patrick.net

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.

I am a speculator on many things… investments, guessing the future…

SJ_Jim,

Thanks for the analysis of "averages". I posted mine before reading yours (a frequent occurrence here, no?), but I think yours does of even better job of explaining why 50% nationwide average equity does not necessarily mean that most homeowners are in safe territory.

Allah-

Speculative Homeowner
While this term might not be found in a dictionary, I think this concept is true for a number of recent homebuyers. Hopefully most potential homebuyers work out the numbers before they buy, but those who use speculative reasoning to project their future costs/returns are indeed speculating IMO. Typical speculative homeowner behavior may include:

• Impulse buying "before they're priced out forever"
• Purchasing w/risky loan products, because of false confidence in "real estate only goes up", rescuing them from any possible default.
• Buying a beater home near market top, spending a half mil to rennovate, and assuming they'll profit selling in 5 years, because they projected the home will be worth 100% more on closing.
• Keeping present house, then pulling out equity to buy more condos or homes because of same speculative assumptions about the future.

All these cases are pretty well documented (and I know people who do all the above)

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

Same. :)

I like labels though. Without labels, we cannot call each other names. :)

Speculative Homeowner

Didn't we already have... labels... for them:

Specupants - speculating home occupants
Invesculators - investors who speculates

Also...

Invescupants - home occupants who speculate in appreciation and also rent out rooms for the "cashflow".

Specupants - speculating home occupants
Invesculators - investors who speculates

PeterP-
Haha...I must have missed those.
From 50 threads previous, eh?

can't we all just get.... ;-)

Anyhow, from Zephyr's 3:15 post:

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.

Good point -- 100% agree.

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.

Here we part ways a bit. RE demand can also be driven by easy CREDIT (as in 4 years of negative real short-term rates thanks to the Fed). I could also turn this around and say that "when real estate goes up employment does well. When real estate is weak, employment suffers". Some studies have estimated the RE component of job growth in CA since 2000 to be 50% - as in half of new jobs being directly or indirectly related to RE, home improvement, construction, etc.

Now HARM You beat me to this one.

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.

Yes in a normal market this is what happens....This is no way near a normal market. In this market, people have been buying mostly because of the over lenient lending standards not just the low rates. It is this funny money that has driven the house prices into the stratusphere.....This easy money and loose credit will be gone and there won't be anything to support the prices when it does....unless everyone gets a huge and I do mean huge raise....not likely.

"Newly abundant liquidity can readily disappear" - Alan Greenspan

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.

Again it's the easy money............Houses cannot be built faster than fools can buy them using AG's fountain of money. Housing in the bubble areas is a combination of easy money and the desire to live there plus the fear of being priced out....that is why it is not comparable to non-bubble areas. Interest rates are rising and the suicide loans are getting harder to get because the FED wants to limit there useage to reduce speculation....Since most (if not all) people who are buying now are speculators, you can see it is working.

UCLA Anderson study - Housing accounts for 70 percent CA new jobs 2003-2005:
rismedia.com/index.php/article/articleview/9680/1/1/

Bloomberg.com - Housing bubble accounts for 40 percent jobs since 2001, 68 percent new wealth:
bloomberg.com/apps/news?pid=10000103&sid=aD88.sUId1IM&refer=us

Easier credit makes the buyer more able to buy. However, easy credit does not cause stagnant markets to thrive. Markets have risen while rates were rising as often as while rates were falling.

Real estate has been about half of the new jobs, but still a small part of the total jobs. It can not do it by itself.

Easier credit makes the buyer more able to buy. However, easy credit does not cause stagnant markets to thrive. Markets have risen while rates were rising as often as while rates were falling.

You are missing my point...it's not just the low rates....it's the fact that NOW you can get a loan without any collateral or good credit. Anyone with a pulse can get a loan....It was NEVER like that before. When this housing orgy ends, who is going to do the mopping up?

Easier credit makes the buyer more able to buy. However, easy credit does not cause stagnant markets to thrive. Markets have risen while rates were rising as often as while rates were falling.

I agree that easy credit is not always a required precursor to a bull RE market; however, the current run-up in prices (100%+ increases in CA since 2000) does seem to directly owe its existence to it. I see a clear cause-effect relationship here, especially with an explosion of lax lending in the form of IOs, neg-ams, no-docs, teasers, etc. only happening after the Fed lowered rates. Flippers/Specupants/Invesculators --whatever-- only seem to care about short-term payment "affordability" and assume record price appreciation will go on forever. Lenders sell off most of these toxic loans as MBSs to investors, so don't really care whether they go south or not.

Real estate has been about half of the new jobs, but still a small part of the total jobs. It can not do it by itself.

According to a 2003 California Builder online article (that's the newest stat I could find) RE accounted for approximately 13 percent of all economic activity in the state. It may be a little higher now, but even 13% is pretty significant. If, say, 25-50% of those jobs go *poof* in the next few years, the macro impact will be very significant.

californiabuildermagazine.com/internal.asp?pid=39

SJ_Jim, you said: “I’d be curious to know exactly how they calculated the 50% national average number.”

I do not know, but I think it is based on the aggregate numbers.

allah... "You are missing my point…it’s not just the low rates….it’s the fact that NOW you can get a loan without any collateral or good credit. Anyone with a pulse can get a loan….It was NEVER like that before. When this housing orgy ends, who is going to do the mopping up?"

Allah, the house is collateral for the loan.

Yes, credit is more easily available than before. Although it was very loose in the 1980s and during the rise to other cycle peaks.

What you might not have noticed is that there are definite credit cycles in the economy. Not always the same, but they do repeat.

The world is awash with excess capital. Credit is not likely to dry up severely in the near future.

Zeph,
Thanks for your thoughtful replies.

I have a further comment:

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

This is one factor. Another factor is that in bubble markets people are putting less money for down payment & are more likely to do interest-only payment. This occurrence acts to decrease equity compared to non-bubble regions, where 10-20% is put as down payment, and principal is payed each month.
So, there we have two opposing factors contributing to the % equity figure in bubble areas--one increasing it, the other decreasing it.
The danger, of course, is that equity by appreciation can disappear, and even become negative, whereas equity by cash infusion cannot (well of course there's always inflation).

So yes at already low interest rate using IO to stretch is more serious than at high interest rate, but it is hardly suicidal if one’s income rises by 5.8% a year (last YoY data).

5.8% while not your average yearly raise is still not enough.

http://tinyurl.com/cggm7
http://tinyurl.com/e4hgm
http://tinyurl.com/cwx6n

Here's something I found entertaining:

http://tinyurl.com/8fy89

One of the more batty collections of logical fallacies I've seen.

Sorta like Lyndon Larouche on real estate.

Data point: assume a loan of 100K 30 yr fixed + 5 yr IO
if interest rate is 8.5%, during IO monthly 708, after 5 yrs 805
if interest rate is 6%, during IO monthly 500, after 5yrs 644

H.Z., I don't know what the underlying assumptions you used to calculate the monthly payments here, but this sounds rather optimistic to me. Most IOs today (never mind neg-am/"option-ARMs" which are even worse) are being offered with a "teaser rate" of 1-2 years, which can be as low as 1% --nowhere near the 5-6% interest on current standard mortgages. It is this rate --not the eventual "real" rate-- that many speculators are basing their monthly "affordability" on, because they intend to sell for a fat profit before that period expires.

On top of that, the payments will go up even more once the non-amortizing period on the mortgage ends --usually 3-7 years out. Again, the typical speculator/flipper believes s/he will sell for a profit long before then, so this "doesn't matter".

Regardless of where interest rates go from here, many of these marginal buyers are going to be in for a rude awakening.

I do not know, but I think it is based on the aggregate numbers.
I think so too...it would probably be easier to calculate it that way.
It would be very interesting, IMO, to compare the two different calculations.

HARM,

Yes, the multiplier effect of real estate is very strong. We are at the top of the cycle where the impact is greatest. As the housing market cools, the effect will be amplified by the loss of jobs resulting from the decline. As I said before it is self-accentuating.

As for interest rates and easy credit, it is important to understand that the flipper model includes only a relatively short holding period, so the interest rate is not very important. Access to credit is important.

The Fed lowered the overnight lending rate. It is an artificial rate target used to influence the market. It has direct impact on the short end of the yield curve. The capital markets including the mortgage markets work from the longer rates – principally the 10 year treasury. These are rates are driven more by inflation expectations than by the short term rates. In addition the capital markets are more international and much larger than ever before. This dwarfs the action of the Fed as far as affecting long rates is concerned.

Thanks for the laugh, KurtS. Kind of reminds me of the NYT article MP posted way back about how people not buying right now were mentally disturbed & suffered from "fear of committment". :mrgreen:

Wish I still had the link for it. Anyone?

Allah, the house is collateral for the loan.

The house being purchased is not collateral...If a borrower can get a no money down loan on an over inflated house....The lender is assuming that if the buyer cannot service his debt, he can take the house and sell it for the full amount of the loan...obviously you are assuming that it can be sold for at least the same price....this may work as house prices are on the rise, but they aren't now.

It use to require 20% down with good credit and verifiable income to get a mortgage.......now you can not only get zero down, but you can have closing costs baked right in....and your credit and income are no longer important...why?

because the bank will sell the note to fannie and is no longer liable for it. Fannie will package the note up with other notes and sell them as securities to investors.

What happens when the holder of the no-money down loan walks because his house is worth less than what his mortgage is......remember...when you put nothing down, you really aren't losing anything! This can happen with even a 5% dip.....and if it happens on a large scale, what do you think will be the outcome?