Friday, August 11, 2006

Further weakening yet to come

From Businessweek:

Why Housing Looks A Little Rickety

Hopes that the worst of the housing slowdown has already come and gone may be dimming. Mortgage rates stopped marching higher during recent weeks, and home sales, after tumbling this winter, appeared to stabilize this spring. But recent data indicate further weakening is yet to come.

The weekly snapshot of lending activity by the Mortgage Bankers Assn. (MBA) not only includes figures on mortgage applications to buy homes but also on the average size of the loans being sought. Both measures are seen as timely indicators of the housing market and both, after leveling off during the spring, are plunging once again.

Based on monthly averages, mortgage applications are now falling at the fastest pace since 1995. In July they were down 15.1%. The Aug. 9 update showed the weakness continued into August.

Moreover, the deterioration in the pool of interested home buyers is forcing sellers to further lower their price expectations. The average mortgage loan size is now smaller than it was a year ago, off by 0.5% from last July. This suggests further weakness in home prices because "average loan size is a reasonable coincident or slightly leading indicator of home price inflation," Goldman Sachs (GS ) economist Jan Hatzius says in an Aug. 2 research note.

There are other reasons to expect that prices will keep softening. The national vacancy rate of homeowner housing hit a record high of 2.2% in the second quarter. The higher vacancy rate was most likely driven by the rising inventory of new homes for sale. In June, the level of completed new homes on the market swelled by 28.2% from a year ago. Rising inventories and weak pricing are significant reasons why homebuilders have become increasingly pessimistic.

24 Comments:

Blogger grim said...

For those interested in the Philly area, Matrix has a great piece up:

Real Estate Brotherly Love: 2nd Quarter 2006 Market Report For Philadelphia, PA

grim

8/11/2006 04:53:00 PM  
Anonymous Anonymous said...

Well according to todays retail sales report, things may not be as week as many feared.

Not only did retail sales surge, but much of the gain was in Building Materials & Electronics.

But mortgage rates are falling. The average 30 year fixed is at 6.50% and should stay in this area since the 10 year treasury doesn't look like it will rise much higher.

You have a very large group of recent college grads in the NYC area who have just seen wonderful economic times for the past 15 years in this area. The last real downturn was back in 1990-1992 with $30 oil prices and 'Operation Desert Shield'.

Now you have many people in NYC just out of school who are waiting for the right time to but can't qualify if they are making just $150,000 a year and single.

Many people are waiting on the sidelines, intending to buy but waiting thinking that prices will be lower by 10% next year.

Rents are skyrocketing in the region. In the NYC/NJ/LI area the rental market resembles the housing market of 2003-2005 with few rental vacancies, multiple applications, renters engaging in 'bidding wars' (especially in Manhattan). As long as this area stays a haven and playground for the wealthy & wealthy single transplants, housing & the economy will continue to do great

8/11/2006 04:58:00 PM  
Anonymous Anonymous said...

Welcome to the new home of Garden State MLS’ public search engine. Currently, there are 31,499 properties advertised for sale in NJ on our site.

Any guess when we hit 31,500? hehe!!

8/11/2006 05:13:00 PM  
Anonymous Anonymous said...

{{Currently, there are 31,499 properties advertised for sale in NJ on our site.

Any guess when we hit 31,500? hehe!!}}

And everyone wants to live here right?? Since NJ is right near NYC (the 'Greatest' city on earth whose slogan should be - ""Leave no Millionaire Behind"")..

Enjoy paying $14,000 a year in property taxes since NJ was rated #1 in property taxes while if you live in NYC you have the priviledge of being taxed 3 different ways- City, State, & Federal..

I think people are finally realizing that quality of life can be better and costs could be lower if you live west of the Delaware River or South of Washington DC.

8/11/2006 05:19:00 PM  
Blogger jayb said...

Does forsalebyowner.com really work? Anyone ever used it or know someone who has?

8/11/2006 05:28:00 PM  
Anonymous Anonymous said...

i have a friend who used it successfully

8/11/2006 05:39:00 PM  
Anonymous Anonymous said...

"You have a very large group of recent college grads in the NYC area who have just seen wonderful economic times for the past 15 years in this area. The last real downturn was back in 1990-1992 with $30 oil prices and 'Operation Desert Shield'.

Now you have many people in NYC just out of school who are waiting for the right time to but can't qualify if they are making just $150,000 a year and single."

Let me just say, I really don't like being used as an excuse. The wife and I are recently out of school (MBA's) and both paid a very good salary.

What makes you think we are dumb enough to buy a house right now?

There is a reason it's called the "greater fool" theory, and I will let you in on a secret.

If you are looking for a new set of fools, don't look in the camp making more than $100,000 with a fancy piece of paper on the wall. You won't find any there. Fortunately for us, math was a requirement.

8/11/2006 06:17:00 PM  
Anonymous Anonymous said...

"Now you have many people in NYC just out of school who are waiting for the right time to but can't qualify if they are making just $150,000 a year and single."

It just looks like everyone in NYC is making $150K/yr. Median household income is about $50K. Whether RE prices can continue to be supported by wealthy transplants is an open question.

8/11/2006 06:28:00 PM  
Anonymous Anonymous said...

I've been fence sitting for nearly 4 years on buying a home, much to the consternation of my wife.

I thought were were on the verge of a crash until recently. Turns out though, that asking prices aren't dropping appreciably, and now mortgage rates are dropping again, just in time for the fall season.

This is my "nightmare scenario" which I fear is about to unfold: the madness will renew itself and continue for yet another cycle, luring yet another massive round of buyers into an obscenely overpriced market.

Politicians must answer to the majority of the people in order to survive. At some point, so many people will have been lured into the inflated market that it will become politically necessary for the government to grant relief to the massive majority of the folks who recklessly bought using risky mortgages.

So, at the end of the day, the real losers will be those of us who "knew better" and didn't buy. The huge mass of idiots who overleveraged themselves to buy using interest only, no money down, ARM terms will be the winners, owning beautiful homes on comfortable, *federally modified* terms. Meanwhile, the minority of intelligent people who were prudently awaiting the crash that never came will still be renting apartments...while funding the bailout with their tax dollars.

Will someone PLEASE prove to me that this isn't going to happen.

8/11/2006 07:35:00 PM  
Anonymous Anonymous said...

anon 8:35:55 -
I have the same doubts, but I stopped looking to buy for the past 4 months. I have seen small price reductions. Nothing huge, but maybe a little awakening to the sellers that there are no longer bidding wars.
I am still waiting to buy, and I plan on making lowball offers. I don't care if they laugh at what I offer, but I only will pay what I am comfortable with. I am not looking to buy again until the Fall.
Good luck to you too.

jj

8/11/2006 08:50:00 PM  
Blogger grim said...

There is no crystal ball, there is no way to divine the future, no one will be able to prove anything to you. If they try to, run away.

All we can do is look at fundamentals, look at history, and make an educated guess about where the long-run price will end. If the fundamentals are strong, the price is justified. If the fundamentals are weak and the market will correct it.

Manias like this are nothing new to markets, whether it be real estate or tulips. They are born of euphoria or even panic.

"My god, the price will rise and I'll never own a house, I'll need to live in the back of my car alone, because my wife will have left me for another man. One who bought a house."

Anon, take what you are feeling, and then multiply that by 10,000. Spread that across the market. What happens? People make panicked decisions out of fear, not rational judgement. What happens when common sense prevails again? The castle in the sky comes tumbling down.

I'm not sure what you mean by "fall season". It's true, we have four seasons, and one is named "fall", but I don't think you are talking about weather. Did you mention this once before? Because I vaguely recollect a prior mention of it.

Anyhow, here is a graph that shows year over year sales for 2003, 2004, 2005, and 2006 (to date).

Northern NJ YOY Sales

These are closed sales. Sales typically close anywhere from a month to two from the contract date. So sales that close in August were likely contracts made in July, perhaps even June.

So, looking at the graph, you'll see that sales typically begin to drop off after the summer months, down to December (where they peak a bit, end of year). Sales continue to fall until the traditional low point of February. So there you have it, there isn't really a "fall season" so to speak. The December peak seen in 2003 and 2004 were a bit of an anomaly, 2002 tracked very similar to 2005.

grim

8/11/2006 08:51:00 PM  
Blogger grim said...

This one includes 2002, sorry.

June 06 YOY

grim

8/11/2006 08:54:00 PM  
Anonymous Anonymous said...

Thanks Grim - I am looking to buy in 08742 zip. It is crazy to even try to look here in the summer with all the rentals, traffic, etc. My kids love the school and area, so I want to buy soon, but have serious concerns about the market. Taxes have just gone up and prices are still high b/c this area is considered a vacation town.
Homes are still priced very high, and I am told by realtors that... "this area is different".

jj

8/11/2006 09:04:00 PM  
Blogger chicagofinance said...

The wife and I are recently out of school (MBA's) and both paid a very good salary.

What makes you think we are dumb enough to buy a house right now?

If you are looking for a new set of fools, don't look in the camp making more than $100,000 with a fancy piece of paper on the wall. You won't find any there. Fortunately for us, math was a requirement.
8/11/2006 07:17:00 PM


Hubris does a good job of messing up many an MBA's finances. Just talk to people who graduated from 1997-2000.

In 1995 the Economics faculty at Chicago got hammered hard [big time] by shorting Netscape.

8/11/2006 09:51:00 PM  
Anonymous Anonymous said...

Real Estate Update Written by M. Anthony Carr
Losing" on Real Estate Price a Matter of Perspective

When it comes to pricing your house when you're ready to sell it, keep in mind you must sell in the market you're in today. It doesn't matter what your former neighbor got six months ago, or what properties are listed for now. All that matters is this -- whatever the last sale price in your neighborhood of your model -- that's probably your sale price now.
When you're looking at what you'll gain on the sale of your house, let's keep it in perspective. If house prices increased year after year at 4 percent per year and then suddenly people were selling their houses for 1 percent less than last year's asking price, would that be reasonable? If so, then when property is moving up at 20 percent per year for several years and then suddenly you have to sell it for 5 percent less than the prices last year, would that be reasonable? The challenge is when we move from percentages to dollar amounts. If 5 percent represented $5,000, most people wouldn't blink. It's when 5 percent represents $25,000 that sellers start to freak.
For example, in the Washington, DC area homeowners were experiencing astounding rates of appreciation as a region, 20 percent from 2004 to 2005 prices. Many homeowners have experienced a doubling in property values over the last five years. The average home price is now about $540,000, according to the local multiple listing system. Now, price appreciation has subsided and is sitting at a mere 5 to 8 percent region wide (depending on where you're standing). Sounds pretty healthy, still, right? You would think.
However, there are stories from the field on how sellers are defending their prices as if their lives depended on it. While sellers are sitting on hundreds of thousands of dollars of equity, they can't stand the idea of dropping their price by $25,000 or $50,000 to sell it today. The house that was $260,000 in 1999, is now selling for $569,000 today. But some sellers now want that same type appreciation and can't imagine selling it for less than $589,000. Bringing it down the $20,000 or $40,000 to sell the property seems, well, just not fair.
The market is like playing Russian roulette. Sometimes you don't know what you have until you pull the trigger. Somebody needs to blink. Sellers seem to be saying to buyers, "I'll drop my price, just make an offer." While buyers are blankly replying, "I'll make an offer, just lower your price."
It's this stalemate that has played a part in creating an abundant supply of houses on the market in the DC area. We're talking upwards to 200 percent more homes on the market in any given year-to-year comparison. And, folks, after a dearth of homes in this area, it's a good thing. Is it affecting prices? Sure thing. Will prices come down? Absolutely. Are sellers going to lose money? Well - in some cases.
For sellers staying in the same area, keep in mind, if you have to drop your price by 5 percent, then the seller of the house you're buying (usually a lot more expensive) is probably going to drop the sales price by about the same percentage point. It means that while you may "lose" money on the sale of your home, you'll more than likely "gain" it on the purchase up.
Keep in mind, the market is the market. When it's time to buy, buy. When it's time to move, then sell. Work with the market you're in, not in the market you wish it would be.

8/12/2006 06:02:00 AM  
Blogger thatbigwindow said...

Hey, anyone see the piece on Fox Local News station? (channel 5 for me) that aired 8/11/06?

They basically said that prices would continue to be lower through December in this ""buyers market"", but next spring it will pick up again

Another spin case of hurry up and buy before 500k houses triple in value next year.

gimme a break!

8/12/2006 06:14:00 AM  
Blogger Richard said...

how could anyone claim the worst of the housing slump has already occurred? every past cycle has shown years of trouble before normalizing. why would this one with greater creative (aka risk) options be any different? in my opinion this is just the beginning of the negative side of the equation. only phenomenal job/income growth can maintain even a portion of the past few years of record sales. if you can't generate near record sales in the future the situation cannot continue and that means only one thing. a housing bear market where prices have nowhere to go but down.

8/12/2006 08:14:00 AM  
Blogger grim said...

First, the market was going rebound in the spring.

When spring didn't come, it was because everyone was waiting until after the Superbowl.

When nothing happened after the Superbowl, everyone pointed to the big "school rush".

That isn't panning out, so we'll just start that cycle over again and talk about next spring season.

Seems kind of similar to one of my favorite links:

Chart of Pompous Prognosticators

Now, the asset class is different, we're not talking about the stock market here. But try to draw your own parallels with what these experts said, and what the real estate industry "experts" are saying today.

grim

8/12/2006 09:32:00 AM  
Anonymous Anonymous said...

Hey Grim--

Thanks for the moral support and for clearing up my concern about the possibility of sales picking up in the fall.

I still worry that if enough people buy into the overleveraged game, there will be no choice but for the government to take action to "make things right"--leaving the minority who sat prundently on the fence to bear the brunt of the bailout.

Still, I can't ignore the risks of jumpting off a cliff, hoping for a safety net, just because everyone else is doing it.

So here I shall sit. At least for now.

8/12/2006 10:50:00 AM  
Blogger chicagofinance said...

beware the false bottom is anon......cross off 2006

8/12/2006 12:43:00 PM  
Blogger Math, like gravity, is law. said...

Cross of 2007 as well.

Real value will take time to return 08' 09' blood in the streets. If you are in cash, and don't try to catch a falling knife, you should be good. To those that have a possibly nagging wife, preganant, maybe other kids growing, rent yourself a nice house for 3 years, 1 year with 2 1 year, your option. Detached game is what I play.

8/12/2006 01:00:00 PM  
Blogger Math, like gravity, is law. said...

pregnant

8/12/2006 01:01:00 PM  
Blogger grim said...

Ah the joys of moral hazard..

Moral hazard

grim

8/12/2006 02:35:00 PM  
Anonymous Anonymous said...

Hey, anyone see the piece on Fox Local News station?

Consider the source...

8/12/2006 11:48:00 PM  

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