Da Bubble's Burstin' ......

[Under FIRE]

Folks,

When buyers need to throw-in dressed-up babies in bug shirts plus drag the DW/DH/Grandma to solicit a seller's pity then we have, indeed, come to the end of this housing mania.

The smart(er) ones would have seen the iceberg by now and are jumping ship with bags of cash in hand while there are still lifeboats.


"Two months in house-hunting hell
How one L.A. couple survived a tight market, head-spinning bidding wars."

http://www.msnbc.msn.com/id/8422350/

 

[BUM]

Hello under,

My take on the article is that the (LA) market is still red hot. It will likely take a long time to cool down. I'm betting on a natural correction not a bust.


BUM

 

[JPatrick]

I pray that some day I am a seller in a market like the one in your article.  Just once for the shear glee of it.

In some places the bubble will burst.  Then, like in Texas in the 80's you will have lots of people way under water in their homes.
We bought a TX home in 91. The seller had built it 8 years earlier and he had to write a 20K check to sell.   Now that is painful.  Of course the checks will be much bigger today or whenever.

 

[RockMiner]

I pray that some day I am a seller in a market like the one in your article.  Just once for the shear glee of it.

In some places the bubble will burst.  Then, like in Texas in the 80's you will have lots of people way under water in their homes.
We bought a TX home in 91. The seller had built it 8 years earlier and he had to write a 20K check to sell.   Now that is painful.  Of course the checks will be much bigger today or whenever.

We bought a house in a large Texas city during the 80's boom and when we were finally able to sell it years later, we lost over 40%. I'm talking about a modest starter house here.  This was commonplace!  Many people just walked away...entire neighborhoods emptied out.

Don't think this could never happen to you, at least if you live in one of the extreme bubble areas.  Just my experience.   

 

[MooreBonds]

We bought a house in a large Texas city during the 80's boom and when we were finally able to sell it years later, we lost over 40%. I'm talking about a modest starter house here. This was commonplace! Many people just walked away...entire neighborhoods emptied out.

Don't think this could never happen to you, at least if you live in one of the extreme bubble areas. Just my experience.

As I was just starting to lose interest in Transformers at the time and not yet in love with the financial markets, I was curious if you could give a short history lesson to a young FIRE-wanna be?

Was the Texas surge brought on by oil prices? The drop in interest rates from 14% to 8%? Or other factors?

Obviously, the price appreciation in some areas is beyond belief, but the simple fact that a 5.5% 30-year mortgage allows you X% more in house price can't be ignored, and would account for a large percent change in the average (read: non-LA/Boston/NY/Miami) areas.

Also, I believe a bigger impact is that before, as rates slowly changed from one level to another, buyers who were able to afford one level but not the other would slowly creep out of the market; however, these days, everyone can afford more, and the super-low rate has allowed nearly everyone to bid on housing, rather than slowly changing the pool of available buyers as rates crept from one high level to a slightly lower level.

Of course, the stock market crash leaving people to look for the next 'big thing' is also a factor in people wanting to follow Carlton Sheets' lead...

Also, it's a bit puzzling that people aren't looking at their budgets and what they can afford to spend on a monthly mortgage to determine their purchase; rather, many people seem to simply say "I want a house that has Y" and do whatever it takes to acquire it, even if their monthly mortgage eats up 40%-50% of their net income.

 

[wabmester]

It's simple supply and demand.   In Texas, the supply exceeded demand as jobs went away.   In California and Hawaii, demand was reportedly fueled by Japanese investment, and that demand went away when their bubble popped at home, which caused our real estate bubbles to pop here.

This time around, I think a lot of the demand is due to individual investors deciding to buy residential properties after the stock bubble popped and bond yields dropped.    I think the popping of the bubble will be more similar to the NASDAQ popping this time as we simply run out of people willing or able to pay those high prices (exhaustion).

Edit: If interest rates were the only driver for prices, then car prices should have gone up just as much as housing prices. Instead they went down over the same period.

 

[retire@40]

...but the simple fact that a 5.5% 30-year mortgage allows you X% more in house price can't be ignored,..."I want a house that has Y" and do whatever it takes to acquire it, even if their monthly mortgage eats up 40%-50% of their net income.

On a $400K mortgage with a 30 year term at 5.5%, the payment is $2,271 a month

At 6.5% it's $2,528 a month ($3,084 increase per year)

And at 7.5%, it's $2,797 a month ($6,312 increase per year)

So with just a 2 point increase in the mortgage rate, the total cost of buying a house with a $400K mortgage increases by $189,360 over the 30 years.

The pool of potential buyers decreases with every increase in mortgage rates. If I had any kind of rental property, I would liquidate now while the going is great.

 

[Jay_Gatsby]

We bought a house in a large Texas city during the 80's boom and when we were finally able to sell it years later, we lost over 40%. I'm talking about a modest starter house here.  This was commonplace!  Many people just walked away...entire neighborhoods emptied out.

Don't think this could never happen to you, at least if you live in one of the extreme bubble areas.  Just my experience.   

That's exactly what happened to my family.  The amount of money going out every month to cover a mortgage on a house that was worth half of the mortgage was astounding.

I agree.  People have VERY short memories once they've decided to take the real estate plunge.  Some are greedy for the seemingly endless (and immediate) appreciation, while others simply want to buy a house instead of renting.  The problem in either case is that a correction in the real estate market will be painful.  In the former case, people will begin walking away from their "investment" properties with their proverbial tails between their legs (and ruin their credit in the process -- serves them right?), while the latter will be forced to continue living in a house until they can either stomach the tremendous hit or prices begin to rise again.

The safest course of action, if you really (and I mean really) want to buy -- right now, as opposed to a year or two from now -- is to buy no more house than you need.  If you're a young couple without kids, a two or three bedroom condo would work.  If you want a single family home, then a three bedroom house should be fine.  Yes, I'm sure that young couple is planning on having kids.  Guess what?  Until they turn 4 or 5 years old, they're not going to need their own rooms, especially if they're the same gender.  Thus, that starter condo/home will serve their needs for 5-8 years, plenty long for the current real estate market to cool down.

Think about it this way.  Warren Buffett still lives in the same house in suburban Omaha, Nebraska, for which he paid $31,500 in the early-1950s.  If Buffett doesn't see the need to keep "trading up" houses, why should you?

Here's a series of excerpts from Buffett and his Vice Chairman, Charles Munger, on the housing bubble:

Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]....

"Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C."

Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."

Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on."

 

[JPatrick]

As I was just starting to lose interest in Transformers at the time and not yet in love with the financial markets, I was curious if you could give a short history lesson to a young FIRE-wanna be?

Was the Texas surge brought on by oil prices? The drop in interest rates from 14% to 8%? Or other factors?

I showed up in Texas in the middle of the crash.  My understanding is that the collapse in oil prices was the primary factor.  The state had been in boom times as tech was taking off in Austin and lenders were lending out of control.  Real estate in many places had become very inflated and when the dominos started to fall everything went to hell.
Another issue that slowed housing recovery is the fact that most Texas cities have unlimited room to expand as opposed to a place like Las Vegas where they are almost out of land.  So if you were trying to sell the house that you over paid for, you had the builders killing you as they were selling new for far less than you could sell used. 
That is still one of the key reasons that Texas real estate is cheap.

A book titled "Small Fortunes" by Edward Zuckerman, tells the story of some Austin businessmen who had a great business going for them until the banks started going bellyup and could no longer lend.  I was trying to get a piece of their action, but it all came down like a house of cards. You would have to find the book used, but it is a fun read, lots of humor and a layout of the 80's crash.

 

[RockMiner]

Was the Texas surge brought on by oil prices? The drop in interest rates from 14% to 8%? Or other factors?

Hello Peter76,

The Texas boom of the early 80's was driven mostly by high Oil prices (Arab embargo etc) This resulted in a boost to incomes and a lot of job creation.  Houston experienced very rapid growth and high demand for real estate.  When oil prices fell, the local economy collapsed rapidly. Many jobs simply evaporated.  Interest rates (though very high) were falling, but this did little to prop up demand.  Many people were "up-side-down" in their mortgages and could not refinance due to negative equity. It took many years for some areas to recover.  We were young and largely clueless about the risks of such a market.  It really set us back financially.

I'm sure low interest rates are a part of the current U.S. real estate "bubble", but I think a lot of it relates to prosperity and the fact that there is simply a lot of $ out there looking for a home (no pun intended).  I suspect that (like the stock market) valuations matter, and "regression to the mean" will
eventually occur in some areas.  My take anyway  

 

[unclemick]

When I left Seattle at the end of 1969 - my 90 unit apartment building in Kent had 45 empty units and 15 of the remaining 45 had given notice to vacate - the big news was trying to invalidate teachers contracts in mid year due to school enrollments creating empty class rooms - Kobe Japan was sending food packages to the Area Council of Churches to feed 78,000 people a week in soup kitchens - food stores, gas stations, etc were going under. The FHA was running national ads listing every house on the block -over 5 to 10 pages worth - come in and take over the mortgage, RETIRE in Seattle. Some where around this time an enterprising soul put up the sign - "Will the last person leaving Seattle please turn out the lights." which got some media attention.

That's the first little bubble. The second was the mid 80's - we felt the oil pop here in Greater New Orleans - not as bad perhaps as Houston - but market price of our Duplex fell from the 80k range to the low 30k range based on equivalent sales around.

Oh - and my Brother-in-Law is a mining engineer - he has seen more than a few. Their worst haircut was about 20k out of pocket to get out from under.

P.S. Needless to say - those that timed the bottom well - did ok.

 

[Nords]

In California and Hawaii, demand was reportedly fueled by Japanese investment, and that demand went away when their bubble popped at home, which caused our real estate bubbles to pop here.

Yup. At the peak of the craziness, Gensiro Kawamoto was driven around in a limo, bidding on over 200 homes from curbside. I hear he did the same in CA. (That later backfired and he's still mired in litigation as he tries to shed his holdings to raise capital.) A local store, Liberty House, in business since the 1850s (yes, the 19th century) went so far overboard catering to "rich" Japanese tourists that locals felt unwelcome there. When DESERT SHIELD killed Japanese tourism and Liberty House's clientele vaporized, locals stayed away in droves. LH went bankrupt and was bought out by Macy's.

Edit: If interest rates were the only driver for prices, then car prices should have gone up just as much as housing prices. Instead they went down over the same period.

Not sure the analogy stretches that far. GM can always add a third shift and ramp up production, but housing starts are a little slower to gain momentum. In addition many buyers are outbidding each other with lotsa loose cash (cheap financing and extreme leverage) against limited inventory.

I think the finance industry has decided that cheap money will keep driving home buyers (and financier's fees). Several researchers claim that the mortgage industry is holding down the long end of the yield curve, in blatant defiance of Greenspan's rate hikes, just to squeeze out a few more mortgages.

Think about it this way.  Warren Buffett still lives in the same house in suburban Omaha, Nebraska, for which he paid $31,500 in the early-1950s.  If Buffett doesn't see the need to keep "trading up" houses, why should you?

Well, yeah, but have you seen the photos? Annual-meeting zealots post them every year and his place has quite a nice curb appeal, as well as a racquetball court and presumably an unmatched security system. I'm sure he's added other improvements. I'm told it's worth $700K, which seems a little pricey for Omaha!

 

[JPatrick]

Nords sez::I think the finance industry has decided that cheap money will keep driving home buyers (and financier's fees).  Several researchers claim that the mortgage industry is holding down the long end of the yield curve, in blatant defiance of Greenspan's rate hikes, just to squeeze out a few more mortgages.
--------------------------------------------------------------------------------------

I quite agree, and I think we going to see the tightly wound spring unwind in the form of much higher rates sometime next year.
In fact, I would not be surprised to see the fed actually lower rates as a result..
I do hope all of this occurs after I have made my move 

 

[wabmester]

In addition many buyers are outbidding each other with lotsa loose cash (cheap financing and extreme leverage) against limited inventory.

Yeah, that limited inventory means that the market isn't very efficient. I think agents basically look at the last highest comparable and add 10% to set prices. And buyers generally have no way to determine fair value, so all negotiations revolve around that arbitrary asking price. Basically, I think this has two effects: prices change quickly (both going up and coming back down), and relatively small changes in the number of buyers or the number of available homes can have a big impact on prices.

I think this bubble has lasted longer than the last one because builders have been building at a more measured pace, whereas last time they just put the pedal to the metal.

 

[ESRBob]

My brother bought a townhouse in Tx -- midway between Fort Worth and Dallas, near DFW, in the early 1980s. 23 years later, it is only now back to the same dollar value (not inflation adjusted ) that he bought at.

So bubbles definitely happen in real estate.

 

[Mr._johngalt]

I showed up in Texas in the middle of the crash.  My understanding is that the collapse in oil prices was the primary factor.  The state had been in boom times as tech was taking off in Austin and lenders were lending out of control.  Real estate in many places had become very inflated and when the dominos started to fall everything went to hell.
Another issue that slowed housing recovery is the fact that most Texas cities have unlimited room to expand as opposed to a place like Las Vegas where they are almost out of land.  So if you were trying to sell the house that you over paid for, you had the builders killing you as they were selling new for far less than you could sell used. 
That is still one of the key reasons that Texas real estate is cheap.

A book titled "Small Fortunes" by Edward Zuckerman, tells the story of some Austin businessmen who had a great business going for them until the banks started going bellyup and could no longer lend.  I was trying to get a piece of their action, but it all came down like a house of cards. You would have to find the book used, but it is a fun read, lots of humor and a layout of the 80's crash.

If I had the money and the time to wait (I have neither), I would load up on Texas real estate. But, that's just me. I would prefer if everyone else just stayed away.

JG

 

[brewer12345]

Actually, I don't think the mortgage industry is holding down rates. Most of those guys are dependent on being able to immediately sell the loans they make into the secondary/securitization markets. The real problem with the mortgage industry is that there was a lot of capital raised to go chase the same pool of business. Right now they are just making a little less money because of competition. When the siht starts to hit the fan is when the real pain will start. I expect to be able to buy stuff like TMA at or below book once that happens.

 

[Danny]

The smart(er) ones would have seen the iceberg by now and are jumping ship with bags of cash in hand while there are still lifeboats.

"Two months in house-hunting hell
How one L.A. couple survived a tight market, head-spinning bidding wars."

I feel for young people who are starting families and want a house now a days in Calif. I worry about my 3 kids getting a house they can afford here in Minnesota.
Left Ca. in 94 and thought my 1500 sq. 1/5 acre place in Walnut Creek was overpriced when I sold it for $250,000 - now its in the $750,000 range. My Minnesota house (3000sq 1/2 acre) bought for $195,000 now worth $450,000 - seems underpriced.

The topper is my wife inherited some Glendale Ca. rentals. One is a 1921 bungalow (696sq - .05 acre!) and this in a not so great area (was firebombed 10 years ago by renter's ex-boyfriend-gangbanger). We are thinking of selling before the bubble bursts and when you get 3 market evaluations of $400,000 you believe there is one - though the Walnut Creek experience tells me it could be alot higher in 10 years.

 

[P.S.]

have lots of family and friends in so cal and SF. interesting to hear what they are doing. One (30 yo) bought his house a few(<5) years ago for about $600k. Comps in his neighborhood have recently sold for $1.2 m, so he's listing his house and and notes that either he'll buy again when prices drop, or the profit can pay for the next 20 years of rent. A couple of houses in my parents' neighborhood have been sitting on the market, one house dropped $100k in order to sell.

 

[tryan]

Boston market saw the same TX-sized correction (~30-40%) between '91-'94. I carried many mortgages thru this time ... took 12 years (from purchase date) for them to flip right-side-up.

If I had any kind of rental property, I would liquidate now while the going is great.

But this has been said for years. Timing is everything. I easily left 80-90% profit on the table for those properties sold 2000-2001. Granted, the wad was not put under a mattress. But I haven't gotten 80-90% returns where it is.

This boom will run longer than anybody predicted. Who the hell really knows, maybe we'll see a Japan size run-up (and a Japan size crash).

 

[Danny]

Comps in his neighborhood have recently sold for $1.2 m, so he's listing his house and and notes that either he'll buy again when prices drop, or the profit can pay for the next 20 years of rent.

I think that's the way to go right now.
I read recently that retiring and still working Ca. folks are cashing out and moving to other states where they can get something more reasonable (in their eyes). What I did in 94. There are 3 other ex-Cal families in my neighborhood - we came for that reason and also a great place to raise a family. Even here in Minnesota where values are high, but not crazy high, we are thinking of selling and renting now that the kids are close to being on their own.

 

[SteveR]

Yep, the Californians are moving out and causing housing prices to go up here too. Too much money chasing too few houses. Every square foot of land seems to be under construction now and building material and labor are also in short supply so building costs are going up more than exisiting home prices.

I think an other factor that will be starting very soon, as the Baby Boomers start retiring, is the move to smaller homes. That will create a glut of bigger houses that cannot be sold and those values will have to come down while the smaller home prices will go up due to demand. It will be an upside down market.

 

[justin]

I just sold my rental unit (1200 sf condo for $94000) in NC to a Californian. The guy also bought 2 more units at a different place here in NC. He's sending his $$ to a different, lower-priced state for some reason. Wonder why? He probably couldn't even buy a driveway for a house in CA for $94000.

 

[Danny]

I think an other factor that will be starting very soon, as the Baby Boomers start retiring, is the move to smaller homes. That will create a glut of bigger houses that cannot be sold and those values will have to come down while the smaller home prices will go up due to demand. It will be an upside down market.

I tend to agree. I'm going to go small soon and will rent - there is a move to downtown loft and condo craze going on now - so I don't want to buy into that.

But your location is key.

When you live in a top rated school district, in a place where taxpayers always vote yes on school referendums and accept higher property taxes because they want the services they get, in an attractive well cared for neighborhood of reasonably sized and valued homes and there are starter families desperate to move from the city with not so good schools - you will have demand.
There has still been a market for the really expensive homes in our area, but they sell slow. When a Californian shows up (think of kids in Willy Wonka movie), take it from me, they realize that Minnesota winters are not going to be as bad as they've been told - heck they always wanted to live in a place with 4 seasons - although they soon enough find out that winter is 6+ months long - but then there are planes to take you to other places

 

[Patrick]

Folks,

When buyers need to throw-in dressed-up babies in bug shirts plus drag the DW/DH/Grandma to solicit a seller's pity   then we have, indeed, come to the end of this housing mania.

Why have we come to the end of the mania?  Sounds like there are still plenty of people willing to pay exhorbitant prices.  These people needed something to separate them from the 50 other bidders and the baby happened to be the thing that made the sellers remember them.  How does that mean the bubble is at an end?

The smart(er) ones would have seen the iceberg by now and are jumping ship with bags of cash in hand while there are still lifeboats. 

They're only the smarter ones if this happens to be the top of the bubble.  If it continues to inflate, they left cash on the table and are not so smart . . . .