I know – there is no housing bubble; it’s all a liberal fantasy to scare people. At least, this is what people on the political right say. According to one pundit on Fox news, there are a few markets that are slightly overpriced but nothing to worry about. (The FDIC has contradicted this assessment.) Well, the reality is there is a housing bubble and it is very dangerous for many reasons.
Consumers – whose wages have been near stagnant after inflation for the last 5 years – have financed their spending with home equity loans.
Instead of playing the stock market, people are now entering the world of flipping real estate – buying and selling property quickly hoping to make a profit. This is great if it works. However, it is conceivable a buyer could be stuck with a home that he can’t afford long-term.
Almost 40% of the paltry few jobs created in this expansion are tied to housing, meaning a slowdown in the market could significantly lower job growth.
In short, the housing market is the engine of this expansion.
Now there are increased signs of it’s slowing.
In Orange County, sellers are lowering prices and inventory is increasing
The frustration experienced by sellers like Hong reflects a cooling in the market for higher-priced homes in Los Angeles and Orange counties, according to recent price and sales data. Faced with reduced buyer demand and rising inventories of unsold properties, many sellers of homes worth more than $750,000 are dropping asking prices.
Many also are taking weeks before landing buyers.
The slowdown in pricier homes is typical of the latter stages of a housing boom, analysts say, as expensive properties were the first to rise sharply at the beginning of the current cycle.
In some of the ritziest areas, such as the 90210 ZIP Code of Beverly Hills where the average home price is $3 million, sellers have cut asking prices by an average of at least 10%.
In the first half of 2004, by contrast, sellers of pricier homes typically got 5% to 10% above their asking prices.
Sales are slowing in New York:
Until recently, apartments in prime locations sold fast. Often bidding wars broke out, and the most aggressive buyer won by paying more than the asking price.
But now flats sit for an average of four-and-a-half months before a sale contract is signed. While that’s well within the normal range for a healthy, balanced market – one in which supply and demand are in sync – that’s a month longer than the process took last spring.
Rates on 30-year mortgages rose this week to the highest level in 15 months while one-year adjustable rate mortgages climbed to the highest level in 4 1/2 years. Analysts expect rising mortgage rates to cool the booming housing market in coming months.
The mortgage company Freddie Mac reported Thursday that the nationwide average for 30-year, fixed-rate mortgages rose this week to 6.10 percent, the highest level since 30-year mortgages were at 6.21 percent in late July 2004.
Last week the 30-year mortgage had risen to 6.03 percent, marking the first time it had been above 6 percent since the last two weeks in March.
There is other fragmentary evidence:
The Federal Reserve’s latest beige book contained 10 references to cooling markets, up from three in the prior beige book and zero before that.
The unsold inventory of existing homes rose to 4.7 months’ supply in August, the highest since November 2003 and a marked gain from January’s 3.8 months.
Condo inventories are climbing to even higher highs – to a 5 months’ supply from a low of 3.1 months in July 2004.
The unsold inventory of new homes, after 2-plus million in housing starts for five months running, has jumped to a five-year high of 4.7 months’ supply from 4.1 months in July.
New-home price appreciation has slowed to a 1 percent annualized rate from the peak of 18 percent in October 2004.
The National Association of Home Builders index fell for a third straight month in September to the lowest level since July 2003.
Homebuyer traffic is at its lowest level since February 2004
and has been flat to down for three months in a row.
This winter could be the rally killer. As energy prices escalate a projected 50-90%, consumers will find their thin budgets stretched further. The Federal Reserve has spoken with a unified voice regarding inflation, implying interest rate hikes will continue through 2005 and possibly into 2006. Consumer sentiment is low, implying fewer people will take the plunge into home ownership. In short, there are a lot of factors indicating the slowdown will continue.
Will housing pop or simply slow? I don’t know. The reality is it doesn’t really matter. While a slowdown would be preferable, it will still have strong negative ramifications for the economy.
“I know – there is no housing bubble; it’s all a liberal fantasy to scare people.”
These people still have faith in the bubble, it would seem (via AP):
That’s $600 billion that will not be available for consumption in the coming year! Reality will be tough to face for these folks.
Bernanke is a fool.
Bonddad, thanks for the diary. One question, what would be the purpose of a one year mortgage referred to by NJ.com above?
Short Term financing for a project, or getting the last bit of financing.
Or, if you are a speculator, and plan to flip the property after 6-9 months.
Is what led to former Tx Gov/former Treasury Secretary having to file for bankruptcy, iirc. (Couldn’t find a link to the story, but the land deals were here in Austin and I remember the famous auction of all of his stuff. I never liked Connelly’s politics, but everyone agreed that he went through it with a lot of class. He and his wife took the “it’s just stuff attitude” even as family heirlooms were being sold off. Of course, in Texas, his very expensive home was not vulnerable – but just about everything else had to go.).
Flipping real estate made a lot of people around here very rich in the 80’s, but the problem with it is, at some point you’re left holding overpriced property – always heavily leveraged (is that the word I want? I mean you haven’t actually paid for it) and no one will buy it once the bubble bursts.
The building that I teach in has a history in this same bubble. A former hardware store owner built it during the bubble, but it burst before he could make any money off of it. For him, bankruptcy, foreclosure, and back to the hardware store. Eventually my college bought it for a suburban campus.
I think is who your referring to.
We both misspelled his name. It’s Connally. And I found a link.
Imagine that. Oil prices at $37/bbl! (Looks pretty good now, doesn’t it?)
A slowdown at this stage can rapidly turn into a bust. Most homeowners have been in their home for a few years, and did not have to pay these inflated prices. So when they go to sell they are more than happy to make a nice profit instead of an huge profit. Thus starts the spiral down in prices.
Also, how many people will be looking to downsize next spring after this winter’s heating bills come in?
Central Valley California: time to sale now running over 3 – 6 weeks; price drop averaging about 6%. New construction continuing, but likely fallout will be builders carrying their own paper, or buying down interest. Lived through the last bust in 80 – 84. Never want to see that again. Destroyed the building trades.
From the point of view of a homeowner – we bought the house I now live in in 83. A year later, we could have sold it for $15k more than we paid for it. A year after that, it was worth about $10k less than we paid – and still owed on the mortgage, of course.
Now, 22 years later, it’s worth about 50% more than we paid. It appreciated eventually, but not by that much, given the time span. No regrets – I had to live somewhere, and by staying in one place long enough, the mortgage payment is now less than rent would be, and was never much more. Seeing the light at the end of the mortgage tunnel now, and in a few years will have a paid off house to live in after I retire.
I think that’s what been lost in the recent bubble mentality. Buying a house is about having a place to live. If you aren’t paying much more than rent would be and stay in it a while, it can be a better deal than renting. But it never seems to be a good idea to look at home buying as a get-rich plan. Even worse is using the equity as a way to finance current spending. The equity can evaporate at any time (it happened twice to me – once when the bubble burst, again when they redrew the school assignment lines) – leaving you holding the bag for the home equity loan.
what would be some good resources for researching specific cities? conversely, do you happen to know much about portland, oregon?
thanks!
I would start with the local newspaper(s).
I would also assume there is information from local realtors on the Web. I would start with a standard search and try to narrow it from there.
The local Chamber of Commerce might help.
Also, try the bizjournal: http://www.bizjournals.com/