The Housing Bubble

This Blog Is Back Online; Archive For Older Posts

noreply@blogger.com (Ben Jones) — Wed, 1 Jun 2005 12:23:00 -0700

This blog will serve as an archive. Please continue to use this other blog for day-to-day postings.

"Correction Inevitable, Could Be A Doozie"

noreply@blogger.com (Ben Jones) — Wed, 25 May 2005 18:59:00 -0700

The Australian has a report out with more details of the speech by Fed honcho Jack Guynn. "He was especially concerned about reports of speculators buying homes and condos 'just to flip them for a quick profit' and that banks and other financers are taking big risks in the area."

"'It seems like every week brings new stories about aggressive financing arrangements that encourage and enable such real estate transactions,' Guynn said."

"New data overnight showed sales of new US homes edged up 0.2 per cent to a seasonally adjusted annual rate of 1.32 million, an all-time record."

"Diane Swonk, chief economist at Mesirow Financial, said, 'The concern is the further we go, the more risk we run of a significant long-term correction."

HBs' Stock Up Double Digits In 10 Days

noreply@blogger.com (Ben Jones) — Wed, 25 May 2005 18:00:00 -0700

Many of this blogs' readers are watching for the top in the US housing market. This chart of the homebuilders KB Homes and Toll Brothers exhibits the kind of 'blow-off' action one would expect to cap a multi-year mania. Notice the move from May 13th to date.

All Eyes On Fannie Soon

noreply@blogger.com (Ben Jones) — Wed, 25 May 2005 17:35:00 -0700

Fannie Mae has the April monthly summary report scheduled to come out any day. This post took a close look recently and the April period should be interesting.

Buyers, Builders, Lenders May Get "Burned"

noreply@blogger.com (Ben Jones) — Wed, 25 May 2005 13:13:00 -0700

Atlanta Federal Reserve Bank President Jack Guynn added to the housing bubble debate with these comments. "'There are some local markets, especially in coastal Florida, where I've heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation,' Guynn said it response to questions after his speech."

"'It makes me very uncomfortable. Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets,' he said."

"The U.S. Federal Reserve is not yet done raising interest rates, but the central bank will watch economic data closely in an uncertain time for monetary policy. 'Given the current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance,' Guynn noted."

7% Of LV Listings Reduce Price In The Past Week

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 16:56:00 -0700

The Las Vegas web site that has a search function for homes reduced in price the last seven days has reposted the results. It reports that out of 16,346 total MLS listings, 1,133 have had prices cut in the last week. That's 6.9%.

Maybe the webmaster is playing some blog-chicken with THB, but you might hurry over and look before they realize what's up.

Spanish Mortgage Debt Up 25% In One Year

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 16:44:00 -0700

In Spain, the RE boom has pushed the country to the brink. "Household debt in Spain surpassed disposable income for the first time last year, posing risks for the stability of the financial system, the Bank of Spain said Monday."

"The increase in indebtedness of Spanish households is largely the result of much bigger mortgages to acquire the family home due to an ongoing property boom in which house prices have risen about 150 percent since 1997."

"According to figures from the Spanish Mortgage Association (AHE), total outstanding mortgage loans at the end of March stood at a new record of €615.132 billion, a rise of 24.5 percent from a year earlier."

Fundamentals Belie Housing Boom

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 14:28:00 -0700

A writer at Motley Fool has done the calculations readers of this blog know a lot about. He didn't like what he came up with. "In our neck of the woods, things look pretty unhealthy. I recently came across an OK-looking three-bedroom. Needs a new roof and windows and updating throughout. Price: $500,000. The showing agent expected prospective buyers to waive all reasonable protections like inspection clauses. To me, that screams, 'Bubble!'"

"For a reality check, I popped a few numbers into our handy rent vs. buy calculator. It informed me that we would be $60,000 worse off after seven years if we buy rather than continue to rent. It also assumed we'd be comfortable putting more than 50% of our income on the line for a home payment every month and it assumed 5% annual appreciation in housing prices for the entire seven years. In my opinion, those are pretty bad assumptions."

CA Prices Soar, Sales Weaken

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 12:18:00 -0700

The CAR reports a new milestone in California. "The median price of a home in California topped a half-million dollars for the first time in April, reflecting the continuing demand for housing and the ongoing supply shortage."

About that supply issue. "An examination of 2003 data from the Census Bureau shows there are 43.8 million second homes in the United States, including 6.6 million vacation homes and 37.2 million investment units, compared with 72.1 million owner-occupied homes."

If you look at the reporting today, most stories lead off with some statistic like this, "Home Sales Up 4.5 Percent in April."

But where is this headline? "Statewide, the 10 cities and communities with the greatest median home price increases in April 2005 compared with the same period a year ago were: Reedley, 68.8 percent; Colton, 64.7 percent; Twentynine Palms, 63 percent; Atwater, 58.7 percent; Rohnert Park, 57.5 percent; Laguna Hills, 53.3 percent; Norco, 51.6 percent; La Canada-Flintridge, 50.9 percent; Adelanto, 49.1 percent; Victorville, 45.8 percent."

Don't miss the table at the bottom of the CAR site. Not one region showed a y.o.y. price decrease. But out of 20 regions, 13 had y.o.y. negative sales volume and 8 of those were double digit declines.

"Possible Speculative Excess": FOMC

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 11:37:00 -0700

Disregarding the so-called 'soft patch' in the economy, the Federal Reserve is signaling that the funds rate will be increased. "'Most members regarded the recent slower growth of economic activity as likely to be transitory,' according to the minutes released today in Washington."

"'All members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run.'"

"'Home sales and other indicators of activity in the residential real estate market remained at very high levels,' the minutes said. 'House price appreciation was expected to moderate over coming quarters, but a number of local markets were still regarded as `hot' with signs of possible speculative excess.'"

Fitch Cuts GM, GMAC To "Junk" Status

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 10:53:00 -0700

As the markets wait for the Fed minutes to be released, Fitch Ratings has lowered the bonds of GM and mortgage giant GMAC to junk status. "Fitch Ratings May 24, 2005: Fitch Ratings has downgraded the senior unsecured ratings of General Motors, GMAC and the majority of affiliated entities."

Congress Wants This Bubble, Not Reform

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 10:27:00 -0700

The gut-less US congress will be remembered for it's role in creating the housing bubble. It appears that the lack of courage will continue as the economy sails off the cliff. "Legislation to be debated Wednesday to overhaul regulation of Fannie Mae and Freddie Mac has been changed to allow the mortgage giants to buy higher-cost loans in pricey markets."

"It would also allow Fannie and Freddie to increase the percentage of the secondary mortgage market that they serve, challenging competitors who now operate in the so-called nonconforming market."

This blog has criticized the supposed 'independent' Federal Reserve for it's failure to take away the punch-bowl. But there is no question the elected representatives have failed us miserably as well. How can they ratchet up the borrowing at a time like this?

"Some lawmakers are reluctant to curb the holdings because they create liquidity in the mortgage market. 'The last thing any lawmaker wants to be accused of is killing the goose that laid the golden egg in our housing market,'" said Jaret Seiberg.

Faulty Appraisals Are "Common Knowledge"

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 09:45:00 -0700

As expected, the appraisal industry is warning congress today. "Faulty appraisals are still dictated by interested parties, the schoolyard bullies of real estate. It's common knowledge that if an appraiser doesn't play the game and 'come in' at whatever value is needed to close the deal, the bullies will take his lunch money. And he had better not tattle.' said Alan E. Hummel, SRA.

"The public..needs to be more aware of the menace of mortgage fraud to their home purchases, the largest investments of their lives. Sadly, all Americans pay the price for this miserable performance, bearing the cost of investigations and financial failures."

"The appraisal organizations say the appraisal standards in H.R. 1295 are our lesson plan to do better." Before you buy that, read this report.

"The Biggest RE Bubble In World History"?

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 08:50:00 -0700

Even before the sales numbers were released today, economists were sounding alarm bells. Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,' he said in a telephone interview yesterday (May 23rd)."

"Mark Zandi, chief economist with Economy.com, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers."

Even Robert Freed of KB Homes, who has pocketed a few million recently, used the 'B' word. "It's not the bubble in housing. It's the bubble in underwriting."

It's all good for Steve Kalmbach of Pulte Homes. "You'd be surprised how far people are willing to drive to have their American dream."

"'If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,' Zandi said."

Economist To Eat His Own Hat

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 08:30:00 -0700

This has already been posted in the comments, but just to get it on the record. "'Fifteen percent price appreciation is too much, even for me,' David Lereah, chief economist at the National Association of Realtors. 'The real estate market is taking on a life of its own right now and we need to get a handle on it.'"

"I do agree with (Federal Reserve Chairman Alan) Greenspan there's some froth now in the market."

Crowd Gathers To Watch Economic Train-Wreck

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 08:05:00 -0700

The home price increase has caused another economist to change his opinion on the housing bubble. "In a real estate seminar in January, I stated that housing price increases reflected underlying conditions of reduced costs to finance homes. What has changed my thinking about the housing bubble is what is happening in the financing of housing."

"Are home buyers not being smart? No. Lenders are being foolish. Some lenders believe that rising housing prices will soon justify whatever loan they offer the home buyer."

Mr. Donald Ratajczak of Georgia State University is joining the crowd of horrified by-standers. "Pundits, economists, and, yes, Warren Buffett have been rushing to get on the record saying that real estate has maxed out. The top may not be here yet, they argue, but it’s close."

"Paul Kasriel, chief economist at Northern Trust Corporation, "constructed a price-to-earnings ratio for housing. In 2004, that P/E ratio 'the highest since 1952, when the time series starts.' And we all know what happens when P/E ratios reach 50-year highs."

"David Rosenberg, Merrill Lynch’s chief North American economist, "We get nervous when we see things move parabolically north, because no asset class at any time ever failed to mean-revert after such an upside move."

Speculators In Charge Of This Bubble

noreply@blogger.com (Ben Jones) — Tue, 24 May 2005 07:27:00 -0700

There isn't a lot of celebrating at the NAR this morning, or even much discussion in the media of their existing home sales report. For months their economists have predicted sales and prices to 'level off'. Nothing of the sort in April 2005. "Existing-home sales hit a record high in April, defying expectations of a modest slowing trend in 2005, according to the National Association of Realtors."

"David Lereah, NAR’s chief economist, said sales had been expected to hold at high levels. 'A new record is a bit unexpected.'"

How's this for a parabolic move. "The national median existing-home price for all housing types was $206,000 in April, up 15.1 percent from April 2004 when the median price was $179,000. The last time prices rose at a stronger pace was in November 1980 when the median price rose 15.6 percent."

A double digit gain on top of the biggest gains ever, but no 'B' words in their report. They slipped this in at the bottom of the page. "The median existing-home price in the West was $305,000, up 21.0 percent from the same month a year ago."

Does this look like a plateau or a cooling market? Alan Greenspan said recently that only those who bought at the top would get hurt, financially. It looks like there will be many millions of those. And as for the recent warning about risk in lending, there isn't any shortage of that either.

Over-Capacity Fuels "Renters Bonanza"

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 15:39:00 -0700

It's a "Renters Bonanza" the TriCity Herald reports. "As occupancy rates drop in the Tri-Cities, renters are getting move-in incentives and a choice of amenities. Vacancy rates, which averaged about 3 percent in 2002, increased to 9 percent in Richland, 11 percent in Kennewick and 8 percent in Pasco."

"Pasco's vacancy rates will probably catch up soon. Permits have been issued for three new apartment buildings at Chapel Hill that will add 668 units, bringing the city's total number 1,959. 'There was a lack of complexes in Pasco, but now that's taken care of,' Sylvia Erickson said. The landlord profits are done for too!

"The average price for a two-bedroom in Richland is $667, compared with $708, the average price in spring 2003. The average rent for a one-bedroom Kennewick apartment is about $486. In Richland, it's $563, and in Pasco it's $524."

"Those selling include San Francisco-based developer Robert Young, who has placed his eight properties on the market. 'I'm bullish on the Tri-Cities. I've always been bullish on the Tri-Cities.' So why is he selling his eight apartment buildings? Young said he wants to devote his energy to a commercial development he is building."

"It could be one of the best times to sell an apartment building in the Tri-Cities, said David Eagle. (He) said many investors are turning away from primary markets like Seattle, Portland and Los Angeles, where real estate prices are extremely high and the opportunity for growth limited. He said they're looking more seriously at 'secondary' markets."

In Las Vegas, They Sell Condos Twice

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 15:29:00 -0700

The Las Vegas RE crowd got some bad press when one condo project pulled a fast one. "First it was the housing market, now it's the condo market. It's almost a given in Las Vegas, buy low and sell high. But Jim Snyder has a story that one attorney says could badly hurt the condo market in Las Vegas."

"Imagine my disgust when I get a similar package in the mail that says, it's not a half a million dollars any more, it is eight hundred and seventy-four thousand," said one burned speculator.

"They all attended a Vegas Grand sales event, put down anywhere from five thousand to 25 thousand dollars and signed letters of intent to buy a unit. That all screeched to a halt when they got a notice in the mail telling them they had two options: pay a revised price almost double the amount they agreed to, or get their deposit back with five percent interest."

"Personally, my feeling is, they have dollar signs in their eyes and they know that if they can get rid of me they're going to make a whole lot more money off my unit." If this is how everybody behaves going up, imagine the chaos when it heads down?

Top Execs Bail-Out At Countrywide

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 14:57:00 -0700

The insider selling continues at Countrywide Financial, where the executives have liquidated 72% of their position. A scan of the individual transactions reveals the sell-off has accelerated.

Canada Gets I/O Loans, US Speculating With Debt

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 13:56:00 -0700

The web site Realtor.org reports that interest only loans are headed to Canada. "A unit of U.S.-based General Motors Acceptance Corp. is offering Canadian home buyers the nation's first fixed-rate, interest-only mortgage for up to 80 percent of a house's value."

"The product will get borrowers into bigger homes, as they can take on a mortgage that is 17 percent larger than one that also calls for the payment of principal."

And a story on home equity loans; "The amount of home equity extracted by U.S. property owners surged to $705 billion in 2004, with most of the money put toward buying new residences, repaying credit-card debt, and funding home-improvement projects. More homeowners are using the cash to purchase investment properties--2.2 million in 2004." That last number is more than all the new homes built in the US.

Housing Bubble Seen As Non-Productive

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 13:08:00 -0700

An editorial in the News & Star challenges the public view of housing in the UK. "As the former features editor of the then leading home improvements magazine Practical Householder, I have a sense of guilt at having contributed in the 1970s to an anti-social trend which has led homes to be seen as profit centres."

"I believe that the drive to invest in totally non-productive bricks and mortar will eventually bring to its knees the economy of Cumbria and the UK."

"I strongly resent the use of my TV licence fee to drive the process on through BBC programmes such as Trading Up and A Place in the Country, with prices in the latter usually from a quarter-of-a-million pounds upwards."

"If Tony Blair is serious about reforming our public services, he could begin by reminding the BBC that its purpose is not to promote the interests of estate agents and speculators."

Selling Condos? "The DJ's Got To Be Really Good"

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 12:49:00 -0700

It would seem the Miami condo craze may be reaching it's zenith with stories like this NYTimes piece. "You could salsa with dancers in fringed hot pants at Aqua, hear a drag queen D.J. at Cynergi or watch stunt men ricochet off a trampoline at Soleil. Nightclubs? No. Carnival acts? Not quite. These were launch parties for condominium projects, one of the stranger forms of nightlife in a city obsessed with real estate."

"Deep-pocketed developers, forced to be ever more creative in the pursuit of buyers for condos still years from being built, pay for these lavish affairs. Builders need early deposits to get construction loans, so they work hard to entice the buyers they covet, image-conscious people, many from Latin America and Europe, with money to burn on a second home, a speculative investment or a status symbol."

"The bait includes small initial down payments, slick marketing, and parties. Usually held just before a project begins selling units, the events are meant to create buzz among brokers, who make up the bulk of invitees."

"Jon Graney, who owns two condos in South Beach and is looking to buy more, said launch parties were beginning to rival clubs. He added, however, that he would probably not buy at Vitri because the building was too low. 'If I spend six hundred grand, I want to go high.'"

The MBS House Of Cards

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 09:26:00 -0700

Credit rating agencies grade mortgage pools up-and-down every day. To get a sense of what's going on, here is a May 20th example from Fitch. "The negative rating actions, which affect $526.8 million of outstanding certificates, are taken due to the continued deterioration in the performance of the underlying collateral."

"In the eight transactions that experience downgrade actions, the high level of losses incurred has led to substantial and rapid decline in credit enhancement, particularly in the form of overcollateralization (OC). In the most severe examples, OC has been exhausted and the most subordinate certificates have suffered principal write-downs."

How about the good news, the 'affirmations' of credit? "The affirmations reflect credit enhancement consistent with future loss expectations and affect approximately $1.49 billion of outstanding certificates. In addition, the affirmation..reflects a guaranty provided by Freddie Mac.. reflect a guaranty provided by Fannie Mae..reflect a guaranty provided by XL Capital Assurance Inc.."

Where is this collateral? "All of the mortgage loans in the aforementioned transactions were either originated or acquired by Long Beach Mortgage Company. The mortgage loans consist of fixed and adjustable rate subprime mortgage loans and are secured by first and second lien mortgages or deeds of trust on residential properties."

"Drive-By" Valuations Worry Australian Regulator

noreply@blogger.com (Ben Jones) — Mon, 23 May 2005 08:50:00 -0700

The Australian reports that appraisals and lending standards are under review in that country as well. "The nation's banking regulator has warned home lenders that their cutting corners on property valuations could expose them to unacceptable levels of bad debt in a major downturn."

"In some cases, banks are using cheaper, 'drive-by' valuations with no internal inspection, or even a 'desk-top' approach involving statistical analysis and comparative prices in the same suburb. An APRA survey of 96 lenders who control the $500billion mortgage market found that some lenders physically inspected fewer than half of the properties they used as security for loans."

"Ian Herriott, 'There are many lenders relying on computers to do their credit analysis, and in a falling market it's a recipe for disaster.' Property prices have been under pressure since last year when the housing bubble began to deflate. Investment bank JP Morgan said earlier this month that prices could fall by as much as 10 per cent over the next 12 months, even without a further rise in rates."