I think the real estate market may have finally peaked [Archive]

DVD Reviews

View Full Version : I think the real estate market may have finally peaked

Pages : [1] 2 3 4

al_bundy

06-23-05, 10:35 PM

Fatwallet has had a housing bubble thread for the last two years and lately there has been a lot of anecdotal posts from around the country about how houses aren't selling at listed prices and sellers have to drop their asking prices

A few weeks ago the NY Times reported that in NYC there is price pressure and people don't want to pay 10% over last year's prices

On Jim Cramer's Mad Money, he said that 3 home care companies had bad earnings. One is in lawn care and the other two are in something else about making your home look nice. He also warned people to start selling Home Depot and Lowe's to lock in profits

Prices of building materials are increasing and this may hurt home builders soon

I don't know if prices will fall of a cliff like some are predicting, and I doubt it will happen because I don't think people will willingly walk away and take the bad credit hit. And every local market is different so we may see appreciation in some markets and depreciation in others. But I think that prices may have finally peaked and there will be a small correction or several years of a flat housing market. I think the mania and euphoria is finally over.

EDIT
a lot of people see australia as a leading indicator and things have started to cool off there as well

and earlier this week they had an executive from ML on CNBC and he said some of the firm's wealthy clients have cashed out of RE and into bonds

On Squawk Box on CNBC this morning they said that the Chinese wanting to buy UNOCAL is an indication that they are branching out of the bond market. less money going into bonds mean rates are going to go up

monkey42

06-23-05, 10:37 PM

I just bought a house a few weeks back, so based on that, prices will drop. Its a skill I have.

Duran

06-23-05, 10:40 PM

Fatwallet has had a housing bubble thread for the last two years and lately there has been a lot of anecdotal posts from around the country about how houses aren't selling at listed prices and sellers have to drop their asking prices

On Jim Cramer's Mad Money, he said that 3 home care companies had bad earnings. One is in lawn care and the other two are in something else about making your home look nice. He also warned people to start selling Home Depot and Lowe's to lock in profits.

Jim Cramer is a hack, and Fatwallet has had that thread forever. Not that I don't believe the housing market might be at it's peak, they are just not the sources I'd use as evidence.

06-23-05, 10:42 PM

On Squawk Box on CNBC this morning they said that the Chinese wanting to buy UNOCAL is an indication that they are branching out of the bond market. less money going into bonds mean rates are going to go upThat's a bunch of crap.

The reason the yield of the 10 year T-note went down so much today is because there is such high foreign demand for it. The Chinese aren't the only players and they don't have a lot of alternatives anyway.

DodgingCars

06-23-05, 10:45 PM

I think the more telling signs as that the 5-year or so price increases have been around the world. Britain, Austrailia, France, Spain, Belgium, etc., and these countries (especially Britain and Australia) are starting to see their prices dropping. Some market have already slowed. I just heard that price increases in Orange and San Diego Co. are about a 1/3 of what they were last year (something like 7% to last years 21%).

Other indications are that too many houses have been built and there simply won't be enough demand. Estimates show that the demand should be about 1.6 million houses, but 1.9 million were built last year and 2 million are in the process of being built.

I think the bubble is coming, but some markets will be hit first -- probably California and NY first.

DodgingCars

06-23-05, 10:51 PM

Other signs we're in a bubble:

Increasing # of investors/speculators.
Increasing # of "creative mortgages."

Or the simple fact that these price cannot stay this high. It's getting to the point where about 5% of LA residents can actually afford to buy.

BigPete

06-23-05, 10:56 PM

Just give me 2 more years and I'll have my $50k down payment sitting in the bank waiting for the bubble to burst.

al_bundy

06-23-05, 11:04 PM

That's a bunch of crap.

The reason the yield of the 10 year T-note went down so much today is because there is such high foreign demand for it. The Chinese aren't the only players and they don't have a lot of alternatives anyway.

the market went down today and people usually flock to bonds in a down stock market. It's not like the whole world has to stop investing in T-Bills. Just a small percentage is big enough to send rates higher.

al_bundy

06-23-05, 11:05 PM

06-23-05, 11:06 PM

the market went down today and people usually flock to bonds in a down stock market. It's not like the whole world has to stop investing in T-Bills. Just a small percentage is big enough to send rates higher.We will see. Just like we have over the last couple of years when the experts said the same thing.

The problem is there aren't many better places to put a lot of money and the Chinese aren't going after Unocal just as an alternative investment.

DodgingCars

06-23-05, 11:15 PM

We will see. Just like we have over the last couple of years when the experts said the same thing.

The problem is there aren't many better places to put a lot of money and the Chinese aren't going after Unocal just as an alternative investment.

I like the one quote I heard, "No one knows if a bubble exists until after it bursts." or something like that. I think it's true. Though, I also like this other (paraphrased) quote: "If this many people are arguing over whether there is a bubble or not, there probably is."

The Bus

06-24-05, 02:25 AM

and earlier this week they had an executive from ML on CNBC and he said some of the firm's wealthy clients have cashed out of RE and into bonds

Bonds are a great buy. When bond prices go up, rates go down, and rates have nowhere to go but down from these 70-year historical highs.

Wait a second...

a lot of people see australia as a leading indicator and things have started to cool off there as well

That market was a lot more overheated as well, though. See, for example:
http://www.fantasticdamage.com/blog/CFN505.gif

On Squawk Box on CNBC this morning they said that the Chinese wanting to buy UNOCAL is an indication that they are branching out of the bond market. less money going into bonds mean rates are going to go up

Rates go up... prices go down... Why is this a good time to get into bonds again?

Directly from Barry Habib:

The mini-rally we’ve enjoyed the past two days is undergoing a bit of a pause this morning, but the party isn’t necessarily over quite yet. As could be expected, profit takers are grabbing their recent gains and pulling some money off the table, and this morning also brought slightly better than expected news in the form of a modest decline in the number of weekly Initial Jobless Claims.

At this point, Bonds have only given up yesterday’s mid-day gains, so rate sheets shouldn’t look much different this morning over yesterday's. It’s not unusual to see Bonds move around a little after a nice move higher, and we’ve got dual support just underfoot at the 25 and 200-day Moving Averages. With a slim economic calendar this week, these levels of support will act as our barometer. If we are able to hold ground and close above these levels, it shows Bonds may have some legs to potentially improve further. If we close below these levels, it may signal further price weakness ahead.

Another look at the health of the housing market today, as Existing Home Sales were reported basically in line with expectations at 7.13M units. In our recent exclusive interview with Frank Nothaft, Chief Economist of Freddie Mac – he noted that housing is experiencing the lowest levels of inventory available in 30 years, which definitely indicates that demand for housing is still plenty strong.

Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow will be hitting the airwaves this morning, testifying before the Senate Finance Committee on China. Topics of discussion will be their “undervalued” currency and China’s interest in purchasing Unocal, one of the largest US oil refineries. Traders will be tuning in to the proceedings for any comments of note from Greenspan or Snow.

Now, Barry Habib is about as bullish as you can find someone on the housing market, so take his words with a grain of salt.

I think "the housing market" is just the latest thing that newspapers can carry stories on. Slow news week? Run that housing market bubble story we've been holding onto for the past 10 months...

I'll put money on this statement: You will only see any major drops in nominal prices in investment and vacation homes and certain metropolitan markets (CA, NY, DC, a few others). The "bursting" of the bubble won't affect 95% of homeowners.

rexinnih

06-24-05, 10:23 AM

C'mon bubble burst. Poppa needs to buy a house.

grrrah

06-24-05, 10:55 AM

Just give me 2 more years and I'll have my $50k down payment sitting in the bank waiting for the bubble to burst.

my advice is don't wait.

I put $0 down, and have to pay the dreaded PMI. Within a year, hoping the bubble doesn't burst too bad, I will have the 20% equity, can stop the PMI, and already have a place at a better price. After 5 months, I am almost at the 20%.

Based on the bidding wars going on right now(during the winter season too), there isnt a shortage of buyers around here.

tronmaster

06-24-05, 12:07 PM

Hopefully it hits Hawaii soon, the prices here are going sky high. Price of paradise...

pyro383

06-24-05, 12:51 PM

The housing "bubble" started in 95 and after 02 they stated it wasn't a bubble because they have never seen the market sustain this type of growth it isn't typical. Prices are going to have to level off soon ie 5-10yrs because of 2 things. Kids can't afford to own and companies can't afford to pay for kids to own.

al_bundy

06-24-05, 12:52 PM

if prices have really peaked or are about to peak then I don't think interest rates have to go up. in many markets prices are at the point where you need to get an ARM or an IO loan at current low rates just to be able to make a payment.

I think what's going to happen is just what greenspan wanted to happen. The market will flatten out with maybe a slight deflation in prices and a minimum amount of foreclosures as people are able to refi into decent rates.

Duran

06-24-05, 12:57 PM

The housing "bubble" started in 95 and after 02 they stated it wasn't a bubble because they have never seen the market sustain this type of growth it isn't typical.

That's the same crap the "experts" spewed about the stock market and the breaking of the business cycle in the 90s. We saw how that turned out.

Oraphus

06-24-05, 01:47 PM

that stupid thread at fatwallet has been going for the last 3 years. Most of the people on there are idiots and talking out of their ass. If they would have invested their money in to realestate instead of posting.."it'll drop any second now" they could have made a lot of money during this time.
The prices are leveling off in certain places where they were way overinflated to begin with. See Vegas, Arizona, etc.
Other places, like Bay Area CA, are still going strong though.

al_bundy

06-24-05, 02:45 PM

i've been reading it since it was in the 30's but I did notice that the tone changed in the last month. For the last two years everyone was posting stupid newspaper stories about people bidding up prices or links to stupid books about how the world is going to end. In the last month people started posting links to stories and anecdotal evidence that there is price pressure, asking prices are dropping and homes are taking longer to sell.

In the new home sales report that came out today and volume is up, but the median price is down

fujishig

06-24-05, 03:05 PM

Well, I live in CA, and if there is no bubble, then I'm never owning a house (here, at least), since I certainly can't afford more than maybe a closet, and I'm not like most of these people who have no problem getting a interest-only loan and counting on increasing equity. I know this is the only way a lot of people can afford houses, but when more than half of new housing loans are interest only, there's a problem. Ah, I'll pay off my debt and save some money for a few years, and see what the market is like by then. If the median price rises to a mil by then, I guess I'm renting until I'm dead.

I wonder how much of the "demand" for housing is from speculators and "investors" and how much is from people actually wanting to live in them?

By the way, about Hawaii: someone mentioned (maybe in the FW thread) that the reason housing is so expensive there is because it takes so long for a new house to be built. Not to mention the limited real estate there. I was born in Hawaii, and often wonder how people can afford to live there, since last I checked, tourism is still down and that's the number one industry there, not to mention the cost of living (even taking housing out) is sky high.

Of course, I'm hoping it's not a nation-wide bubble, since that could hurt our economy, but to me the coastal real estate markets are ridiculous.

DodgingCars

06-24-05, 03:43 PM

DodgingCars

06-24-05, 03:45 PM

I wonder how much of the "demand" for housing is from speculators and "investors" and how much is from people actually wanting to live in them?

I think that I read that it's something like 30% of houses sold last year were to investors and another 30% were 2nd homes. Less than 50% of the homes bought last year were for a primary residence.

Edit: I believe this figure was in LA or California, not nationally.

fujishig

06-24-05, 04:03 PM

Without the help of "experts" though, I think some housing markets have to be at their peak. There are lower-middle class neighborhoods near me that have houses selling for $500-600k. That's nuts. Who's buying these houses? .

I read the same articles from the FW thread. You know who's buying the houses?

1. Makeshift "investors" who hope that the real estate market continues growing at it's current rate, and who either take out money from their primary home to invest in a second one, or just take out an interest-only or ARM and hope to sell in a couple of years (although that new law will kill short term sellers with taxes) They don't mind paying the appreciated price because they assume some other guy will pay even more later on down the line.

2. Young families who are afraid of being priced out of the housing market and are forced to take IO or ARM loans to even afford the monthly payments on the house. They are assured that the equity will continue to grow at this insane rate so that by the time they have to pay off principal or the rate becomes adjustable and their payments rise, they should have enough to cover it.

I'm really, really close to being buyer number 2.

DodgingCars

06-24-05, 04:08 PM

I don't know if there is a national bubble, but I do think that there are some local markets they may be in one.

Signs of a housing bubble?

MA home sales decline by 11.1 percent
Talk of a housing bubble may be a self-fulfilling prophecy (scare off buyers)
Economists at the Merrill Lynch investment firm, the University of Maryland and the UCLA Anderson Forecast all claim that the bubble is hear or near.
Foreign markets are starting to see cooling
In California the rent v. own ratio is growing further apart (meaning people can't even cover interest payments with the rent they could get)
Home prices have risen far above incomes in 30 of the nation's top 52 metropolitan areas.
Large numbers of people are using "creative" mortgages to get into homes.
The Anderson Forecast warns that the construction of new homes is outstripping the natural growth of the population.
In some markets, prices have risen about 75 percent since the start of 2001.

DodgingCars

06-24-05, 04:09 PM

I'm really, really close to being buyer number 2.

My wife and I were long priced out of the LA market. We're looking to move because of it.

al_bundy

06-24-05, 05:06 PM

Actually, there was a great article in the Economist on this. Some of their predictions seemed a little dramatic, but many of the reasons they citied that they believe that this is a bubble seemed legitimate. I know that people have talked about this for a couple of years, but I think the talk is getting more serious. We're also starting to see the market cool in some places overseas and even domestically (I mentioned earlier that Orange County and San Diego County had both seen some cooling). Most of the people that are taking the "There's no housing bubble!" stance seem to be in real estate or home building. :) I think all the talk of a housing bubble will cool the market a little (investors may back off).

We're starting to see more economists talking about seeing a bubble. There were several reports release just last week -- UCLA was one of them.

Without the help of "experts" though, I think some housing markets have to be at their peak. There are lower-middle class neighborhoods near me that have houses selling for $500-600k. That's nuts. Who's buying these houses? Houses in better areas (i.e. better school districts) have prices at about $700-800k. Someone I know lives on a street with, in my opinion, fairly modest houses selling for over a million dollars. These houses would have been $600k, at most, 5 years ago.

I read that article, and it was very short on actual facts except a few dire predictions

My theory on housing is that the whole thing is built on the first time home buyer. This is where the real cash money comes into the market. Everything else is equity and paper profits. But the real cash comes in from the first time buyer.

Example. First time buyer buys a home for $150,000 and puts 20% down. 10 years later he sells the home for $250,000 and uses the equity to buy a new home. The equity was financed by the person that bought the home from him and is now in the form of debt belonging to the current resident of that home. The original buyer most likely could not have afforded that new home without selling the original home to someone who is also probably a first time buyer.

My theory is that no matter how low rates go and no matter how much crazy financing they can think up, if the first time buyer can't afford their home then the whole system is in trouble and the more expensive homes can't get sold up the chain. In many places the market is at the point where interest rates are low, but people need crazy financing deals like IO or negative ammortization just to be able to afford the payment.

As far as bubble, I think California and Florida are maybes or most probably. NYC is a no to a small chance of a bubble here. The percentage of IO loans is one of the lowest in the country here and getting a mortgage is only part of the process. To buy most real estate you need to come up with 20% down in cash or more and have the HOA do a full background and credit check on you.

Jack Straw

06-24-05, 05:07 PM

I just bought a house a few weeks back, so based on that, prices will drop. Its a skill I have. I think this will be the first time I've offerred congrats and condolences in the same sentence.

LurkerDan

06-24-05, 05:17 PM

I don't know if there is a national bubble, but I do think that there are some local markets they may be in one.
I was goint to point this out. It seems rather silly to talk about a bubble in the abstract, as it varies so much by region. In fact, here in Boulder, we had a number of years of flat prices, even slight declines. We were hit hard by the dot-com crash, plus we have a stupid-ass constitutional amendment regarding govt spending that has been surpressing a rebound. However, in the past few months, prices finally started to crank upwards. I doubt that suddenly things will burst now.

And I hope not, seeing as I closed on a house 4 days ago. :D

Puzznic

06-24-05, 05:22 PM

I think there is definitely a bubble. When the late 90s stock bubble burst everyone ran to real estate because it was "safe". Now with so many people desperate to get into the market they have just created the same problems as the late 90s stock market. It seems like you would be better off investing in stocks now because once the real estate bubble bursts the same people will probrobly run back to stocks.

LurkerDan

06-24-05, 05:25 PM

except people need houses to live in, nobody needs stocks. thinking about it purely in the same terms as other investments, like stocks, is incorrect.

al_bundy

06-24-05, 05:27 PM

I'm way ahead of you

Forbes has a nice article of how hedge funds are manipulating prices of T-Bills and oil. I need to get me a book to really learn it

http://www.forbes.com/business/2005/06/20/bond-rates-mortgages-cx_lm_0620rates.html

al_bundy

06-24-05, 05:29 PM

except people need houses to live in, nobody needs stocks. thinking about it purely in the same terms as other investments, like stocks, is incorrect.

he meant a lot of the 1990's speculators/day traders probably moved into real estate and started flipping homes. A lot of builders are putting an end to this and now they will have to move somewhere else

www.condoflipping.com

LurkerDan

06-24-05, 06:10 PM

he meant a lot of the 1990's speculators/day traders probably moved into real estate and started flipping homes. A lot of builders are putting an end to this and now they will have to move somewhere else

www.condoflipping.com
but my point is valid. thinking about the market for stocks and the market for real estate as the same thing, 2 different types of investments that function the same, is incorrect. The market for real estate will not act the same as the market for stocks, because you don't have the same types of investors (which is due to the fact that the investments function very differently).

al_bundy

06-24-05, 07:30 PM

people sold their worthless stock certificates on ebay after the companies went bankrupt

real estate is like musical chairs, there is always a sucker at the end

if there is a bubble then some poor sucker is going to be left with a mortgage they can't afford. already has happened in las vegas

al_bundy

06-25-05, 04:26 PM

Watching a rerun of yesterday's Bloomberg and Bill Gross from Pimco was on as well as someone from Freddie Mac.

Both said that they are worried by speculation that they see in a few local markets and Bill Gross is also worried that some people are over leveraged in RE.

DodgingCars

06-25-05, 08:45 PM

I read that article, and it was very short on actual facts except a few dire predictions

My theory on housing is that the whole thing is built on the first time home buyer. This is where the real cash money comes into the market. Everything else is equity and paper profits. But the real cash comes in from the first time buyer.

Example. First time buyer buys a home for $150,000 and puts 20% down. 10 years later he sells the home for $250,000 and uses the equity to buy a new home. The equity was financed by the person that bought the home from him and is now in the form of debt belonging to the current resident of that home. The original buyer most likely could not have afforded that new home without selling the original home to someone who is also probably a first time buyer.

My theory is that no matter how low rates go and no matter how much crazy financing they can think up, if the first time buyer can't afford their home then the whole system is in trouble and the more expensive homes can't get sold up the chain. In many places the market is at the point where interest rates are low, but people need crazy financing deals like IO or negative ammortization just to be able to afford the payment.

As far as bubble, I think California and Florida are maybes or most probably. NYC is a no to a small chance of a bubble here. The percentage of IO loans is one of the lowest in the country here and getting a mortgage is only part of the process. To buy most real estate you need to come up with 20% down in cash or more and have the HOA do a full background and credit check on you.

That's an interesting theory. I think its valid. There are already markets where many first time buyers have been priced out. This of course helps drive up other markets (i.e. cities in the west: Phoenix, Portland, Vegas, etc.) But then, people start getting priced out of those markets as well.

I didn't know NYC was so weird. :)

06-25-05, 09:09 PM

Every study I have seen shows no significant correlation between real estate prices and stock market prices. There certainly isn't a negative correlation between them but there might be a slightly positive trend.

Leaving out drastic interest rate increases which I think we can agree aren't very likely to occur, real estate prices most highly correlate with wage and unemployment levels.

mosquitobite

06-25-05, 09:14 PM

High end home - I'm talking 5bd, 3+ baths and over 3000 sq ft would cost you $400K TOPS.

First time home buyers here can still own a home for around $100K.

My 2600sq ft 4bd, 2ba brick home cost $118K.

No bubble on price here :lol:

I will say though, that I have noticed a LOT more "For Rent" signs around town. Which to me, seems to point to the fact that more people can afford to buy with the lower interest rates so why rent (especially here). I do wonder what this will do to the market here since investors will have to take lower rent or sell.
:shrug:

It's got me & my hubby wondering what our next step should be.

Puzznic

06-25-05, 09:15 PM

except people need houses to live in, nobody needs stocks. thinking about it purely in the same terms as other investments, like stocks, is incorrect.

Your right, its definitely not the same. I was just looking at it in a simple human behavior way. It just reminds me of the stocks bubble because the current RE market seems to be built like a house of cards.

al_bundy

06-28-05, 02:06 PM

6 months ago I would say no way there is a bubble

but with all the "creative" financing people are using these days just to afford a payment, I don't know

SpaceBoy

06-28-05, 03:20 PM

I think there maybe is some bubble bursting, at least in certain areas.

I have been watching a few different houses around the boston area, nothing great, but pretty nice value for the money.. (right around 500k, which is a reasonable house price up here, and even then the house normally needs lots of work done)

Just this week, 2 of the 3 I had been watching dropped around 50k each, in their asking price. That's a serious drop.. I'm going to go check one of those out now.

Also, I can count at least 10-15 houses in my neighborhood where I rent and surronding areas that the houses have been sitting since before xmas forsale.

I think only marginal gains are possible anymore in some markets. Overall doubt it will ever happen. I mean if you can get 2k sq ft place, like the one poster said in IN for around 120k, how much cheaper can it get.. ha

06-28-05, 03:58 PM

6 months ago I would say no way there is a bubble

but with all the "creative" financing people are using these days just to afford a payment, I don't knowI'd sure like to hear your reasoning on this.

Deftones

06-28-05, 04:23 PM

The house prices in AZ continue to be insane. A 3800 sf house that is 12 years old just sold across from my gf's parent's house. It was bought for about $300k and just sold for $725k. -eek-

VinVega

06-28-05, 04:42 PM

There is a bubble, simply because of the 0% rate loans abounding and the speculation buying. People are buying condo's before they're even built in Florida and then flipping them after 6 months for a profit (still before they've been built). That can't continue for much longer, the market can't sustain that type of frenzy. I think they'll be a pullback, but a bust will be hard to achieve unless the interest rates skyrocket AND the economy slows.

VinVega

06-28-05, 04:47 PM

SpaceBoy

06-28-05, 04:55 PM

The house prices in AZ continue to be insane. A 3800 sf house that is 12 years old just sold across from my gf's parent's house. It was bought for about $300k and just sold for $725k. -eek-

725k for a 3800 sq ft is insane? Seems d@m good to me. My friend here got a plane 800k and it was just 2k sq ft.

Then again, the same can be said lots of places nowadays.

To bad a place that much only really does you any good if you sell it and move somewhere you dont' want to live, otherwise you just have to pay more.

Deftones

06-28-05, 04:58 PM

725k for a 3800 sq ft is insane? Seems d@m good to me. My friend here got a plane 800k and it was just 2k sq ft.

But the AZ market is different in there is infinite space to expand. It's not like an LA where growth isn't possible.

It's insane in that just two years prior, that same house would've sold for about $500k. Now it's more than doubled in price in less than 2 years. Also, all the houses in that neighborhood of similar plans have sold in the $600k range in the past 6 months. That's like almost a $75k jump in that short period of time.

al_bundy

06-28-05, 05:56 PM

I'd sure like to hear your reasoning on this.

affordability

at current low rates it should be nothing for a middle class family to buy a home on a fixed rate loan. Why are so many people getting IO loans?

How does a middle class family making $150,000 a year afford a $600,000 home in california if they are first time buyers?

My theory is that if the first time buyers can't afford then the person who is going to sell them the home can't sell it and buy something better and so on up the food chain.

06-28-05, 06:41 PM

Didn't Real Estate prices spike up after the stock market recession in the early 1990's? I don't have the numbers in front of me though.Both the stock market and the real estate market spiked up. However they don't show a long term correlation and that time period certainly doesn't show that one spikes at the expense or due to weakness of the other.

BigPete

06-28-05, 06:51 PM

How does a middle class family making $150,000 a year afford a $600,000 home in california if they are first time buyers?

Actually, 4x doesn't seem that bad to me ... lower the salary to $75k - $100k and then I'll agree with you.

06-28-05, 06:51 PM

affordability

at current low rates it should be nothing for a middle class family to buy a home on a fixed rate loan. Why are so many people getting IO loans?

How does a middle class family making $150,000 a year afford a $600,000 home in california if they are first time buyers?Let's assume they put down 10%, or $60,000. That leave $540,000 to finance.

Here are two alternatives...

An interest-only loan for a minimum of 5 years at, let's say 5.25%. That means payments of $28,350. Chicken feed, considering it's fully tax deductible.

A fully amortized 30-year loan at 5.5% means annual payments of $36,793. Again, most of that amount will be deductible as interest in the first 5 years. Over $29,500 is deductible the first year, $25,000 is still deductible in year 10.

In fact $600,000 is just about the maximum that lenders recommend for a $150,000 income.

grrrah

06-28-05, 07:05 PM

First time buyers arent the ones that typically buying the $600k homes. we are buying the 300k condos :(

the guys buying the 600k homes are the ones that bought the 150k condos, and sold it to us for 300k and used the profits as a down. or they work for google. :(

ukywyldcat

06-28-05, 07:07 PM

I think that prices may have finally peaked and there will be a small correction or several years of a flat housing market. I think the mania and euphoria is finally over.

Question: Why <i>finally</i>? Are you one of those people who are bitter that they have waited so long they are priced out? I hope not.

When I run an open house on one of my rentals, most visitors are "kick the tire" types who are obviously feeling the pain of their own stupidity. They waited when prices went up and kept waiting, waiving their fist in the air about how stupid it all is while vowing to swoop in and get a bargain-priced palace from some sucker who lost it all. These same people have been telling the same miserable story for years, and that story has served them no purpose. They love to come to the open house and try to make me as miserable as they are. They bash my plans and offer to buy at a ridiculously low price. They waste my time and I cannot stand them. (I keep needles handy for the most annoying ones)

Anyway, I can count my blessings for people like that. I lovingly refer to these losers as "tenants".

But back to my question...why are you so set that it has <i>finally</i> peaked? I don't think it has, but it has definitely slowed. I honestly don't care if it does, but I'm poised to buy if it begins to drop. Hell, I'm poised to buy if it keeps rising. I really don't give a damn.

Oh, I almost forgot. Those people who crash my open house. Quite often they are married couples. One spouse really wants to buy or rent a nicer unit than they have. The other, usually the man, wants to stay put. He is the dumb one of the two, keeping them in the rut they are in. Anyway, the man uses my open house to do two things. Remind his wife that they cannot afford to buy and to show her again just how far $600K goes, and that the $600K 1500 sq. ft. 2/2.5 home is ridiculous, and that next year they can get it for $300K when the world collapses and he is ready execute the shrewd move he has been contemplating for 5 years. The second reason to show her the rental is to remind her that their $1400 rental condo is where they should stay, because it is big compared to the newer $2500/month rental units that are half the size.

DodgingCars

06-28-05, 09:48 PM

I'll talk to you skeptics in a year and we'll see whos right. :)

06-28-05, 11:00 PM

I'll talk to you skeptics in a year and we'll see whos right. :)You mean the ones who are still living in the home they bought that might have gone down in value a little? Or the ones who still won't be able to buy a home even if it has? Or the ones who are living in the home that has gone up a lot in value? Or the ones who were suddenly able to buy a home because the values plunged 50%?

Sloth911

06-28-05, 11:18 PM

BadlyDrawnBoy

06-29-05, 01:05 AM

You mean the ones who are still living in the home they bought that might have gone down in value a little? Or the ones who still won't be able to buy a home even if it has? Or the ones who are living in the home that has gone up a lot in value? Or the ones who were suddenly able to buy a home because the values plunged 50%?

Ooh Ooh, I'm in one of those categories.

This is a great thread.

DodgingCars

06-29-05, 01:13 AM

You mean the ones who are still living in the home they bought that might have gone down in value a little? Or the ones who still won't be able to buy a home even if it has? Or the ones who are living in the home that has gone up a lot in value? Or the ones who were suddenly able to buy a home because the values plunged 50%?

Well considering this thread is about a possible bubble and there seems to be 2 views: we're in one or we're not, and I've taken the position that we are....

ummm.. you figure it out.

DodgingCars

06-29-05, 01:18 AM

Housing Bubble:
I doubt the housing bubble will burst. The prices may slowly cool off and stop increasing (when rates go up) but housing prices will NOT burst like the internet stocks did. Why? Cause homes are real property and hold real value that is unlike that value that was placed on interent stocks.

Maybe not a burst like the stock market, but I could see a quick cooling... Maybe not a burse, what a quick deflation. :) Califonia had something similar in in the early 90s.

kvrdave

06-29-05, 01:30 AM

Anyway, I can count my blessings for people like that. I lovingly refer to these losers as "tenants".

DAMN!!! I actually think there are plenty of good reasons to rent rather than buy (but not in my situation), and tend to look at my tenants as neighbors. :shrug:

06-29-05, 02:46 AM

Maybe not a burst like the stock market, but I could see a quick cooling... Maybe not a burse, what a quick deflation. :) Califonia had something similar in in the early 90s.Yes. My house went down about 11% at that time (I know because I had it appraised during the height and the slump). Everybody was in shock. Didn't matter much to me because I wasn't selling then.

During that year or so it wiped out about the previous 2 years of appreciation. Since then it's gone up 3 to 4 times the value it dropped down to.

al_bundy

06-29-05, 08:38 AM

BigPete

06-29-05, 09:09 AM

orangerory

06-29-05, 09:29 AM

I think the people who think there is a bubble that has burst (or will soon) or that everything has peaked - are those people who never "got in" and are sorry about it.

Those people who don't feel that there is a bubble (like me) are people who own more than one property, have made significant gains on their properties and are confident that they will make more.

I think that the reality is that things will slow down - but prices aren't going to drop. At least in my area (Wash. DC) - the job market is strong, rates are still reasonable (and will remain so for quite some time), and we're still nowhere near the prices of NYC or San Fran.

Anyway - I have heard people complaining about the "bubble" for 5 years - well, they sat back and waited and other folks got in on the action and made a killing. Keep complaining, keep waiting - you're not going to see a crash and you will never own.

The Bus

06-29-05, 10:04 AM

Housing Bubble:

Prices in the market continue to rise until the median two-family income in an area can no longer support the current monthly cost of the home (princiapl/interest). As long as the rates stay low, buyers can afford more principal - and the prices of homes will rise until that monthly payment is more than 30% of the median two family income. 30% is the rough debt/income
ratio that banks use to figure out how much house you can afford. In "hot" areas like NY/CA people are getting interest only mortgages - and their maximum montly payment is based on interest alone - allowing these people to afford "twice" the house of a conventional mortage. Granted, they are building no equity.

[SNIP]

Another very, very populat alternative is doing an 80/20 mortgage where 80% is in a conventional mortgage and 20% is in a HELOC that you can use to cover the down payment.

Some points are pedantic, but as a whole, this part of the message is incorrect.

First off, the ratio most banks use is 36%, although some will allow up to 45% or even 50%. (Or more, but those are specialty cases).

Second, interest only lets you afford anywhere from 10% to 30% more house, not quite twice, assuming you're not counting the period when you start paying back principal.

And third, yes, they are very much building equity. Remember:

<blockquote>Sales Price - Amount Owed = Equity</blockquote>

Even if the amount owed remains the same, increases in price will mean you gain equity. If sales prices drop (even moderately), having a regularly-amortizing loan is not going to protect you from equity loss. A 30-year mortgage gets paid down only by about 1% in the first year. If
nominal house prices were to remain stagnant, it would take five years to pay down the mortgage by 7%, which is the point where you are almost guaranteed to not come out upside-down.

Finally, an 80/20 does not need to be with a HELOC. It can be done with 30-, 20-, 15-, or 10-year fixed mortgages, with ARMs, with HELOCs, and/or with Interest Only.

What I do know is this: house price increases cannot greatly outpace wages for any significant period of time. If this rise continues, at some point, we are either need to be earning a lot more, or the pricing will cool off.

What is Likely to Happen...

Consider this: say we enter a period of (comparatively) rapid inflation. Let's say inflation is suddenly at 7%, which is high, but not alarming. Assume wages increase at 9% on average. Now interest rates are much higher (back to the "normal" 7 to 10%), making houses effectively 25-50% more costly (in terms of monthly interest payments for new home buyers). This puts a damper on house prices, which now only increase 5.5% or so a year (their long-term average).

Let's say this continues for about three years.

What has happened to the REAL price of a home in DVD Town? Let's find out, assuming this begins in 2006.¹ All figures are estimates of current indices, I'm not going to waste time to make this currently accurate since accuracy is not my focus. Anyways, let's take a look at DVD Town.

DVD Town, USA

2005
Inflation: 3.0%
Wage Increase: 3.0%
Housing Increase: 15%
Mortgage Rate: 6.25%

Which results in...
Median wage: $40,000
Median house price: $200,000
Monthly P&I housing costs²: $1231 or $1169
House Price to Wage ratio: 5.0
Housing Cost to Wage (monthly) ratio³: 36.9%

Let's see what happens later...

2006
Inflation: 7.0%
Wage Increase: 9%
Housing Increase: 5.5%
Mortgage Rate: 8.75%

Which results in...
Median wage: $43,600
Median house price: $211,000
Monthly P&I housing costs²: $1659 or $1576
House Price to Wage ratio: 4.8
Housing Cost to Wage (monthly) ratio³: 45.6%

And then...

2007
Inflation: 7.0%
Wage Increase: 9%
Housing Increase: 5.5%
Mortgage Rate: 7.5%

Which results in...
Median wage: $47,500
Median house price: $222,000
Monthly P&I housing costs²: $1552 or $1474
House Price to Wage ratio: 4.7
Housing Cost to Wage (monthly) ratio³: 39.2%

And finally...

2008
Inflation: 7.0%
Wage Increase: 9%
Housing Increase: 5.5%
Mortgage Rate: 7.5%

Which results in...
Median wage: $52,000
Median house price: $234,000
Monthly P&I housing costs²: $1636 or $1554
House Price to Wage ratio: 4.5
Housing Cost to Wage (monthly) ratio³: 43.2%

Adjusting for wages:

2008 (in 2005 earned dollars)
Median wage: $40,000
Median house price: $178,000
Monthly P&I housing cost²: $1250 or $1187
House Price to Wage ratio: 4.45
Housing Cost to Wage (monthly) ratio³: 37.5%

____________________________________________________

Results...

Homeowners who bought in 2005 have enjoyed a 17% nominal increase in their homes. If you bought a median-priced home, you made $34,000 in equity. :up:
Wage-adjusted house prices dropped 11% since 2005, or roughly 3.8% per year. :up:
For 100% or 95% financing, monthly house payments have not become more or less affordable for someone who waited it out. :up:
For homeowners who bought in 2005, the monthly payments that were $1231 are now effectively much more affordable since their wages rose from $40,000 to $52,000 per year. :up:
If first-time buyers who decided to "wait it out" saved $300 per month, by 2008 they could have a 5% down-payment.

So, in summary...

-- Houses will not become stratospherically unaffordable.

-- The wage- and inflation-adjusted price of houses may drop without an effect on the perceived value of the home.

-- Houses can be higher in price AND more affordable, even when rates rise.

____________________________________________________

¹ I am NOT predicting these exact numbers, I am simply using this as an example to illustrate my point.

² The first number is for 100% financing. The second number is for 95% financing. These are the more popular options for first-time homebuyers, since many don't have large down payments. For brevity, we assume rates are the same.

³ This ratio figures compares the 100% financing option only.

ukywyldcat

06-29-05, 12:59 PM

If first-time buyers who decided to "wait it out" saved $300 per month, by 2008 they could have a 5% down-payment.

As usual, a great overall post. I found this tidbit amusing. Another example that backs my theory that saving up for something in any long term plan is for suckers. If I can't save for something and have it by the end of the week - maybe the end of the month...I'm either not going to be interested or I'll find another way.

kvrdave

06-29-05, 01:09 PM

In reality, isn't it simply the price of the land that is skyrocketing? Won't the same $250k allow you to build the same kick-ass house as it would have 5 years ago, provided you already have a place to put it?

Sort of. Lots of building materials have gone up significantly. Codes generally become more complex over time which contribute to a higher price. And municipal hook up fees tend to go up quite a bit as well. But the land probably is over half of it.

The Bus

06-29-05, 01:48 PM

Land is land. I know that's a trite response, but it is what it is. If you're to follow the "Three Rules of Real Estate" (location, location, location), then that's all that matters. It's also the main catalyst for why a 4-bedroom ranch home sells for $135,000 in South Carolina and $980,000 in California.

However, kvrdave is right, in that other costs do change. Not only do the costs of material change (and certain ones can change quickly from year to year), but you also have the cost of labor (which has been effectively stagnant recently), and the cost of convenience of available labor. If the economy is slow and the housing market is slow, you can probably build a house to-suit for very little compared to trying to get a good builder during busy times.

Here are some costs of homes to be built in this area, not counting the site. These are estimates of appraisals, so take them with a grain of salt. They're all in Delaware, which, as a market, ranks slightly above average in house values. I'd imagine construction costs (not counting hook ups, taxes, etc.) would be similar across the country IF these appraisers are right.

BIG DISCLAIMER: I'm not a contractor, or a real estate agent, or a handyman, or an appraiser, so I can't tell you if this is right or not. This is just the info I have. This info covers the past two years, so I am just putting this up as a novelty:

$290,000 - 2,900 ft.² 2-story home, 4 Bed, 2.5 Bath, finished basement, 2 car garage, deck
$250,000 - 2,600 ft.² 2-story home, 4 Bed, 2.5 Bath, finished basement, 2 car garage
$235,000 - 1,450 ft.² 2-story home, 3 Bed, 2.5 Bath, finished basement, 2 car garage, patio & porch
$230,000 - 1,900 ft.² 2-story home, 4 Bed, 2.5 Bath, finished basement, 1 car garage, deck
$180,000 - 1,800 ft.² 1-unit twin-home, 3 Bed, 2.5 bath, finished basement, 1 car garage, covered porch
$175,000 - 1,600 ft.² 2-story home, 3 Bed, 2.5 Bath, finished basement, 1 car garage, deck
$170,000 - 1,000 ft.² ranch home, 3 Bed, 1 Bath, finished basement, patio/sun room
$170,000 - 1,300 ft.² 2-story home, 3 Bed, 1 Bath, finished basement, 2 car garage, deck & open porch
$160,000 - 1,600 ft.² 2-story home, 3 Bed, 2.5 Bath, finished basement, 2 car garage
$145,000 - 1,800 ft.² end-unit townhome, 3 Bed, 2.5 Bath, no basement, 1 car garage
$140,000 - 1,800 ft.² split-level home, 3 Bed, 1.5 Bath, finished basement, 1 car garage, deck
$130,000 - 1,200 ft.² ranch home, 3 Bed, 2 Bath, no basement, 1 car det. garage
$105,000 - 1,200 ft.² townhouse, 3 Bed, 1.5 Bath, finished basement

(All these are colonial-type houses, with wood frames, brick/siding exteriors, nothing fancy, just the typical stuff here in the East/Mid-Atlantic/New England).

Site/land values for these properties ranged from $25,000 to over $100,000. For the most part, these prices are in line with each other, and it tells us that properties that sell for $600,000 or more and have features similar to the ones in the list above have a large percentage of their value in the land. The land is what is getting so pricy, not the actual costs of building the site.

The problem with just buying land at first is that you usually need a lot more down than for a house (typically anywhere from 10 to 30% down). You might be able to buy a site for $150,000, but you will still need a hell of a lot of money, and now ALL your investment is exposed to risk as opposed to a house where at least some of the value is inherent in the structure.

Then again, if you are savvy, go ahead and buy large plots of land, subdivide them, and sell them piecemeal. I know a lot of people that have turned $10,000 into $50,000 or more over time, but they are shrewd investors.

mllefoo

06-29-05, 02:05 PM

We were told by the title company as we were signing our documents yesterday that just about 90% of the loans she sees are I/O ARMs. She was impressed we have a loan where we pay on the principle as well as interest, but we had to jump through hoops to get the loan we did. I didn't want an I/O because I'd like to build some equity, and I don't plan on moving out of my digs for a while.

The real estate market in the SF Bay Area will occasionally flatten, but it never goes down. We will be able to make a decent profit on our place in six or seven years, but unlike a lot of people who buy around here, I'm not doing this to invest. I'm buying a place so I have a place to live.

mllefoo

06-29-05, 02:17 PM

My husband brought up an interesting point: I/O loans were popular just before the stock market crash in '29.

jiggawhat

06-29-05, 02:45 PM

06-29-05, 02:54 PM

I'm a RE agent in california and I can tell you that the one thing keeping prices so high is simply Supply and Demand. Rates are low, so people are induced into buying at any cost. The one thing that does scare me is that there are so many interest only loans happening. Most of these folks don't realize that the interest only period last for a couple years, then when the period ends and they find out they have to pay both interest and principal. Usually the payment doubles and most of them simply can't afford the payments and forced to sell.The amount of I/O loans was relatively small in 2002 but now it's almost 50%, which is ridiculous.But you need to consider the time periods you're talking about here.

Interest-only loans are generally interest-only for the first 5 years. Somebody taking out that type of loan now won't have to worry about their payment going up until mid-2010. And at that time they can just refinance again, either interest-only or conventional, if interest rates/payments are more favorable at that time. Five years is a good amount of time to increase your income via raises, job switching, or inflation as well.

For the people who already have a few years on an interest-only, they can refinance now at extremely favorable rates to extend their low payments until 2010.

In addition, I think I read that the average amount of time a home is owned by someone is less than 5 years in California.

So I don't see this type of loan popping the bubble for many years, if there even is one.

kvrdave

06-29-05, 02:56 PM

Agree big time. I also don't understand the attraction people have to ARMs currently. I know the story of "I don't plan on being here longer than X years" etc. but why bother with an ARM when regular rates are incredibly low? Plans and situations change, and some people will get hurt by the ARM as well. Those suckers can shoot up a fair amount.

jiggawhat

06-29-05, 03:08 PM

But you need to consider the time periods you're talking about here.

Interest-only loans are generally interest-only for the first 5 years. Somebody taking out that type of loan now won't have to worry about their payment going up until mid-2010. And at that time they can just refinance again, either interest-only or conventional, if interest rates/payments are more favorable at that time. Five years is a good amount of time to increase your income via raises, job switching, or inflation as well.

For the people who already have a few years on an interest-only, they can refinance now at extremely favorable rates to extend their low payments until 2010.

In addition, I think I read that the average amount of time a home is owned by someone is less than 5 years in California.

So I don't see this type of loan popping the bubble for many years, if there even is one.

The loans I've been seeing lately are only interest only for 2 years.

06-29-05, 03:16 PM

The loans I've been seeing lately are only interest only for 2 years.That's not what I see around here. There are 3 year ones if you want a slightly lower interest rate, but 5 years is the norm and there are 7 and 10 year versions as well.

Just as a comparison in rates (no points)...

3 year IO 4.875%
5 year IO 5.000%
7 year IO 5.250%
10 year IO 5.500%

I saw a 1-year at 4.000% in the paper, but no 2-years advertised at all.

mllefoo

06-29-05, 03:40 PM

The I/O loan the lending agency was considering for us was five years with an enormous balloon payment due in 2010.

With our current loan, we have a balloon payment due in 15 years, but by that time we will have moved on to another, hopefully bigger place.

LurkerDan

06-29-05, 03:51 PM

But the AZ market is different in there is infinite space to expand. It's not like an LA where growth isn't possible.
You do realize that you live in a desert, right? There may be (effectively) infinite land, but there sure ain't infinite water! ;)

How does a middle class family making $150,000 a year afford a $600,000 home in california if they are first time buyers?
Um, I make about a third of that and I just bought a home that's less than half that. It can be done.
The loans I've been seeing lately are only interest only for 2 years.
Mine is for 10 years, and the interest stays fixed even after that.

JimRochester

06-29-05, 10:12 PM

No, it will wait until I pick up that investment vacation home in Florida then values will plummet 50%

Deftones

06-29-05, 11:07 PM

You do realize that you live in a desert, right? There may be (effectively) infinite land, but there sure ain't infinite water! ;)

Of course there isn't. But, if there's one thing that those damned Mormons did is make sure AZ keeps most of the water that runs into the state. They made all sorts of exclusive deals back in the early to mid 1900's to ensure Phoenix would have water for generations to come.

Recently, one of the federal courts decided that LA and SD can't have a drop of water from Colorado. Nevada, luckily, got some of their water rights back from Lake Mead as a result of this federal court decision.

If anything, Californians should be worried about running out of water. ;)

LurkerDan

06-30-05, 11:29 AM

Of course there isn't. But, if there's one thing that those damned Mormons did is make sure AZ keeps most of the water that runs into the state. They made all sorts of exclusive deals back in the early to mid 1900's to ensure Phoenix would have water for generations to come.

Recently, one of the federal courts decided that LA and SD can't have a drop of water from Colorado. Nevada, luckily, got some of their water rights back from Lake Mead as a result of this federal court decision.

If anything, Californians should be worried about running out of water. ;)
Yeah, I was mostly kidding, I know AZ has lots of water rights. Though it always kills me when I drive there and see all the pretty green lawns, and think how much water is wasted growing lawns in the desert.

You're right, California has more to worry about, though of course as residents of the West, I think we all need to be conscious of the water problem (heck, you just got back from Lake Powell, how different is it looking?).

kvrdave

06-30-05, 11:42 AM

If anything, Californians should be worried about running out of water. ;)

Boy, that's the truth. I have been surprised that there hasn't been more attention to it. I also blame them for low flow toilet legislation.

But there are a lot of stupid things that blanket legislations do. Forks, Washington gets about 120 inches of rain a year, and yet they have the same requirements for septic tanks as I do with 16 inches of rain a year. Stupid.

BadlyDrawnBoy

06-30-05, 12:01 PM

my int only is a 3/1, but I am in a TIC Agreetment with a partner, and I know that when we convert the units to condo, we will refinance, so the lower rate was key for me, why throw money away when I need that money to use for condo converstion costs.

Deftones

06-30-05, 02:28 PM

Yeah, I was mostly kidding, I know AZ has lots of water rights. Though it always kills me when I drive there and see all the pretty green lawns, and think how much water is wasted growing lawns in the desert.

You're right, California has more to worry about, though of course as residents of the West, I think we all need to be conscious of the water problem (heck, you just got back from Lake Powell, how different is it looking?).

Those are few and far between anymore. Most new builds have desert landscaping. It's easier to take care of and requires much, much less water. Even still, if you decide to have a lawn you have to be water conscious. Some cities (Phoenix and Mesa) can fine you if you have excess water running down the street gutters from your property.

As for Lake Powell, it's amazing what some rain can do. It's going to be quite a while before it's back to full pool (about 14 years ago was the peak), however the Lake is up at least 20 feet this year and actually rose 4 feet in the week we were there. So it's getting better, but still not ideal.

DaveNinja

06-30-05, 02:38 PM

Southern California needs to worry about water, not Northern California (they're 2 seperate states now, right?)

al_bundy

07-06-05, 03:13 PM

DodgingCars

07-06-05, 03:14 PM

Southern California needs to worry about water, not Northern California (they're 2 seperate states now, right?)

SoCal takes all of NoCal's water... at least that's what NoCal claims. The truth is, central California (agriculture) gets most of it.

DodgingCars

07-06-05, 03:19 PM

CSFB downgraded KB Homes a few days ago citing risks in certain markets

KB Homes is selling it's mortgage unit to Countrywide. KB Homes supposedly wrote up a lot of IO loans. I think that their management learned a thing or two from the telecom meltdown of a few years ago and are trying to minimize their risk to having a lot of people default.

CSFB downgrades homebuilders
Lower ratings on Ryland, KB Home, M.D.C. Holdings
By John Spence, MarketWatch
Last Update: 4:21 PM ET July 5, 2005

BOSTON (MarketWatch) -- Analysts at Credit Suisse First Boston on Tuesday morning downgraded two large U.S. homebuilder stocks on risks in key markets, and another on valuation concerns.

CSFB said it believes that "there is not a national housing bubble but . . . there is significant risk in markets where the builders derive a large percentage of profits."

Analysts downgraded KB Home (KBH: news, chart, profile) and M.D.C. Holdings Inc. (MDC: news, chart, profile) to underperform from neutral because they said the companies have higher exposure to speculative housing markets that could see a turnaround if investor sentiment shifts.

CSFB said KB Home remains highly exposed to Las Vegas, Phoenix and many California markets that the broker views as risky based on excessive investing, above-average home price appreciation, interest-only market share, job growth and permit growth.

CSFB estimates that Arizona, California and Nevada comprise roughly 77% of KB Home's operating profit. Meanwhile, analysts estimate these three hot markets represent about 71% of M.D.C. Holdings' operating profit.

On Tuesday, shares of KB Home lost 73 cents to $75, and M.D.C. Holdings shed 76 cents to $80.75.

The broker also downgraded shares of Ryland Group Inc. (RYL: news, chart, profile) to neutral from outperform on a valuation that it believes has approached a peak relative to its peers.

However, CSFB said it believes Ryland "still benefits from one of the most risk-averse and differentiated business models among the public builders," citing the company's strategy of not over investing in any particular market.

CSFB estimates only 66% of Ryland's operating income is derived from its five most profitable states, compared with 85% on average for other homebuilders the broker covers. Also, the analysts said Ryland has relatively lower exposure to some of the most speculative markets.

"As such, this downgrade is based solely on valuation and we would likely revisit our outperform rating at a more attractive price," CSFB analysts wrote.

Shares of Ryland lost 54 cents to close $75.46.

CSFB also reiterated its outperform rating on shares Centex Corp. (CTX: news, chart, profile) and raised its target price to $80 from $71 based on its relatively lower exposure to the riskiest housing markets.

Shares of Centex last gained 62 cents to $71.36 on Tuesday.

John Spence is a reporter for MarketWatch in Boston.

http://www.marketwatch.com/news/story.asp?guid=%7BD65622C0-2DCF-4374-B70A-A75482F57135%7D&siteid=google

The Bus

07-19-05, 08:57 AM

(All emphasis mine.)

Housing Goes Frothy to Flat in Denver Area
By MOTOKO RICH
Published: July 17, 2005

http://graphics8.nytimes.com/images/2005/07/17/national/17denver.1841.jpg
Kevin Moloney for The New York Times
To entice homebuyers, sellers are reducing prices in Denver as the once-hot housing market there slumps.

PARKER, Colo., July 12 - Tom Woods, a 37-year-old defense industry consultant, wanted to build a nest egg for one of his young sons' college tuition. Inspired by rising prices for homes in this Denver suburb, three years ago he invested in a new three-bedroom townhouse for $155,000. His hopes were that renters would cover most of his mortgage and that the property's value would appreciate by at least $10,000 a year.

But last October, when Mr. Woods put the townhouse up for sale to help pay some unforeseen medical bills, there was more pain than gain: the house sat on the market for eight months. He finally found a buyer in June, but to seal the deal he had to make big concessions, including paying the buyer's closing costs. After handing over the keys on Friday, he ended up with a profit of just $10,000 for his three-year investment.

Even as prices for homes in frothy markets like Las Vegas; Riverside, Calif.; Miami; and Washington are still jumping by more than 20 percent a year, Denver's homeowners are learning the hard way about living through the real estate doldrums. Five years ago, median house prices were rising at an annual clip of nearly 17 percent. By the first quarter of 2005 the increase had slipped to 3 percent, according to an analysis by Economy.com, a research firm.

Still, some Denver homeowners have read reports in the news media of skyrocketing prices elsewhere and assume they are accumulating wealth in their homes at the same rapid pace.

"I was surprised," Mr. Woods said. "My expectations were higher."

Although sellers continue to profit, houses are sitting on the market longer, buyers are negotiating harder, and some owners, particularly young buyers who may have been counting on rapid appreciation, are postponing dreams of renovations, moves to larger homes and big savings for their families.

With economists warning that prices in hot markets cannot continue to rise as sharply as they have in the past few years, the experience of Denver's homeowners may foreshadow what could happen if those markets start to cool. Denver's circumstances are in some ways particular to the area, driven largely by job losses in the telecom sector, but they illustrate how a moderate slowdown could play out for homeowners in other parts of the country and stand as a potent reminder that galloping price appreciation is not the norm.

Economists are divided as to whether certain markets will simply cool off, or whether they will actually melt and send prices plummeting, as happened in parts of California, New England and New York in the 1980's and early 1990's. Earlier this year, Federal Reserve Chairman Alan Greenspan said some metro areas were showing signs of "froth."

Optimists point to Denver as a model of an adjusting real estate market. "I think it's a good example of when a market softens, what happens," said David Lereah, the chief economist of the National Association of Realtors, a trade association. "You see double-digit price appreciation go down to 4 percent or even 1 percent, and then it starts coming back to a historical norm of between 4 and 6 percent. That's very healthy. That's wonderful. It beats inflation."

But many analysts take a gloomier perspective, suggesting that the most heated markets could suffer more than Denver's so-called soft landing. "I think Denver is a best-case scenario," said John H. Vogel Jr., adjunct professor of real estate at the Tuck School of Business at Dartmouth College. In the case of markets like Naples, Fla.; Miami; and New York, he said, "I think you'll see dramatic price decreases because I think the prices have become artificially inflated by trading and speculation."

Denver's housing boom never quite reached the heights of Las Vegas's, for example, where home prices increased by nearly 33 percent in the first quarter of this year, according to Economy.com. But from 1998 through the third quarter of 2001, homeowners in sprawling Denver enjoyed double-digit appreciation as telecom employers like Qwest Communications International added jobs - and homebuyers - to the market.

From December 2000 to September 2003, however, Denver lost about 74,000 jobs, about 6 percent of its job base, according to Economy.com. Increases in home prices stalled, then started to taper off. Houses lingered on the market, and sellers were forced to cut prices.

Touring a development last week in Castle Rock, a southeastern suburb, Tom Santilli, an agent with Re/Max Alliance, pointed out a four-bedroom house that had not sold for five months, despite its impeccable condition. The price had been lowered to $396,500 from $419,000, but because of a few flaws - a smallish family room, and white kitchen cabinets instead of wood and glass - the sellers had "not even had a low-ball offer" after showing it to 65 prospective buyers, Mr. Santilli said.

Where buyers here had few properties to choose from in the late 1990's, today they can afford to be picky. Inventories of available homes have tripled from 8,010 in January 2000 to 25,817 in June, according to Gary Bauer, a real estate broker and consultant in Denver.

Sellers are also competing with homebuilders, who are offering incentives like discounted mortgage rates and free air-conditioning.

At Sapphire Pointe, a subdivision in Castle Rock, huge beige and cream houses, dubbed prairie palaces by local residents, are clustered along curving lanes and cul-de-sacs. Last week the builder, D. R. Horton Continental Series, was offering a four-bedroom, 4,371-square-foot house for $489,697, $40,000 below the listed price. The builder had added upgrades that included fireplaces; granite countertops; and metal banister pickets on the curving staircase. The master bathroom was bigger than some studio apartments in Manhattan.

Many sellers of existing homes are offering incentives of their own. When Mary Ann and Brian Kuklinski put their mocha-colored three-bedroom house on the market in May for $275,000, they knew that a house nearby had languished on the market for eight months. After five weeks and 30 showings, they reached a deal by lowering their price to $270,000 and throwing in their washer and dryer, the refrigerator, and a swing set in the backyard.

The Kuklinskis, who have three sons, ages 11, 7 and 5, paid $197,000 for their home in 1999 and ended up with enough appreciation to help with a down payment on a house they are building nearby, a $385,000 four-bedroom with a three-car garage.

But for other homeowners, the calculus of the 1990's that might have led them to trade up quickly no longer applies. "When the market was strong, somebody would move up to a nicer home in two years because they had so much equity," said Karen Snyder, an owner of Metro Brokers Right Realty in Centennial, a suburb southeast of Denver. Now, she said, "they're just staying put."

Those who had hoped to tap increased equity to pay for home improvements are also scrapping their plans. Gustavo Salazar, a high school math teacher, bought a small house with his fiancée, her sister and her boyfriend two years ago for $232,000. Earlier this year they decided to refinish the basement. But when they checked with their mortgage lender, they learned that they only had about $9,000 of equity in the house, less than the estimated $15,000 they would need for the project.

Mr. Salazar, 30, said he was shocked that the house had appreciated so little. "I was thinking the market was going up because this is such a nice area," he said.

Michelle Konishi and her husband, Jeff Konishi, were living in a four-bedroom, four-bathroom house not far from Mr. Salazar when they filed for divorce. They paid about $350,000 in 1999 to build their house, and put it on the market at $474,900 in April 2003. Five price cuts and 10 months later, they sold it for $405,500. Because they had invested in landscaping, a deck, carpeting and custom window coverings, Ms. Konishi said, the couple just about broke even.

Local analysts say it was inevitable that surging prices would not last. "Now we're back to what I would portray as a normal market," said Mr. Bauer, the real estate consultant. "Historically we had 5 percent appreciation, and now we have 5 percent appreciation."

While many homeowners have adjusted to the new reality, others pine for the good times that still exist in other markets.

When sellers come in with high expectations, Chad Ochsner, a managing broker with Re/Max Alliance, said he reminds them that "just because it's like that in Las Vegas or Phoenix, that doesn't necessarily mean it's going to be the same way here in Denver."

If some of those places follow Denver's lead, it may be for reasons other than those that softened Denver's conditions, economists say. "The thing that weighed on Denver's housing market was its job market," said Mark Zandi, chief economist at Economy.com. He added, "The concern now is that interest rates rise and suck the wind out of housing demand."

In fact, analysts say the Denver market has remained as healthy as it has because of low mortgage rates as well as creative financing, including no-money-down and interest-only loans. Interest-only loans have accounted for a high rate - 42 percent - of purchase loans over $360,000 in Denver this year, according to LoanPerformance, a mortgage data firm.

That unnerves some economists, who say that even with appreciation of less than 5 percent, Denver's housing prices may be overvalued.

"I think it is a very frothy market," said Tucker Hart Adams, the chief economist of the Rocky Mountain region for U. S. Bank, adding that those who bought homes with interest-only or variable-rate mortgages could be vulnerable. "When rates start moving up, they're going to see their payments go up," she said. "When people start getting nervous and start to sell, it's a downward spiral."

Despite the warnings, some of those like Mr. Woods, who have seen less than stellar returns, say they have not soured on real estate. Mr. Woods said he still hopes to invest in real estate and pay for his three children's college educations. "If I had the cash available to invest in a rental property, I would do it," he said. "It's a pain, but I still think, over time, that there are some real good benefits to it."

Source: New York Times (http://www.nytimes.com/2005/07/17/national/17denver.html?incamp=article_popular)

The Bus

07-19-05, 08:59 AM

That's not what I see around here. There are 3 year ones if you want a slightly lower interest rate, but 5 years is the norm and there are 7 and 10 year versions as well.

Just as a comparison in rates (no points)...

3 year IO 4.875%
5 year IO 5.000%
7 year IO 5.250%
10 year IO 5.500%

I saw a 1-year at 4.000% in the paper, but no 2-years advertised at all.

2-yr ARMs (or 2/28s) are generally products only sold by subprime lenders, like Household, Option One, Ameriquest, First Franklin, Citifinancial, New Century, etc.

VinVega

07-19-05, 02:14 PM

al_bundy

07-19-05, 03:22 PM

I don't believe NYC is risky because of the low investor ratio and the low IO loan ratio. The biggest thing that drove housing prices in Manhattan in the last 2 years was Wall Street bonuses. Some stocks are 10x - 100x higher than their 2002 prices and people got rewarded for making bets on them.

I was going to bump this but someone beat me to it. I read this on a blog and it made me think. The price appreciation is slowing down and this should get the investors and the flippers out of the market and cool things off or cause a price drop if there is suddenly a lot of inventory. Investors that that hold a lot of property need it to appreciate at least 6% per year or they will lose money. If prices start to appreciate slower than they lose money and this may put inventory on the market and slow demand as well.

DodgingCars

07-19-05, 03:31 PM

I heard about that 13 markets things on the radio. The guys behind it talked about the formula they used to help come up with the list. If I remember these were some of the things they used:

Rent to mortgage ratio
Job market (expected increase or decrease in unemployment)
Speculation

Edit: The article mentions:
Job growth, population, median income and affordability all play roles in determining which markets are vulnerable to price declines.

I find it surpising that neither Las Vegas nor Phoenix is on the list, because I believe both have had the most extreme increases in prices.

VinVega

07-19-05, 03:50 PM

I find it surpising that neither Las Vegas nor Phoenix is on the list, because I believe both have had the most extreme increases in prices.
Personally, I think the flood of people to Vegas and Phoenix has little to do with real estate speculation. It has more to do with cost of living/escaping the insane CA market. A lot of people expect that migration to continue, regardless of the housing market.

LurkerDan

07-19-05, 03:53 PM

Cool, no housing crash in the Denver area! :banana:

Denver and Colorado have been growing through some rough times economically. The loss of telecom jobs only tells part of the story, a retarded constitutional amendment passed in 1992 tells the rest. The amendment basically makes it very hard for the state to pull out of an economic downturn when one happens. So, to hear that people are just not getting huge returns is ok with me, doesn't make my very recent home purchase seem like a bad move. And Boulder is also a somewhat different market than Denver.

Aphex Twin

07-19-05, 04:23 PM

BigDan

07-19-05, 04:27 PM

Orange County is probably lumped in with Los Angeles.

al_bundy

07-20-05, 05:08 PM

Looking at the market lately and I think California may be saved. Tech is on a roar and this increases the value of people's stock options. People cash in their options and pay off their mortgage therefore avoiding a nasty ammortization surprise a few years down the road.

If this is the case, then I have to put this away into the remember for later. I don't know if it's a coincidence that IO loans shot up in the first part of the year just as tech started coming back. People must have seen that business is going to improve later in the year, leveraged nice houses and will pay them off with options while enjoying nice capital gains. The ultimate form of insider buying.

kvrdave

07-20-05, 05:31 PM

I'm ready for the peak. Working to hard and making too much money. I'm probably down around 12 posts per day!!!! :(

Deftones

07-20-05, 10:08 PM

Personally, I think the flood of people to Vegas and Phoenix has little to do with real estate speculation. It has more to do with cost of living/escaping the insane CA market. A lot of people expect that migration to continue, regardless of the housing market.

That's the problem. There wasn't a flood of people moving to Phoenix. 25% of all new homes sold last year were from real estate investors from other states. Now that homebuilding companies have wised up to it, they have restrictions on who can buy and how long you have to live there.

SpaceBoy

07-20-05, 10:23 PM

13 Riskiest Housing Markets in US (http://biz.yahoo.com/special/re05.html)

The Riskiest Housing Markets

1. Boston, MA
2. New York, NY
3. Fort Lauderdale, FL
4. Washington DC
5. Detroit, MI
6. Los Angeles, CA
7. San Francisco, CA
8. Sacramento, CA
9. Providence, RI
10. Minneapolis-St. Paul, MN
11. Denver, CO
12. Miami, FL
13. Tampa-St. Petersburg

The Bubble is here. :)

That's not to promising to me, with me and my fiance considering buying.. I myself am trying to get her to wait, because I agree with this list, and I really believe things are going to drop somewhat here (not huge, but if I can save 10-20k I'll take it, since it's gonna cost 500k or so just to get a fixer upper not even close to boston)

DodgingCars

07-20-05, 10:44 PM

That's the problem. There wasn't a flood of people moving to Phoenix. 25% of all new homes sold last year were from real estate investors from other states. Now that homebuilding companies have wised up to it, they have restrictions on who can buy and how long you have to live there.

Phoenix did have a large increase in their population over the last year. I think in pure numbers (not percent), they were #1 last year in population growth.

However, you're right... There are tons of out of state investors in the Phoenix market. In fact, I heard a story that some HOA in the Phoenix area wanted to prevent homeowners there from renting out their property (they had to either occupy it or sell it) because of the large number of people who were buying and renting out.

On the topic of crazy house prices... my wife and I walked buy a townhouse for sale in our area and I picked up a flyer. 2300 sq ft townhome (3 units complex) in Lomita (LA school district) --- $679,000.

Ranger

07-20-05, 10:54 PM

Oh my. That's pretty expensive for a townhouse.

I'm still considering moving to Boston after I finish school (just one more damn year) because I have some relatives there and I thought the job market would be better, but the cost of living in these cities just seem ridiculously high so I guess I'd be better off staying in the red stick.

The Bus

07-21-05, 10:16 AM

Phoenix did have a large increase in their population over the last year. I think in pure numbers (not percent), they were #1 last year in population growth.

However, you're right... There are tons of out of state investors in the Phoenix market. In fact, I heard a story that some HOA in the Phoenix area wanted to prevent homeowners there from renting out their property (they had to either occupy it or sell it) because of the large number of people who were buying and renting out.

On the topic of crazy house prices... my wife and I walked buy a townhouse for sale in our area and I picked up a flyer. 2300 sq ft townhome (3 units complex) in Lomita (LA school district) --- $679,000.

I just walked by a townhome for sale at the end of my street (same as mine), and they had it for sale for $209,000. That would give me a $50,000 increase in <2 years. Crazy.

:whofart:

neiname

07-21-05, 10:35 AM

I just walked doen the block from where I live and there is a townhouse that just went on the market at $10,000,000. It's near the park though.

Deftones

07-21-05, 11:00 AM

Phoenix did have a large increase in their population over the last year. I think in pure numbers (not percent), they were #1 last year in population growth.

However, you're right... There are tons of out of state investors in the Phoenix market. In fact, I heard a story that some HOA in the Phoenix area wanted to prevent homeowners there from renting out their property (they had to either occupy it or sell it) because of the large number of people who were buying and renting out.

On the topic of crazy house prices... my wife and I walked buy a townhouse for sale in our area and I picked up a flyer. 2300 sq ft townhome (3 units complex) in Lomita (LA school district) --- $679,000.

Actually from my recollection, Vegas has been #1 the past 2 years. But that's neither here nor there. ;)

There has been an increase in population, and that's why the state was looking ahead when the light rail was proposed. Should be done by 2008, I think.

DodgingCars

07-21-05, 11:06 AM

Actually from my recollection, Vegas has been #1 the past 2 years. But that's neither here nor there. ;)

There has been an increase in population, and that's why the state was looking ahead when the light rail was proposed. Should be done by 2008, I think.

"Phoenix had the greatest population gain among the nation's largest cities - an increase of 29,826 residents from July 2003 to July 2004"

http://www.azcentral.com/news/articles/0719census-ON.html

:)

:p

Deftones

07-21-05, 01:23 PM

"Phoenix had the greatest population gain among the nation's largest cities - an increase of 29,826 residents from July 2003 to July 2004"

http://www.azcentral.com/news/articles/0719census-ON.html

:)

:p

You are reading that incorrectly. Las Vegas isn't considered a large city, yet. Phoenix only had the most growth amongst the top 10 - 15 populous cities.

When Phoenix gets put into the top tiers of these lists, it is because they are including Phoenix metro (Mesa, Tempe, Chandler, Gilbert, Peoria, Glendale). Phoenix alone doesn't have a huge population growth that these other cities are.

In fact, Gilbert and Chandler had nearly the same growth population wise in actual numbers, but the percentages were far higher since their head count is much lower than Phoenix.

grrrah

07-21-05, 01:32 PM

I just walked by a townhome for sale at the end of my street (same as mine), and they had it for sale for $209,000. That would give me a $50,000 increase in <2 years. Crazy.

:whofart:

similar here for me but ~6 months after I saw that, I looked into maturity lengths. Too bad I will still have to pay PMI for 1.5 more years :( . Oh well, Thats why I hoping there isnt a major burst. 50K+growth in the next 1.5 years is better than not paying the $200*24 months and saving 10-20k.

grrrah

07-21-05, 01:34 PM

You are reading that incorrectly. Las Vegas isn't considered a large city, yet. Phoenix only had the most growth amongst the top 10 - 15 populous cities.

When Phoenix gets put into the top tiers of these lists, it is because they are including Phoenix metro (Mesa, Tempe, Chandler, Gilbert, Peoria, Glendale). Phoenix alone doesn't have a huge population growth that these other cities are.

In fact, Gilbert and Chandler had nearly the same growth population wise in actual numbers, but the percentages were far higher since their head count is much lower than Phoenix.

I don't know much about population growth in AZ, but I have 3 friends, that couldn't afford to buy here in CA, but bought in AZ and FL to rent out while they are renting here in CA. The 2 that bought in AZ have no plans whatsoever to move there, and the 1 that bought in FL said it was very unlikely that he would move there.

Deftones

07-21-05, 01:36 PM

Yeah. Your friends are the a-holes that are ruining our market. ;)

DodgingCars

07-21-05, 03:07 PM

You are reading that incorrectly. Las Vegas isn't considered a large city, yet. Phoenix only had the most growth amongst the top 10 - 15 populous cities.

When Phoenix gets put into the top tiers of these lists, it is because they are including Phoenix metro (Mesa, Tempe, Chandler, Gilbert, Peoria, Glendale). Phoenix alone doesn't have a huge population growth that these other cities are.

In fact, Gilbert and Chandler had nearly the same growth population wise in actual numbers, but the percentages were far higher since their head count is much lower than Phoenix.

You're right. I found something showing that Gilbert's population growth was actually larger than Phoenix's. This was just for "large cities"

Aphex Twin

07-21-05, 03:58 PM

You are reading that incorrectly. Las Vegas isn't considered a large city, yet. Phoenix only had the most growth amongst the top 10 - 15 populous cities.

When Phoenix gets put into the top tiers of these lists, it is because they are including Phoenix metro (Mesa, Tempe, Chandler, Gilbert, Peoria, Glendale). Phoenix alone doesn't have a huge population growth that these other cities are.

In fact, Gilbert and Chandler had nearly the same growth population wise in actual numbers, but the percentages were far higher since their head count is much lower than Phoenix.

It's really hot in Phoenix. 18 people have died due to the heat. I wonder what that does to the population growth and real estate prices.

07-21-05, 04:26 PM

Yeah, lately it's been 50 degrees hotter in Phoenix than where I live.

I grew up in Phoenix and the heat didn't seem so bad when I was a kid but I'd never want to live there again unless I could be gone from June through October.

07-25-05, 12:26 PM

Existing home sales set record in June

House prices rise at fastest pace in 25 years

WASHINGTON - Sales of existing homes set a record in June with home prices shooting up at the fastest pace in nearly 25 years.

The National Association of Realtors reported that existing homes were sold at a seasonally adjusted annual rate of 7.33 million units last month, a gain of 2.7 percent from the May sales pace.

The torrid sales pace helped to push the median price of an existing home up to a record of $219,000 last month, a gain of 14.7 percent from the median, or midpoint, for prices a year ago. That was the biggest jump in prices since November 1980.

The June performance was better than expectations as the nation’s housing market continued to flash signals that some parts of the country could be in the grip of what Federal Reserve Chairman Alan Greenspan last week called a “speculative fervor.”

The concern is that housing prices are rising at a pace that is unsustainable and that in some parts of the country could start declining if rising interest rates begin to weaken demand.

Such a development could spell trouble for homeowners who find the value of their homes falling below the value of the mortgage they obtained to finance the purchase.

For June, sales were strong in all regions of the country. Sales in the West rose by 5.5 percent. Sales were up 3.4 percent in the Northeast, 1.9 percent in the Midwest and 1.1 percent in the South.

The performance in June beat expectations. Many economists had expected sales last month would be flat, given the strong increases in previous months.

“Just when you think sales activity is ready to settle into a more sustainable pace, the housing market continues to surprise,” said David Lereah, chief economist at the Realtors.

Lereah said the boom in housing is being driven by mortgage rates which, defying expectations, have remained near rock-bottom levels this year even as the Federal Reserve has continued to raise short-term interest rates.

However, mortgage rates have risen in the past three weeks, according to a national survey by mortgage giant Freddie Mac.

Lereah said as long as rates continue to rise slowly, he predicted that sales of both new and existing homes will decline only slightly in the second half of the year.

Sales of both existing and new homes have set records in the past four years and many analysts are looking for both sales groups to climb to new records this year as well. Just to lend a little perspective, here are the average 30 year fixed mortgage rates from 1980 and surrounding years...

01/1979 10.39
02/1979 10.41
03/1979 10.43
04/1979 10.50
05/1979 10.69
06/1979 11.04
07/1979 11.09
08/1979 11.09
09/1979 11.30
10/1979 11.64
11/1979 12.83
12/1979 12.90
01/1980 12.88
02/1980 13.04
03/1980 15.28
04/1980 16.33
05/1980 14.26
06/1980 12.71
07/1980 12.19
08/1980 12.56
09/1980 13.20
10/1980 13.79
11/1980 14.21
12/1980 14.79
01/1981 14.90
02/1981 15.13
03/1981 15.40
04/1981 15.58
05/1981 16.40
06/1981 16.70
07/1981 16.83
08/1981 17.29
09/1981 18.16
10/1981 18.45
11/1981 17.83
12/1981 16.92
01/1982 17.40
02/1982 17.60
03/1982 17.16
04/1982 16.89
05/1982 16.68
06/1982 16.70
07/1982 16.82
08/1982 16.27
09/1982 15.43
10/1982 14.61
11/1982 13.83
12/1982 13.62

Cardiff Giant

07-25-05, 01:52 PM

Good maybe prices around me will finally get to the point where I could buy something. It seems like I'd have to shell out about 200k for even a decent condo in my town.

BadlyDrawnBoy

07-25-05, 01:59 PM

18.45 in '81

that's the same as a really really bad Credit Card APR. and would seem impossible to pay off. wowowowow.

VinVega

07-25-05, 01:59 PM

Yahoo Story (http://news.yahoo.com/s/washpost/20050725/ts_washpost/d_c__area_housing_market_cools_off)

By Kirstin Downey and Sandra Fleishman, Washington Post Staff Writers
Mon Jul 25, 1:00 AM ET

Washington area temperatures may be sizzling, but the once-torrid real estate market seems to be cooling off as houses stay on the market longer and the number of homes for sale rises.

Home sales tend to slow in the summer, but the number of houses for sale in the Washington area has climbed by 50 percent in recent months. The available inventory has risen to about 35,300 homes, up from an average of about 23,000 in the past three years, according to Metropolitan Regional Information Systems Inc., which runs the local multiple-listing service.

The average number of days a house stays on the market has crept up by two days in Fairfax County, to 16 days in June from 14 days a year earlier. In Montgomery County it has risen to 20 days from 18 days, according to MRIS. Those are, however, still short turnaround times by historic standards.

Meanwhile, the number of houses sold in Northern Virginia's inner suburbs fell by 9.6 percent in June, compared with a year earlier. In the District, the number of houses sold dropped by 8 percent, while in Montgomery County they dropped about 1.6 percent.

Local real estate brokers say they are seeing signs of a change.

"The market has slowed for sure, especially at the high end," said Wes Foster, chairman of Long & Foster Real Estate Inc.

Foster said the market is returning to "normalcy" after a frenzied era of multiple contracts, bidding wars and desperate buyers waiving their right to property inspections or appraisals.

"It's very healthy," he said. "It worried the pure hell out of me the numbers we were seeing. I remember Boston in 1982 to 1989, when [prices] went up 25 percent a year for six years, and then in one year [they] fell 87 percent. The ride up for everybody selling was wonderful but the ride down was awful. . . . It was very painful and I don't want to see that here."

Foster said the recent manic market has been fueled by what he called "crazy fools running around buying houses as investments," with "bad loans, interest-free loans."

"They'll get hurt, and I think they should," as prices inevitably correct themselves, he said. A slowdown is needed because so many average people have been priced out of homes or compelled to pay high prices, he said.

Real estate broker Susann H. Haskins of the Long & Foster office in Potomac, president of the Greater Capital Area Association of Realtors, cautioned that the down-tick may simply be summer-related.

"Is it a major shift? Not necessarily. . . . I don't think we should raise the red flags and send up the alarms yet. . . . We don't have enough data to definitively say the expansion has ended," she said.

The Washington region remains strong, compared with other markets, said Ken Wenhold, regional director for Metrostudy, a housing research firm based in Houston. "Although the resale inventory and days on the market have increased slightly, it is still overall a very tight resale market," he said.

Many area real estate agents said that good houses in good neighborhoods, realistically priced, still sell well and that sales are faster in less-expensive areas. In Prince William County and its largest cities, including Manassas and Manassas Park, the median price is $380,000 and sales rose 10.7 percent in June, compared with the year before. In Prince George's County, where the median sales price in June was $300,000, the number of sales rose 3 percent.

"I still see prices rising and the market is very strong," said real estate broker Donald L. Frederick, with Re/Max International Inc. in Camp Springs, who cited Prince George's County's affordability as the reason for its strength at a time real estate agents from other areas said market activity "is way off."

But in many of the region's inner suburbs, where prices have about doubled in four years, some sellers who expected results within days of posting a for-sale sign have been disappointed. Some are cutting their prices.

At the beginning of the year, buyers were frantically grabbing at anything. Now some have the time to pick and choose among neighborhoods, line up home inspections before buying and carefully consider the lofty prices they are paying.

Computer consultant Will Gibson, 39, put his red-brick Bellevue Terrace duplex, just off Wisconsin Avenue in Northwest Washington, up for sale in the spring. His wife, Jeep, was hoping to move to the suburbs. Gibson listed it at $895,000, but it did not sell. After two months, he took it off the market and stored the for-sale sign in an upstairs hallway. He said he will try to sell it again "after we fix a few things up."

Liza Potter, 31, who owns a townhouse in Burke, has been monitoring the market since March because she wants to move to a larger, single-family house. In March, she said, homes listed for sale on the Internet lasted two days. She often could not drive to them quickly enough to make a bid before they went under contract.

Now, she said, attractive listings are lasting two weeks and the prices seem to be slightly lower. Two weeks ago, she and her husband, Darrell, 41, a computer specialist for the Defense Department, bought a house for $650,000 in a nearby neighborhood they had thought they could not afford. They now are listing their townhouse for sale at $439,000.

"More houses are on the market, so people have a little more time to look around and see what else is out there," Potter said.

Neighbors, for whom watching the home-sale market has been a favorite parlor pursuit, are noticing the slowdown, too. Dimetra Panagakos, 81, who lives next door to Gibson in Northwest Washington, chortled as she discussed the market.

"They used to sell in a week, these houses here, but now no more," said Panagakos, who has lived in the neighborhood since 1948. "Ha, ha, ha, they went crazy in my neighborhood, my neighbor asked $900,000 -- and now no more."

Some renters are also watching with interest. Sabrina Daly, 26, a research analyst who shares a $2,000-a-month rental house in Arlington's Lyon Park with two other young women, said the renovated bungalow next door went on the market three weeks ago for $1.5 million. It has not sold.

"I'm surprised," she said. "Maybe people don't want to pay $1.5 million. Maybe they can't pay $1.5 million."

In Falls Church, Josefina Villegas, 71, thought her house would sell in just a few days when she put it on the market in late June and that she would soon be winging her way, carefree, to visit her grandchildren in Florida.

Houses in her woodsy neighborhood had been selling in the $900,000s, so she priced hers at $925,000 and waited for the bids to come in. She waited some more -- no bids. She dropped the price to $899,00. Three weeks later, still no bids.

"I think houses are going slower now," she said, as she worried about getting the lawn mowed once again to keep up its pristine market-ready appearance. "Send me somebody to buy."

Deborah Davenport, 50, listed her single-family house in Fairfax County last week at $569,000. Her husband, an echocardiographer who does heart ultrasounds, was offered his "dream job" with pediatric cardiologists in Tucson. In the past week, her home has been visited by just one set of prospective purchasers.

"We haven't gotten any nibbles, unlike a month ago, when people put their houses on the market, and poof, they'd be gone," she said. "I figured it had to slow, it had to stabilize; but I hope it hasn't completely stalled -- for our sake."

07-25-05, 02:04 PM

Home sales tend to slow in the summer... :hscratch:

Maybe in D.C. when everybody's out of town and since nobody wants to send their kids to public school there they're less at the mercy of the school summer vacation.

But they are talking about Virginia as well. I believe the summer months are the biggest selling months overall.

The Bus

07-25-05, 02:41 PM

I didn't know summer was a slow time for purchasing. Maybe the tail end (August, September), but I always thought May-July were really busy.

Remember there's probably a several-weeks or several-months lag time between when mortgage rates change and what happens in housing.

Now, some squabbles I have.

"It's very healthy," he said. "It worried the pure hell out of me the numbers we were seeing. I remember Boston in 1982 to 1989, when [prices] went up 25 percent a year for six years, and then in one year [they] fell 87 percent. The ride up for everybody selling was wonderful but the ride down was awful. . . . It was very painful and I don't want to see that here."

OK, so for a $100,000 house...

1982 | $100,000
1983 | $125,000
1984 | $156,250
1985 | $195,313
1986 | $244,141
1987 | $305,176
1988 | $381,470

And then it plunges 87%...

1989 | $49,591

To half of its value from 7 years ago? HALF?

<blink>FACT CHECK ALERT</blink>

I'm going to call bull on that one. There's no way that Boston had a -10% year-over-year overall decline from 1982-1989. That's absolutely disastrous.

MAYBE the prices declined in 1989. MAYBE they dropped by half.

But by 87%? No way.

al_bundy

07-25-05, 04:06 PM

18.45 in '81

that's the same as a really really bad Credit Card APR. and would seem impossible to pay off. wowowowow.

and my Yahoo calculator says that a loan of $100,000 and 18.45% interest the payment is $1543 per month. A $400,000 loan at 5.5% is $2245 per month.

I think prices have peaked or in the process of peaking for a few years, but no where near a bubble except maybe California, Florida or any other place with a high IO loan and investor percentage.

07-25-05, 04:20 PM

18.45 in '81

that's the same as a really really bad Credit Card APR. and would seem impossible to pay off. wowowowow.The point is, even with those high interest rates, people were buying houses like there was no tomorrow. The mentality was, house prices were rising quickly and if they didn't get into a house then, even with very high interest rates, they would never get into one.

So it seems our interest rates have a long way to go before they become a discouragement to buying.

I think prices have peaked or in the process of peaking for a few years, but no where near a bubble except maybe California, Florida or any other place with a high IO loan and investor percentage.And as I backed up before with empirical information, I don't think the high IO loan rate has any bearing on creating any sort of near-term bubble. Rather, it is merely a symptom of higher priced properties and a method used to afford them.

The Bus

07-25-05, 05:38 PM

07-25-05, 06:14 PM

I'd have to disagree. It may not create a near-term bubble, nor may it exacerbate it, but it will keep it from popping.I'm not sure that's a disagreement. :)

I can easily see your point about it helping avoid a pop. I would only be concerned about its effect if that financing technique were made illegal. But then another would take its place.

DodgingCars

07-25-05, 06:23 PM

Denver's cooling. DC is cooling. Will Phoenix please cool (both temp and housing)!

al_bundy

07-25-05, 06:33 PM

The point is, even with those high interest rates, people were buying houses like there was no tomorrow. The mentality was, house prices were rising quickly and if they didn't get into a house then, even with very high interest rates, they would never get into one.

So it seems our interest rates have a long way to go before they become a discouragement to buying.

And as I backed up before with empirical information, I don't think the high IO loan rate has any bearing on creating any sort of near-term bubble. Rather, it is merely a symptom of higher priced properties and a method used to afford them.

what happens if prices stop growing and in 2 years or so the people getting IO loans now for the low rate end up being refinanced into 7% rates when the ammortization starts?

There are also high investor purchase percentages in California and Florida. RE has to rise at something like 10% a year for them to make a profit. There are stories that something like 20% or more of properties are bought by investors and flippers and up to 80% in some developments. If prices stop growing that is a lot of inventory to work through.

kvrdave

07-25-05, 06:45 PM

07-25-05, 06:46 PM

what happens if prices stop growing and in 2 years or so the people getting IO loans now for the low rate end up being refinanced into 7% rates when the ammortization starts?

There are also high investor purchase percentages in California and Florida. RE has to rise at something like 10% a year for them to make a profit. There are stories that something like 20% or more of properties are bought by investors and flippers and up to 80% in some developments. If prices stop growing that is a lot of inventory to work through.What does it matter if prices stop growing except to investors? Due to the ability to easily refinance at low teaser rates they will probably slowly unload their property in all but the most extreme situations. You do realize investors rent out their property so they don't need the appreciation rate to equal the interest rate?

As for "in 2 years or so" please see my earlier analysis of interest-only loans, their timeframe and the ability to restart the clock if one is worried about it.

DodgingCars

07-25-05, 06:51 PM

Investors tend to figure that in to their investing. Stike while the iron is hot and ride it as long as you can. What you lose when you get out will pale in comparison to what you have made. Though I don't think I would want to speculate currently.

There are a lot of "amatuer" investors/speculators though. I know some personally. They don't know much about real estate or especially real estate investing, but are buying houses because they're hoping they'll make money off it.

I know a couple who live in the LA area who just bought (or made a commitment to buy) a new home construction in Phoenix. They have no intention of living there -- they're hoping prices continue to rise so they can make some quick money.

Not all investors are really "investors."

kvrdave

07-25-05, 06:52 PM

There are a lot of "amatuer" investors/speculators though. I know some personally. They don't know much about real estate or especially real estate investing, but are buying houses because they're hoping they'll make money off it.

I know a couple who live in the LA area who just bought (or made a commitment to buy) a new home construction in Phoenix. They have no intention of living there -- they're hoping prices continue to rise so they can make some quick money.

Not all investors are really "investors."

True enough. It's like day traders. I have no doubt some of them will get hurt.

al_bundy

07-25-05, 07:01 PM

It's inventory. Investors are causing demand to increase while prices increase at 20% per year. You could have bought a $400,000 house and sold it for almost $500,000 a year later.

$30,000 for RE commissions and $20,000 for 12 months of mortgage payments and taxes. That's $50,000 for doing nothing all year. So people bought the homes, held them and sell them. The investors helped demand.

Now say you buy a $600,000 house and it only goes up 10% in a year. At 4.5% - 5% interest on an IO loan is like $3000 a month.

$36,000 a year in mortgage. $40,000 RE commissions on a $660,000 selling price. And say $5000 a year taxes. At 10% annual gains it's a loss of money for investors. If you sell for $700,000 than you only make around $13,000 for that year. Say $20,000 to account for a larger down payment because of a previous sale and capital gain. The above figures don't include income taxes on the capital gains unless you lie on your taxes.

What would happen to the hot markets if 10% - 20% of the home buyers dissappeared?

DodgingCars

07-25-05, 07:12 PM

al_bundy

07-25-05, 07:20 PM

And some developers are smart because they saw what happened to Cisco, EMC and Lucent. A lot of developers already started to require buyers to live in the home for 2 years and put in other stipulations so people don't flip.

No one wants the risk of 20 people buying enough homes for 100 people, defaulting because prices stopped growing or dropped and then the developer has to work through a year of inventory and stop building. I think a lot of developers are prefering slower growing steady business and controlling the inventory to the mania of the telecom and dot com market of the late 1990's. My company paid $250,000 for an EMC SAN in 2001. We got rid of 4 EMC's when we bought a company out of chapter 11 and I saw a bunch on ebay for $50,000 each for years afterward. Liquidators were buying them from the dot com graveyard for pennies and reselling them on ebay. Same thing for Cisco and Lucent and Nortel for the junk they sold to a lot of companies on credit. Not only did they not get the money, but the equipment was on the gray market for years depressing their sales. It's still having an effect on their sales.

Same thing happened in NYC in the early 1990's. Rental buildings went co-op and the new owners tried to resell at a profit. Prices plummeted. My parents' old place went from $80,000 in the late 1980's and my mom finally bought it after a divorce for $15,000 in 1992.

Now things are different here. The new owners can't sell without board approval, unlike the original owners who could sell to anyone. The people buying now are those that plan to live in the apartment and the high prices are pricing investors out of the market. Not only that, but many buildings have investor unfriendly policies. And the figures I saw show that NYC has one of the lowest IO loan percentages in the US.

07-25-05, 07:47 PM

al_bundy

07-25-05, 08:11 PM

That's only if it's rented for the entire 12 months. I've read that it's taking a few months to find renters. And if prices go up 10% it's still a very small profit. Say you make $25,000 on the rent. That brings your total profit when you sell to around $40,000 - $50,000 minus capital gains and income taxes.

You have to be leveraged pretty far for 2 homes at a time and may have to pay a higher rate. Plus if you get no-doc no income verification loan that is also a higher rate to eat into your profits.

07-25-05, 09:01 PM

The Bus

07-25-05, 09:08 PM

There's a hell of a lot more downside to real estate than a lot of other markets. If you lose money in the stock market, you can never OWE, unless you're selling short on margin or something ridiculous. In real estate, you can.

Buy a house for $320,000. Get $1800 rental income, but pay $2000 on a mortgage. (See the rental vs. mortgage pricing in your area, for example). After a year, the market falls out and now the house is worth $295,000. Slowness continues. During the second year, you raise rent to $1850, but pay $2025 on the mortgage because of rising tax and insurance costs. Market slowness continues, with the house barely appreciating in value and going for $315,000. Now it's the third year. Your IO period is over, the rate fluctuates and moves your mortgage payment to $2500.

You can't afford to keep it so you sell as quickly as possible. You'll be glad to take any offers. If you get a decent one, you can avoid foreclosure. Mind you, you probably have anywhere from $10,000 to $25,000 in real estate costs. Plus the $10,000 you paid to buy the house.

If you can't get out of the house, it'll be foreclosed on and your credit ruined.

This is something that WILL happen to people in the next 3-5 years. It won't happen to most, it won't happen to many, even, but it will happen.

When USA Today is doing articles about investing in real estate, it's time to ditch the market, unless you've been a savvy r.e. investor from the start.

The Bus

07-25-05, 09:13 PM

Who says investors only have to hold the house for 12 months? And a profit of $40,000 - $50,000 less capital gains tax is still a nice return on that investment. Probably over 50% and up to close to 100% return in one year considering the down payment on a $600,000 house. And when the property is a business investment you don't even have to realize the capital gains when you invest in another property.

Investors have been buying and holding on to properties for many, many years. You are only talking about the amateur fast-buck artists and a shake-out of them will just mean more people will be able to buy homes they want to live in. The demand is there and second home demand is growing along with the baby boomers.

You guys, and me, aren't disagreeing. Real investors aren't buying the inflated prices of housing in developments that aren't worth the money. Real investors aren't paying market rates for foreclosures that need $20,000 in repairs.

My point is that there are MORE flash-in-the-pan fast-buck shimmy sham shake-out amateurs than real investors. And there's going to be thousands of shirts lost over the next couple of years, just like a lot of money was lost on people buying Webvan at $25.

07-25-05, 09:17 PM

This is something that WILL happen to people in the next 3-5 years. It won't happen to most, it won't happen to many, even, but it will happen.The question is, will this pop the bubble, will housing prices plunge, or will it just shake out the people who shouldn't have been in there in the first place. That's the point of this thread.

DodgingCars

07-25-05, 09:43 PM

The question is, will this pop the bubble, will housing prices plunge, or will it just shake out the people who shouldn't have been in there in the first place. That's the point of this thread.

Nationally.. probably not. In fact, if the trends continue it looks like a lot of markets will only cool.

Locally? I think there a some markets, especially those with lots of investors (Phoenix, Vegas, and LA for instance) that could definately experience a pop.

Especially Phoenix and Vegas which have a lot of out of state investors who are simply trying to flip houses in a year or less -- a lot of times selling to another investor whos trying to do the same thing.

Deftones

07-25-05, 10:52 PM

Will Phoenix please cool (both temp and housing)!

No, no, no. I need about another $25 grand increase and then it can slow down. ;)

al_bundy

08-04-05, 11:03 PM

www.stockta.com

Check out the charts for some housing stocks like TOL, JOE, TARR and KBH. JOE and TARR are dropping close to their 50 day Exponential Moving Averages. The others are still way ahead, but they seem to be in a pull back.

I'll have to watch these the next few months to see if it's a normal pull back like in March, or the start of a down trend. If it's the latter than look for exciting developments in housing 6-12 months after the start of a down trend.

DodgingCars

08-04-05, 11:14 PM

Duran

08-05-05, 09:58 AM

A guy on Motley Fool last Friday was giving his reasons why he thinks it unsustainable -- nothing really new:

* Incomes not keeping up with price increases
* Rents still low while mortgages are high
* Fewer people can afford to buy

In Califonia, they said the household income needed to buy a median priced home with 20% down is now at $119k

I agree with his first and third points, but in DC at least, rents have been going up as well. DC's a little different, though, since there's been tremendous job growth due to Bush's spending spree.

DodgingCars

08-05-05, 10:40 AM

I agree with his first and third points, but in DC at least, rents have been going up as well. DC's a little different, though, since there's been tremendous job growth due to Bush's spending spree.

In SoCal, rents have stayed pretty flat -- only modest increases (i.e. $1000 to $1050.) I've been in my apartment for 2 years. The rent went up after my 1-year lease was up (by $50) and hasn't gone up again yet (knock on wood).

Duran

08-05-05, 10:59 AM

My rent in DC would go up about $100/year for a 1 bedroom.

LurkerDan

08-05-05, 11:23 AM

In Boulder, rents are pretty low and not rising a lot. You have to put a big downpayment down to be able to have rental income pay the full mortgage.

al_bundy

08-05-05, 11:29 AM

homebuilders down big time today and a few downgrades on valuation and slowdown fears

Another few months and we'll see what is in store for next year depending on how the stocks peform

svadas

08-05-05, 12:31 PM

As I see my IO loan payment continue to climb it is making me very nervous. I doubt I am the only one in this situation.

08-05-05, 12:46 PM

As I see my IO loan payment continue to climb it is making me very nervous. I doubt I am the only one in this situation.You have a variable rate on your interest-only payment?

Deftones

08-05-05, 12:48 PM

homebuilders down big time today and a few downgrades on valuation and slowdown fears

Another few months and we'll see what is in store for next year depending on how the stocks peform

I don't see how the stocks should be greatly affected, though. My father's company has had record years for the past 5 years. Even if there were a slowdown in the Phoenix market, they will continue to sell more houses than they did 5, 10 and 15 years ago.

fujishig

08-05-05, 01:17 PM

In SoCal, rents have stayed pretty flat -- only modest increases (i.e. $1000 to $1050.) I've been in my apartment for 2 years. The rent went up after my 1-year lease was up (by $50) and hasn't gone up again yet (knock on wood).

In most parts of SoCal, like Los Angeles, there's rent control, so the max they can raise your rent each year is something like 4%, and an extra 1% each if they pay for gas, electricity, and/or water. You should look at how much a new apartment is going for... I'm sure it's gone up a little more than that. Still, with the insane housing prices, rents haven't gone up THAT much lately. Even without building equity, I'm starting to think I should just stay in my apartment for a few years longer to save more money, as I've been here for almost 6 years now and my rent is pretty cheap...

fujishig

08-05-05, 01:19 PM

Deftones

08-05-05, 01:32 PM

But stocks aren't necessarily based on performance compared to years ago, they're based on perception. If they decline from last year, even if last year was a record high, that gives a negative perception, right?

Usually stocks are priced based on performance and earnings reports. Or at least the stock market I follow. ;)

al_bundy

08-05-05, 01:46 PM

I don't see how the stocks should be greatly affected, though. My father's company has had record years for the past 5 years. Even if there were a slowdown in the Phoenix market, they will continue to sell more houses than they did 5, 10 and 15 years ago.

no one cares about the past

investors want a company that will grow at double digit percentages in the future. If housing slows down to single digit growth, than watch the stocks crash because they are priced for a higher level of growth. But than this may be a temporary and healthy pullback. A lot of enery and housing stocks are trading a lot higher than their 50 day moving averages, and this usually results in a pullback.

Look at Microsoft. Their revenues are 70% higher today than 3 years ago along with their earnings. But their stock price is 50% lower than 3 years ago even when adjusted for a split. The reason is their growth rate has slowed over the last 3 years and investors fled the stock except for the usuall 4th quarter run ups.

Housing, energy and health have been growing at faster rates than previous years and that is why their stock prices have soared.

If housing stocks start breaking support levels on a downward trend than get ready for a housing slowdown next year. Secret to making money in the stock market is to control risk. Rates are going up and with some other macro-economic conditions investors are selling housing stocks to lock in gains and get the cash. You can't buy a porsche with a stock certificate. Bad news comes out, investors sell stock to lock in gains or minimize losses in case of worse news in the future and wait until good news to buy the stock back or get into another sector that is growing.

08-05-05, 02:00 PM

If housing stocks start breaking support levels on a downward trend than get ready for a housing slowdown next year.I should point out that this "slowdown" can be just a slowdown in the rate of growth, or a slowdown in new units compared to very high years. But not necessarily a slowdown in new units compared to average years.

al_bundy

08-05-05, 02:04 PM

fujishig

08-05-05, 02:05 PM

Usually stocks are priced based on performance and earnings reports. Or at least the stock market I follow. ;)

But that's not relative to five years ago, that's relative to recent performance, right? And it's speculating that they will continue to grow at that rate or higher. Which is why even if a company outperforms what it did last year but fails to live up to it's own estimates, stock prices will fall.

al_bundy

08-05-05, 02:12 PM

that's a lesson I learned last week

I bought some shares of a software company and was up by almost 20% in 6 weeks until it dropped to the low teens. I kept the stock since I thought it was a normal pullback. It was my IRA account and I can trade all I want without worrying about taxes.

Anyway, earnings come out and I quickly look at the numbers but no mention of forward guidance. I listen to the conference call and the CFO goes on a 10 minute speech before giving out forward guidance, and it takes him another 10 minutes to compare guidance with previous numbers and the company they are merging with. Dumped the stock there for a 5%-7% gain.

Next time I'll look at the numbers and do some quick math for forward guidance to see where the stock is going. If there is no forward guidance or it's too complicated to understand than that is a warning sign.

fujishig

08-05-05, 02:18 PM

that's true, and I don't think it's going to be a nationwide crash

I think a housing slowdown will just be a slow rate of growth for the next few years because of rising rates and affordability in some markets

The economy can't afford a nationwide crash, and even those looking for cheap housing shouldn't be hoping for one. With the recent report that average net savings are 0, if housing equity takes a big dive, there goes the nation.

I am still hoping for a crash in the "crazy markets" like SoCal, though. Even if appreciation dropped to normal levels, needing an income of 120K a year on average to buy a median house WITH 20% DOWN is crazy.

08-05-05, 02:22 PM

Possibly the biggest problem with a "crash" would be the number of lost jobs. The hiring of the construction industry has been a huge factor in the employment numbers.

al_bundy

08-05-05, 02:27 PM

something else will come up to fill the jobs

no one talked about housing during the tech boom and the unemployment rate was the lowest in history. Toll Brothers dropped from 1998 to 2000 until it started going up.

http://chart.finance.yahoo.com/c/my/t/tol

http://chart.finance.yahoo.com/c/my/i/intc

Sectors go up and down in cycles. Look at the volume.

I would read that net savings figure with a grain of salt. 401k numbers are rising and I've read articles that the way it's calculated leaves a lot to be desired.

svadas

08-05-05, 02:29 PM

You have a variable rate on your interest-only payment?

Yep, and it is adjusted monthly based on the current prime lending rate.

Deftones

08-05-05, 02:34 PM

But that's not relative to five years ago, that's relative to recent performance, right? And it's speculating that they will continue to grow at that rate or higher. Which is why even if a company outperforms what it did last year but fails to live up to it's own estimates, stock prices will fall.

I never said it was. My main point is that if all these "forecasters" are predicting xxxx in sales, and the company doesn't meet that figure, but meets their own internal figures for the year, the stock is not going to plummet as some would suggest.

08-05-05, 02:34 PM

Yep, and it is adjusted monthly based on the current prime lending rate.Whoa. I never heard of that kind.

Doesn't seem like a variable rate right from the start is a good idea because the payments could even get up to the amount you'd be paying with a fully amortized loan but you're not reducing principal at all. Or it could even get higher.

08-05-05, 02:36 PM

I never said it was. My main point is that if all these "forecasters" are predicting xxxx in sales, and the company doesn't meet that figure, but meets their own internal figures for the year, the stock is not going to plummet as some would suggest.If the current stock price was based on what the "forecasters" predicted, it would indeed plummet when they got disappointed. If the company keeps meeting its own mediocre numbers it's not going to go up.

Deftones

08-05-05, 02:39 PM

If the current stock price was based on what the "forecasters" predicted, it would indeed plummet when they got disappointed. If the company keeps meeting its own mediocre numbers it's not going to go up.

But that's the point. They aren't mediocre numbers. They are increased sales from last year. So how a stock could just suddenly plummet when a company exceeds it's sales goals and it's sales from previous years, while not meeting "forecasters" projections is a bit of an absurd assumption.

svadas

08-05-05, 02:43 PM

Well it's subprime money and I calculated what I would be paying monthly with a fixed loan and pay that amount each month. So while it's an interest only loan, I am paying it down and at a much faster rate than a conventional loan. However, as interest rates increase, it is in fact becoming closer to an interest only payment.

Whoa. I never heard of that kind.

Doesn't seem like a variable rate right from the start is a good idea because the payments could even get up to the amount you'd be paying with a fully amortized loan but you're not reducing principal at all. Or it could even get higher.

al_bundy

08-05-05, 02:48 PM

But that's the point. They aren't mediocre numbers. They are increased sales from last year. So how a stock could just suddenly plummet when a company exceeds it's sales goals and it's sales from previous years, while not meeting "forecasters" projections is a bit of an absurd assumption.

it depends on what kind of performance the stock it priced at compared to it's expected performance. Many times a stock's price is run up on good expectations and crashes on mediocre news.

Cramer mentioned a healthcare stock a few weeks ago and it jumped 10%. Earnings come out and they met estimates. The stock crashes because it was priced to decimate earnings. Compare that to Whole Foods latest quarter. The stock has been flat for 3 months and beats estimates and jumps 20% in a week. The price of the stock at the time of the earnings release was to meet estimates or to come in a little lower. High flying stocks are usually priced for good news until the end of the world. Look at retailers. A lot of retailers have rocketed in the last year due to good same store sales. Yesterday most came in below expectations and some have dropped 10% in two days.

Check out what I wrote about technical analysis in the Let's Talk Stocks thread. Now that retailers have crashed, I'm looking at a few names to buy that are now priced around their 50 day EMA's. Last week most retailers were around 10% above their 50 day EMA's. Same thing with housing. Last week they were around 10% above their 50 day EMA's, now they are within 2% of their 50 day EMA prices. that is their 50 day exponential moving average with more weight given to the most recent prices. Give it a few months for news to come out to see what the outlook is going to be for 2006.

DodgingCars

08-05-05, 03:21 PM

In most parts of SoCal, like Los Angeles, there's rent control, so the max they can raise your rent each year is something like 4%, and an extra 1% each if they pay for gas, electricity, and/or water. You should look at how much a new apartment is going for... I'm sure it's gone up a little more than that. Still, with the insane housing prices, rents haven't gone up THAT much lately. Even without building equity, I'm starting to think I should just stay in my apartment for a few years longer to save more money, as I've been here for almost 6 years now and my rent is pretty cheap...

I don't think most parts are under rent control. I think very few are under rent control. There is no rent control in any South Bay city (where I live). I don't believe there is any in the Valley either. I think Santa Monica has it... Not sure who else.

fujishig

08-05-05, 03:52 PM

I don't think most parts are under rent control. I think very few are under rent control. There is no rent control in any South Bay city (where I live). I don't believe there is any in the Valley either. I think Santa Monica has it... Not sure who else.

From http://www.caltenantlaw.com/RCcities.htm:

Berkeley
Beverly Hills
East Palo Alto
Hayward
Los Angeles
Los GAtos
Oakland
Palm Springs
San Francisco
San Jose
Santa Monica
West Hollywood

Sorry, not most, but LA and San Fran both do.

The Bus

08-08-05, 02:14 PM

While this not "evidence" by any means, I was browing Newsday, the newspaper for Long Island (NY) on Saturday and was pleased to see a lot of homes showing as "Price Reduced!". On one page there were at least a dozen.

I'm not hoping for a crash, but I'm for markets that aren't as, uh, "frothy" as they are now. Looking at a 5-10 year timeline, the majority of homeowners are not the ones that own homes now. Anything to make it easier for them is AOK in my book.

08-08-05, 02:23 PM

I think one of the best things that could happen to help stabilize prices and increase home ownership is a phase-out of the home interest deduction with an offsetting decrease in tax rates.

al_bundy

08-08-05, 02:26 PM

i've read that there are a lot more homes in san diego for sale now and they are taking a lot longer to sell and asking prices are coming down.

The Bus

08-08-05, 02:54 PM

I think one of the best things that could happen to help stabilize prices and increase home ownership is a phase-out of the home interest deduction with an offsetting decrease in tax rates.

Maybe in states with high-property taxes. I pay about $1000/y in property taxes here for an 1800 sq. ft. towhhome on a 1/10th of an acre. Not a lot of home, but not a lot in taxes (that figure is county and school). Even your average "nice" 4/5 BR, 2.5 bath homes on half an acre are less than $2000/y in property taxes.

And, AFAIK, real estate property taxes are still taxes paid and can help in adjusting your tax situation.

08-08-05, 02:59 PM

I was thinking a reduction in income taxes, since that's where you get the home interest deduction. Property taxes, as all other taxes, should remain (be) deductible.

BTW, my property taxes are around $6500 and that's low for around here.

DodgingCars

08-08-05, 04:01 PM

From http://www.caltenantlaw.com/RCcities.htm:

Berkeley
Beverly Hills
East Palo Alto
Hayward
Los Angeles
Los GAtos
Oakland
Palm Springs
San Francisco
San Jose
Santa Monica
West Hollywood

Sorry, not most, but LA and San Fran both do.

Yeah, but LA is huge and includes cities that aren't officially L.A. (for instance Santa Monica, Beverly Hills, and West Hollywood could be called LA). With 88 cities in LA County alone -- not to mention Orange County, San Berandino County, and Riverside County... Rent control is a SMALL fraction of the housing in the SoCal area.

al_bundy

08-09-05, 08:11 AM

Investor's Business Daily had a little blurb on housing stocks today. They are crashing through their 50 day EMA's and doing so on heavy volume which is cause for a concern.
Too bad Cramer is on vacation and not here to warn his viewers.

Duran

08-09-05, 09:38 AM

My property taxes around around $3300 for my 3 bedroom townhouse. I agree that X's suggestion would help stabilize prices in the long run, simply by reducing demand. Without the interest deduction, houses are much more expensive. The offsetting income tax reduction would not really offset since an income tax reduction would affect everyone, not just those that paid property tax.

The Bus

08-09-05, 09:40 AM

shifrbv

08-09-05, 10:22 AM

I think one of the best things that could happen to help stabilize prices and increase home ownership is a phase-out of the home interest deduction with an offsetting decrease in tax rates.

For people who've hit the limit for AMT, the interest deduction has already been phased out. More and more people will fall into this category, especially once the lowered limits are removed next year. AMT is affecting alot of people, especially people with high incomes who still buy the expensive homes.

I think taking away the tax-free capital gains on the sale of a home would do much more to stabilize the market. Since that's been removed, the bubble has only grown larger. Lottery winnings are taxed, why not gains on the sale of a home?

The Bus

08-09-05, 10:42 AM

I think one of the best things that could happen to help stabilize prices and increase home ownership is a phase-out of the home interest deduction with an offsetting decrease in tax rates.

For people who've hit the limit for AMT, the interest deduction has already been phased out. More and more people will fall into this category, especially once the lowered limits are removed next year. AMT is affecting alot of people, especially people with high incomes who still buy the expensive homes.

I think taking away the tax-free capital gains on the sale of a home would do much more to stabilize the market. Since that's been removed, the bubble has only grown larger. Lottery winnings are taxed, why not gains on the sale of a home?

Just tax transfers. Here, the state and county will tax a total of 3% of the price of the home whenever it is sold. The seller pays half, the buyer pays half. Increasing that may help slow down the flipping.

Duran

08-09-05, 11:45 AM

For people who've hit the limit for AMT, the interest deduction has already been phased out. More and more people will fall into this category, especially once the lowered limits are removed next year. AMT is affecting alot of people, especially people with high incomes who still buy the expensive homes.

I think taking away the tax-free capital gains on the sale of a home would do much more to stabilize the market. Since that's been removed, the bubble has only grown larger. Lottery winnings are taxed, why not gains on the sale of a home?

AMT is evil, I agree, but as far as I know very, very few people are affected by it as a percentage of the population.

The capital gains exemption on a home are only applicable for one you've lived in - they don't apply to investment properties.

08-09-05, 11:47 AM

Just tax transfers. Here, the state and county will tax a total of 3% of the price of the home whenever it is sold. The seller pays half, the buyer pays half. Increasing that may help slow down the flipping.You have to own and occupy a home for two years to avoid the capital gains tax. Otherwise you pay 15% of the profit. I wouldn't really call two years of occupied home ownership "flipping". If you're not occupying the home and doing "flipping" you're probably in that business and different tax rules apply.

A transfer tax is a ridiculously high burden to put on all people, including those who have owned their home for a long time and and are taxed on inflated house prices. You might as well implement a wealth tax.

You want to see home prices go up even more? Restrict the availability of homes on the market due to high sales/transfer taxes.

08-09-05, 11:51 AM

You and X's suggestion is making housing more expensive, any which way you slice it.My suggestion would lower home prices and put people into homes for the right reasons. It's unfair to have high income home owners subsidized by low income home owners and renters who can't afford inflated home prices. Not to mention it's wrong for the government to tell you what to do through tax policy.

The Bus

08-09-05, 12:17 PM

My suggestion would lower home prices and put people into homes for the right reasons. It's unfair to have high income home owners subsidized by low income home owners and renters who can't afford inflated home prices. Not to mention it's wrong for the government to tell you what to do through tax policy.

Well, why not put a limit on the amount of mortgage interest? Say, set it at $15,000 or $20,000, or some other number?

It looks like the AMT is going to take care of all this anyways.

08-09-05, 12:29 PM

Well, why not put a limit on the amount of mortgage interest? Say, set it at $15,000 or $20,000, or some other number?

It looks like the AMT is going to take care of all this anyways.AMT doesn't take care of high earners who pay a decent amount of taxes already. It ends up hurting the people who pay a substantial percentage of their income toward home interest.

As for setting a limit on mortgage interest, that's getting there. But it's just a tweak and hurts different people in different ways depending on how their mortgage is structured, length of time they've owned the home, etc. And it doesn't eliminate the fact that people who don't own homes and people at low tax brackets are still subsidizing other home owners.

I'd rather just have buying a home be the same as buying a stock or a car or DVDs or whatever you feel like putting your money into without the government deciding what you should do with it. That creates distortions in the marketplace that always seem to go bad over time. You're seeing the result of it now in the price of houses and the types of financing people are using to get more house than they really should be in.

The Bus

08-09-05, 12:32 PM

AMT doesn't take care of high earners who pay a decent amount of taxes already. It ends up hurting the people who pay a substantial amount of their income toward home interest.

As for setting a limit on mortgage interest, that's getting there. But it's just a tweak and hurts different people in different ways depending on how their mortgage is structured, length of time they've owned the home, etc. And it doesn't eliminate the fact that people who don't own homes and people at low tax brackets are still subsidizing other home owners.

I'd rather just have buying a home be the same as buying a stock or a car or DVDs or whatever you feel like putting your money into without the government deciding what you should do with your money. It creates distortions in the marketplace that always seem to go bad over time. You're seeing the result of it now in the price of houses and the types of financing people are using to get more house than they really should be in.

I agree with you, in that I want the same results. Believe me, I am in real estate, and would be more than happy to see these crazy increases slow down. (I hope that it is beginning to do so).

However, I don't see how getting rid of the home interest deduction is going to help low-income homeowners. In theory, yes, all the extra tax revenue the government would get could flow back into the low-income homeowners, but I just don't see that step happening.

08-09-05, 12:45 PM

However, I don't see how getting rid of the home interest deduction is going to help low-income homeowners. In theory, yes, all the extra tax revenue the government would get could flow back into the low-income homeowners, but I just don't see that step happening.By lowering or keeping the prices of homes lower. Perhaps an even higher tax exclusion could be made for low income earners with the additional tax revenue. (Not that I'm necessarily advocating that.)

And people would be freer to do what they want with their money and not so left behind if they don't do what the government is strongly encouraging. Who knows if sinking so much money into homes is the best investment for this country? But home ownership is so heavily subsidized, even while you're making the investment, it's hard not to have it be the first and sometimes only choice for the individual.

If people are buying homes for their intrinsic value to them and long term appreciation, and financing it more with their own money instead of a good way to save on taxes, there will be more stability in the market, less creative financing (like interest-only), and less people getting in over their heads.

This would be a major change and would have to be phased in over a fairly long period of time. So it'll probably never happen.

al_bundy

08-16-05, 04:25 PM

a few updates from the fatwallet housing bubble thread

foreclosure.com has statistics on per state and county basis. Florida and California account for around 50% of the national foreclosures. My state of NY has only 2500 foreclosures and some counties are less than 100.

If oil is really rising based on demand and not speculative buying of the futures contracts than this can have an effect on housing as well

Housing stocks have bounced off the lows of the last few weeks. My Yahoo portfolio of KBH TOL JOE TARR WTMK.OB MTH WLS PHM DHI RYL NVR BECN LEN HOV was up 36% since jan 1 a few weeks ago, dropped to a 24% gain and is now at 28%. This will play out for a few weeks and by october there should be clear direction for housing stocks

with today's housing numbers some analysts are fearing the market has topped and this along with fears of the ipod glut and the denim glut will take a few months to play out

Deftones

08-16-05, 07:58 PM

Here's an update. The average house price increase in AZ was 47%, while the national average was 13% or so. :lol:

http://www.azcentral.com/news/articles/0816homeprices16.html

DodgingCars

08-16-05, 08:29 PM

Here's an update. The average house price increase in AZ was 47%, while the national average was 13% or so. :lol:

http://www.azcentral.com/news/articles/0816homeprices16.html

Yeah.. The Phoenix market was/is nuts.

However, the article did mention:

"But the frantic pace of sales and price run-ups in the Phoenix area's housing market could be winding down. In July, Valley home prices showed their smallest month-to-month increase so far this year. "

and

"Investors, trying to cash in on the Valley's rapid housing price gains, have fueled some of the home-buying frenzy. But now that the market could be close to peaking, some investors are less willing to pay premiums for homes."

and

"Liz Stalford, a real estate agent with Russ Lyon Realty, said some Valley homes are staying on the market a little longer than they would have in the spring."

CRM114

08-16-05, 08:36 PM

A house on my street which sold for $375,000 18 months ago sold last month for $525,000. Its not fizzling in my neck of the woods, on the contrary.

08-16-05, 09:35 PM

It's still roaring around here too. A tiny POS house in my area that was listed at $995K just sold for $1,100K.

I should post a picture of that thing just to show how crazy this is.

With gas getting more expensive, homes near work areas should continue to do well. Homes really far out are going to need good mass transportation to keep up.

al_bundy

08-16-05, 10:05 PM

i wonder if the buyers paid with a IO mortgage

08-16-05, 10:50 PM

i wonder if the buyers paid with a IO mortgageI don't see that it matters much.

Deftones

08-16-05, 10:54 PM

Yeah.. The Phoenix market was/is nuts.

However, the article did mention:

"But the frantic pace of sales and price run-ups in the Phoenix area's housing market could be winding down. In July, Valley home prices showed their smallest month-to-month increase so far this year. "

and

"Investors, trying to cash in on the Valley's rapid housing price gains, have fueled some of the home-buying frenzy. But now that the market could be close to peaking, some investors are less willing to pay premiums for homes."

and

"Liz Stalford, a real estate agent with Russ Lyon Realty, said some Valley homes are staying on the market a little longer than they would have in the spring."

Well, I can tell you that new homes are still selling at a record pace. Resale homes have slowed down.

I was talking to my dad about this whole situation, this week. Since he's in the home building business, he has a better perspective on this whole thing. The funniest story is how these out of town investers, continue to try and circumvent the restrictions placed on out of state people buying new homes. They've already sued a ton of people to get the houses back, and will continue to do so. I guess his company was really the first to start doing that, and now many other builders in town have followed their lead. In a way, I'm glad to see this as when my home is finally done, I don't want renters next to me.

al_bundy

08-16-05, 10:56 PM

if the buyers used an IO loan then it's possible they can't really afford the home and if rates go up they will have to sell

the question remains is if a lot of the IO people start to sell at once or close together will it push too much inventory into the market and force prices down

08-16-05, 11:03 PM

Here we go...

http://tinypic.com/anxxll.jpg

al_bundy

08-16-05, 11:08 PM

nothing one can really say about this

CRM114

08-16-05, 11:15 PM

Here we go...

:lol: This is a house down the street from me. Around here, this is what $1.2 million will get you

http://www.lvarmls.com/listingpics/bigphoto/059/208859.jpg

al_bundy

08-16-05, 11:33 PM

NYC $1.5 million and $1000 a month in HOA fees gets you a 5 bedroom house in a community with private streets. If you park without a permit you get booted. You can drive through it though.

johnglass

08-16-05, 11:45 PM

I give up trying to afford a place here in South Florida. Me and the wife are packing up and moving to the Atlanta area where it's (somewhat) more affordable.

Deftones

08-16-05, 11:45 PM

the question remains is if a lot of the IO people start to sell at once or close together will it push too much inventory into the market and force prices down

When was the last time housing prices went down? That's not a likely trend. Sure, people don't always get their asking price, but it's a rare thing for the market to take a downswing where home values go down.

08-16-05, 11:55 PM

:lol: This is a house down the street from me. Around here, this is what $1.2 million will get you:lol:

That's a minimum of $4-5 million around here. But then you wouldn't get that amount of land either.

Here's one of the rare properties around here with some land -- a whole 3.5 acres. I think it belongs to Andre Agassi and Steffi Graff and it's a little more expensive.

http://www.globalestates.com/cgi-bin/inventory_item.asp?p_homes_id=64

al_bundy

08-17-05, 12:44 AM

When was the last time housing prices went down? That's not a likely trend. Sure, people don't always get their asking price, but it's a rare thing for the market to take a downswing where home values go down.

early 1990s prices dropped in a few markets, not sure about the national market though

The Bus

08-17-05, 12:52 AM

Nationally, I don't believe there's ever been a sustained down trend for more than a couple of months. Hopefully, we will some short-term "lopping off" of high prices, and prices will remain the same, drop 5% or so, up to 15-25% in some markets with very specific properties (vacation/investment condos, etc.). Over the next couple of years, wage increases* will outpace real estate gains and the rest is eroded by inflation.

There's no good reason for houses to not be profitable.

* HA!

al_bundy

08-17-05, 12:57 AM

i think even in california and florida the worst is maybe a 5% drop to wring the investors out of the market and then single digit gains for the next few years as inventory corrects itself

Deftones

08-17-05, 01:01 AM

early 1990s prices dropped in a few markets, not sure about the national market though

I see the market as more of topping off and leveling out. I've never heard of anyone whose house went down in value. It just doesn't appreciate at all. Even in stagnation, you still don't lose any value of the house.

08-17-05, 01:06 AM

Houses have lost value around here at times. About 10% in the early '90s. (Values had gone up about 50% in the 4-5 years before that.) But if you didn't need to sell right then the value recovered within a year or so and kept going up.

That's one of the things that makes losing value not so calamitous. If you have any control over remaining where you are during one of the downturns you don't get hurt. If you don't have that control you need to be cautious.

Deftones

08-17-05, 01:08 AM

I'd say your market is aberration to the norm, though, right? Wouldn't it be safe to say your market is a little more sensitive to local economy issues (i.e. the tech crash in the 90's)?

08-17-05, 01:17 AM

The housing market around SF actually did ok during the tech crash. Silicon Valley had more problems.

It's a real supply and demand situation with the supply being severely (and somewhat artifically) constrained. There likely won't be a greater supply around where people want and need to work for a very long time.

I can go for a 2 minute walk and be in an area that is worth unfathomable billions of dollars just in land value. But it's been designated as a national recreation area so no houses are going up there.

Very different than Phoenix, where there is a huge potential supply but factors such as natural resources that may eventually constrain the growth.

Ranger

08-17-05, 01:27 AM

Here we go...

http://tinypic.com/anxxll.jpg
That's actually just a one-floored house not counting the car garage and basement?

08-17-05, 01:36 AM

That's actually just a one-floored house not counting the car garage and basement?I believe that is correct. Probably 2 bedrooms.

ChiTownAbs, Inc

08-17-05, 02:05 AM

I see the market as more of topping off and leveling out. I've never heard of anyone whose house went down in value. It just doesn't appreciate at all. Even in stagnation, you still don't lose any value of the house.

I know we might be comparing apples to oranges, but some Japanese homes went down nearly 40% in the early nineties.

DodgingCars

08-17-05, 02:12 PM

I'd say your market is aberration to the norm, though, right? Wouldn't it be safe to say your market is a little more sensitive to local economy issues (i.e. the tech crash in the 90's)?

Actually a few markets had price devaluation in the early 90s. SoCal prices went down quite a bit. I remember my friend's dad bought a house for about $500k and in 2 years it was valued at $350k.

It does happen, but usually not nationally.

DodgingCars

08-17-05, 02:24 PM

I found something:

From 1989 through 1995, Los Angeles housing prices fell by 20 percent. Prices in the San Francisco Bay Area, San Diego, and Boston fell by 10 to 15 percent during the same time period, but most other housing markets did not lose at all.

http://www.ti.org/vaupdate51.html

Not sure about their source.

al_bundy

08-17-05, 03:15 PM

i'm reading Maestro by Bob Woodward. It's about Alan Greenspan. From the first few chapters I think he will keep on raising rates until there is no way banks can make anymore loans. He has too many bad memories from the S&L disaster.

Deftones

08-17-05, 03:28 PM

My point is that the "devaluation" may occur from place to place, but on the whole, there isn't going to be some crazy bubble bursting where every market devalues. It just doesn't happen.

DodgingCars

08-17-05, 03:43 PM

My point is that the "devaluation" may occur from place to place, but on the whole, there isn't going to be some crazy bubble bursting where every market devalues. It just doesn't happen.

You're right, but I don't think anyone in this thread has said anything different.

Myster X

08-17-05, 03:52 PM

Housing market dips a bit Experts say it's too early to tell if market is faltering or resting

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/08/17/BUGAJE8R9P1.DTL&hw=housing&sn=004&sc=484

The torrid Bay Area housing market hit the pause button in July, with sales falling nearly 11 percent and prices dipping below record territory for the first time this year, a real estate information firm reported Tuesday.

The median price for a single-family home in the nine counties last month was $643,000, nearly 18 percent above the year-ago median, but just shy of the June peak of $644,000, according to DataQuick in La Jolla (San Diego County).

The number of properties that changed hands in July dropped 11.9 percent from June and 10.8 percent from July 2004.

For the last few years, economists have fretted that the Bay Area and other high-priced housing markets represent bubbles on the verge of popping --

in the worst-case scenario -- or at least leaking some air.

"It's going to take several more months of information before we know whether this month was the turning point, but it sure smells like it," said Ed Leamer, economist at the UCLA Anderson Forecast.

Although a drop in sales can indicate a turn in the market, DataQuick analyst John Karevoll cautioned against reading too much into July's figures. For one, the price appreciation from last year follows a trend that has been under way for 18 months.

What's more, sales totals have declined since April. But they are being compared with the same four-month period one year ago, when there were record highs.

In addition, Karevoll, who scrutinizes various data, such as loan-to- value ratios and the mix of homes selling, for evidence of stress in the market, said there is scant evidence of a major slide.

In all nine counties, prices for both detached homes and condos surpassed year-ago levels. The median for a condo in the nine counties was up 19.4 percent to $474,000. The median is the midpoint, where half of the sales are above and half below.

Marin County, as usual, had the highest median for a single-family home at $910,000, a 13.6 percent rise over the year-ago price. At $450,000, Solano County had the lowest, but that was still 23.3 percent higher than in July 2004.

Nevertheless, the monthly report, which is based on filings with county recorders' offices and reflects sales initiated 30 to 60 days earlier, largely predates the recent climb in mortgage interest rates.

Since late June, the average rate for a 30-year, fixed-rate mortgage has risen from 5.53 percent to 5.89 percent, according to mortgage titan Freddie Mac. The average for a one-year, Treasury-indexed adjustable-rate mortgage has increased from 4.21 percent to 4.57 percent in the same period.

As home prices have raced upward in the last few years, homeowners have been able to squeeze into the market by taking advantage of rock-bottom interest rates as well as riskier mortgages that offer low initial payments but the threat of steep increases down the line if rates rise.

If rates continue advancing, more and more consumers may hit the affordability wall -- although that would probably set off a gradual slowing in the market, not a bust.

Leamer said he suspects the affordability crunch is putting the brakes on San Diego's market, where the annual price appreciation has tumbled from the 30 percent range last year to 5 percent this year.

"Rising interest rates are making it just a little less affordable for certain home buyers, and when you pull out that fraction of buyers in a fragile market, that might be enough to turn the thing around," Leamer said.

That begs the question: Is the Bay Area next?

No, said Richard Calhoun, a San Jose real estate firm owner who closely analyzes Multiple Listing Service data in the South Bay. According to his calculations, the median home price in Santa Clara County has hovered between $740,000 and $760,000 for the past four months.

The inventory of unsold homes has increased from 28 days in March to 46 days earlier this month. That figure represents the number of days it would take to sell all of the homes on the market at the current sales pace.

But he chalks much of that up to seasonal fluctuations. In the fall, Calhoun and others predict the market will rebound.

"There are a lot of people out looking right now," said Aldo Congi, vice president and managing broker at San Francisco's McGuire Real Estate. "I would anticipate a really active September based on the activity we've seen on the few listings we have now."

In fact, Karevoll said he believes the Bay Area median might hit another record in August.

As the bubble debate swirls, home shoppers like Gleb Budman dutifully attend open houses each weekend. Budman, who works on the business side of a high-tech startup, worries about buying at the peak. Still, he hopes the sixth time -- he's put in five offers in the last nine months -- is a charm.

"I don't know whether (the price is) going to go up or down," he said Sunday during a break from touring a Noe Valley condo listed for $729,000. "But if it goes down, it's OK if you can hold onto it for a while."

Otto

08-17-05, 03:52 PM

I see the market as more of topping off and leveling out. I've never heard of anyone whose house went down in value. It just doesn't appreciate at all. Even in stagnation, you still don't lose any value of the house.
a) You're ignoring inflation. A house that doesn't adjust upwards in price is losing value.
b) It happens all the time, just never before on a national level. Housing markets move both up and down. The value of a thing, any thing, cannot increase indefinitely.

Deftones

08-17-05, 04:00 PM

You're right, but I don't think anyone in this thread has said anything different.

somone a few pages back, maybe even last page, was talking about a "downturn" and devaluation of housing prices.

fujishig

08-17-05, 04:05 PM

It won't be an across the board crash, but I can't see how the median price of half a mil in Southern CA doesn't go down. Even with yearly wage increases and if prices just stagnate, it will take a long, long time for wages to get to that level. And when interest rates rise, that's even less buying power that people will have. If foreclosures happen as IO loans come due, it'll certainly be harder for people to get financing as well. Sure, land is scarce, but I have to believe speculation is a driving force here (as well as people fearing that they'll be priced even further out of the market, and must buy now with IO only)...

It's one thing to ride a downturn in the market, paying off a mortgage that you budgeted out and can afford, even if you are at times upside down on it. It's another thing if you're almost counting on that increase in value to help you make payments down the line.

If I'm wrong, then I'll be part of the mass exodus out of here... or a renter for life. We'll see.

08-17-05, 04:14 PM

It's one thing to ride a downturn in the market, paying off a mortgage that you budgeted out and can afford, even if you are at times upside down on it. It's another thing if you're almost counting on that increase in value to help you make payments down the line.I can see how an increase in value could remove PMI, but other than that I don't see how an increase in value can help your payments.

Nick Danger

08-17-05, 04:17 PM

Those California prices continue to amaze me. After looking at X's million dollar home, I did a search for all the million dollar homes in Albuquerque. There are only 42 of them on the market, with a maximum of $4M.

Here, $1.1M will get you 1.6 acres, 5900 sq ft, a swimming pool, and a house down the road from Al Unser Jr. http://www.realtor.com/Prop/1046210330

Myster X

08-27-05, 02:01 PM

I can't wait to see the look on people who bought $900K plus for a two bedroom home in San Franfrisko.

http://business.timesonline.co.uk/article/0,,16849-1752866,00.html

US heading for house price crash, Greenspan tells buyers

WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.
He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

In a pre-retirement speech to fellow central bankers at Jackson Hole, Wyoming, Mr Greenspan said that people were investing in houses as if they were a one-way bet, not allowing for the risk of price falls. He said “history had not dealt kindly” with investors who kept ignoring risks.

The Federal Reserve Chairman’s warning, his strongest yet, sent share prices falling on Wall Street, at one point knocking 66 points off the Dow Jones industrial average. By the close the Dow had recovered to 10,397.30, down 53.30 points.

Traders said that Mr Greenspan’s comments were reminiscent of his 1996 inveighing against “irrational exuberance” on the stock market, for fear that a crash there would hit consumers and push the economy into recession. When the share price bubble finally burst, Mr Greenspan cut Federal interest rates to 1 per cent, triggering the flood of cheap loans for housing. He fears that rate increases set in train as the economy recovered could throw the housing market into reverse and suggested that the twin deficits would now restrict his room to manoeuvre if a house price downturn hit spending. Asset prices were, he complained, driving monetary policy more than ever before.

Share traders were also worried by an unexpectedly sharp fall in the University of Michigan consumer confidence index, a small but influential barometer, which fell for the first time in three months. The expectations index slid from 88.5 to 76.9.

Rob Carnell, of ING Bank in London, said that Mr Greenspan’s warning was an eerie reminder of a successful campaign last summer by Mervyn King, Governor of the Bank of England, to “use rhetoric rather than interest rates” to cool an overheating homes market. Britain has avoided a crash thus far.

On traditional tests, about a third of US local homes markets are now markedly overpriced. Over the past five years, the average US house price has risen by 50 per cent, half the rate of increase in UK prices in the five years to summer 2004. However, prices have risen more sharply in favoured areas, such as New York, and more than doubled in a few cities, such as San Diego.

al_bundy

08-27-05, 03:13 PM

last night there was a guy on Suze Orman who wanted to buy a $800,000 house near DC with an option loan and pay 1% interest on it and take the negative ammortization. He said values were going up so fast he could make a lot of money.

I was going to bump this with some info I gathered the last few weeks.

Housing stocks have broken through their 50 day moving averages and are going down.

I listened to the Toll Brothers conference call a few days ago and they had good numbers and their stock got hammered.

some of the highlights from the call:

EPS growth is going to drop from almost 100% last year to around 20% for the next few years

Average selling price is going to drop next year due to cheaper homes selling more

Less traffic in communities being sold due to requirements for an appointment to be made with a deposit

50% of the people this year are getting ARM's. 38% of those are getting IO loans

Overall the market has gone from red super hot to hot

they are selling more affordable homes, a trend away from their luxury roots

Interesting note about IO loans. A lot of Toll Brothers customers are higher end and financially savy. The average LTV of an IO loan is 70% and the mortgage originators use the loans to sell more homes. Since the people are higher income, they won't be financially strapped if the rates rise.

Toll Brothers makes people sign a contract that they won't flip, but they haven't gone to court yet. they said that they believe the paperwork deters most flippers. I wonder if this is true among other builders as well and how much it really deters flippers.

Guy on CNBC SquawkBox from ISI Group said nationwide housing is OK except for a few markets. He named Florida specifically.

Personally I think that sooner or later The Fed is going to increase short term rates high enough that banks won't be able to think up of any more exotic loans because they won't make money. When the liquidity dries up it'll be interesting to see what happens.

al_bundy

08-27-05, 03:20 PM

I read a housing bubble blog for fun a few days a week and they gather news from around the country about RE. Believe it or not a lot of speculators are buying up houses in Boise, Idaho of all places. The story said the speculators were from California.

kvrdave

08-27-05, 03:28 PM

I can sure believe that. While I am in E. Washington, and not Idaho, it is fairly similar, and we are seeing the market go pretty wild. Lots of retired people, and no jobs.

Interest rates are still cheap, and probably housing lending rates need to get to about 7.5% to have a significant cool off.

al_bundy

08-27-05, 03:35 PM

i don't even think long term rates will go up much

i think what happened with houses is the same thing as stocks. they race forward, then drop a little, stay flat and then go up again. Over time the prices average out. sometimes the prices go away from the historical averages for a long time.

I think the same thing happened with homes and the low rates caused them to race ahead of their true value. To keep business going lenders started using IO loans for a lot of people because short term rates are low. As the fed raises rates it's going to kill the exotic loan products. As buyers are priced out and the stupid people that overpaid get foreclosed on, there will be an inventory correction for a few years.

08-27-05, 05:18 PM

It's worthwhile reading the entire speech of Chairman Greenspan's instead of the sensationalist stories being written about it.

Remarks by Chairman Alan Greenspan
Reflections on central banking
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 26, 2005

In the spirit of this conference, I asked myself what developments in the past eighteen years--both in the economy and in the economics profession--were most important in changing the way we at the Federal Reserve have approached and implemented monetary policy.

The Federal Reserve System was created in 1913 to counter the recurrent credit stringencies that had so frequently been experienced in earlier decades. As lender of last resort, we had a mandate that, at least viewed from today's perspective, was limited. We did not engage in Systemwide open market operations until the 1920s. And as recently as the 1950s, the framework within which those open market operations were formulated was still being developed. Credit was eased when the economy weakened and tightened when inflation threatened, but largely in an ad hoc manner. As a consequence, the Federal Reserve was perceived by some as often accentuating, rather than damping, cycles in prices and activity. Importantly, however, the surge in prices that followed the removal of wage and price controls after World War II and again after the Korean War kept monetary policymakers wary of the threat of inflation.

But concern that the monetary restraint of the 1950s had led to unnecessarily high unemployment persuaded the Federal Open Market Committee to adopt a more stimulative policy stance in the mid-1960s. Those actions appear to have been predicated, in part, on an acceptance of the then-prevalent view that a long-term tradeoff existed between inflation and unemployment.1

Subsequently, however, the experience of stagflation in the 1970s and intellectual advances in understanding the importance of expectations--which built on the earlier work of Friedman and Phelps--undermined the notion of a long-run tradeoff.2 Inflation again became widely viewed as being detrimental to financial stability and macroeconomic performance. And as the decade progressed, a keener appreciation for the monetary roots of inflation emerged both in the profession at large and at central banks. Indeed, the insights from the work of Friedman and Schwartz a decade earlier gained greater prominence in the realm of practical policy.3

These events, both economic and intellectual, significantly influenced the tool kits employed by macroeconomists inside and outside policymaking institutions. The large-scale macromodels that had been the focus of so much work in the 1960s came under attack on two fronts.

Most prominently, greater recognition of the importance of expectations suggested that those models, which for the most part incorporated autoregressive expectations, were excessively reduced-form and backward-looking in nature and thus insensitive to changes in economic structure and the policy process. In addition, some researchers observed that simple time-series models often produced better forecasts than the large macromodels of that period.4

One prescription was to focus on uncovering, at a more fundamental level, the structural parameters of the economy. Needless to say, this task has proven to be a very tall order that has yet to be filled. Partly in response to these difficulties, a substantial body of research focused on improvements in empirical modeling, such as vector autoregressions for forecasting, and in some cases, for policy analysis.

Each one of these approaches has proven useful, and their descendants are currently employed in various forms in central banks throughout the world. But as yet, none of these approaches is capable of addressing the full range of policymakers' needs.

At various points in time, some analysts have held out hope that a single indicator variable--such as commodity prices, the yield curve, nominal income, and of course, the monetary aggregates--could be used to reliably guide the conduct of monetary policy. If it were the case that an indicator variable or a relatively simple equation could extract the essence of key economic relationships from an exceedingly complex and dynamic real world, then broader issues of economic causality could be set aside, and the tools of policy could be directed at fostering a path for this variable consistent with the attainment of the ultimate policy objective.

M1 was the focus of policy for a brief period in the late 1970s and early 1980s. That episode proved key to breaking the inflation spiral that had developed over the 1970s, but policymakers soon came to question the viability over the longer haul of targeting the monetary aggregates. The relationships of the monetary aggregates to income and prices were eroded significantly over the course of the 1980s and into the early 1990s by financial deregulation, innovation, and globalization. For example, the previously stable relationship of M2 to nominal gross domestic product and the opportunity cost of holding M2 deposits underwent a major structural shift in the early 1990s because of the increasing prevalence of competing forms of intermediation and financial instruments.

In the absence of a single variable, or at most a few, that can serve as a reliable guide, policymakers have been forced to fall back on an approach that entails the interpretation of the full range of economic and financial data. Policy is implemented through nominal and, implicitly, real short-term interest rates. However, reflecting the progress in economic understanding, our actions are now better informed about the pitfalls associated with relying on nominal interest rates to set policy and the important role played by inflation expectations in gauging the stance of monetary policy.

Our appreciation of the importance of expectations has also shaped our increasing transparency about policy actions and their rationale. We have moved toward greater transparency at a "measured pace" in part because we were concerned about potential feedback on the policy process and about being misinterpreted--as indeed we were from time to time. I do not intend this brief and necessarily incomplete review of events to illustrate how far we have come or to despair of how far we have to go. Rather, I believe it demonstrates the inevitable and ongoing uncertainty faced by policymakers.

Despite extensive efforts to capture and quantify what we perceive as the key macroeconomic relationships, our knowledge about many critical linkages is far from complete and, in all likelihood, will remain so. Every model, no matter how detailed or how well conceived, designed, and implemented, is a vastly simplified representation of the world, with all of the intricacies we experience on a day-to-day basis.

Formal models are a necessary, but not sufficient, system of analysis. To be sure, models discipline forecasts by requiring, among many restraints, that identities are indeed equal, inventories non-negative, and marginal propensities to consume positive. But we all temper the outputs of our models and test their results against the ongoing evaluations of a whole array of observations that we do not capture in either the data input or the structure of our models. We are particularly sensitive to observations that appear inconsistent with the causal relationships of our formal models. Tentative revisions of that structure are reflected in our add factors.

Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, the paradigm on which we have settled has come to involve, at its core, crucial elements of risk management. In this approach, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decisionmakers then need to reach a judgment about the probabilities, costs, and benefits of various possible outcomes under alternative choices for policy.

The risk-management approach has gained greater traction as a consequence of the step-up in globalization and the technological changes of the 1990s, which found us adjusting to events without the comfort of relevant history to guide us. Forecasts of change in the global economic structure--for that is what we are now required to construct--can usefully be described only in probabalistic terms. In other words, point forecasts need to be supplemented by a clear understanding of the nature and magnitude of the risks that surround them.

In effect, we strive to construct a spectrum of forecasts from which, at least conceptually, specific policy action is determined through the tradeoffs implied by a loss-function. In the summer of 2003, for example, the Federal Open Market Committee viewed as very small the probability that the then-gradual decline in inflation would accelerate into a more consequential deflation. But because the implications for the economy were so dire should that scenario play out, we chose to counter it with unusually low interest rates.

The product of a low-probability event and a potentially severe outcome was judged a more serious threat to economic performance than the higher inflation that might ensue in the more probable scenario. Moreover, the risk of a sizable jump in inflation seemed limited at the time, largely because increased productivity growth was resulting in only modest advances in unit labor costs and because heightened competition, driven by globalization, was limiting employers' ability to pass through those cost increases into prices. Given the potentially severe consequences of deflation, the expected benefits of the unusual policy action were judged to outweigh its expected costs.

* * *

The structure of our economy will doubtless change in the years ahead. In particular, our analysis of economic developments almost surely will need to deal in greater detail with balance sheet considerations than was the case in the earlier decades of the postwar period. The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts and hence policy are becoming increasingly driven by asset price changes.

The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.

Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.

The lowered risk premiums--the apparent consequence of a long period of economic stability--coupled with greater productivity growth have propelled asset prices higher.5 The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

* * *

Broad economic forces are continuously at work, shaping the environment in which the Federal Reserve makes monetary policy. In recent years, the U.S. economy has prospered notably from the increase in productivity growth that began in the mid-1990s and the enhanced competition engendered by globalization. Innovation, spurred by competition, has nurtured the continual scrapping of old technologies to make way for the new. Standards of living have risen because depreciation and other cash flows generated by industries employing older, increasingly obsolescent technologies have been reinvested to finance newly produced capital assets that embody cutting-edge technologies.

But there is also no doubt that this transition to the new high-tech economy, of which expanding global trade is a part, is proving difficult for a segment of our workforce that interfaces day by day with our rapidly changing capital stock. This difficulty is most evident in the increased fear of job-skill obsolescence that has induced significant numbers of our population to resist the competitive pressures inherent in globalization from workers in the major newly emerging market economies. It is important that these understandable fears be addressed through education and training and not by restraining the competitive forces that are so essential to overall rising standards of living of the great majority of our population. A fear of the changes necessary for economic progress is all too evident in the current stymieing of international trade negotiations. Fear of change is also reflected in a hesitancy to face up to the difficult choices that will be required to resolve our looming fiscal problems.

The developing protectionism regarding trade and our reluctance to place fiscal policy on a more sustainable path are threatening what may well be our most valued policy asset: the increased flexibility of our economy, which has fostered our extraordinary resilience to shocks. If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment.

The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances. That process of correction limits the size and the consequences of cyclical imbalances. Enhanced flexibility provides the advantage of allowing the economy to adjust automatically, reducing the reliance on the actions of monetary and other policymakers, which have often come too late or been misguided.

In fact, the performance of the U.S. economy in recent years, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence that we have benefited from an enhanced resilience and flexibility.

We weathered a decline on October 19, 1987 of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress--an episode that provided an early hint that adjustment dynamics might be changing. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was limited by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for crude oil and natural gas that we have experienced over the past two years.

* * *

This morning I have tried to outline my perceptions of the key developments that have influenced the conduct of monetary policy over the past eighteen years. I acknowledge that monetary policy itself has been an important contributor to the decline in inflation and inflation expectations over the past quarter-century. Indeed, the Federal Reserve under Paul Volcker's leadership starting in 1979 did the very heavy lifting against inflation. The major contribution of the Federal Reserve to fashioning the events of the past decade or so, I believe, was to recognize that the U.S. and global economies were evolving in profound ways and to calibrate inflation-containing policies to gain most effectively from those changes.

For reasons that may not be too obscure, I will pay close attention to, and hope to learn from, the deliberations of the next couple of days. I have been asked to make a few closing remarks tomorrow about some of the unresolved challenges facing policymakers in the years ahead and about my experiences living inside the Federal Reserve for nearly two decades, after so many years of observing our institution from afar.

Footnotes

1. See Romer, Christina D. and David H. Romer, "The Evolution of Economic Understanding and Postwar Stabilization Policy," NBER Working Paper No. 9274 (October 2002), p. 39.

2. Friedman, Milton. "The Role of Monetary Policy", American Economic Review, vol. 58, No. 1 (March 1968) pp. 1-17. Phelps, Edmund S. "The New Microeconomics in Inflation and Unemployment Theory", American Economic Review (May 1969) pp. 147-160.

3. Friedman, Milton and Anna Jacobsen Schwartz. A Monetary History of the United States, 1867-1960. Princeton University Press, Princeton, NJ, 1963.

4. Sims, Christopher A. "Macroeconomics and Reality". Econometrics, vol. 48, No. 1 (January 1980). pp. 1-48.

5. Despite the two-year bear market following the stock market collapse of 2000, equity prices have risen at an annual rate of 10 percent since 1995.

6. Capital gains do not add to GDP. The higher prices of plant and equipment and homes are reflected in an economy's cost structure, which directly or indirectly increases prices of goods and services, leaving real output largely unaffected. Capital gains, of course, cannot supply any of the saving required to finance gross domestic investment. Remarks by Chairman Alan Greenspan
Closing remarks
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 27, 2005

The Federal Reserve will almost surely face as many uncertainties over the next eighteen years as it has over the past eighteen. Technology continues to bring rapid change and, hence, considerable uncertainty, to the global marketplace. Monetary policy, supervision and regulation activities, and payments system operation will need to be calibrated to respond to the influences of that technological change.

Other forces will be at work on the economic environment as well. The inexorable aging of our population will markedly influence the policy milieu in the years ahead. Monetary policy, for example, cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those that could arise in meeting commitments to future retirees. However, I assume that these imbalances will be resolved before stark choices again confront us and that, if they are not, the Fed would resist any temptation to monetize future fiscal deficits. We had too much experience with the dangers of inflation in the 1970s to tolerate going through another bout of dispiriting stagflation. The consequences for both future workers and retirees could be daunting.

Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover will decline from currently historic levels, while home price increases will slow and prices could even decrease. As a consequence, home equity extraction will ease and with it some of the strength in personal consumption expenditures. The estimates of how much differ widely.

The surprisingly high correlation between increases in home equity extraction and the current account deficit suggests that an end to the housing boom could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement in the current account deficit. Whether those adjustments are wrenching will depend, as I suggested yesterday, on the degree of economic flexibility that we and our trading partners maintain, and I hope enhance, in the years ahead.

On monetary policy, I envision a continuous refinement of our risk-management paradigm. I presume maximum sustainable economic growth will continue to be our goal, with price stability pursued as a necessary condition to promote that goal. To date, we have chosen not to formulate explicit inflation targets, in part, out of concern that they could inhibit the effective pursuit of our goal.

I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes behavior among the world's central banks. Despite the various public characterizations of the form of monetary policy regime, the Federal Reserve and most other central banks generally pursue price stability and, consistent with that goal, ease when economic conditions soften and tighten when they firm. That said, I am certain this will remain a topic of lively discussion here and at other monetary forums in years to come. Participants on all sides of that debate will be well served by keeping open minds and remaining attentive to the evidence as events unfold and practices evolve.

Debates on the relative merits of asset price targeting also will continue and possibly intensify in the years ahead. The configuration of asset prices is already an integral part of our evaluation of the large array of forces that influence financial stability and economic growth. But given our current state of knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon. However, I certainly do not rule out that future work could improve our understanding of asset price behavior, and with it, the conduct of monetary policy.

* * *

I will miss debates on such topics with members of the Federal Open Market Committee and with the staffs of the Board and the banks. The Federal Reserve is a remarkable institution. Aside from its technical expertise in supervision and regulation and in overseeing an increasingly complex payments system, it combines for monetary policy an academic sophistication and a market-sensitive understanding that is brought to bear in formulating the tie between instruments and the goals of monetary policy.

Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces. Having been exposed to the inner workings of this extraordinary institution for nearly two decades, I have little doubt that my successors, and theirs, will continue to sustain the leadership of the American financial system in an ever-widening global economy.

twikoff

08-27-05, 05:37 PM

i sure hope the real estate market isnt on its way down!
hmmmmm
although, i guess that is a bad thing on one side, and good on the other
probably wont effect me much either way though :lol:

al_bundy

08-27-05, 06:16 PM

It's worthwhile reading the entire speech of Chairman Greenspan's instead of the sensationalist stories being written about it.

when has the media ever not changed his words into something else?

Xndman

08-28-05, 11:01 AM

I believe the market will slow dramatically very soon (6-9 months), the cause?? Rising gas prices. Soon the increase in gas will affect manufactorers and distributors significantly. They'll in turn raise their prices to offset their higher cost. Since gas affects every industry, this will ultimately increase the CPI, and interest rates will be raised to offset this new inflation. The rising interest rates will cool off the housing market (as well as negatively affecting many new interest-only, etc. purchasers).

That's how I see it.

08-28-05, 12:30 PM

I wouldn't be so sure about inflation going up that much. Gas prices are doing what high interest rates are supposed to do, they they suck up so much money it makes it hard for manufacturers and retailers to pass on their cost increases.

The high oil costs that can't be passed on will hurt the performance of companies (luckily all companies, not just the domestic ones) and economic growth will be moderated. Rates won't need to be raised to counteract a runaway economy.

Interest rates are bound to go up a bit, they're at such historically low levels. But even with all the Fed funds rate hikes we've had and the short-term interest rate rising, the long-term rates have stayed very low. They keep trying to go up and come right back down again, even in this environment of expensive oil. This reflects a lack of concern by economists that interest rates are going to go up that much over the relatively long term. Greenspan does prefer to use monetary policy rather than interest rates to moderate the economy so that could be an indication of interest rates remaining low.

When people want to buy houses that are greatly increasing in value the interest rate doesn't stop them that much. I watched that happen in the early '80s when interest rates were over 15% and people were frantically buying houses with extremely creative financing. High interest rates signify high inflation and it's better to own appreciating hard goods in times of inflation.

Even when prices aren't increasing that much, people still need to buy homes. But a slowing of the increase of their value will wring out the speculators who have been making the prices crazy. How quickly that happens will determine the severity of the "burst".

Higher interest rates do stop refinancing and taking equity out of the home and that's what Greenspan was warning about because a lot of that equity being turned into the purchase of goods is driving this economy. That's not necessarily so bad either with respect to where that money is going.

At least that's how I see it.

Xndman

08-28-05, 02:27 PM

X, I appreciate your logic (are you an Economist?).

However, I think that companies will pass on virtually all of the gas increase. Today we see surcharges added for pizza and flower delivery. Tomorrow industries not directly related to transportation but heavily reliant on it (particularly grocery stores) will have no choice but to pass on the increased cost. These companies have stockholders to which to answer.

08-28-05, 09:04 PM

Thanks for the logic compliment. I'm not sure about the economist remark though :)

I just don't see the factors that fueled the high inflation environment of the past occurring this time. I really do believe the Fed has figured out ways to temper inflation short of using the heavy stick of interest rates. And the factors and psychology required to severely raise long-term rates just don't seem to be there anymore. Globalization has probably contributed a lot to this. If you haven't lived through it, I can't tell you how bad it is to live in an environment of high inflation.

I don't think companies are in a position to substantially pass on their higher costs. Take a look at the pricing models the domestic car companies have had to take just to stay in business. If all companies are hit with higher costs due to oil prices they all will have the same problems with profitability and will remain relatively the same to shareholders. I suppose we'll ultimately find out which of us is correct.

al_bundy

08-28-05, 09:55 PM

greenspan said as much in his speech and in previous writings. People say globalization and outsourcing is bad, but the alternative is a lot worse. Globalization has effectively killed inflation and even lowered prices for a lot of goods. And we have extremely low unemployment as well.

Jack Straw

09-12-05, 10:37 PM

http://img.photobucket.com/albums/v282/thgord/mrhousingbubble.gif

al_bundy

09-19-05, 07:22 PM

Jim Cramer actually called the housing boom over today and said that the peak was back in January

jiggawhat

09-21-05, 09:00 PM

I just wanted to chime in again. I am a RE agent and have seen what's been happening. One thing I'm finding is that people are getting too greedy. People are reluctant to list their homes because they feel the prices are still going up and they feel they can time the market so that they can sell at the top. Although the rules of economics actually state that generally people will start selling when it's close to the bottom. This has happened throughout history and happened with the dot-com bust as well.

As long as demand is outstripping supply, home prices will continue to rise. The main reason of course for this supply shortage is what I pointed out earlier which is people trying to time the market.

I think once more reports come out from NAR (National Association of Realtors) and other agencies showing that price appreciation is less than 10%, you'll see a flood of listings go on the market and that my friends is when the correction occurs. California of course and states where astronomical price increases have occurred will be hit hardest.

I don't think there will be an all-out crash because housing cannot be sold instaneously like stocks and bonds can but there will be a steady decline. That decline will last approximately 3 years before it starts to level out. Then we might see a flattening for another couple of years and then maybe we'll see and upturn again albeit with price appreciation more in line with historical rates.

Any thoughts?

al_bundy

09-21-05, 09:11 PM

09-21-05, 09:23 PM

around 2 months ago i was in the bookstore and saw a book called TrimTabs in the investing section. They had some charts that showed that housing and stocks move inversely over the long termI did some research and found no significant correlation between the two.

Sometimes they both go up, sometimes they both go down, and sometimes one performs better than the other. They don't really appear to be alternative investments. Probably due to people needing to live in houses.

al_bundy

09-21-05, 09:28 PM

in the 1990's it was generally an inverse movement

the stock market started it's big move up around 1994 and the housing market bottomed our around 1995. Housing started it's current bull run around 1998 and the market topped out around 2000. Not an exact inverse movement, but pretty close.

jiggawhat

09-21-05, 09:31 PM

Well housing is generally used by investors as a hedge against inflation. Never heard of stocks and housing being inversely related. Interest rates and homes prices are inverse related though.

I feel bad for the people who got into really bad loans like interest only or
neg-am loans because they will be hit hardest.

Since I am an agent hopefully I can swoop up on those deals.

09-21-05, 09:32 PM

There's more to significant correlations than what happened in 5 or 10 years so I would consider a longer timeframe that includes more factors, such as inflation, interest rates, and GDP growth.

ChiTownAbs, Inc

09-21-05, 09:32 PM

most likely

around 2 months ago i was in the bookstore and saw a book called TrimTabs in the investing section. They had some charts that showed that housing and stocks move inversely over the long term

if that is true, then either the stock market has tanked over the last 20 years or the housing market has tanked.

the only purely negative correlation is stocks and gold. the correlation is near -1.

ChiTownAbs, Inc

09-21-05, 09:35 PM

i read in the journal a few weeks ago (maybe it was businessweek, can't remember) that robert schiller and a company (perhaps his?) is working on some futures contracts on real estate.

basically you are making bets about the median housing prices in certain markets. i think they will start with san fran, new york, and boston. expanding into other cities and then baskets of real estate.

ChiTownAbs, Inc

09-21-05, 09:36 PM

<a href=http://money.cnn.com/2004/08/06/real_estate/investment_prop/hedging/>here is the story</a>


Best Sellers
1.	Star Trek (Three-Disc +Digital Copy) [Blu-ray] Buy: ~~$39.99~~ $19.99
2.	Up (4 Disc Combo Pack with Digital Copy and DVD) [Blu-ray] Buy: ~~$45.99~~ $19.99
3.	Star Trek (Single-Disc Edition) Buy: ~~$29.99~~ $12.99
4.	Harry Potter and the Half-Blood Prince (Widescreen Edition) Buy: ~~$28.98~~ $9.99
5.	Night at the Museum: Battle of the Smithsonian (Single-Disc Edition) Buy: ~~$29.98~~ $9.99
6.	Harry Potter and the Half-Blood Prince (Blu-ray/DVD Combo + Digital Copy & BD-Live) [Blu-ray] Buy: ~~$35.99~~ $16.99
7.	Angels & Demons (Single-Disc Theatrical Edition) Buy: ~~$28.96~~ $9.99
8.	Up (Single Disc Widescreen) Buy: ~~$29.99~~ $18.99
9.	Santa Buddies Buy: ~~$29.99~~ $9.99
10.	Fight Club [Blu-ray] Buy: ~~$34.99~~ $15.99

DVD Blowouts
1.	Cars [Blu-ray] Buy: ~~$34.99~~ $15.49
2.	The Boondock Saints [Blu-ray] Buy: ~~$29.99~~ $11.99
3.	Firefly: The Complete Series [Blu-ray] Buy: ~~$89.98~~ $53.99
4.	Angels & Demons [Blu-ray] Buy: ~~$39.95~~ $18.99
5.	Castle: The Complete First Season Buy: ~~$39.99~~ $16.49
6.	Monsters vs. Aliens Buy: ~~$29.99~~ $12.99
7.	John Adams (HBO Miniseries) Buy: ~~$59.99~~ $19.99
8.	Grey's Anatomy: The Complete Fifth Season Buy: ~~$59.99~~ $22.49
9.	District 9 [Blu-ray] Buy: ~~$39.95~~ $19.99
10.	Mad Men - Season One Buy: ~~$39.98~~ $18.99