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The Housing Bubble - To Die or Not to Die


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#16 NV 375

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Posted 17 December 2002 - 07:17 PM

Seems to me, that lending standards are being pushed beyond the limit. But what do I know. When I was looking to buy a home in Denver in '97, my price range was $160,000 or less. I was making in the upper $40,000 range.

The homes I was being shown were in the $180,000+range. IMO at that time, fair value was about $150,000. These were homes that had been around $80,000-$100,000 around 1988-90.

Silly me. These homes now sell for $340,000-$400,000. My salary has certainly outstripped real estate appreciation though. I'm up to the mid $60's now. Yesiree bob, I can most certainly buy more house now, than I could then. How do I know? I know a couple of people making less, that aren't just buying one house at these prices, but they're qualfying to buy two houses. Ya know, real estate always goes up they tell me. :wink2:

Here's Noland's latest on perhaps who's buying these days,

Apparently, we were not alone in being disturbed by Tuesday’s excellent Wall Street Journal article by Patrick Barta and Queena Sook Kim – Home Buyers’ Down Payments Are Now Paid by Some Builders - reporting on the proliferation of “Down Payment Assistance Programs” (DPAs). For those that read the story, I decided it was worth digging a bit deeper. For those that missed it, let me do a brief summary. The Federal Housing Administration (FHA) a few years back changed its provisions to allow “non-profit” organization gifts to be used as the 3% down payment required of qualifying home buyers. This loophole has spurred the creation of hundreds of “non-profit” groups, many funded by the homebuilders, which have become major providers of downpayments for scores of cash-short homebuyers. And while history tells us rather clearly that borrowers putting no money at risk are quite poor mortgage Credits, the government guarantee (along with an over-liquefied marketplace) allows today’s holders of the rapidly expanding quantities of these mortgages to sleep soundly at night. Still, this is one more extraordinary example of a dangerous mortgage market distortion that is progressive, self-reinforcing and, once unleashed, virtually impossible to reign in.



Looking back, it didn’t take long before the idea germinated that these “Non-Profits” could fund their “Gift” pool with “Donations” from interested homebuilders and home sellers. Wow…what incredible profit potential! Cash-strapped renters are afforded the opportunity to rise to the status of proud homeowners. Builders would now enjoy an enlarged pool of prospective buyers, with the not insignificant benefit of having many so anxious at the opportunity of homeownership to be enticed by even the difficult-to-sell and least desirable properties (and they’re willing to pay asking price!). Anxious home sellers, as well, have an enticing avenue to attract a new class of “motivated” buyers. The “Non-Profits” would garner fees to the tune of between $800 and 1% of sales price per transaction. And, not to be overlooked, Wall Street would have more FHA mortgages to sell (and package into Ginnie Mae and other MBS, CDOs and various instruments). What could possibly add more fuel to the unfolding explosion of subprime mortgage lending and the blow-off stage of the Mortgage Finance Bubble? And, of course, what’s good for The American Dream is good for the economy! This is but one more frustrating and recurring Bubble dilemma of seemingly “What’s not to like?” … but eventual collapse.Creditbulletinbubble latest

#17 Fartpolio Manager

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Posted 17 December 2002 - 09:07 PM

Ever notice that the ones who deny the existance of the housing bubble seem to be the ones with the McMansion that's had it's equity sucked dry by quadruple refinancing in 2 years?

Houses are not stocks or bonds. You can't just call up the borker and say sell. If you wait until the market shows unmistakeable signs of going soft, it may well be too late. You might sit and wait and then in desperation drop the price, only to find that everyone else dropped their price too. All the while your imaginary equity goes up in smoke.

One of the thing that most people who deny the existance of the bubble point to is the lack of overbuild. They base that on days of inventory. You must remember that days of inventory is based on the sales rate as well as the number of units available. So when the sales rate drops you get an automatic invnetory increase without driving one more nail. Secondly most forget to count the rental units as inventory. Pick up your paper and look at the number of single family homes for rent. Seem like more than you remember? Sure, all these new homeowners aren't falling out of the sky they're vacating rental units. So what happens to the landlords who because of their get rich with real estate plans can't make the payments on their rentals because they're vacant? That's right they go back on the market. Apartments are running increasingly higher vacancy rates also. The ovebuild is there folks, and it's very real. It's just in a stealth mode, but will burst onto the scene soon enough. Try and act surprised.

No, but I've noticed that most of the housing bears live in Podunk Idaho, or sold out long ago... lolol. A house just down the street from me sold for $2.6 MM last week, 100K over the asking, 3 offers to back it up. Like Bontchev said, there's no such thing as THE housing market... remember, it's location, location, location...

#18 Bearwithme

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Posted 17 December 2002 - 09:50 PM

The postings and links you guys put into this thread are great.

I literally moved to the cabin in the mountains of NH after cashing in all the "equity" in my house close to Boston.
Of course it went up another 80 g since I sold it!!

Here is the thing.. Bubblemania is up here in the sticks too!
My buddy that closed on the deal to sell a house to a lady that went bankrupt last year ( she got financing!!) told me my fixed up cottage is worth 150 g's.

Should I sell, and if I do.. could I move into a fellow stoolies tool shed or abandoned septic tank and frolic naked all day in a bathtub full of gold eagles .

What I need from my fellow Stooliologists:
Please alert me as to whether I should sell the Uni-Bear shack, and if so, any suggestions as to available housing opportunities.

#19 Goldilocks

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Posted 17 December 2002 - 10:08 PM

"From Mortgage Banking, December 2002: “In a conversation with this columnist (Neil J Morse) at the MBA Annual Convention, (Nehemiah’s president) Syphax said the program’s founding philosophy has been widely embraced. ‘We went from being heretics to being imitated,’ said Syphax, referring to low- and no-down-payment financing programs now commonly offered by Fannie Mae, Freddie Mac and major lenders. However, Syphax said, there are still ‘pockets of opposition to our purpose’ from those ‘who continue to believe that if a prospective borrower does not have sufficient funds for a down payment, they must not be quite ready to own.’ "

- The Capitalist BASTARDS! Well, we will see about that! Quick! Socialist nanny State to the rescue! Quickly confiscate some more money from the productive members of society and place it in the hands of those who could not earn it and have no ability to spend it wisely! Hooray! Hooray I say!

"I said Hooray Citizen". "Now put your hands together and say it with me". "Like you mean it"!

#20 Pigeon Drop

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Posted 18 December 2002 - 03:10 AM

The thing that is missing from these arguments and actions is the fact that one could be wrong in his forecast. Selling the house to move into a cabin carries a risk: what if you're wrong? Where are you going to live?

Similarly living in a mansion you can't really afford, betting on the come as it were, carries a risk: what if you're wrong?

What if neither extreme happens? What if mortgage rates increase a bit, causing prices to slump (not crash), and we have a stagnant housing market for years because of this? Years where no one makes big bucks from owning a house, and say prices range over 10-20% from their highs.

If the extreme scenarios don't happen, then extreme actions will look foolish in hindsight. I believe both extreme actions: selling a house simply to cash in before the big crash, or overleveraging because houses always skyrocket, will look foolish in hindsight. I believe rash actions usually do.

If you have a house and need to have a place to live in anyway, and have no other reason to move, it seems idiotic to me to "daytrade" your house. A house to live in is not really an investment or a speculation, it is a necessary living expense. Moving is expensive. Trading has huge costs.

By the way, over the years I've read many times about the impending doom and coming crash. Anyone who followed those soothsayers looked dumb in the end. Likewise, those who got caught up in speculation and ended up with overleveraged portfolios of real estate rentals went bankrupt when they couldn't handle the vacancies and negative cash flows.

I can't think of anyone I know who did poorly from owning a house to live in, and totally ignoring the price fluctuations both up and down.

#21 anoscope

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Posted 18 December 2002 - 04:19 AM

The postings and links you guys put into this thread are great.

I literally moved to the cabin in the mountains of NH after cashing in all the "equity" in my house close to Boston.
Of course it went up another 80 g since I sold it!!

Here is the thing.. Bubblemania is up here in the sticks too!
My buddy that closed on the deal to sell a house to a lady that went bankrupt last year ( she got financing!!) told me my fixed up cottage is worth 150 g's.

Should I sell, and if I do.. could I move into a fellow stoolies tool shed or abandoned septic tank and frolic naked all day in a bathtub full of gold eagles .

What I need from my fellow Stooliologists:
Please alert me as to whether I should sell the Uni-Bear shack, and if so, any suggestions as to available housing opportunities.

got my Private eye after ya!

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#22 DrStool

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Posted 18 December 2002 - 07:21 AM

Hey, how come, nobody mentioned that building permits were down 2.7%? Convenient oversight.

PigeonDrop- That's what I said, more or less. In spite of the collapse, that is already beginning (in spite of super low mortgage rates) I ain't selling.

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#23 Guest_yobob1_*

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Posted 18 December 2002 - 08:28 AM

No, but I've noticed that most of the housing bears live in Podunk Idaho, or sold out long ago...


Now, now fart, don't disparage the proletariat in Podunk. We're an amiable bunch. See what I mean about home owners?

Selling is of course a personal choice based on yourself and your market. I sold in October of this year. Why? I wanted a lower maintenance lifestyle and my market was acting very peaky in my price range, which by the way is proving to be correct as prices are being increasingly reduced to garner sales. If you're happy with where you live, can handle the payments or own it outright, fine and dandy. To deny the existence of the bubble is a different matter than accepting the consequences. You could easily end up paying taxes and insurance on a 2.5 million dollar bungalow when market value is only 2 million or 1.5 million. Those areas that have experienced the meteoric rise in prices will likely fall the farthest. Something that is far off most people's radar scopes is what is going to happen to city and county property tax bases in the event of a serious repricing of property. Do you suppose the assessor is just going to cut your property values automatically? Doubtful, you'll have to fight for that. Do you suppose levy rates may rise? Where they can I'll bet they will. Do you suppose your insurance company is going to drop your rates just because property values have fallen? No, I expect insurance to continue it's rise mostly due to prior poor investment strategies. It might end up like driving an Impala but paying tax and insurance rates for a Mercedes.

#24 BarBu

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Posted 18 December 2002 - 04:13 PM

Dow Jones Business News

Fannie Mae Economist Expects Strong 2003 Housing Market

Wednesday December 18, 2:58 pm ET

By Dawn Kopecki

WASHINGTON -- The rapid rise in home prices and mortgage originations will drop in 2003 from this year's record highs, but low inflation and strong consumer demand will continue to drive the robust U.S. housing market, according to Fannie Mae chief economist David Berson.

"It's going to be hard to characterize 2003 as a down year," said Mr. Berson, who presented Fannie Mae's year-end housing forecast Wednesday. "It's going to be downright strong, although perhaps not as strong as this record year."

Fannie Mae Economist Expects Strong 2003 Housing Market

#25 Bearwithme

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Posted 18 December 2002 - 05:59 PM

Anoscope:

The future Bearwithme dwelling looks perfect!

It is a great hideaway from the dozens of people I have PO'd by telling them the truth about where I feel this economy is headed, a ready supply of high quality compost for my garden, underground protection fit for a moderate nuclear attack.. it looks like a great place for me to start my movement!!
And all the crack you want for free!

...Let me know how much I owe you for the custom sign!

#26 Bearwithme

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Posted 18 December 2002 - 06:10 PM

It just hit me that both myself and Doc see the demise of the real estate bubble the same way, although we are looking at it from different angles.

Sure.. as long as there are morons to buy these mortgages from 3% down unemployed home buyers, great.

But the JIG IS UP very soon... even fartknockers like me know that the loan holders have loans in arrears increasing dramatically by the month, and it is only a matter of weeks before they tighten up on the requirements for the loans they buy.

LIKE DOC SAID it is all about the funding from the fed going into the M-3 to fund all this insanity.. as soon as the store-front former used car salesmen lenders are no longer allowed to lend to every schmucko that comes through the door, the loans dry up, and the market implodes.
When loan restrictions are made more stringent, there will be far, far less demand to tap into the fed's electronically created pool of play money.

I see this as potentially being a much higher percentage drop than the early 90's crisis was in real estate.

#27 Drano

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Posted 18 December 2002 - 06:23 PM

Anoscope:

The future Bearwithme dwelling looks perfect!

It is a great hideaway from the dozens of people I have PO'd by telling them the truth about where I feel this economy is headed, a ready supply of high quality compost for my garden, underground protection fit for a moderate nuclear attack.. it looks like a great place for me to start my movement!!
And all the crack you want for free!

...Let me know how much I owe you for the custom sign!

Aw shucks, I was gonna offer to let you pitch a tent in my backyard.

Of course, I live in Minnesota and it does get to be 20 below in the winter sometimes, but, you got that built-in fur coat, don'tcha? :D

Owning a modestly-priced house in an area that is in demand because of its convenient location to downtown seems to me to be the real estate equivalent of owning a pile of gold coins. If there is a ruinous inflation, my house will have some value, and I'll have a place to live. If you're renting, you'd better be able to keep your job and be earning money at the new, wheelbarrow-load rate, if you don't want to be living in that tent in my back yard.

And if there's deflation, well, I'm down to paying mostly principal, not interest, on my mortgage now.
Of course I'm caustic!

#28 Guest_Icky Twerp_*

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Posted 18 December 2002 - 06:29 PM

from Lightening VII by Seamus Heaney (about Thomas Hardy herding with sheep(?))

Their witless eyes and liability
To panic made him feel less alone,
Made proleptic sorrow stand a moment

as do sheeple in their 401Ks and unaffordable mansions...

pro·lep·sis ( P ) Pronunciation Key (pr-lpss)
n. pl. pro·lep·ses (-sz)
1) The anachronistic representation of something as existing before its proper or historical time, as in the precolonial United States.

2a) The assignment of something, such as an event or name, to a time that precedes it, as in If you tell the cops, you're a dead man.
2b) The use of a descriptive word in anticipation of the act or circumstances that would make it applicable, as dry in They drained the
lake dry.
3) The anticipation and answering of an objection or argument before one's opponent has put it forward.
[I]
do you see the common affliction all Stoolies suffer? Prolepsy!
[I]

#29 LostItAll

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Posted 18 December 2002 - 07:39 PM

Pigeon Drop,

I can't think of anyone I know who did poorly from owning a house to live in, and totally ignoring the price fluctuations both up and down.


Ya do now! Me!

Repossessed on a house I bought in the UK in 1988 (I handed in the keys in 1994).

I even bought knowing that there might be a slight drop in prices and I bought in a podunk area (because it was about the only area I could afford that was commutable to work). I bought at 8.5% mortgage interest rates and I had:

1. savings to see me through six months of job loss
2. mortgage payment insurance
3. no immediate need to move (to cope with that mild downturn I was expecting)
4. a slightly higher than average UK salary

Interest rate rises did for me.

They did for many more people too but in most cases it's actually job loss, divorce (where the mortgage is supported by both spouses working) or sickness that pulls the trigger. For most, rising interest rates weaken you and reduce your ability to sell. But some other factor delivers the coup de grace.

In my case the other factor was realisation.
Higher rates took out my savings cushion. Then the assrrears built up so much that I recognised I was unlikely to ever pay off both the assrrears and the capital and be able to maintain employment in that area. Employment was declining. Sooner or later it would deprive me of my income and that would deprive me of my mortgage-paying ability and then my house. So I made a hard decision and let it go. Most have that decision forced on them by the trigger-pulling factors I listed above.

Now here's the interesting bit:

I bought the place after recognising the possibility of a downturn. I even prepared for it. When the scope of the price declines became obvious I continued paying every month for five years because I believed prices would turn up again. (They still haven't in my area but the compound interest on my monthly payments would still have me in me loss now even if they had caught up now).

That's the poison that kills homeowners who buy at the wrong time. They hang on in hope.

I don't think you should day trade houses either. But I do believe that you should rent when house prices are high and buy only after several years of high interest rates, which will likely have flushed out excess prices. Equally, if you want to make more money out of houses, sell after a couple of years of low interest rates and move into rental.

Another difference between houses and stocks is that house ownership is usually a debt liability. That imposes a fear that holds off selling into a downturn. Which delays the downturn and worsens the losses of owning a house asset at the wrong time.

To put some perspective on losses that are possible. I paid around $60,000 for my place. It was sold for $8,000.

But it was sold to a cannier guy than I was and I have no regrets over learning that lesson.

My name is LostItAll and I am a renter. :D

#30 EasyAl

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Posted 19 December 2002 - 07:45 PM


Even if home prices are rising at what many consider unrealistic rates, Lisa Grant and her husband, George Vail, were not deterred from selling their house in the Silver Lake area of Los Angeles and investing their sizable profit in a $340,000 duplex in nearby Echo Park.

Real estate "is your best bet as an investment," said Grant, 29, an actress. "We feel pretty confident."


Southland Home Prices Soar, Defying Sluggish Economy





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