Sizing the Housing Bubble

More Fuel For the Housing Fire

http://www.andongkim.com/articles/2005/07/Montier_picturesofamania.htm

Re: More Fuel For the Housing Fire

HaHa said:

http://www.andongkim.com/articles/2005/07/Montier_picturesofamania.htm

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Good article, but it only addresses the question of whether there is a bubble.   I don't think anybody can question the bubble's existence any longer.

So, now the questions are:

Q) How big?
A) Biggest in the history of the US.    Unprecedented.

Q) How far will it fall?
A) I'm guessing about 40% on a national level.   About $7 trillion of wealth will disappear.

Q) How fast?
A) No idea.   Shiller thinks it'll happen pretty quickly due to the speculative nature of bubbles.   Last one took 6 years, but it was much smaller.   Japan took 15 years.   My guess is 10+ years.

Q) What are the repercussions?
A) Loss of jobs, deep recession due to lack of consumer spending, banking crisis, dollar crisis (at least China thinks so), general ugliness.

Q) What can we do to hedge?
A) No friggin idea.

Quick take, here in San Diego, none of my friends are worried about a bubble bursting, we can afford our payments and are glad to be "in". In fact we all were at the beach this weekend BBQing and having an awesome time. Locally I see it flattening but not crashing. Nobody who owns is going to leave! But nationally, the trend of using the home equity as an ATM is troubling, I have plenty of friends that have done exactly that. How much has that spending propped up the economy. Also, if your house goes upside down due to price slump, will the banks come around asking you to pay down the balance on your HELOC to maky you rightside up?

Laurence said:

Also, if your house goes upside down due to price slump, will the banks come around asking you to pay down the balance on your HELOC to maky you rightside up?

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No, as long as you make your payments, the bank will love you.    The problems will come when you're upside-down and you need/want to move for whatever reason.

Only a few home sales (I think it's about 5% of total homes on an annual basis) set the price for all the other homes.    So, when neighbor Joe has to sell due to a new job, your house gets revalued.    Eventually, when you decide you want to sell, that's when the decline hurts you.    If the decline lasts 10 years, almost everybody will feel the pain since the average ownership period is something like 7 years.

"The problems will come when you're upside-down and you need/want to move for whatever reason."

In some states (California I think), if you are upside down on a home, you can sell the home and walk away from the loss... only if you haven't refinanced (so, the buyers in the last 12 months maybe)... in which case the bank eats it, not the homeowner.

Brat said:

Make sure that clients don't get behind on their fees because some will walk away. 

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Yup, we've had some big battles with one developer who feels we should be his bank.

I also saw the housing bubble in SoCAL in the Late 80's. My area in particular (South Orange County) saw declines of 35% in my particular gated subsivision in Mission Viejo. It lasted until 1995 when it finally stabilized and only pulled back with real big returns being seen in 2002 - 2005. We eventually sold for double what we paid and we did not buy at the low.

That was our experience in SoCAL.

I have a slightly different theory (contrarian) regarding reasons why real estate will not stay high.

Baby Boomers, inheritances, ....... money, money, money
6.5%, I remember 12% and being grateful when we refinanced at 8%.
Housing is expensive, have ya filled your gas tank lately. Have you noticed CEO pay scales.......
Housing in New England dropped 45% ... not in my part.

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I would not rely on baby boomers so much, most are deciding to stay at work till at the earliest 65 and more likely 70 as they can no longer afford to retire and move. Also more wish to be close to their children and grand children. This will tie them to the cities where they raised them. Florida realtors in particular are banking on all the boomers moving here from their opulent mansions in NY and Boston and paying way too much for local real estate. I think it is a dream and while some migration will occur, it will not be at the magnitude that the local realtors predict.

Also, interest rates are on the rise, the government is BROKE! Real BROKE! and getting even POORER! The way they get cash is with bonds and other paper, if rates are low, no one will want the paper and they will remain broke. The only other source of cash is taxes and they seem hell bent against raising them.

Also along with high RE priced come high re-occuring costs, TAXES!!!!!!!!!!!! we all seem to forget about that. I was paying $3750 per year on my SoCAL home, the prople that got it from me had to Pay almost $10,000!!!!!!! I could not afford to buy it back!

Back to RE.

Since then we Fired ourselves and took 2 years off sailing. Returning to the RE market in late 2005 in Northeast Florida. We secured a VERY REASONABLE rental on water in St. Augustine, giving us a lot of time to research the local market, which we have been doing very seriously since July 2005, anticipating our rental luck would run out at some point. By the way on any given day around here there are over 1000 rentals of 3 bed 2 bath 2 garage detached homes available for under $900! or 2, 2 condos/apartments for the same price. Check out the Flagler county pennysaver (Google it).

We are looking in the Local Market here from Pointe Vedre Beach to North Daytona Beach. It seemed to have peaked in October of last year. Now we see a steady decline in prices of Single Family homes (all our research is within 10 miles of the coast). I should take the time to define the market segments as I see them. I do not consider property under $200k in this evaluation as I am not yet ready to move into a >75 years of age mobile home park. That will come no doubt, but later. These are for single family homes about 2200 sqft and over. Condos are still pricey and demanding silly prices but not really getting sold in any great quantity. Investors seem to be about to bail or at least considering bailing. Realtors are finally starting to admit it is a buyer's market here.

Lower end = $200k - $400k
Mid end = $401k - $800
high end = $801 - ~

In the lower market end at the moment. $50k - $75k Reductions from October are not uncommon in asking prices, offers are encouraged at any level. We were not in this market but do keep an eye out for bargains. But we really want a place on water, golf or nature preserve. Only now is this segment starting to offer something to peak our interest.

In the Mid end of the market, which IMHO was grossly overpriced to start with we are seeing price drops starting to be realized. A particular home we were looking at in November last year for $729 just sold for $575, nice home wood not concrete, which is somewhat less desirable in these parts now, but nice home on salt water with intracoastal access. Our ideal property location. We will be buyers at under $500k. Still a way off.

As far as the upper end I have noticed no real reduction in prices, but I must admit I do not watch it very carefully.

I would be interested in seeing these kind of stats from different areas of the country.

SWR

ok, all the sky that's falling is making me very nervous. so before you all talk me into going back to work, i've a few questions. as i'm just learning all this economic/financial stuff so late in life, please excuse me if these questions seem ignorant.

is it fair to compare today's national u.s. alleged housing bubble with california's past one. i thought i read that california's prices dropped because of lost jobs and out-migration. one article i read mentioned the loss of 1 million jobs which preceded the decrease of housing values.

also is it fair to compare with japan's loss? wasn't their real estate problems exacerbated by rather extreme stock woes?

ok, i have one more question. does size of economy make a difference? would the larger national u.s. economy shoulder better a bubble than say one particular state or one of a smaller nation? is there more money here to more quickly close up a hole that might form?

ShokWaveRider said:

Florida realtor in particular are banking on all the boomer moving here from there opulent mansions in NY and Boston and paying way too much for local real estate. I think it is a dream and while some migration will occur, it will not be at the magnitude that the local realtors predict.

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from a june 2005 study by

Stanley K. Smith
Bureau of Economic and Business Research
221 Matherly Hall
University of Florida
Gainesville, Florida 32611-7145
(352) 392-0171, Ext. 210
sksmith@ufl.edu

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found here http://tinyurl.com/ocx2o

quote...Absolute population increases, however, have been around 3 million for each of the last three decades and are projected to remain high for the next three decades. In fact, the current decade is projected to have the largest absolute population increase of any decade in Florida’s history (3.6 million).
Although increases are projected to decline slowly thereafter, the population is expected to reach almost 26 million by 2030. Florida is expected to pass New York by around 2010 to become the
nation’s third largest state.... Table 14 shows Florida’s projected population by age. The proportion age 65+ does not change much by 2010, but the proportion age 45-64 increases very rapidly, reflecting the aging of the Baby Boom generation. unquote

anyway, if those stats are more true than the bubble, you might wanna consider locking in that waterfront property now.

wab said:

If the decline lasts 10 years, almost everybody will feel the pain since the average ownership period is something like 7 years.

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Most homeowners move within 7 years. Almost all within 10. People who stay past ten years are quite rare.

Interestingly enough, this is the case in most countries, its not a US phenomenon. Last numbers I saw for most european countries showed the same pattern. I had this stereotype in my head of european families that lived in the same home for 300 years. Pop.

Heat humidity hurricaines yea a great place. sorry man but Florida does nothing for me.

In a world that will have to pay high prices for energy living in a place where air conditioning may become to expensive to use in the near future is well a deal breaker. By the way a Hurricaine is approaching today June 12th.

lazygood4nothinbum said:

is it fair to compare today's national u.s. alleged housing bubble with california's past one. i thought i read that california's prices dropped because of lost jobs and out-migration. one article i read mentioned the loss of 1 million jobs which preceded the decrease of housing values.

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Yup, parts of CA had a crash in aerospace jobs which may have provided a trigger.    But what fuels a speculative bubble is expectations of rising prices, and the bubble pops when people stop expecting prices to rise.   Buyers seem to think that the current rise has stopped, and we're seeing inventory levels go up in many markets now.

If the bubble is popping, here's what we'll see next (from what I remember in 1990):

1) The high-end market dies the quickest and drops the farthest, since those markets have the fewest buyers to support them.

2) Far-flung burbs (think Riverside County in SoCal) die off next since their desirability falls dramatically as prices become more reasonable closer to work.

3) The condo market is next to go as entry-level single family homes become more affordable.

also is it fair to compare with japan's loss? wasn't their real estate problems exacerbated by rather extreme stock woes?

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Japan's stock market crashed a couple years before their housing market did.   We had a stock market crash a few years ago, too.   Here's a WSJ article on some of the similarities and differences:

Article

lazygood4nothinbum said:

anyway, if those stats are more true than the bubble, you might wanna consider locking in that waterfront property now.

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I am still not sure I buy it. While migration will be consistant in either direction, I still do not see it as being as stong as they suggest. Especially in the smaller areas. It may hold true for South Florida and the West Coast. But people will move out also. Those Taxes will get you. The affluent do not care about taxes and interest rates, and those who percieve themselves to be affluent but are not do not care either.... at first, until they are upside down on their homes which happen to be in an area where the average household income (Year 2k Census) was JAX = $42k, Palm Coast $42k, St. Augustine $32k, Daytona $32k. and they cannot get an income to support their housing investment. Now they are 2000 numbers but looking around salaries are not that much if any different. I do not know this for a fact but I do look at jobs in the paper to keep abreast of things. One needs to earn $56k to afford a home of $250k which is arguably the median price. Something has to break. 80% of the WHOLE COUNTRY have houshold income of less than $54k per year. (USA today around February of this year, I do not have the article)

Here is a spin on the same thing. There is so much propaganda written on this subject it is silly. I especially hate it when a realtor pitches their case, not biased one bit I suppose. As least your article was written by an independent.

http://www.businessweek.com/the_thread/hotproperty/archives/2005/09/is_florida_hous.html

Whether my contrarian view plays out or whether I am wrong remains to be seen. As I do not intend on making a ton of cash from RE in the foreseeable furure. I will keep renting my 3 bed 2 bath 1600sqft Town home on the San Sabastian River for $800 pm inclusive of utilities for as long as I can, and enjoy the beautiful viewwait.

SWR

Hi,
Here is a potentialhedge :<http://www.cme.com/trading/prd/env/housingover16250.html>
I know little about these CME housing futures, but it sounds like I should learn.....quickly!  They are part of a new product line of futures and options based on the Case-Schiller Housing Index.  If we do get this predicted correction in RE values it sounds like those guys at the CME are going to be pretty busy. Maybe they'll take some of their new found money and go shopping for bigger houses

One question:
In looking at the original charts, I couldn't help but notice that housing values really accelerated after the Cap. Gains Laws were loosened in '97.
I haven't seen any mention of this effect in this thread.
Couldn't this be one of the more important funadamental changes(along with demographics, stock market boom and low mortgage rates) that have been responsible for the run-up?
And , if so, is there some sort of intrinsic step-up in values(at least until our wise leaders do away with the tax-law changes).
Disclaimer: I am not arguring that we won't have a correction.
I am just wondering if I can worry about it a little less.
wm

wagemonkey said:

In looking at the original charts, I couldn't help but notice that housing values really accelerated after the Cap. Gains Laws were loosened in '97.

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Yeah, I've thought about that. It's sort of the same argument that can be made about the stock market: maybe we have permanently higher P/E ratios since the introduction of discount brokers, IRAs, and 401-k plans in the early 1980's.

The new cap gains laws probably had an effect on the way up, but wouldn't they also make it easier for people to sell on the way down?

Re: More Fuel For the Housing Fire

wab said:

Good article, but it only addresses the question of whether there is a bubble. I don't think anybody can question the bubble's existence any longer.

So, now the questions are:

Q) What can we do to hedge?
A) No friggin idea.

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Reading all the doom and gloom (and I am not arguing with it) I wonder why folks on the other threads are trashing immediate annuities so hard. Not to start that one up again

Cute Fuzzy Bunny said:

Most homeowners move within 7 years. Almost all within 10. People who stay past ten years are quite rare.

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Man this seems strange to me. I live on Capitol Hill in DC, a metro area that is described as very transient. Mentally counting row houses to my left and right I see the seven to my immediate left and three to my immediate right (end of block) ALL being here over 10 years. Of those ten, at least six of us have been here more than TWENTY years. Across the street things are not so extreme but still more than 50% are 10 years + and there were several deaths causing turnover of long term home owners.

Some of you must be turning them over yearly to make up for my neighborhood. Seriously, I remember reading somewhere that nieghborhoods go in cycles - young folks move in to new construction, stay for years rainsing kids, grow to a ripe old age and then all die off together and the nieghborhood starts getting young again - rinse and repeat.

Actually I see the housing value a little differently.

In order of change:

1. Condos where there is a lot of inventory comming on line.
2. Far flung burbs where the cost of gas hits commuters.

donheff said:

Some of you must be turning them over yearly to make up for my neighborhood.  Seriously, I remember reading somewhere that nieghborhoods go in cycles - young folks move in to new construction, stay for years rainsing kids, grow to a ripe old age and then all die off together and the nieghborhood starts getting young again - rinse and repeat.

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I just came back from a visit to my old home city. On the block where I lived, many people who have moved in with young kids are the grandchildren of my parents generation. Sometimes they live in the same houses, sometimes in neighboring houses, or a street of two over. This is an urban neighborhood, with bus service, lots of hospital and parks, etc.

My parents lived there for > 40 years, and my sister lived in their house when they had to move out. She had to move, because she couldn't afford their house, but she and her family live nearby.

I have owned my current house for 30 years. It is the only house I have ever owned, though I had to rent it out occasionally when I had to be elsewhere for work.

I can see why people want to get the hell out of a typical suburb asap, but city or country can be different. I have cousins that still own and live on the farm where my Grandfather was born before the end of the War Between the States. There are values here that don't come cheaply.

Ha

donheff said:

Some of you must be turning them over yearly to make up for my neighborhood.

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Blame the military. Spouse and I put together 14 moves (four of them together!) over 21 years.

I've stayed seven years twice, oddly it was almost 7 years to the day.

Three years in the current residence is in third place.

Here are some stats from NAR:

26 percent of all repeat home buyers in 1995 had been in their previous home three years or less.

Fully 60 percent had been in their previous home seven years or less.

Only 28 percent had been there 10 years or more.

Article

And 90% of those there 10 years or longer had sold or attempted to sell their house.

wab said:

Here are some stats from NAR:

26 percent of all repeat home buyers in 1995 had been in their previous home three years or less.

Fully 60 percent had been in their previous home seven years or less.

Only 28 percent had been there 10 years or more.

Article

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I wonder if that "repeat home buyers" qualifier at the top is limiting the sample. Let me take my brothers and sisters as an example - six of us: three have been in their current homes for 30+ years, Two of us for 24+ years, and one sister (Steamboat Springs) got an unsolicited offer she can't refuse and is selling hers after 10 years.

All these transients must be moving to some pretty sterile places if they want/need to get out so fast. Or "repeat buyers" is tapping a young group when people are getting started and buying up.

Can't be military since most of them are smart enough to follow Nord's advice in another thread to be careful before you buy

newguy88 said:

Heat humidity hurricaines yea a great place. sorry man but Florida does nothing for me.
By the way a Hurricaine is approaching today June 12th.

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It is here and so far we are thankfull for the rain it is bringing. When I lived in SoCAL we use to tell everyone how bad the Quakes were, hoping they would not come. We had 3 or 4 in my time there.

So for all the hurricane shy, we get so many! They affect every household in the state. Please re-consider moving to Florida, Please.... And by the way you cannot get insurance for protection either. I am in my safe room typing this message.

Oh and don't move to Oklahoma either, those Tornados.....

SWR