Sizing the Housing Bubble

Interesting...housing as other hot items for the moment won't crash, rather going down slowly for number of years. It will screw people with mortgage up to their chin if something were to happen, they would have to choose which bills to pay, which possessions to let go, etc..etc...I'm sure in another five years someone will come to sum up performance between market and housing compared to inflation...well, as usual.

Here in Shanghai housing market has its own life. Shanghainese or whoever bought believe china will surpass hongkong, shanghai's property price is only a fraction of that in HK therefore upside is big or so they thought. The truth is chinese in general prefers brand new house, some believe it's bad luck to live in used house, previously owned market is not as established as it is in US unless they are special such as the shikunmen - the old lane houses. Besides, newer properties have better design, cleaner, better amenities...maintenance here is an issue, within 3-4 years the buildings can look worn out. Developers are trying to finish as soon as they can, use cheaper materials, cheap lobby...fat margin, I suppose.

As for comparison, recent apartment about 1800 sf that I know of within Grade A office location recently is sold for 600K while renting there is only $1,750 a month....go figure. Believe it or not, elevators and lobby have no AC!! Compare to the same location in another far east country, Indonesia, for 700K you will get private elevator, 3500 sf, marble and granite finish. Oh my......
 
califdreamer said:
Wow. The CA Assoc of Realtors as housing bear.
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So instead of BUY!BUY!BUY! it is SELL!SELL!SELL! Realtors make money when transactions happen. The higher number of sales, the more the commissions. CA Assoc of Realtors is probably scared of losing half its members to "reductions in force" when the market volume slows down.
 
Housing prices are primarily a function of "affordability".   We had a "one time step change" increase in affordability due to new/exiotic loans and low interest rates.

Future affordability is going to depend primarily on wage growth.

The wage growth is going to have to offset the negative influence of higher interest rates and the pressure for House price/income ratios to revert towards mean.

Anybody have any good predictions of US future wage growth ?

I'm pessimistic.   The difference in US wages verus rest of world, offshoring, US manufacturing "hollowing", percent of GDP eaten up by debt service and medical costs, etc.

Affordability just has to come back in line.   It's never "different this time".
 
We got a huge bump in new housing starts the last few months, and that was seen as a positive. Since I drive by a half dozen new home construction sites every day, I think I see what happened. All the builders are going like hell to finish up as many homes as possible as the prices are dropping. They're throwing in upgrades. Big discounts. A bunch of homes just bought and never lived in just went up for sale. My favorite is the guy who taped a 2x3' piece of white construction paper on his garage door with "for sale, 3 bed 2 bath, never lived in" and his phone number.

Several of the most recently sold homes have foreclosure notices on the door and big signs in the front window "construction/bank personnel only". Looks like they walked away from their deposit.

So i'm guessing the rise in new home starts is going to bottom out in a month or two. None of these builders have poured any new foundations and the interiors are just about done...then it looks like they're going to stop and wait.
 
Fed Chairman Bernanke calls the RE downturn 'orderly' and expects a 'safe landing'. I agree with him that this is the most likely scenario.

The 'Affordability index' does not factor in existing home equity or size of down payment. 2/3 of families in this country are homeowners - 90% of all homesales are from exisitng homeowners. These people have equity $$$ for large downpayments. The affordability index does not factor this in. Like I have stated previously - unless you are forced to sell, a real estate downturn will probably not effect you.
 
justin said:
CA Assoc of Realtors is probably scared of losing half its members to "reductions in force" when the market volume slows down.
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Yes, that's right. Later in same article:

"The state Dept of RE recently reported that the total number of agents in the state passed 500,000 in May for the first time. That's one agent for every 55 adults in the state." Appleton-Young, the CAR economist: "We're expecting a fairly significant shakeout."
 
Alex said:
The  'Affordability index' does not factor in existing home equity or size of down payment.   2/3 of families in this country are homeowners  - 90% of all homesales are from exisitng homeowners. These people have equity $$$ for large downpayments.
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I thought I read somewhere recently that 1/3 of homeowners have less than 5% equity in their homes.

This is intesting:
http://www.oftwominds.com/blogmay06/wealth-effect.html

If the numbers are right, it suggests that 1/2 of the $5 trillion of asset inflation was sucked out in home equity loans and spent on "stuff".

I was also reading somewhere that the oldest baby boomers are now retiring - as they retire, many will go from 2 houses to 1, then from 1 to 0 when they leave this earth - supposedly creating excesses in housing supply.

All this tells me it is NOT the time to add to your real estate exposure.

But I am NOT convinced selling what you have make sense - just seems like "selling and renting" is more risky than holding your current positions.

It will be very interesting to see how this pans out.
 
Delawaredave said:
I thought I read somewhere recently that 1/3 of homeowners have less than 5% equity in their homes.
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That'd probably be a little low. Many loans are originated with more than 5% down, although lately the 100% two mortgage deal has been common. But its probably not that low, since most people move every 5-7 years theres not a lot of room for building equity, unless they move from a high priced area to a lower priced one and their 10% in equity turns into 20%.
 
did you know that 40% of households own their property outright with ZERO mortgage? The percentage of homeowners with first mortgages has hovered around the 60 percent mark since 1988, and the percentage of owners with second mortgages has remained constant at 5 percent. The only increase has been in the percentage of consumers using equity lines of credit, where 8 percent now have a credit line versus 6 percent 10 years ago.
Nearly one in five homeowners between the ages of 18-34 has no mortgage debt. Half of all homeowners between 55-64 years of age have zero debt against their houses. And, perhaps less surprisingly, more than 80 percent of seniors 65 years and older are mortgage-free.
 
OK, so let's say the housing market is really two markets: the entry market and the upgrade market.   Obviously, affordability matters to the entry market.   And the entry market feeds into the upgrade market over time.   So, I think we can all agree that making homes so expensive that nobody can afford to enter the market is a Bad Thing for the housing market.

So, Alex's thesis seems to be that the upgrade market should continue to be healthy since there's so much equity out there, so people can just keep swapping homes and home prices will continue to rise.

Obviously, that equity swap thing has been going on forever.   That defines the upgrade market.  So, for the rate of prices to rise faster than they have historically, the amount of available equity would have to be larger than it has been historically, right?

Unfortunately, that's not the case.   In fact, the opposite is true.   The LTV for existing home owners had been pretty constant until 1992, when it increased significantly.   I.e., there is less equity available today than ever before.

Also, the debt-to-service ratio has increased steadily since 1992.   Meaning that home owners are paying out a larger percentage of their incomes for housing than ever before.

These two trends are not good for the upgrade market.

Article
 
I'm suprised that many people own home outright.  Must be either very elderly and/or people that don't live near me....

With such high ownership outright, plus fixed rate folks - suggests the "ARM readjust crisis" articles are exaggerated.

Seems easy to find lots of data to support all the possible outcomes....

http://www.foreclosurenet.net/foreclosure_resources/news/story.asp?ID=51294

"However, Duncan points out that 34 percent of all U.S. households own their homes with no debt, and another 48 percent-50 percent of homeowners have a fixed-rate mortgage. That means that 82 percent-84 percent of households are not interest-rate sensitive."
 
Delawaredave said:
I'm suprised that many people own home outright. 
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Dave,

Don't be surprised.  If you truly belive the LBYM mantra, you can redirect what most folks would spend on "toys" to eliminate your mortgage.

Example?  We are in our 4th home since we married in '69.  The one we are in now is considered our "terminal home", which we built in 1994.  It had a traditional 30-year mortgage, but through some careful LBYM planning, we paid it off in late 1999 (5.5 years).  After we did that, we took the money we used for the mortgage and redirected it to our retirement saving/investments.

This went a long ways in planning our "dream" of ER (next year, at age 59 for both of us).

No mortgage, no car payment, no CC debt.  Yes - it can be done.  The question is do you want to live a lifestyle beyond your income and be a "slave" (both to your employer and debt companies) or do you want to live life without financial worries?

If you've read this forum long enough (especially the content from the folks that have already ER'ed), I belive the answer is obvious...

BTW, our home is just that; it is not part of our retirement financial plan, but it is there as an "emergency fall-back" if our plan (validated by two separate fee-only advisors) does not pan out for the next 30+ years (any less than that, it dosen't matter!!!  ;) )

- Ron
 
Delawaredave said:
With such high ownership outright, plus fixed rate folks - suggests the "ARM readjust crisis" articles are exaggerated.

"However, Duncan points out that 34 percent of all U.S. households own their homes with no debt, and another 48 percent-50 percent of homeowners have a fixed-rate mortgage. That means that 82 percent-84 percent of households are not interest-rate sensitive."
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The thing to be careful about here is that houses, like commodities, are priced at the margin. Example: If you have 85% of households not interest rate sensitive, that means you have 15% that are....and let's say a third of those people have to sell to bring finances back into order, prices will significantly dip if there are not enough people around to buy the 5% of all houses that have to be sold. And I'll speculate many of those people are speculators gambling on the margin.

in the crude oil market the margin is about 1 million barrels per day of crude in a 75-80 million barrels a day market. A supply margin of 1-2% can be wiped out in a blink and the very next "barrel", not million barrels, sets the new price.
 
wab said:
...Also, the debt-to-service ratio has increased steadily since 1992.   Meaning that home owners are paying out a larger percentage of their incomes for housing than ever before.

These two trends are not good for the upgrade market.

Article
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Yes the upgrade market was normally fuelled by the buyer's ability to carry a higher mortgage with higher earnings. If all the equity has already been sucked out, those higher earnings have been tapped out.

Plus the upgrade market is dependent on those new purchasers upgrading at the bottom of the chain. No new purchasers eventually causes the upgrade house of cards to collapse.
 
40% of households own their property outright with ZERO mortgage?
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This sure seems to conflict with the other statistics we hear every day (e.g. 70% live paycheck-to-paycheck). I'd believe this stat for people on the ER forum (maybe 65%) but for Americans in general?
 
I seem to have observed that in most cases people's interpretations of the housing bubble (or potential, who knows what it will/would look like) depend highly on their own situations.

Some realtors insist all is well, there is slight overstock in the market but that is normal for this time of year yadah, yadah, yadah, no one really seems to listen to realtors and they seem to be in much disregard, unless of course they are one or are related to one.

Home owners insist all is well and things will keep getting better and their house prices will rise.

Talking heads simple follow the latest news and what some other pundit has said recently.

Renters and people waiting to buy think the market is in a tailspin and there will be a crash and an excellent buying opportunity.

So, me thinks it will pay to simply wait and see. ;)

SWR
 
ShokWaveRider said:
I seem to have observed that in most cases people's interpretations of the housing bubble (or potential, who knows what it will/would look like) depend highly on their own situations.

SWR
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And those of us without a mortgage and with the intent to live in the house for the next 5-10 years don't really care all that much :D
MB
 
According to an article in the San Jose Mercury News this week housing prices increased 9% year over year and 2% from last month but sales were down.  This has been the trend for a year or so.  Incidentally rent prices were up 9% also.

MB
 
mikew said:
Just some random thoughts of what I have seen in Japan.
[...]
According to our realtor, when anything interesting does come up it sells within hours but that only happens a couple of times a year.
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Our area, closer to Tokyo, is developing pretty fast, but even here the prime properties are few and far between, and you have to be on a realtor's "serious clients" list to have any hope of being notified of one in time to grab it. Anything that makes it to the public listings has already been picked over pretty thoroughly. I suppose this may be generally true whatever the state of the market.

With the Bank of Japan having ended their zero interest-rate policy, mortgage rates are starting to rise. Of course now long-term fixed-rate loans are the most popular, but I was surprised to read in the paper the other day that even up to a year ago, 90% of the loans originated were floating-rate or fixed only for a very short term (3 years typically). The reason this surprised me is that even a year ago it seemed pretty obvious that interest rates had nowhere to go but up, and and they were likely to do so sooner than later, so the choice of a fixed-rate loan seemed the obvious choice. For some people, who expected to be able to pay off the loan soon, then the floating-rate loan made sense, but even young people with no such expectation were taking out floating-rate loans. Of course, now there is a booming business in re-financing to fixed-term loans, so those people will end up with higher fixed rates than they could have had a year ago, and pay extra paperwork fees on top. I just hope their affordability calculations were not dependent on the lower rates.
 
AltaRed said:
The thing to be careful about here is that houses, like commodities, are priced at the margin.  Example: If you have 85% of households not interest rate sensitive, that means you have 15% that are....and let's say a third of those people have to sell to bring finances back into order, prices will significantly dip if there are not enough people around to buy the 5% of all houses that have to be sold. And I'll speculate many of those people are speculators gambling on the margin.
Click to expand...

This is a great point. Home prices are established only by those who sell. Something like 5% of homes sell each year, so if only 5% of home owners get in trouble, those owners/sellers will have a huge effect on prices.
 
bpp said:
With the Bank of Japan having ended their zero interest-rate policy, mortgage rates are starting to rise.  Of course now long-term fixed-rate loans are the most popular, but I was surprised to read in the paper the other day that even up to a year ago, 90% of the loans originated were floating-rate or fixed only for a very short term (3 years typically).  The reason this surprised me is that even a year ago it seemed pretty obvious that interest rates had nowhere to go but up, and and they were likely to do so sooner than later, so the choice of a fixed-rate loan seemed the obvious choice.  For some people, who expected to be able to pay off the loan soon, then the floating-rate loan made sense, but even young people with no such expectation were taking out floating-rate loans.  Of course, now there is a booming business in re-financing to fixed-term loans, so those people will end up with higher fixed rates than they could have had a year ago, and pay extra paperwork fees on top.  I just hope their affordability calculations were not dependent on the lower rates.
Click to expand...

Our mortgage is resetting this month. Our banker is still recomending a 2 year fixed rate. His reasoning is that even during the bubble the rate only went up to 4% (I am not sure how long that rate was fixed). Also the BOJ is limited in how much they can raise rates. One reason is they are worried about crashing the economy again. The other is that the govt deficit is 7% of GDP. (US is 2%)
 
mikew said:
Our mortgage is resetting this month. Our banker is still recomending a 2 year fixed rate. His reasoning is that even during the bubble the rate only went up to 4% (I am not sure how long that rate was fixed). Also the BOJ is limited in how much they can raise rates. One reason is they are worried about crashing the economy again. The other is that the govt deficit is 7% of GDP. (US is 2%)
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I wonder about the possibility of inflation. And are you sure your banker is looking out for your best interests instead of his? :)

Anecdote: a relative in the banking biz strongly urged us last year not to let the bank talk us into a floating-rate loan. He said they were pushing them with the expectation that rates would be rising soon. We were already planning on a fixed-rate loan anyway, but it was interesting to hear that perspective from the inside.

That said, I expect you are in a pretty good position to make an informed decision regardless.
 
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