Real Estate - Housing bubble.... - GoFuckYourself.com

goBigtime · 07-13-2004, 07:00 AM

http://biz.yahoo.com/bizwk/040709/b3892064mz011_1.html

BusinessWeek Online
Is A Housing Bubble About To Burst?
Friday July 9, 3:59 pm ET

How crazy is real estate getting in parts of the country? Ask Sierra and Corbin Stewart, who just bought a modest, 2,000-square-foot house in Pleasanton, Calif., for $730,000. Mortgage and tax payments will consume 55% of their income, forcing them to do without extras such as cable TV. Says Sierra, a 29-year-old marketer: "The other night we were doing our budget, and we almost called the real estate agent and said we want to get out."

It may not be long before the Stewarts -- and other recent home buyers paying exorbitant sums around the country -- wish they had paid attention to their cold feet. After an amazing four-year boom in residential real estate, the housing market could finally be topping out and heading for a downturn. The culprit: rising interest rates. House prices could flatten on a national level in the next year or so while taking a spill in overheated coastal markets. A downturn in housing would squeeze recent buyers who overleveraged themselves to pay top prices -- and risk slowing the entire economy by cooling consumer spending as well as housing construction, lending, and the real estate business.

It's always tricky to call the top of an overheated market, and the pessimists have been wrong before. Optimists argue that even if there is a correction, most homes will remain far more valuable than they were a few years ago. And they say immigration, second-home purchases, and boomers' inheritances will support housing. Says Angelo R. Mozilo, chairman and CEO of mortgage lender Countrywide Financial Corp. (NYSE:CFC - News): "I think (the market) will continue to rise."

Monthly Payment Jump
But this time something important is different: Interest rates are inching up. It was the Federal Reserve-engineered decline in rates that inflated the housing bubble. But starting with a quarter-point increase in the funds rate on June 30, the Fed has begun what promises to be a prolonged tightening cycle. Even if the Fed's hikes are measured, higher mortgage rates will inevitably make houses less affordable. If 30-year fixed-rate mortgages rise just one percentage point, to 7.2% from their current 6.2% -- well within the range of forecasts -- house prices would have to fall 11% to keep new buyers' monthly mortgage payments from rising. If fixed rates went to 8%, prices would need to fall 20% to keep payments level.

Rising rates will hurt more than in the past because the market is more dependent on heavily leveraged buyers. Mortgage debt has shot up even faster than home values since 2000, leaving homeowners' equity at just 55% of housing value, down from 72% in 1986, according to Federal Reserve data. Leverage intensifies the pain of falling prices. If, say, a buyer owes $450,000 on a house that's valued at $500,000 and the house's price falls 10%, the equity shrinks to zero.

Heavy mortgage borrowing since 2000 has enabled the housing market to dodge an iron law: House prices can't perpetually rise faster than incomes. For the past four years, they have. The ratio of house prices to median family income is a record 3.4, a figure that's 19% above the 1975-2000 average, according to data from the Office of Federal Housing Enterprise Oversight and the Census Bureau. As rates rise, a return to the long-term-average ratio would require housing prices to fall 19% -- or incomes to shoot up an implausible 24%.

A downturn in housing, if it comes, is likely to chill the economy. People will feel less wealthy, hence more reluctant to spend. Goldman, Sachs & Co. (NYSE:GS - News) economist Jan Hatzius, among others, argues that a decline in housing wealth dampens consumer spending at least twice as much as a same-sized loss in the stock market. Even homeowners who still feel like spending would have a harder time qualifying for home-equity loans or cash-out refinancings -- a major source of consumer liquidity for the past few years.

Rather than a sudden wallop, the economic impact would be gradual and grinding. Ian Morris, U.S. economist at HSBC Securities Inc. (NYSE:HBC - News), estimates that housing prices nationally will slide 5% to 10% over the next five years. That could cause economic growth to slow to 2% by the second half of 2005 from 4% now, he predicts in a report called The U.S. Housing Bubble.

Optimists on housing point to the National Association of Realtors' Housing Affordability Index, which shows that a median-priced existing house at $184,000 is easily affordable by a family with the median income of $55,000. But that's only because interest rates are so low, holding down monthly payments. The juice of cheap mortgages has made housing pricey by every other measure. They're high not only in comparison with family incomes but in relation to rental rates for similar properties and relative to the cost of new construction.

Federal Reserve Chairman Alan Greenspan has downplayed the danger of a national housing bubble, arguing in part that housing is a local market. Sure enough, prices are still reasonable in most of the Heartland, from Ohio to Texas to Arizona, because construction has kept pace with demand. But bubbles are appearing in enough markets that their impact, if they were to pop, would be felt nationally. Greenspan also asserts that the high cost of buying and selling houses dampens speculation. Nevertheless, some markets are seeing speculative behavior such as "flipping," in which people buy houses or condos before they're even built and then sell them for a profit a few months later.

The overheating is greatest in markets such as Los Angeles, San Francisco, San Diego, Washington, New York, and Boston. The takeoff in coastal real estate started around 2000 -- suggesting that the speculative fever of the late 1990s did not die but instead jumped from stocks to real estate. From 2000 through the first quarter of 2004, single-family home prices are up at an annual rate of 8.2% in the Pacific region, 8% in New England, and 7% in the Middle Atlantic region, according to the Office of Federal Housing Enterprise Oversight. Prices rose 18% in Los Angeles, 14% in Miami, and 13% in Washington in the year through the first quarter, says the agency.

The most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates. In fact, the rise in one-year adjustable rates since late March has already raised annual borrowing costs for new buyers by 25%. And data from the Federal Housing Finance Board show that the most expensive markets tend to have the highest share of buyers with adjustable-rate mortgages.

Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor.

80smetal · 07-13-2004, 07:01 AM

California is the epitome of bubble. I wouldnt touch cali with your money. Shithole

jimmyf · 07-13-2004, 07:05 AM

I thought it was going 2 happen in California at least the bay Area 1 1/2 to 2 years ago.

goBigtime · 07-13-2004, 07:06 AM

Heh... and the fed was pushing ARM's _right before_ they started raising interest rates again.

Soo if you're paying 55% of your income towards your ARM mortage - just wait and see how much you'll be paying if (imo, WHEN) the interest rates continue to go back up.

You'll be squeezed into selling (and poverty).

It's sort of a perfect plan actually - (if you're an evil greedy bastard who wants to crush civilization that is)

QualityMpegs · 07-13-2004, 07:08 AM

Quote:

Originally posted by 80smetal
California is the epitome of bubble. I wouldnt touch cali with your money. Shithole

Way over inflated prices for garbage.

80smetal · 07-13-2004, 07:12 AM

Quote:

Originally posted by goBigtime
Heh... and the fed was pushing ARM's _right before_ they started raising interest rates again.

Soo if you're paying 55% of your income towards your ARM mortage - just wait and see how much you'll be paying if (imo, WHEN) the interest rates continue to go back up.

You'll be squeezed into selling (and poverty).

It's sort of a perfect plan actually - (if you're an evil greedy bastard who wants to crush civilization that is)

arms are great for short term residents. 3-5 years. No discussion needed about that. If you found your dream house and plan on staying forever, ya then a conventional 30 is your best bet.

jimmyf · 07-13-2004, 07:19 AM

Quote:

Originally posted by goBigtime

You'll be squeezed into selling (and poverty).

It's sort of a perfect plan actually - (if you're an evil greedy bastard who wants to crush civilization that is)

It was going on.

When I lived there 2 1/2 years ago (lived there for 25 years) my one bedroom Apt. went from $ 750.00 to
$ 1,400.00 per month, my office
$ 595.00 went to $ 1,450.00 per month.

I moved, the guy i shared the building with bought in ID. 5 arces with house barn for less than 200 K. In the bay area you couldn't get even a Town House for that.

FlyingIguana · 07-13-2004, 07:35 AM

Quote:

Originally posted by jimmyf
I thought it was going 2 happen in California at least the bay Area 1 1/2 to 2 years ago.

the thing with bubbles is you don't know when they will pop. but the bigger they get, the worse the pop. but even when it pops, there will be certain areas to still go up.

warlock5 · 07-13-2004, 07:36 AM

The scary thing is looking at Japan's real estate market. I guess prices haven't gone anywhere but down in the last 20 years. Stock market and bonds are definately where your investments should be. (pick good ones)

80smetal · 07-13-2004, 07:38 AM

Quote:

Originally posted by warlock5
The scary thing is looking at Japan's real estate market. I guess prices haven't gone anywhere but down in the last 20 years. Stock market and bonds are definately where your investments should be. (pick good ones)

Ill take my buying foreclosures over stocks any day. Easy flips

07-13-2004, 07:00 AM	#1
goBigtime Confirmed User Join Date: Nov 2002 Posts: 7,761	Real Estate - Housing bubble.... http://biz.yahoo.com/bizwk/040709/b3892064mz011_1.html BusinessWeek Online Is A Housing Bubble About To Burst? Friday July 9, 3:59 pm ET How crazy is real estate getting in parts of the country? Ask Sierra and Corbin Stewart, who just bought a modest, 2,000-square-foot house in Pleasanton, Calif., for $730,000. Mortgage and tax payments will consume 55% of their income, forcing them to do without extras such as cable TV. Says Sierra, a 29-year-old marketer: "The other night we were doing our budget, and we almost called the real estate agent and said we want to get out." It may not be long before the Stewarts -- and other recent home buyers paying exorbitant sums around the country -- wish they had paid attention to their cold feet. After an amazing four-year boom in residential real estate, the housing market could finally be topping out and heading for a downturn. The culprit: rising interest rates. House prices could flatten on a national level in the next year or so while taking a spill in overheated coastal markets. A downturn in housing would squeeze recent buyers who overleveraged themselves to pay top prices -- and risk slowing the entire economy by cooling consumer spending as well as housing construction, lending, and the real estate business. It's always tricky to call the top of an overheated market, and the pessimists have been wrong before. Optimists argue that even if there is a correction, most homes will remain far more valuable than they were a few years ago. And they say immigration, second-home purchases, and boomers' inheritances will support housing. Says Angelo R. Mozilo, chairman and CEO of mortgage lender Countrywide Financial Corp. (NYSE:CFC - News): "I think (the market) will continue to rise." Monthly Payment Jump But this time something important is different: Interest rates are inching up. It was the Federal Reserve-engineered decline in rates that inflated the housing bubble. But starting with a quarter-point increase in the funds rate on June 30, the Fed has begun what promises to be a prolonged tightening cycle. Even if the Fed's hikes are measured, higher mortgage rates will inevitably make houses less affordable. If 30-year fixed-rate mortgages rise just one percentage point, to 7.2% from their current 6.2% -- well within the range of forecasts -- house prices would have to fall 11% to keep new buyers' monthly mortgage payments from rising. If fixed rates went to 8%, prices would need to fall 20% to keep payments level. Rising rates will hurt more than in the past because the market is more dependent on heavily leveraged buyers. Mortgage debt has shot up even faster than home values since 2000, leaving homeowners' equity at just 55% of housing value, down from 72% in 1986, according to Federal Reserve data. Leverage intensifies the pain of falling prices. If, say, a buyer owes $450,000 on a house that's valued at $500,000 and the house's price falls 10%, the equity shrinks to zero. Heavy mortgage borrowing since 2000 has enabled the housing market to dodge an iron law: House prices can't perpetually rise faster than incomes. For the past four years, they have. The ratio of house prices to median family income is a record 3.4, a figure that's 19% above the 1975-2000 average, according to data from the Office of Federal Housing Enterprise Oversight and the Census Bureau. As rates rise, a return to the long-term-average ratio would require housing prices to fall 19% -- or incomes to shoot up an implausible 24%. A downturn in housing, if it comes, is likely to chill the economy. People will feel less wealthy, hence more reluctant to spend. Goldman, Sachs & Co. (NYSE:GS - News) economist Jan Hatzius, among others, argues that a decline in housing wealth dampens consumer spending at least twice as much as a same-sized loss in the stock market. Even homeowners who still feel like spending would have a harder time qualifying for home-equity loans or cash-out refinancings -- a major source of consumer liquidity for the past few years. Rather than a sudden wallop, the economic impact would be gradual and grinding. Ian Morris, U.S. economist at HSBC Securities Inc. (NYSE:HBC - News), estimates that housing prices nationally will slide 5% to 10% over the next five years. That could cause economic growth to slow to 2% by the second half of 2005 from 4% now, he predicts in a report called The U.S. Housing Bubble. Optimists on housing point to the National Association of Realtors' Housing Affordability Index, which shows that a median-priced existing house at $184,000 is easily affordable by a family with the median income of $55,000. But that's only because interest rates are so low, holding down monthly payments. The juice of cheap mortgages has made housing pricey by every other measure. They're high not only in comparison with family incomes but in relation to rental rates for similar properties and relative to the cost of new construction. Federal Reserve Chairman Alan Greenspan has downplayed the danger of a national housing bubble, arguing in part that housing is a local market. Sure enough, prices are still reasonable in most of the Heartland, from Ohio to Texas to Arizona, because construction has kept pace with demand. But bubbles are appearing in enough markets that their impact, if they were to pop, would be felt nationally. Greenspan also asserts that the high cost of buying and selling houses dampens speculation. Nevertheless, some markets are seeing speculative behavior such as "flipping," in which people buy houses or condos before they're even built and then sell them for a profit a few months later. The overheating is greatest in markets such as Los Angeles, San Francisco, San Diego, Washington, New York, and Boston. The takeoff in coastal real estate started around 2000 -- suggesting that the speculative fever of the late 1990s did not die but instead jumped from stocks to real estate. From 2000 through the first quarter of 2004, single-family home prices are up at an annual rate of 8.2% in the Pacific region, 8% in New England, and 7% in the Middle Atlantic region, according to the Office of Federal Housing Enterprise Oversight. Prices rose 18% in Los Angeles, 14% in Miami, and 13% in Washington in the year through the first quarter, says the agency. The most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates. In fact, the rise in one-year adjustable rates since late March has already raised annual borrowing costs for new buyers by 25%. And data from the Federal Housing Finance Board show that the most expensive markets tend to have the highest share of buyers with adjustable-rate mortgages. Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor.

07-13-2004, 07:05 AM	#3
jimmyf OU812 Join Date: Feb 2001 Location: California Posts: 12,651	I thought it was going 2 happen in California at least the bay Area 1 1/2 to 2 years ago. __________________ Epic CashEpic Cash works for me Solar Cash Paysite Plugin Gallery of the day freesites,POTD,Gallery generator with free hosting

07-13-2004, 07:06 AM	#4
goBigtime Confirmed User Join Date: Nov 2002 Posts: 7,761	Heh... and the fed was pushing ARM's _right before_ they started raising interest rates again. Soo if you're paying 55% of your income towards your ARM mortage - just wait and see how much you'll be paying if (imo, WHEN) the interest rates continue to go back up. You'll be squeezed into selling (and poverty). It's sort of a perfect plan actually - (if you're an evil greedy bastard who wants to crush civilization that is) Last edited by goBigtime; 07-13-2004 at 07:08 AM..

07-13-2004, 07:01 AM	#2
80smetal Registered User Join Date: Jun 2004 Posts: 505	California is the epitome of bubble. I wouldnt touch cali with your money. Shithole

07-13-2004, 07:36 AM	#9
warlock5 Confirmed User Join Date: Jan 2004 Location: Uranus Posts: 2,808	The scary thing is looking at Japan's real estate market. I guess prices haven't gone anywhere but down in the last 20 years. Stock market and bonds are definately where your investments should be. (pick good ones)