Tuesday, November 29, 2005

Existing-Home Sales Cool, Supplies Rise But Median Price Still Is Building Steam

Look at these charts from Investor's Business Daily; especially that middle one; supply is dwindling until we hit 2005 and then it rockets up.

Some choice quotes:
"Fall chills hit existing-home sales in October, even as prices kept climbing. It's the latest of several signs that the housing boom is finally over."

"Existing-home sales fell 2.7% to an annual rate of 7.09 million from Sept.'s revised 7.29 million, despite heavy selling in areas hit by Hurricane Katrina, the National Association of Realtors said. Without storm-related sales, the drop would have been 3.2%. The number of unsold homes hit a 19-year high of 2.87 million — 16.3% higher than a year ago."

"In what many analysts see as some last-gasp gains, home prices continue to set records...the median sales price in October was [up] 16.6% above a year ago. Such huge advances are not sustainable, economists say."

"...high-end home prices are already cooling. The rest of the market is expected to follow, since higher prices can't hold up as sales fall and supply swells."

"In red-hot markets like Florida and California, sellers appear to be losing their grip on the market..."

"In California, real estate agents saw sales drop 2.8% vs. a year earlier while prices fell 1% from September. But the median price for a single-family home still swelled 17.2% vs. a year earlier to an eye-opening $538,770."

"...foreclosures and defaults are starting to pick up. U.S. foreclosures jumped more than 18% in October from September, according to Web foreclosure marketplace RealtyTrac. Another report from Foreclosures.com showed rising mortgage defaults in California too."

A New Blog

I just added a link over on the right to a new blog (called "Another F@cked Borrower") that I greatly appreciate and that I think you might like; certainly anyone contemplating an exotic loan to "buy" a typically PoS house at a typically inflated price in Marin should peruse that blog first.

Here is the blogger's write-up about himself and his blog:
I am a Mortgage Banker. I am a wholesale account executive for a major nationwide lender on the subprime side (I ONLY deal with brokers/loan officers, NO contact with borrowers). I have appoximately 30-40 broker offices that I am responsible for servicing. Some offices have 1-2 people, some have 20, my largest one topped out at almost 100. I see lots of loan officers, and I see their subprime loan business (I also see a decent amount of alt-a and a-paper loans).

I also have my financial licenses (series 7, 63, life insurance). The economics major and "financial planner" in me is horrified by the "risks" that people are taking to "own" a home. I am also saddened by the amount of "fraud" and the "get it done by any means possible" attitude in the industry. So that is why I started my blog. An honest, insider opinion of what is REALLY going on out there.

Hopefully I can enlighten people and help them NOT make some of the mistakes I am seeing out there.
This is just in time as lawsuits over these exotic loan types are starting to develop as their rates begin to reset. This is important as California homebuyers are to a very large degree dependent upon them:
"Option ARMs have been especially popular in high-cost markets, such as California. 'The fact the loans are no longer available on such attractive terms...could mean that the boom is ending in some of those markets,' says Arthur Frank."

"Many borrowers have been attracted to option ARMs by the low introductory rate, which is used to set the minimum payment for the first year. Some borrowers say they weren't clearly informed of these features."

Sunday, November 27, 2005

October 2005 Results for Marin

Well, West Bay Real Estate has the October results out for Marin. They can be viewed here. It might be premature to report it now as they sometimes revise their numbers weeks later. But as there has been a dearth of data shown on this blog of late...

The median sales price of a SFH in Marin went up 5.3% in October from the previous month but is still down -8.3% from its peak in June. On the other hand, the average sales price in October dropped -3.4% from the previous month and is down -14% from its peak in July. So a rather mixed bag of results here in Marin, pretty much like the nation as a whole.

The following plot might be of interest. It shows the number of houses sold in September and October, 2005 in Marin grouped into bins of $200,000 intervals (e.g., $0 - $200,000, $200,001 - $400,000, etc.).


The real story is condos: October condo sales dropped -50.6% from the previous month and are off -39.1% from a year ago. Wow!

Saturday, November 26, 2005

Flipping Burgers Instead of Condos -- Ouch!

There's still more discussion regarding whether the Fed is (privately) targeting the housing bubble. If the Fed is truly concerned with the "average American", Boobus Americanus, and therefore the average affordability of housing, what does that portend for those real estate markets that are at the extreme of the housing bubble? I don't know (but I have a good idea). I'm just throwing it out there in the hopes that the 800 to 1000 weekly readers of this blog post a comment.
"The mighty Federal Reserve. It's more powerful than a ballooning housing market, able to stop inflation in a single bound. And, if it slips, if it uses its super powers unwisely, if it goes too far, it could push the economy into recession with just a nudge of its pinkie."

"While investors are growing impatient with the Fed's rate hikes, it's important to remember that at the start of this tightening program, rates were at a 45-year low. "It was like war time," Krosby said."

"Citigroup's chief global equity strategist, Ajay Singh Kapur, quotes a market adage, 'Economies don't die of old age, they are always murdered by the central bank.' Eight of the last 12 recessions were preceded by Fed rate hikes, he said, a figure that is mentioned and repeated often by the 'all-powerful Fed' school of Wall Street strategists these days."

"This is nonsense, said Sandy Lincoln. There are factors that are far beyond the Fed's control, Lincoln said, such as the introduction of the euro, the globalization of the economy and the current sharp increases in commodities prices."

"What the Fed is trying to do is take the air out of the housing bubble, slow down the larger economy and see employment edge slightly lower."

""The key is a slowdown, not a crash," she said. Still, when the Fed has finished, people will get hurt, she said."

"Speculators could be in particular trouble. "The more leveraged you are, the more vulnerable you are to losing," she said. "Instead of flipping condos, you could be flipping burgers -- and I don't think the Fed cares. What the Fed cares about is the average American.""

Friday, November 25, 2005

Winding Down to Take a Bath

Here's some advice from our cheerleading friends:

"Now even [David] Lereah [chief economist for the National Association of Realtors] agrees the boom is well past its peak. It's now “winding down into an expansion,'' he says."

Heh! "Winding down into an expansion". Another great Lereah euphemism. Just a few months ago he was screaming that there were no bubbles.

"But this much seems certain: Sellers and buyers in the coming months will need to change their assumptions and strategies from what they've been for the last three heady years."

Advice to sellers: "There may not be enough buyers to cut the glut for years. So if you absolutely have to sell, prepare to take a bath. If you don't have to sell, keep it off the market. And keep looking for tenants who'll reduce your red ink during the down cycle."

Advice to buyers: "Down cycles can produce your best opportunities in a decade. But bear in mind that many sellers you encounter will be in denial about pricing. They will refuse to believe that they cannot get what their neighbors got for their less-attractive house across the street in the spring of 2005... Walk away from everything but the most soberly priced deals. After all, you can't know for sure when the cycle will hit bottom."

So, “winding down into an expansion" means "if you absolutely have to sell, prepare to take a bath" and renting for less than you need to stop the bleeding.

Sage advice: be patient. All good things come to those who wait.

Thursday, November 24, 2005

Post Thanksgiving Table Conversations

So, how about if you readers share your Thanksgiving dinner table conversations vis-à-vis the real estate bubble? For my part, the bubble is begrudgingly regarded as a fact by some people; others still don't realize what has been going on in our local real estate market recently. "What?! Prices have come down? Sales volume is down? That can't be right. How can that be? This is Marin after all! We're special." It's like when Wiley E. Coyote runs off of a cliff and keeps on running and only falls once he realizes that he is no longer on the ground.

Dinner Conversation

It's Thanksgiving 2005! If your family is anything like mine, then the likely table conversation at some point will center around Marin's ludicrous housing prices. Given what's been going on in Marin's housing market (and many others, of course), families in Marin will be listening more closely to what their more bearish members have to say (better late than never I suppose).

In order to give you all more ammunition for your arguments (as if you don't already have enough) as you sit around your Thanksgiving dinner table, I performed the following calculation with the intention of answering the following question:
"How far does Marin median house prices have to fall so as to be affordable to a family earning the median annual Marin income?"
All calculations are based on September, 2005's real estate data. (Note: as of September, 2005 the median house price in Marin has fallen each month since June, 2005. So, the following calculations show how far house prices have to drop after having already dropped roughly -13%).

Here we go...
Median Marin house price: $900,000 (source)

Income needed to buy median priced house: $180,514.29 (assumes a 20% down payment, 30-year fixed rate loan at 6%)

Affordable house price ratio: $900,000 / $180,514.29 = 4.986

Marin's real median household annual income: $71,306 (source)

Affordable house price at the real median income level: 4.986 x $71,306 = $355,514.24

Implied market correction needed to bring Marin's median house price in line with the real median income: (($355,514.24 - $900,000) / $900,000) x 100% = -60.5%

Add on top of that the 13% drop we've already seen and we are looking at an estimate peak-to-trough drop of roughly -74%
Have a nice Thanksgiving weekend.

Tuesday, November 22, 2005

That Little Red Light In People's Brains is Beginning to Blink

The limbic system, as you will recall, is that part of our primitive brain that controls emotions. As such, it is common among nearly all mammals. In fact, for some mammals (like mice) the brain stem is pretty much all they've got to work with.

The little red thing shown in the picture is the amygdala, an almond-shaped brain structure that forms a critical part of the limbic system. Whether you like it or not everyone and their mouse has one (two actually) and they all work the same.

For most of us during our ho-hum day the amygdala hums right along and does its thing, keeping us within the bounds of a nice emotional equilibrium. That's a good thing when minor annoyances occur such as when driving down the freeway and some arse cuts you off. But if something threatening occurs it will scream bloody murder such as when a bear is, uh, bearing down on you. And that's a good thing too (not the bear part, but the inner scream-of-bloody-murder part).

But it's not so good for markets. Right now the amygdalas inside of a lot of housing speculators and property owners in bubble-land are lighting up pretty strongly now and are likely to be going into the equivalent of an epileptic fit fairly soon. Why? Because it looks like this housing bubble has turned. We can't be sure yet (I'm waiting to see what happens in the Spring), but it sure is looking like it. Home equity loan growth has slowed down to a trickle, home builders are sinking fast (and here), price reductions have increased significantly and sales volumes are down in Florida (and here), Arkansas, Nebraska, Massachusetts (and here), Colorado, New York, Virginia, Marin, Sonoma, California (and here, and here, and here, and here, and here, and here, no need to go on), just to name a few. Speculators are beginning to panic. Even Warren Buffett is waiting to scoop up properties on the cheap.

Monday, November 21, 2005

NAHB-Wells Fargo Housing Opportunity Index


Here is a plot of the National Association of Homebuilders (NAHB) - Wells Fargo Housing Opportunity Index for the Bay Area.
"The Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the median income. For income, NAHB uses the annual median family income estimates for metropolitan areas published by the Department of Housing and Urban Development. NAHB assumes that a family can afford to spend 28 percent of its gross income on housing; this is a conventional assumption in the lending industry."

Saturday, November 19, 2005

And Now for Something Completely Different...


All around West Mulberry Street,

Homeowners were in trouble.
Greenspan thought 'twas all in fun,
Pop! goes the bubble.

A half-a-mill for a fixer-up,
This house is nearly rubble.
If prices don’t soon level off,
Pop! goes the bubble.

Make your payments and don't be late,
And never ask for trouble.
That’s the way the money goes,
Pop! goes the bubble.

Half a buck for tuppenney rice,
Inflation’s really double.
Eat it slow and make it last,
Pop! goes the bubble.

Friday, November 18, 2005

Housing Sales Fall, Prices Rise in Marin

Well, I must say that the Marin IJ is sure acting out of character with publishing this article. I interpret the IJ's reversal as coming to terms with reality; Marin is clearly in the "denial phase" and is following the trend that is being seen throughout the rest of the state.

Some choice quotes:
"Marin's median single home price popped to $914,250 in October, but the pace of sales dropped off, continuing a seven-month slowdown experts blame on rising mortgage interest rates."

"Sales, however, were down to 261 in October from 278 in September and were flat with the 260 single homes sold in October 2004."

"McLaughlin, of West Bay Properties in Corte Madera, agreed with Prentice that the market was heading for more balance after the "feeding frenzy" of February and March. Properties are staying on the market longer, the inventory is higher and price reductions are common, he said."

""It's good news for buyers - there's a lot to choose from, and if you don't make up your mind today, and come back next week, the home still might be there," McLaughlin said."

"The Marin single home prices were slightly higher than across the nine-county Bay Area, but the sales trends were the same."

"Marin buyers "have definitely backed off, almost like the herd instinct," McLaughlin. He said a check of listings for the last 30 days shows 138 new sales started in Marin - an average of about four and a half sales opening a day."

""That's very little - in a peak market, you'll see 12 to 15 sales in a given day," McLaughlin said. "Even this time of year, which can be slower, you'll normally see eight to 10 sales openings a day.""

"McLaughlin...said only about 30 percent - or 234 - of the 787 single homes listed for sale in Marin for under $1 million were in contract as of this week."

""In February and March, we might have had 500 properties listed and 300 were in contract," McLaughlin said. Of 306 new single homes and condos listed in the last 30 days, only 46 have gone into contract, he said."

""At this point, if you want to sell your house, you're going to have to chase the buyers and reduce prices," McLaughlin said. "That's unusual for Marin.""
"That's unusual for Marin"? Wait a minute. I thought we were special, immune. Every one wants to live here, right? We have "intangibles" gosh darnit!

Gaming the Peak, Denial, "Mind-numbing Depreciation" -- The End of the Cycle

It is clear that today's sellers are "gaming the peak" and are in denial, pricing their houses based on comps from months ago. This is typical at the turn of a RE cycle -- sales volume declines because houses are still being priced at bubble levels; median prices remain high because buyers are being more selective and only the nicest houses are actually selling (average or slightly above average houses no longer justify the ludicrously high price tag).

From the SF Chronicle:
"The Bay Area housing market cooled in October, as home sales declined for the seventh consecutive month and prices softened amid a steady rise in interest rates."

"The industry slowdown comes as rising interest rates increase the cost of home ownership. For the 10th consecutive week, the nationwide average for 30-year fixed-rate mortgages rose this week, this time to 6.37 percent -- the highest level in more than two years, according a report from mortgage giant Freddie Mac."

"The rise in interest rates was on the minds of Adam and Kathleen Bunshoft on Wednesday night as the newly married couple checked out a luxury two-bedroom condo on the 2900 block of Anza Street in San Francisco listed for $689,000."

""It's causing me to think about waiting,'' said Adam Bunshoft, a 35-year-old sales executive who has been looking for a two-bedroom home or condo."

""I don't get the feeling that prices have declined," he said. "Homeowners are seeking prices that are in line with comps (comparable listings) of homes that sold a few months ago.''"

"John Karevoll, an analyst with DataQuick, said that is exactly what happens at the end of a real estate cycle. "We always see people trying to game the peak -- trying to get the most for their properties,'' he said."

"In effect, the market had been robust because house seekers who would have waited to buy purchased this year instead because of low interest rates. "We were stealing (housing activity) from the future,'' he said."

"Tapan Munroe, an economist and director for LECG, a worldwide consulting firm, agreed. "Sales are flattening, and prices are also going down a bit, but I doubt very much it is a bursting of a bubble. It's more like a slowdown and a soft landing.''"

"The biggest drop in housing activity occurred in Napa County, where the number of homes sold fell 12.5 percent."
You tell me which outcome is the more likely one:


Well, there is this prediction from an honest realtor:
"Yes, we have started on the down leg of the typical 'Bell Curve' and the probability of surpassing our approximate 20 percent drop in San Diego home values experienced from 1990 through 1996, seems assured. Plus, as real estate trends seem to start in the West and then move east, any U.S. real estate market that experienced huge price appreciation the past five years, will experience the same depreciation in real estate residential values."

"...due to the huge home appreciation all San Diego real estate has seen, with the average home up 100 percent in the past 5 years, combined with the boom in 100 percent adjustable/interest only loans, the stage is set for what is sure to be mind-numbing depreciation."

Thursday, November 17, 2005

Mill Valley Lots Dropping


It's not just houses in Marin that are dropping in price, but lots too. Oops! Looks like someone in Mill Valley could not afford to finish their dream house. They dropped the price by a solid 34%

Bay Area Sales Continue To Sink


Bay Area sales data continue their downward trend. I love how it's the YoY statistics that get reported since that is about the only way now to positively spin the data. I look forward to when that trick no longer works.
"San Francisco Bay Area home sales declined on a year-over-year basis for the seventh month in a row in October, according to DataQuick Information Systems."

"A total of 10,508 new and resale houses and condos were sold in the nine-county Bay Area on a year-over-year basis, which DataQuick attributed to rising mortgage interest rates and reduced demand. That was down 6.2 percent from 11,205 for September, and down 6 percent from 11,180 for October last year, the company reported."

"Sales have been lower compared to 2004 every month since April. So far this year 107,099 Bay Area homes have been sold, 5.1 percent fewer than 112,873 for the same ten-month period last year."

"The median price paid for a Bay Area home was $614,000 last month. That was down 0.3 percent from $616,000 in September."

"Sales dropped 11 percent in Alameda County, 10.2 percent in San Mateo County, 9.2 percent in Napa County, 6.9 percent in San Francisco County, 6.6 percent in Contra Costa County, 4.3 percent in Solano County, 2.2 percent in Marin County, 1.8 percent in Sonoma County, and 1.5 percent in Santa Clara County from October 2004 to October 2005."

"Median prices increased 22.9 percent in Contra Costa County, 18.8 percent in Marin County, 18.2 percent in Sonoma County, 16.8 percent in San Francisco County, 15.8 percent in Santa Clara County, 15.7 percent in San Mateo County, 15.4 percent in Napa County, 15.3 percent in Solano County, and 14.9 percent in Alameda County from October 2004 to October 2005, DataQuick also reported."
And then there is this from the Press Democrat:
"Sonoma County home prices dipped in October for a second straight month - the first back-to-back decline in two years - with sales dropping and supplies rising as the housing market continues slowing."

"In another sign that the region's market is beginning to lose momentum, homes are staying on the block longer. Buyers, who have unflinchingly bid up prices for three years, are becoming more cautious. And sellers are lowering prices to get attention in an increasingly crowded market."

""Now prices are going to be based on the new market and not the old crazy market," said Ted Horsman, owner of Remax of Santa Rosa."

"October's median resale home price was $590,000, down from $615,000 in September and $619,000 in August, a record high. The county's median last dropped for two straight months in September and October 2003."

""The trend has come full circle. I'm starting to see clients come in under an offer price," said Darren Seliga, owner of Seliga Financial, a Santa Rosa mortgage broker. "I'm starting to hear from a lot of the first-time home buyers that lack of frenzy.""

""What we saw this month is a seasonal slowdown and the buyers stepping back," Laws said. "They're stepping back and saying 'I'm not going to pay that price, I want a better deal, I want you to fix this.' It's almost a collective mentality that happens in the marketplace.""

Wednesday, November 16, 2005

New Home Sales in Northern CA Fall 40%

"A report from the California Building Industry Association shows new home sales in Northern California fell 40 percent during the past three months, compared to the same period last year. It's the sharpest such drop in the last 15 years."

"Deangelis said a year ago people would come in panic buying mode. "They would come in and be anxious to buy anything we had available," she said. "Now they're in panic selling mode because it's taking them longer to sell their existing house.""

"To counter the decline, many developers are offering incentives to buyers. Some are putting in thousands of dollars in upgrades at no extra charge, while others are discounting the base price of homes by five to 10 percent."

"The cooling of housing market appears to be accelerating, although the market has been trending downward for much of the year. In the first ten months of 2005 new home sales fell by 14 percent over the same period in 2004."
You can read all about it here.

Tuesday, November 15, 2005

We're Coming Down the Other Side of the Mountain

Thanks to the reader who sent me the URL for this article:
"The latest report on third-quarter home prices, released Tuesday by the National Association of Realtors, showed continued strength. But increasingly there are signs that prices have plateaued."

""We're coming down the other side of the mountain," said DeKaser [chief economist for mortgage banker National City]."

"Builder pessimism - The builders DeKaser surveys are less optimistic than they were even a few months ago."

"New-home sales declining - DeKaser also notes that the number of new homes sold have fallen sharply since peaking in July at an annual rate of 1.3 million units."

"Inventories rising - Supplies of new homes are way up, to nearly 500,000 units, from 350,000 a few months ago. "That's an all-time high for new homes," says DeKaser. The higher the inventory, the more likely prices will fall."

"Sell times are up - Houses are sitting on the market longer."

"While DeKaser expects a slowdown, he predicts an "orderly transition" for the most part, with some exceptions. "There will be busts in some markets," he said. "Mostly, we'll come out of it unscathed.""

"But history shows that some over-valued markets could fare much worse."

"It may already be too late to cash out at the top, which some residents of hot markets have already done. About 500,000 California residents moved out of state since 2001, according to economy.com, many to take advantage of lower housing prices elsewhere."

"People looking to buy right now should shop carefully. Look at a number of homes, try not to fall in love, and be realistic about prices. Don't be afraid to bid low. The days of multiple bids may be over for a while."

Interest Rates and the M3


Interest rates just keep going up and up.
"Interest rates took another jump Thursday, rising to their highest levels in more than two years at a time when the number of people able to buy a Bay Area home continues to drop."

"Mortgage giant Freddie Mac reported Thursday that the nationwide average for 30-year, fixed-rate mortgages rose to 6.36 percent, up from 6.31 percent last week."

"That's nearly a point above the 5.53 percent average in late June, which — for a median-priced Bay Area home bought with a 20 percent down payment — adds $300 a month to mortgage payments."

"It's the fifth straight week rates topped 6 percent and the highest level since 30-year mortgages were at 6.44 percent in September 2003."

"While mortgage rates are going up, fewer people can afford to buy a home, according to a survey released Thursday by the California Association of Realtors. Only 12 percent of Bay Area households in September had the annual income of $167,420 needed to buy a median-priced detached home at $709,980, the survey found. A year ago, 15 percent could afford a median-priced"
We have also learned that the M3 report is now going to be kept secret (and here and here). So much for "transparency" in our financial system. Does this mean that the US is a less attractive investment to foreigners? Does this mean we can kiss goodbye the AAA bond? Does it mean that Bernanke will be able to print as much money as he likes and there will be no easily accessible data about it? Maybe the economy isn't as rosy as the Fed wants us to believe. Furthermore, many countries will likely dump US dollars if the Iranian Oil Bourse removes its peg from the dollar (but hey, we'll just invade Iran and solve the problem that way like we did in Iraq) and the Plunge Protection Team is going to need to have lots of liquidity. On the other hand, Greenspan was operating under the precedent that by increasing short-term interest rates the long-term rates would move higher. This turned out not to be true this time around and led to his infamous "conundrum" comment. Perhaps this is the Fed's way of trying to get back control.

Welcome to the Matrix. Now go back to sleep.

Sunday, November 13, 2005

Marin Real Estate Data Blog

I put all of my Marin real estate graphs and plots in a new blog to make it easier for readers to find. You can find the permanent link at right under 'Resources'.

Saturday, November 12, 2005

The House Party is Almost Over


To see the discrepancy between rents and SFH sale prices in Marin County, go here.

From the Mouths of Marin Realtors

Here is what some Marin realtors have to say about today's Marin real estate market; remember, these folks have an agenda:
"Despite a growing inventory, the next 12 months will show fewer sales, and here’s why: only 11% of homeowners in Marin could afford to buy their own house today, according to the California Association of Realtors. The median price is nearly one million dollars, and with 20% down payment you would need an income of nearly $250,000. Until earnings increase, rates go down, prices decline, or some combination of these happens, appreciation will slow and sales will turn down.

Sales continued to fall due to lack of inventory. Home sales were off 16.9% compared to last year, while condo sales were off 12.5%." Source.
---
"As of today, 28% of all listing are pending in Marin, indicating a slight turn from a nuetral market to a buyers market. The average list price is $1,250,000, though the median is closer to $995,000. The numbers are skewed by a few ultra high priced listings." Source.
---
"Marin County is experiencing a changing market, it is showing some signs of moderation. Multiple offers are less common on homes that are reasonably priced or in "the most popular" neighborhoods. The future remains uncertain as Buyers try to understandi the impact of rising interest rates, and as seller seek to price their homes to attract Buyers in this changing market." Source.
---
"While prices remain steady, changes have occurred in the average number of days on the market(up) and the number of multiple offer situations(down). Part of this trend may be seasonal, and part may reflect a more fundamental market shift. Buyers have become more contemplative, and many are no longer willing to enter into bidding wars for a property." Source.

Economists Use the "R" Word

The party's over and it will soon be time to clean up the mess according to the economists quoted in this article. Lots of "we knew it all along" and "we saw this coming" sorts of talk.

Of course, none of these dire things will happen here in Marin...au contraire, we're special after all. Sure, all those other places (like San Diego, Orange County, Seattle, Vancouver, Boston, various Florida bergs, Las Vegas, etc.) that also happen to (mistakenly) say they are special too (but they're not because we're the ones who are special and we can prove it because we have nice weather, we have hills and intangibles, we're immune, everyone wants to live here, this is God's country [well, no, actually this is]), they're the ones who have to look out. But not us. No way. Not gonna happen. Nope.
""The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession," warned a July report by the Center for Economic and Policy Research."

""The demographic story behind the housing market boom, as we always thought, was a giant hoax," wrote Merrill Lynch & Co.'s North American economist, David Rosenberg."

"A downturn in housing could mean more than 1.3 million lost jobs, Goldman Sachs Group Inc. predicts, bumping up the national unemployment rate by 1 percent and the unemployment rate in house-mad California by 2 percent. Those numbers don't include likely job cuts in housing-dependent businesses, such as banking, furniture and building materials."

"The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of 5 million to 6.3 million jobs."

""At no time in the past three decades has the gap between household formation and housing starts been as wide as it has been over the past 12 to 24 months," Rosenberg wrote. "We've become accustomed to hearing about how housing is in a new paradigm, that the fundamentals are sound, so on and so forth. But please, just don't tell me that the sector has managed to divorce itself from supply and demand realities.""

"Rents provide more evidence of an imbalance between supply and demand. Since World War II ended, sale prices for homes have generally kept pace with the overall rate of inflation, and rents moved at the same pace. That hasn't been the case for the last eight years, according to the Center for Economic and Policy Research."

Wednesday, November 09, 2005

The Social Ills of this Housing Bubble

Some people who read this blog wonder why I even started it. Afterall, what's wrong with people making money from their houses? And I say and have said time and again "nothing, there's nothing wrong with making money from your house"...until it gets too extreme. I have said before on this blog and I will say it again that the distortions in the Marin real estate market have become so acute as to be destructive in a socially fundamental way. That's why I care.

This comment, left on another blog in response to a post regarding this article, sums it up pretty well. It refers to the Long Island (LI) housing market which is out of whack in a manner very similar to that of Marin; I would almost say "identical". And like Marin the general attitude among the folks who own property is "I don't care; I've got mine":
"LI born and bred. There is almost no renting, and there is almost no chance of first time buyers being able to afford a home in many towns. I can't go back.

I grew up in a well to do town in Nassau County where very few of my young married friends live anymore because they can no longer afford the homes. The prices have chased out the children of families who have lived in the town since the early 1900s. Those who stay are being helped by mom and dad (we're not old enough to be rich on our own for the most part). There are a TON of baby boomers who want to downsize but can't, because the smaller homes are so overpriced that it makes little sense - they will have hardly any money left over from the sale of the larger house. There are few townhouses or condos either. And all of the "luxury" homes have been sitting for ages (and by "luxury" I mean something that down South or in the midwest would cost you about 350K now priced over 1 million here).

It's changing our lives more than we realize - for example, I can't really afford a home in my town, so my potential future offspring can't live near their grandparents. Scratch that extended family off the list. I will have to move to a town where I don't know anyone and have no support network and likely schools that aren't as good. I don't know, I find this whole housing run up more upsetting for what it's doing to us more than just the money it's costing."
And then there is this which we have already seen in Marin for some time now:
"Aside from housing everything else in this part of the country is extremely expensive. Making finding new teachers, fireman, policeman etc. who can live anywhere near where they work a problem for towns all over the NYC metro area.
You can follow the thread here.

Monday, November 07, 2005

Shiller's Figure 2.1

Here is Figure 2.1 from Robert Shiller's book Irrational Exuberance showing long-term housing valuations from 1890-2004. I would have used a scanned version from my copy of the book but didn't for fear of copy right violations. Fortunately, this image was posted on the Housing Bubble 2 blog and so I am showing that here.

Quantitative Analysis

There is a comment over at the Housing Bubble 2 blog that is well worth reading. The commentor is an MIT staff member explaining that a 1% increase in interest rates corresponds to roughly a 10% decrease in housing affordability for standard loan types; it's more like a 16% decrease for those with ARMs and IO loans. If the mortgage tax reduction proposal is implemented, then we are looking at an additional 15% drop on top of each drop due to interest rate increases alone. Check it out.

Saturday, November 05, 2005

"Where ignorance is bliss, 'Tis folly to be wise"

These be the facts:
  1. House prices have been increasing 15-30% per year for the last four years or so.
  2. Affordability is at an all time low. So low in fact that people have had to resort to IO and ARM loans and other crazy things to buy a house. Affordability is so bad that some households have resorted to housing three generations under a single roof!
  3. Interest rates and the ARM rates are up like a half of a percentage and continue to rise.
  4. The mortgage related tax deductions are being considered for a major overhaul.
  5. Salaries and wages are essentially flat over the same period during which house prices are doubling and tripling in price.
  6. Every increase in interest rates lowers the maximum amount that an individual can afford to borrow.
  7. Lending standards are finally being reigned in.
  8. Officially acknowledged inflation has been more or less constant at around 2% even though the cost of everything (except for what goes into the calculation of core inflation, naturally) has been going up and up.
  9. The price of energy is going up and is not expected to retreat. We are told to expect a 70% increase in our natural gas bills this winter.
  10. The baby boomers are starting to retire and we are told that they will be wanting to unload their inflated houses so as to fund a luxurious retirement.
  11. Rents are so low that they cannot recoup mortgage costs.
So what is going to happen next?

Either wages/salaries increase relative to house prices so as to restore affordability, or house prices fall to the point of restoring affordability. I seriously doubt that we are all on average going to get a 200%+ increase in our salaries.

So unless you believe that we are living in another "New Economy" or "New Paradigm", house prices will fall.

So the real questions to ask are when will house prices fall and by how much?

If prices fall then they would have to fall by about 47% to restore affordability to its historic trend line.

NAR Chief Economist Now Admits to the Possibility of a "Pop"

Now David Lereah, chief economist with the National Association of Realtors, is using the word "pop" to describe what will likely happen to some of the nation's real estate bubble markets:
""It's the peak of the boom," David Lereah said at the Chicago-based trade group's annual meeting this week. "But we're looking at a soft landing next year. I can't guarantee that there won't be some hard landings in some markets, where prices will actually decline. In fact, there will probably be two or three over the next two years that do pop.""

Friday, November 04, 2005

Three-legged Chihuahuas and the Sleeping Lions

Here is an article worth reading (scroll down towards the end); nothing new to us "survivors" but maybe the three-legged Chihuahuas out there in the RE wild will finally get a clue. Ok, so maybe not. But I also like the fact that the author quotes a Marin County fool:

"Doug Levy, a university administrator in San Francisco, sucked $25,000 out of his Marin County condo to pay a few bills and to take a modest skiing vacation in British Columbia. "It's like I'm sleeping in my piggy bank," Levy gushes. "In this market, real estate is a liquid asset. There is no longer an incentive to paying off your mortgage. The only way I'll ever pay mine off is if I win the lottery.""

"The flip-side of this borrowed prosperity as Levy admits, is that the leveraged homeowner becomes a kind of long-term renter, never really accumulating much equity in the house he purports to own. "I'm never going to be able to retire," Levy says, "because I'll never have enough money in the bank"...And neither will the millions of other American homeowners who have mortgaged away their home equity. In the old days, a mortgage was something that started off big and slowly shrank. Now it does just the opposite."

"Because so few Americans posses so little home equity, they possess no capacity to withstand adversity. That's why a reversal of fortunes could prove so devastating...and why the next recession could be surprisingly ferocious."

Thursday, November 03, 2005

Housing Price Index for Bay Area

The following graphic was sent in by a reader. The data is from the San Francisco-San Mateo-Redwood City, CA Metropolitan Division, Marin, San Francisco, and San Mateo counties. He has other such graphics which can be found here.

According to the author's write-up:
  • The HPI tracks the resale prices of the same homes. In other words, if the HPI rises by 5 percent in a year, it means that, on average, every individual home has increased in price by 5 percent compared with the price it sold for last year.
  • The trend line (green) is established from the minima circa 1986 and 1997.
  • See the details for each Metro Statistical Area (MSA) here.
  • OFHEO Website

Wednesday, November 02, 2005

Income Gap Widens

According to this article, the difference between the median household income and the qualifying income needed to purchase a median-priced house in the Bay Area increased to $100,670. Here is the chart from the article:

Oh yes, I am just so sure that this can continue. Maybe one of you could calcuate The Gap for Marin.

Tuesday, November 01, 2005

You Are Here

I like this graph which I found here. It's a few months old so the red arrow should be moved one notch to the right or maybe almost two notches.

Raw Land in Marin Dropping

It's not just the prices of Marin residential real estate that are starting to slide, really nice pieces of raw land are being discounted as well. This one is down 37%!

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.