patrick.net

Fresh buyers are a small minority, and even among those people not everyone is overstretched. The bottom line is that I don’t understand why you’re saying that homeowners on the coasts are heading for “financial disaster”.

Face Reality, it depends on what you mean by "financial disaster".

What does buying at “inflated” prices have to do with being overstretched?

If I buy something with a huge pile of money I haven't earned yet and that something drops in value (what I could get for it currently).....My net worth is a negative number....I rest my case.

Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

Agreed.

If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now.

People appeared to be getting richer because of the everincreasing virtual appreciation....That has gone on the past few years.......now that has started to make a u-turn.........If you noticed, many news sources that once denied the bubble are starting to change their tune to protect their reputation.......you will see shortly.....there will be many sob stories.......the worst is just ahead.

Don’t you think there’s at least some chance that things aren’t actually as bad as you want to believe they are?

No.........but they may be worse!

What does buying at “inflated” prices have to do with being overstretched? Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

It seems rather easy to connect the dots here. Judging by the news stories, are not recent buyers spending more of their income on housing? That info is well-documented; I could dig it up myself, but so could anyone else.

Therefore, if people tap-out their incomes on the home purchase, they're setting themselves up for higher risk, especially using those crazy loan products.

Anecdotally, I know of people locally who put themselves at risk simply because they wanted to live in a higher status area. Where a fixed-rate in a modest neighborhood would suffice, they opted for an IO that would put them in a trendier area. They may have "worked the numbers" based on a series of assumptions, but it's risky all the same.

They may have “worked the numbers” based on a series of assumptions, but it’s risky all the same.

No they didn't, their honest RE agent and mortgage broker did......They know whats best for them :twisted:

Judging by the news stories, are not recent buyers spending more of their income on housing?

Virtual reality...I mean Face reality doesn't read those things.

Since we're on the subject of "facts" about the housing market, let’s recap a few more:

1. Housing affordability is now at an all time low (14%), as measured by CAR (conservatively assuming a traditional 30-yr fixed-rate mortgage): http://www.car.org/index.php?id=MzE3ODY=
It hasn't hit this low since the peak of the last bubble (May-June 1989), so exactly where are all the new buyers going to come from, especially with rates going up? Maybe that’s why “One-third of households spend more than 30 percent of their income on housing, and more than one in eight spends more than 50 percent.” http://www.msnbc.msn.com/id/8175152/

2. Buy vs. Rent in this market?? A no brainer in most parts of both coasts:
http://www.cepr.net/calculators/hb/hcc.html
http://dinkytown.net/java/MortgageRentvsBuy.html
Where’s the logic in buying when you can rent an equivalent house/unit at a discount of 30-50%? Unless, that is, your “counting” on perpetual appreciation of 20%/year forever.

3. Contrary to the belief of some on this blog, RE speculation (especially in CA) is widespread, rampant and having a BIG impact on the market. In fact, speculators comprised 23-36% of the entire national market in 2004:
http://www.rismedia.com/index.php/article/articleview/9512/1/1/
Even non-speculator FTBs have essentially been forced into using speculative financing, simply to compete in bidding wars against flippers, which explains why 70% of BA homes have been financed with IOs this year:
http://www.sanluisobispo.com/mld/sanluisobispo/business/11698635.htm
Nationally, the figure’s at 23%, an all-time high:
http://www.latimes.com/business/la-fi-rup26.3oct26,1,1539369.story?ctrack=1&cset=true

4. In 2006 some $100 billion in “creative” mortgages convert to adjustable rates (from current artificially low “teaser” rates):
http://query.nytimes.com/gst/abstract.html?res=F30E13FE3C5F0C758DDDAF0894DD404482
In 2007, this shoots up to $1 Trillion. Additionally, people with IO & neg-am loans also get the double-whammy of having these loans convert to fully amortizing mortgages at some point, usually 3-7 years from the date they signed the papers. Imagine what happens when these people (many of whom can barely “afford” their loans now) see their payments shoot up 50-100% per month?

5. That average homeowner equity “above 50%” stat is nothing to crow about --quite the contrary. “Between 1973 and 2003, homeowner's equity actually fell—from 68.3 percent to 55 percent through the second quarter in 2004. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s”:
http://www.commondreams.org/news2005/0110-04.htm
Talk about eating your seed corn!

As for rents doubling, it’s often said that a thing is worth what someone is willing to pay for it. That’s wrong. A thing is worth what someone is willing and able to pay for it, and that’s a huge difference.

This is the basis of the bubble....people are willing to pay these inflated prices and with these "suicide loans" they are able to, but when the bill comes due they will find out they were never able to in the first place. These loans are very similar to credit cards....they are basically putting their house on a credit card and paying the bare minumum due (just the interest) and Americans are very notorious for being good with credit cards!:lol:

........and as far as rents doubling, people have a choice..........if they don't want to pay the price, they get up and go somewhere else..rent is controlled by supply and demand........If you own a house in a down market, you have no such choice. Being that so many people want to own a house, they will most likely leave and buy somewhere cheaper rather than to piss away their hard earned cash on a overpriced rental.

Just so I'm not accused of being a Doomsdayer/perma-bear (again), I'm not predicting a global financial meltdown, just a very severe correction/crash in the most inflated housing markets (CA, FL, NV, MA, etc), and a moderate one elsewhere.

Soft landing coming? 'Face Reality', indeed!

Overstretched people are the ones who took a loan for which they can’t afford to make the payments. You can buy at “inflated” prices without being overstretched, and you can buy at a reasonable prices and still be overstretched.

Prices are inflated because people overstretch to buy houses.

Similarly, I don’t follow much of your logic. If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now. Don’t you think there’s at least some chance that things aren’t actually as bad as you want to believe they are?

As soon as prices stop going up, we will see a lot of trouble. There are many voodoo financing options when prices are appreciating.

Again, reflexivity.

Similarly, I don’t follow much of your logic. If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now.

Rear-view mirror driving anyone?

Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

Not exactly. Anyone who spend more than 1/3 or their gross income on housing costs (PITI + HOA + maintenance) is overstretched. (Note, this is interest-rate independent.)

fyi - My first attempt at posting this got blocked, so my above comments probably don't make a lot of sense until you read this.

Since we’re on the subject of “facts” about the housing market, let’s recap a few more:

1. Housing affordability is now at an all time low (14%), as measured by CAR (conservatively assuming a traditional 30-yr fixed-rate mortgage): car.org/index.php?id=MzE3ODY=
It hasn’t hit this low since the peak of the last bubble (May-June 1989), so exactly where are all the new buyers going to come from, especially with rates going up? Maybe that’s why “One-third of households spend more than 30 percent of their income on housing, and more than one in eight spends more than 50 percent.” msnbc.msn.com/id/8175152/

2. Buy vs. Rent in this market?? A no brainer in most parts of both coasts:
cepr.net/calculators/hb/hcc.html
dinkytown.net/java/MortgageRentvsBuy.html
Where’s the logic in buying when you can rent an equivalent house/unit at a discount of 30-50%? Unless, that is, your “counting” on perpetual appreciation of 20%/year forever.

3. Contrary to the belief of some on this blog, RE speculation (especially in CA) is widespread, rampant and having a BIG impact on the market. In fact, speculators comprised 23-36% of the entire national market in 2004:
http://www.rismedia.com/index.php/article/articleview/9512/1/1/
Even non-speculator FTBs have essentially been forced into using speculative financing, simply to compete in bidding wars against flippers, which explains why 70% of BA homes have been financed with IOs this year:
sanluisobispo.com/mld/sanluisobispo/business/11698635.htm
Nationally, the figure’s at 23%, an all-time high:
latimes.com/business/la-fi-rup26.3oct26,1,1539369.story?ctrack=1&cset=true

4. In 2006 some $100 billion in “creative” mortgages convert to adjustable rates (from current artificially low “teaser” rates):
query.nytimes.com/gst/abstract.html?res=F30E13FE3C5F0C758DDDAF0894DD404482
In 2007, this shoots up to $1 Trillion. Additionally, people with IO & neg-am loans also get the double-whammy of having these loans convert to fully amortizing mortgages at some point, usually 3-7 years from the date they signed the papers. Imagine what happens when these people (many of whom can barely “afford” their loans now) see their payments shoot up 50-100% per month?

5. That average homeowner equity “above 50%” stat is nothing to crow about –quite the contrary. “Between 1973 and 2003, homeowner’s equity actually fell—from 68.3 percent to 55 percent through the second quarter in 2004. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s”:
commondreams.org/news2005/0110-04.htm
Talk about eating your seed corn!

How likely will the tax reform become law?

I say 65 %- 75% chance. Anyone?

The Wall Street is going to love it.

Most Americans are going to love the tax credit (as oppose to deduction that they cannot take).

Rich Americans are going to love the elimination of AMT.

Who cares about Cali-phonier?

allah,

Don't worry, all credit bubbles and asset manias eventually come to the same end. As Herb Stein famously put it: "If something can't go on forever, it won't." The mounting inventory is only Act I, scene 1 in the coming crash saga (or "correction" for Jack & the bulls prefer to call it).

Peter P,
How likely will the tax reform become law?

That all depends on whose version of 'tax reform' you're referring to. I've seen a lot of different proposals, none of them have been codified/finalized into bills yet.

Not buying a lotery ticket is not gambling.

Not buying one this week because you think next week will be better is gambling.

HARM,

Comments on your points:

1. Housing markets are at or near the cyclical peak. This is not a good time to buy.

2. Renting is cheaper than buying in most places at this time.

3. Short-term speculators (flippers) distort the market by adding to demand in the short run, and then by adding to supply (once the market slows and declines) as they exit their last positions.

You say that 23% to 36% of recent buyers are speculators. But the article you linked said that this was second home buyers and investors. Some, but not all, of such buyers are speculators (flippers). I know many people who own second homes for their personal use. They have no intention of selling them. I also know some who have several such homes. In addition, many people do invest in real estate for the long run and are not flippers. There are many investors who buy to hold as rentals. Many are not very good at market timing.

With 30% of all households being renters, the market needs many investors buying property in order to provide housing for all the renters. This means that about 30% of all housing must be purchased by investors. Of course, they are mostly buying apartments and condos, but many investors buy single family homes to rent out. I do this, and I do not plan to sell.

4. People who are on the edge will be in trouble if their payments double.

5. The point of the 50% equity comment is to point out that with 50% as the average, most homeowners are far from the edge. Their homes have appreciated significantly since purchase, and a decline will cause them no financial difficulty. Disappointment, but not pain.

"...many investors buy single family homes to rent out. I do this, and I do not plan to sell." - Zephyr

Ofcourse not, afterall you don't care where the market goes. Just like Jack. That's why you both frequent this blog so often.

Pop! ;-).

Ofcourse not, afterall you don’t care where the market goes. Just like Jack. That’s why you both frequent this blog so often.

I know...why is that?

Not buying one this week because you think next week will be better is gambling.

This statement doesn't make any sense!! Whos on first?

5. The point of the 50% equity comment is to point out that with 50% as the average, most homeowners are far from the edge. Their homes have appreciated significantly since purchase, and a decline will cause them no financial difficulty. Disappointment, but not pain.

I know you realize this, but I should point it out anyways: This average number is much less meaningful without knowing the distribution. For example, this # is accurate if 50% have 100% equity and 50 % have 0% equity. Imagine if this were the case? Of course it's not, but neither is it true that 100% have 50% equity.
Also, this is a national average. I wonder what it is in the bubble areas (which is the main focus of people here)?

And honestly, I don't know if it's based on total outstanding mortgage debt vs. total US RE value, or if it's based on individual equity.
HERE's a striking example:
If Joe Blow in Nebraska owes only 25K on his 100K house, then he has a 75% equity position. If Joe Suck in San Francisco owes 300K on his 400K house, then he has a 25% equity position. So, in this situation, you have 50% national average equity position .
BUT...
NOW look at the consolidated debt vs. equity: we have 25K + 300K = 375K debt. That leaves 500K - 375K = 125K equity.
So, this would imply a 125/500 = 25% national average equity position.
Pretty amazing that both numbers, 25% and 50%, can be considered technically correct.
I'd be curious to know exactly how they calculated the 50% national average number.

Just some food for thought regarding how numbers can mean different things.

I’d be curious to know exactly how they calculated the 50% national average number.

Of course it's calculated by those in the RE industry.

Praise be to allah.

It is clear that your belief is independent of the facts, and you have no interest in learning about the market. Perhaps, you should spare yourself the heresy of my data by not reading my posts.

SJ_Jim,

Yes, the distribution around the average is important. In the bubble markets the average equity tends to be higher because the appreciation has been higher, thus adding to the owners equity position.

The 50% equity applies to all areas not just the bubble areas……..In the bubble areas, this percentage is much smaller!

Looks like allah beat me to the punch here. I could also add that averages can be deceiving, as in the fact that Lake Saint Clair is only 10' deep on average doesn't mean parts of it aren't much deeper, or that you can't drown in it. Some homeowners own their houses outright, others "own" nothing in the way of equity or very little (homedebtors). Average them together and, sure, it doesn't sound so bad.

Problem with this line of thinking is, you don't need 100% of homedebtors to default on their mortgages to have a huge impact on inventory and prices --only a small percetnage of them.

Of course, the first time buyers are more stretched in the hot markets, and any bumps in the road can have a bigger effect on them.

It is clear that your belief is independent of the facts,

You call your posts facts? I don't see anything but opinions!! ...and they're not good. Where are these facts? Do you have any links to some good sources of articles? I see some here http://tinyurl.com/444qj ..I would love to see some of yours... I am all about learning the market...that is why I am here...Why are you here if you think we are wrong? If I had any doubts of the FACT that we are right smack in the middle of the biggest housing crash in US history, I would not be wasting my time with a blog that believes in the bubble...... You won't see me going to an anti-bubble blog and tell them (the realtors and insecure marginal wannabe house-owners) who run it... that they are wrong.

HARM,

It is very true that it takes only a small percentage of the market to shift the supply-demand balance because only a small share is sold each year. So, even if only 2% of homeowners are in trouble they would still be a significant factor in the market.

However, the bigger factor is prospective buyers no longer being able to buy. This is more significant to most markets than the troubles that come to some existing homeowners.

Zephyr/allah,

I don't think we're arguing completely at cross purposes here (see Zephyr's response to my points above). It's a good idea to keep in mind that we're all generally in agreement about the bubble.

We're mostly arguing over the scale/economic impact of the correction to come. I would put Zephyr in the category (along with Jack) of 'reasonable bull' or a moderate. He has a lot of experience in the mortgage industry and I believe his insights are well worth considering.

Allah,

I though this blog was a reality parser – not a propaganda site for one point of view on the real estate bubble.

I am here to discuss the topic. We don’t have to all agree.

SJ_Jim,

In response to your earlier posts, I remember four prior cycles. I have also studied the cycles back to the 1920s. However, the data for the 1950s and prior is no longer easy to find, and it was limited when I first studied this over 30 years ago. I had access to private data that I used for my first significant study.

Anyway, you asked about real estate related employment and its affect on the market and the cycle. First of all, RE employment has always been significant to the economy. It does grow in significance as the real estate activity increases over the cycle.

The GDP multiplier effect of real estate is much larger than most industries, so a dollar spent on a new home leads to more subsequent economic activity than a dollar spent on almost all other goods. Because of this the real estate boom contributes to self-accentuation of the boom. When the real estate market slows down it can cause, or significantly contribute to a recession, and the real estate downturn or bust.

Real estate is driven by able demand – people with income and/or wealth who want to buy. Everything else is secondary. When employment goes up real estate does well. When employment is weak, real estate suffers.

The most commonly cited other factor for real estate demand is mortgage rates. However, history and market variances show that mortgage rates have an impact, but do not drive the markets. If the boom was caused by low mortgage rates then all communities would simultaneously experience the same or similar price movements and would be priced at comparable levels. However, the reality is nowhere near that.

The cycles are most pronounced in places where it is harder to provide new housing to satisfy the growing demand. Because the supply is slow to respond the supply-demand imbalance can only be addressed through price changes. Supply responds to demand on a lagging basis, and eventually overshoots the need as the market tops. The result is a growing oversupply and prices fall.

Why is no money down necessarily a speculation? Cash flow is what is important to service the debt. IO loans and ARMs are speculating on interest rate, not house appreciation. But if one couldn’t service the higher rate, house will be on the line.

When you are using no money down with an IO or NA (suicide loan), you are depending on the appreciation of the house to rise enough so you can refinance the loan with a fixed rate using the equity you have gained.....This is what most people who use these loans do.........If you put down no money, you have zero equity....even if prices stay the same, you will have to refinance eventually before the rate rises....If you have no equity, you will not be able to do that, nor would you want to do that............That makes you a speculator!

re: speculation:
Taken off businessweek, possibly mentioned above:

Second homes made up an amazing 36 percent of houses
purchased last year, the NAR reports—13 percent for
vacation use and 23 percent primarily for investment.

I'm reading 23% investment here, and I gather investors normally have a first home, no?
Also, this has to be a national average, so there are undoubtedly areas where investment is far more concentrated. Given all the get-rich types in my locale, I'm certain the figure in far higher locally.

I though this blog was a reality parser – not a propaganda site for one point of view on the real estate bubble.

I am here to discuss the topic. We don’t have to all agree.

This is not a propaganda site.....and I am not here to attack you or anyone else.....If you have something to contribute...that is great...even if it's disagreeable. This is how people learn things which is what this site is all about.....but don't try to pass your own opinions as facts. I base most of my statements on facts and I can back them up with links to articles if I have to. Sorry that your feeling were hurt :(

Allah, Go look up speculator and speculation in the dictionary. If you do so, you will see that we are all speculators on this web site.

You say that 23% to 36% of recent buyers are speculators. But the article you linked said that this was second home buyers and investors.

Is an investor also a speculator if he would not have bought without high expectation of appreciation?

People do things for multiple reasons. Labels like investor, speculator, and second-home-buyer are not mutually exclusive.

allah, My feelings are not hurt.

Allah, Go look up speculator and speculation in the dictionary. If you do so, you will see that we are all speculators on this web site.

You mean we are not? :)

I definitely consider myself a speculator.

I don't really care what labels are used for different buyers. My inerest is in the market forces and the likely results.