I see why it makes sense for them. So, if you want a beautiful home to fill with family memories of your own, check it out. And, don't forget the stellar school system, easy access to NYC, and potential for future craigslist house-posters of your own that come with it! However, if you aren't going to be nice to the house (remember what makes a home vs. a house!) then maybe this isn't for you. And, if you're going to knock it down and rebuild, then we'll have words.

8/03/2006 01:19:00 PM  
Anonymous Anonymous said...


It just amazes me that people try to sell something for over a million dollars using the Mom and Apple pie ploy.

Stupid is as stupid does, Forrest.

Would you buy anything for $1.4M with that ad? It's like going to see a house, walking into the bedroom, and finding the drunken Uncle asleep in bed. Sans Hanes.


8/03/2006 01:53:00 PM  
Anonymous UnRealtor said...

"It's like going to see a house, walking into the bedroom, and finding the drunken Uncle asleep in bed. Sans Hanes."

Now that's an image!

8/03/2006 02:03:00 PM  
Anonymous Anonymous said...

For those of you that have not been on a tour of the real estate market with me, now is the time. In the past 3 weeks things have started to crumble on the outside, meaning builders are publicly making deals and “accepting offers”. Since when do home builders wheel and deal like used car salesmen?

Private sellers are becoming desperate and slashing prices, as well as accepting low ball offers. Flippers are dead. These people have mortgage their primary residences to buy flip houses that are now driving them to bankruptcy.

Things can only worsen as more inventory comes on line and more flippers walk from contracts AND homes they bought and cannot afford to continue to carry. Builders and flippers are in a horrific dogfight over prices. Some builders are giving homes away just to get them off the books. How about a $490,000 home sold at $315,000. The contract read $490,000 top line, but within the contract are "builder’s incentives" of $275,000. Not sure how they get away with this, but they do.

8/03/2006 02:24:00 PM  
Blogger jayb said...

Anonymous said...
Look at this crack addict.


what do you think 200K or 225K at most?

You guys are ruthless. A 70x100 lot is worth 200K by itself I'm sure. A couple of grand to knock that house down and then you can put up a brand new beauty. I know this only cause my father recently started building on lots that size(he was and is a landlord for the past 35yrs). Give the guy a break and throw a little bonus on top of that 225K. Although I do agree he must be on some serious blow to be asking anything near 400, forget about 500+.

8/06/2006 10:35:00 AM  

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