Housing Bubble?

[willstrickland]

BTW, bankruptcy filings hit an all time high last month. Foreclosures are picking up substaintially.

The quality of credit (not to mention the volume) is absurd.

 

The banks don't care about the credit quality, they sell the loans to Fannie anyway who packages them and sells the MBSs. Add in the other derivatives and you have a highly leveraged credit system with horrendous underlying quality.

 

Anyone have an idea of the reserve banks are carrying as a % of loans? Used to be around 10% or so for a 10:1 leverage, if my numbers are correct. Today? Ohh try 0.93%.

 

In other words, you go deposit a dollar into the bank, they loan over $100 off that $1.

 

More? Ok. 40% of the jobs created since the dot-bomb collapse are residential housing related...construction workers, mortgage brokers, real estate agents, etc. When the sector cools and we loose the economic driver of the latest expansion, what happens?

 

I don't argue that homes are a great investment. Clearly they are. But I can't see any reasonable case that the current trend is sustainable. At some point, you run out of speculators and price the avg person out of a home. In SoCal the median house price is only affordable by 10% of the population...that is not sustainable. Asset class price rises above and beyond GDP growth+inflation are not sustainable.

 

When 68% of families own their home, who are you going to keep selling to? As Dru points out, prices will rise as long as everyone chases real estate as the latest "no brainer" investment. And optimism in a sector is always highest at the blow-off top. Once everyone is "in", prices must fall.

 

With housing, the reaction is typically first seen in longer turnover times (i.e. avg time a home is on the market). But houses act diffently than other assets. As the prices drop, people tend to take their home off the market, thus restricting supply and stabalizing prices.

 

Japan had stagnant property values for a decade. So did parts of Texas after the mid-80s housing bust. SoCal took only 3 or 4 years to recover after a 10% haircut in the early 90s.

[Stonehead]

But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? (…)

 

("The Challenge of Central Banking in a Democratic Society"

(http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm ), December 5, 1996)

[archenemy]

BTW, bankruptcy filings hit an all time high last month. Foreclosures are picking up substaintially.

The quality of credit (not to mention the volume) is absurd.

 

 

New laws have just gone into affect to limit bankruptcy--it will take a little while to see what happens as a result. Income/debt ratio rating requirements for your standard loan are about the same as always. It is a shame that new-fangled loans are sucking in careless buyers--caveat emptor.

 

The banks don't care about the credit quality, they sell the loans to Fannie anyway who packages them and sells the MBSs. Add in the other derivatives and you have a highly leveraged credit system with horrendous underlying quality.

 

 

That depends on the bank. Banks use different systems. Some sell the loan but retain "servicing" rights, others package and sell the loans themselves. Many mutations exist to finance the loans.

 

Anyone have an idea of the reserve banks are carrying as a % of loans? Used to be around 10% or so for a 10:1 leverage, if my numbers are correct. Today? Ohh try 0.93%.

 

 

Because so many banks no longer carry their loans, they have much less of a volume than it would appear. Many banks also have holdings in other areas (like real estate) that are not immediately liquid, but can be capitalized within a short period of time.

 

In other words, you go deposit a dollar into the bank, they loan over $100 off that $1.

 

That has been the case for a very long time. At least deposits are FDIC insured for more than you should have in cash.

 

More? Ok. 40% of the jobs created since the dot-bomb collapse are residential housing related...construction workers, mortgage brokers, real estate agents, etc. When the sector cools and we loose the economic driver of the latest expansion, what happens?

 

Same thing that always happens, another sector gains strength, people change jobs, new opportunities open up.

 

 

I don't argue that homes are a great investment. Clearly they are. But I can't see any reasonable case that the current trend is sustainable.

 

And that is what we call the business cycle...

 

At some point, you run out of speculators and price the avg person out of a home.

 

More than 60% of Americans are homeowners. Not everyone can be and not everyone wants to be. We are at the highest home ownership ratio than we have been in a long time.

 

In SoCal the median house price is only affordable by 10% of the population...that is not sustainable. Asset class price rises above and beyond GDP growth+inflation are not sustainable.

 

And this is good, right? Prices lower again and people who have saved their money now qualify for a loan.

 

When 68% of families own their home, who are you going to keep selling to? As Dru points out, prices will rise as long as everyone chases real estate as the latest "no brainer" investment. And optimism in a sector is always highest at the blow-off top. Once everyone is "in", prices must fall.

 

As soon as you buy your first investment property, you quickly learn that it does require a brain to finance, track, pay taxes for, and upkeep your property.

 

With housing, the reaction is typically first seen in longer turnover times (i.e. avg time a home is on the market). But houses act diffently than other assets. As the prices drop, people tend to take their home off the market, thus restricting supply and stabalizing prices.

 

This is an arguement against the bubble theory.

 

Japan had stagnant property values for a decade. So did parts of Texas after the mid-80s housing bust. SoCal took only 3 or 4 years to recover after a 10% haircut in the early 90s.

 

I don't know what you are leading to here--need a little more info.

Edited June 7, 2005 by archenemy

[archenemy]

It seems that this sort of risk is something that the Banks offering and the people taking should bear the burden of. I don't know the details of that type of loan, but basically if the market goes to pot, there is going to be more people declaring bankruptcy, if they can. I certainly hope the cost associated with the risks of these loans are built into the cost of the loan....but I highly doubt. It just sounds like a way for banks and real estate people to make money while others take the risk, if the cost isn't built in.

 

Your home loan is not based on the rate of the housing market, it is based on your income. Therefore, regardless of what the market does, you have the same payment and same job (unless you build houses that you always had.

[Dru]

[archenemy]

 

When you're a tenant, you're renting space, when you're an owner, you're renting money to pay for your space. Conventional wisdom is that over the short term neither option has a real advantage.

 

This is where your interest only loans do come in handy. If you use the property as cash flow for the three or five years of your ARM, then sell it or fix the rate, you make money. Be sure not to get an Option ARM that adds the unpaid interest onto the principle.

 

 

(not sure how it works in the US, but in Canada, that profit is tax free if the property is your principle residence).

 

 

In the US, your first $200K over the original purchase price is tax free. After that, its 15%. For investment properties, you can do a 1031 exchange to defer your taxes.

 

 

These days, owning a home is more of a lifestlye choice (an emotional decison) than an investment vehicle (a fact based decision). Unless you live in a crazy market (e.g. Vancouver) where prices just keep going up and there is potential to profit quickly, there are lots of other ways to make returns on your money without the hassles of ownership.

 

That being said, I just bought condo in January, and ownership feels good (once you get used to having an almost incomprehensible amount of debt).

 

Condos are a whole different market in the US. But congratulations on your home!

[Dechristo]

No, blue-hairs should be safe; unless they dumped their nest-egg in the lap of a televangelist.

[archenemy]

Get the smallest/shittiest house on the nicest block.

Buy a house that is 65-75% of what you are 'qualified' for.

Get a 30yr fixed-rate...and pay it off in 15 or less.

NEVER take out a home equity loan.

I agree with all but the last. LOC's can be a very powerful cash tool that allow you to leverage your money effectively. They allow you liquidity and flexibility--just be sure to chose the right one.

[willstrickland]

[tomtom]

I can see housing prices stagnate, but there would have to be an economic disaster, or some other kind of disaster before prices would really drop.

One.

[tomtom]

As long as people keep having sex, housing prices will rise. More sex means population growth.

 

Housing prices will slow at their growth rate in the Puget Sound area in probably around 10-15 years when the baby boomers start moving to Arizona and New Mexico to get away from this rain. In the real estate short term--no growth rate stoppage whatsoever.

Two.

[tomtom]

As far as bubble, I doubt it! Consider this area of the country the economy is lagging a little worse than most other areas, but housing prices are climbing at a steady 15% a year (thats better return than any other investment you can make!) and we are in chronic housing shortage in this area. Buying a primary residence is a good investment. Buying rental property is also really good, if you have extra cash laying around: rental income is not taxed!

Three!

[StevenSeagal]

[sexual_chocolate]

As far as bubble, I doubt it! Consider this area of the country the economy is lagging a little worse than most other areas, but housing prices are climbing at a steady 15% a year (thats better return than any other investment you can make!) and we are in chronic housing shortage in this area. Buying a primary residence is a good investment. Buying rental property is also really good, if you have extra cash laying around: rental income is not taxed!

Three!

 

?

 

what is it you are trying to say?

[sexual_chocolate]

ah yes, case-shiller.

[tomtom]

Obviously too many people have had their head in the sand because it was obvious it was going to come to this for about 2 years now.

[ALLCAPS]

YOU GOT'EM TOMTOM! GOOD JOB YOU LITTLE RASCAL!

[denalidave]

I did not read the entire thread but you may want to consider your reason for wanting to buy. Are you doing this as an investment opportunity or because you want to have your own home? If it is the latter, you might want to put less emphasis on all the nitty gritty analysis (crystal balling) of what the market is going to do. Sure, many markets are in a slide now, but chances are if you hang on to it for at least the 3 years you should do alright, statistically speaking anyway. I sell real estate for a living and what I find is people tend to know the right home when they find it. It just seems to "click". If you are have a S.O. involved in the decision, it can be a challenge to find the home that meets both/all of the criteria though. If it as investment home, all this is out the window. Of course, you will want to do your homework on the area and it really does boil down to location, location, location. As far as resale is concerned, I would be more inlined in selecting a location that has all the right assets for resale (quiet st, close to major freeways/amenities but out of earshot of them, overall quality of surrounding neighborhood, etc) with the least amount of bad selling points (on a busy st, next to loud freeway or industrial/commercial area, etc) rather than trying to micro analyze who is going to default on the loan in the future. If you buy the right house, IN THE RIGHT LOCATION, resale should be much easier regardless of where the market heads in the future. Sure, there is always risk but it sure beats paying someone else's mortgage, IMO.

[Recycled]

If someone were to ask me, I'd just say to focus on the spread between rental rates and house prices. For years, Seattle rents for single family houses have been very low with foolishly low cap rates. In some cases, actual rents have returned 1-5% on investment. The main upside has been appreciation. That upside appears to be slowing or reversing in the short term. Until rents catch up or prices bottom, I think renting is a better idea, unless the psychological aspects of home ownership outweigh the financial calcs.

 

In my own case, we just put out home on the market and had a full-price offer (with an unused $15k escalator clause no less) within 4 hours. We've passed the inspection and financing contingency and are cleared to close within 2 weeks. We're going to rent for a while and then probably live on a boat and travel. We priced our house fairly low (it is by far the cheapest house in the nicest neighborhood...), thus the no bullshit quick sale.

 

We still have a couple rentals so we're still "in the market," but we've drastically reduced our exposure to housing market risk. If things really get ugly in the next few years, we're in a good cash position to snap up a few houses and take the upside again.

 

The response I've typically gotten from people is that I'm crazy. However, at this stage in my life, I need a break from home ownership - particularly from the continuous maintenance, remodeling and other bullship involved with home ownership. I realize that some people love puttering around their house, but that's not where I am now. Every day I spend dealing with the roof, yard, plumbing, painting is a day I don't spend doing what I want to do. I'm making this point, because I think home ownership has been a cultural goal post in our society and that it has a real opportunity cost - particularly for people who would really prefer to spend time in the mountains, volunteering, traveling or just doing other things.

 

[sexual_chocolate]

If someone were to ask me, I'd just say to focus on the spread between rental rates and house prices. For years, Seattle rents for single family houses have been very low with foolishly low cap rates. In some cases, actual rents have returned 1-5% on investment. The main upside has been appreciation. That upside appears to be slowing or reversing in the short term. Until rents catch up or prices bottom, I think renting is a better idea, unless the psychological aspects of home ownership outweigh the financial calcs.

 

In my own case, we just put out home on the market and had a full-price offer (with an unused $15k escalator clause no less) within 4 hours. We've passed the inspection and financing contingency and are cleared to close within 2 weeks. We're going to rent for a while and then probably live on a boat and travel. We priced our house fairly low (it is by far the cheapest house in the nicest neighborhood...), thus the no bullshit quick sale.

 

We still have a couple rentals so we're still "in the market," but we've drastically reduced our exposure to housing market risk. If things really get ugly in the next few years, we're in a good cash position to snap up a few houses and take the upside again.

 

The response I've typically gotten from people is that I'm crazy. However, at this stage in my life, I need a break from home ownership - particularly from the continuous maintenance, remodeling and other bullship involved with home ownership. I realize that some people love puttering around their house, but that's not where I am now. Every day I spend dealing with the roof, yard, plumbing, painting is a day I don't spend doing what I want to do. I'm making this point, because I think home ownership has been a cultural goal post in our society and that it has a real opportunity cost - particularly for people who would really prefer to spend time in the mountains, volunteering, traveling or just doing other things.

 

Funny!

 

we're planning on the same thing, down to living on our boat while watching the market.

[JayB]

If someone were to ask me, I'd just say to focus on the spread between rental rates and house prices. For years, Seattle rents for single family houses have been very low with foolishly low cap rates. In some cases, actual rents have returned 1-5% on investment. The main upside has been appreciation. That upside appears to be slowing or reversing in the short term. Until rents catch up or prices bottom, I think renting is a better idea, unless the psychological aspects of home ownership outweigh the financial calcs.

 

This is basically the plan.

 

Although - I agree with Dave that if you can handle the costs, know what you are getting into, plan to stay in the home for at least a few years, and the intangibles associated with owning a home have more value for you than whatever savings you might realize by renting while the rent-own differential persists - then you'll be much happier buying, and at the end you may well come out ahead of where you'd have been if you'd rented until rents and mortgages equalized.

[JayB]

If someone were to ask me, I'd just say to focus on the spread between rental rates and house prices. For years, Seattle rents for single family houses have been very low with foolishly low cap rates. In some cases, actual rents have returned 1-5% on investment. The main upside has been appreciation. That upside appears to be slowing or reversing in the short term. Until rents catch up or prices bottom, I think renting is a better idea, unless the psychological aspects of home ownership outweigh the financial calcs.

 

In my own case, we just put out home on the market and had a full-price offer (with an unused $15k escalator clause no less) within 4 hours. We've passed the inspection and financing contingency and are cleared to close within 2 weeks. We're going to rent for a while and then probably live on a boat and travel. We priced our house fairly low (it is by far the cheapest house in the nicest neighborhood...), thus the no bullshit quick sale.

 

We still have a couple rentals so we're still "in the market," but we've drastically reduced our exposure to housing market risk. If things really get ugly in the next few years, we're in a good cash position to snap up a few houses and take the upside again.

 

The response I've typically gotten from people is that I'm crazy. However, at this stage in my life, I need a break from home ownership - particularly from the continuous maintenance, remodeling and other bullship involved with home ownership. I realize that some people love puttering around their house, but that's not where I am now. Every day I spend dealing with the roof, yard, plumbing, painting is a day I don't spend doing what I want to do. I'm making this point, because I think home ownership has been a cultural goal post in our society and that it has a real opportunity cost - particularly for people who would really prefer to spend time in the mountains, volunteering, traveling or just doing other things.

 

Funny!

 

we're planning on the same thing, down to living on our boat while watching the market.

 

Why now? Life simplification, gain maximization, or both?

[sexual_chocolate]

combination of things. it's not a done deal yet (house isn't on market, and won't be for another month or two; still a chance for cold feet/sentimentality to affect our decision, among other things), but it's where we're leaning.

 

the main thing is location for me. we're in a cool spot in rainier valley, with views of lake washington, seward park, the olympics a little, downtown etc, but my life in seattle has always been more in the north end. we bought here 5 years ago because we could afford this really cool house with views and all (something similar would have been close to double up north), but the drive's always been an issue.

 

so, with the market the way it is, it might be a good idea to step out for a little while we can still realize maximally good returns on this house (so the theory goes!), live a simple life on our boat while the weather's nice, and watch the market while keeping an eye out for houses in areas we want to be in (west phinney, queen anne, west ballard....).

 

i'm not averse to renting if we find nothing, since we might even leave the area at some point in the next 5 years.

[jclark]

go to www.seattlebubble.com all the info you would want on the local housing market. And it is not writtten by realtors.

[JayB]

combination of things. it's not a done deal yet (house isn't on market, and won't be for another month or two; still a chance for cold feet/sentimentality to affect our decision, among other things), but it's where we're leaning.

 

the main thing is location for me. we're in a cool spot in rainier valley, with views of lake washington, seward park, the olympics a little, downtown etc, but my life in seattle has always been more in the north end. we bought here 5 years ago because we could afford this really cool house with views and all (something similar would have been close to double up north), but the drive's always been an issue.

 

so, with the market the way it is, it might be a good idea to step out for a little while we can still realize maximally good returns on this house (so the theory goes!), live a simple life on our boat while the weather's nice, and watch the market while keeping an eye out for houses in areas we want to be in (west phinney, queen anne, west ballard....).

 

i'm not averse to renting if we find nothing, since we might even leave the area at some point in the next 5 years.

 

Taking profits and chilling on the boat sounds pretty nice.

 

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I seem to recall a story about a guy in SD who sold his house to an investor who was looking for a rental property, but structured the deal so that he (the seller)would be the occupant, and so that he had the right of first refusal if the new owner decided to sell within five years. Sounds like he captured a nice capital gain, paid a fair amount less than he was for his mortgage, and didn't have to move a single piece of furniture to make any of it happen.

 

Might be possible in Seattle. You'd probably know better than most if this was the case, though.