Lereah: Cannot Rule Out Hard Landings

This has already been posted on other blogs, but it is too good to resist.

David Lereah, chief economist with the National Association of Realtors, has done a complete 180 degree about-face and is saying that he cannot rule out a "hard landing" for those real estate markets that are experiencing a bubble. What a hypocrite. Of course, he is blaming it all on the proposed reductions in the mortgage tax deductions. But IMO (maybe you disagree) he is using it as a way to cover his arse as he knows a hard landing is more than likely.

Some choice quotes:

""We are projecting a significant drop in the price appreciation pace," Lereah said."

""Some markets are more susceptible to interest rate risks and shock," he said. "I cannot guarantee that there will be no hard landings.""

""The country is really unbalanced when it comes to the price of a home," Lereah said. "The boom has really discriminated across America.""

"Many cities are already transitioning from a sellers' market to a buyers' market. And the time it takes to sell a house is increasing in many cities."

""The biggest risk I see right now in California and other parts of the U.S. is the element of risk introduced by adjustable-rate mortgages and interest-only loans and negative amortization loans," he [Lereah] said."

"Lereah said among the real threats to the continued health of the housing market are proposals in Washington to cut tax deductions for home mortgage interest and property taxes."

Halloween 2005

Happy Samhain, All Hallowtide!

Fool's Rule in Marin [updated]

[Update: I found average rental data for Marin for the years 1980 and 1990 from a different data source. I included them in the graph.]

Or do fools rule in Marin?

Someone asked how the Motley Fool Rule works out for Marin. Here it is. I divided the mean Marin SFH sales price by Marin's mean monthly rent.

Yearly Mortgage vs. Yearly Rent in Marin County

It has been explained time and time again in various publications that rents in Marin County have been trending down while house prices have been trending up. I wanted to know how each has been changing relative to the other.

Below is a graph showing the ratio of the average unadjusted yearly cost of a mortgage vs. the average yearly rent in Marin County for the years ranging between 1995 and 2005, inclusive. For the 2005 mortgage data I used the average sales price for the months of January to September, inclusive.

The way I calculated this needs some explanation. For average yearly unadjusted mortgage I just took the average house price and divided it by 30, as in 30 years (no adjustments for maintenance costs or insurance costs or interest on the loan or an assumed down payment or property tax, etc.). For average yearly rent I took the average monthly rent and multiplied it by 12 (except for the 2005 data where I multiplied by 9). I then divided the two resulting numbers for each year.

I know it is rough and amateurish but I just wanted to know what the graph would look like. If anyone can tell me how to come up with a better estimate for yearly cost of a mortgage, please let me know.


The following graph shows the average yearly rent for Marin County between the years 1995 to 2005, inclusive:

Housing Problems

This article quickly summarizes the data indicating that housing is having some serious problems now. It also slams the media for spinning the statistics to make them look favorable for housing. (And this one discusses how investors accept statistics at face value only to their peril.)

The facts are that house sales have increased but prices have declined over the last few months (that's good as how else can lower prices get locked-in if there are no sales?). And tightening lending standards, increasing mortgage rates, revisions to the tax code vis-à-vis real estate, etc. will only make matters far worse.

Here in Marin, according to the Marin Report (see table) the median price of a house has already fallen 13% over the last three months from a peak in June at $1.0335 million to today's $0.9 million.

Below are just the conclusions of the article:

There is always a way to spin a story and make it look like things are not so bad especially when so much is at stake but the following facts cannot be changed

1. Housing prices have been dropping for 3 months in a row.

2. In many cities the more expensive houses are taking longer to sell.

3. Inventories are slowly building up, nothing dramatic yet but that’s how bubbles usually pop.

4. Mortgage rates are rising across the board. The 30-year mortgage has just hit a 15-year high.

5. More and more individuals are slowly starting to look into the option of renting VS buying. In time this will gather even more steam

6. Real Estate is also taking a breather in several hot international markets; China, Australia and Britain are the main ones that come to mind.

7. A revision in the US Tax code could also have potentially detrimental effects on the housing sector.

So one can sit down and pretend everything is fine or pay attention to what’s really going and then take appropriate measures to protect oneself. In the end patience and perseverance are always handsomely rewarded; buying a house now is not the smartest thing to do. Paying down one’s debt and trying to put as much money away for a rainy day are the things that should be on top of the prudent investors mind.

OCC Putting Pressure on Lenders Regarding Exotic Loans

This article is too good to pass up. Apparently, the Office of the Comptroller of the Currency (OCC) is putting pressure on lenders vis-à-vis exotic loans. Good. These sorts of loans sacrifice long-term affordability for short-term affordability. This will no doubt affect higher priced markets like Marin (which is currently at an historic extreme of unaffordability) more heavily than lower priced markets. Someone on this blog commented that in Marin a very high percentage of all new loans are some sort of interest-only loan. Please chime in whoever you are.

Some choice quotes:

"...the increasing use of interest-only and option adjustable rate mortgages has put federal regulators on high alert."

"Will the inability to gain easy access to these creative mortgage products finally help let some of the air out of the inflated housing bubble?"

"It's certainly a distinct possibility, said Andy Laperriere, managing director at ISI Group, a research firm."

""I think it will affect a meaningful amount of loans," he said. "It'll be enough to take the marginal buyer out of the hottest markets and therefore slowdown or even stop some price appreciation.""

"Experts certainly see some correlation between the availability of these products and the surge in housing prices. Laperriere added that in high-priced markets such as California and Washington, interest-only and option ARMs make up about 50 percent of the mortgages used to finance homes."

"The new standards are likely to take some marginal players out of the market and may make sellers reconsider their exorbitant asking price as interest rates rise."

""You're going to see a pullback in prices as inventories grow," said Neil Garfinkel..."

PoS Blog

In order to further impress upon the three people who waste their precious time reading this blog that the Marin real estate market must have "intangibles" driving our house prices beyond the Oort cloud, I have created a new blog listing the finer homes of Marin.

King of RE Calls it Quits -- "Too Much Debt and Too Few Brains"

Tom Barrack, the king of real estate, what all these wannabe RE "geniuses" imagine themselves to be, is quitting RE because the market has gone insane.

Some choice quotes:

"Today Barrack sees signs of the tech bubble mentality in the U.S. real estate market."

""I feel totally safe playing polo on a field full of pros," says the bronzed 58-year-old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back." It's the same with the U.S. real estate market right now: "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: "That's why I'm getting out.""

Market Psychology

There are many similarities between the San Diego and Marin real estate markets. Oops! Did I say that? We Northern Californians are supposed to despise Southern California. Shame on me. I take it all back. We're special; we're immune to market fundamentals. Everyone wants to live here. This is God's country lest we forget.

Well, anyway, there is an article on market psychology at the Piggington blog worth a read.

California Could Be Hit Hardest

According to this article, when the housing bubble pops, busts, deflates, hisses, slows, decelerates, whatever, choose your favorite adjective, it will almost certainly bring down California's economy and will likely not leave the US economy as a whole unscathed if for no other reason than the "RE broker bubble" will pop along with it.

Some choice quotes:

"In 2004, the gross domestic product of the United States was nearly $12 trillion. But one state contributes far more than the 49 others."

"At 13.3 percent of the national GDP, California's share is nearly double that of New York, the nation's second-largest economy."

"That's why Alan Greenspan cannot relent in his quest to quash the speculative fervor in "frothy" housing markets."

"The whole darn state of California could qualify as the frothiest bubble in the land and, by the way, harm the U.S. economy as a whole when it blows."

""As home prices decelerate, consumption that has been financed through mortgage-equity withdrawal is likely to decline," Mr. Hatzius wrote. "As spending slows, the labor market is likely to weaken as well.""

"Northern Trust Co.'s Asha Bangalore estimated recently that 43 percent of the jobs created since 2001 have stemmed from housing. It stands to reason that a slowdown in housing will just as easily take away what it has so generously given to the workforce."

"Mr. Hatzius figures that the nation as a whole could lose upward of 1.3 million jobs, or 1 percent of the pie, in a housing-bubble recession. And California would get hit twice as hard, losing some 2 percent of its jobs."

"These estimates assume that employment in housing-related industries falls back to 1990 levels, when housing employed 4.4 percent of the U.S. population and 5.3 percent of California's. Today, it employs a record 5.2 percent of the nation as a whole and 6.3 percent of California's population."

""These estimates probably still understate the total impact of a housing downturn. First, our employment numbers do not include related areas such as banking, furniture or building materials manufacturing. Second, there likely will be an indirect hit from weaker consumer spending.""

RE Agents Are Actually Having to Work Now?

You want to sell that average town house in Novato, the "backwaters" of Marin? Well, you better throw in a Jaguar. And real estate agents actually having to do some work? Huh?! What's the world coming to? We've just jumped off the cliff, still rising upwards a bit, still feeling a bit euphoric but glancing down sure is looking scary.

Some choice quotes:

"To sell a Novato town home that's been on the market for nearly half a year, real estate agent Peter Nielsen lowered the price $50,000 and is kicking in his 1986 Jaguar."

"After a buyer for a SoMa condo failed to materialize in two months, agent David Jones and the seller decided to yank the listing and upgrade the appliances and lighting fixtures."

"Amid a perceptible cooling in the housing market and a jump in the number of homes for sale, Bay Area real estate agents find they must do something they haven't done in years: sell."

"Sales, meanwhile, have slumped 26 percent and 14 percent for single-family homes and condos, respectively, between September 2004 and September 2005."

"In Marin County, a similar report by Nielsen, an agent at ReMax, found prices have dipped 3 percent for single-family homes between the second and third quarters of this year."

"But neither does the market appear to be in the midst of a typical seasonal slowdown."

"At a weekly meeting of about 50 Prudential San Francisco sales agents last week at Fort Mason, several said they had been involved in transactions in the last month in which a property had changed hands at or -- gasp -- below the asking price. Later in the hour, some agents even questioned the long-practiced strategy of listing a property far below the desired sale price, much as shark hunters throw bloody chum in the water to incite a feeding frenzy."

""Sellers are sometimes the last to know," said Bodnar. "They think they're still going to get 20 percent or 30 percent over (the asking price), but now they may find that offer dates are coming and going with no offers.""

"Many new agents who flocked into the industry after the technology crash face the first "normal" market they've ever seen, Bodnar added."

Sonoma's RE Market Stumbles

Sonoma County's real estate market is starting to get hit hard. This is not too surprising. Outlying areas get hit first and hard as there are more investment properties on the fringe. As the bubble contracts the effects move inward. Watch out Marin! I've got my popcorn and a comfy seat in preparation for the show.

Some choice quotes:

"Sonoma County's housing market is slowing after a record run."

"Price reductions and seller concessions, listings languishing on the market and buyers negotiating better terms are signs the housing market has cooled after a sizzling three-year home buying binge."

"The extent of the sales slowdown and flattening prices show the shift in the real estate market goes beyond the seasonal swing that happens almost every autumn."

"Inventory is at a three-year high. Homes are taking five weeks on average to sell, compared with three weeks a year ago."

"It means sellers have to be more competitive. I think stubborn sellers might believe that their particular property is golden and is going to sell higher than the last one that sold down the block. If they really want to move their property, they're going to have to change their thinking."

"While home prices continue rising rapidly in California's interior, appreciation has slowed in Sonoma County, the Bay Area and other high-cost coastal regions."

"There is a key difference in that the median prices have been moving up a lot more quickly compared with the state as a whole," said Robert Kleinhenz, deputy chief economist for the California Association of Realtors. "It becomes increasingly difficult for the typical household to buy, especially to do the trade-up purchases that have been such a big part of the market."

"Only 7 percent of Sonoma County households were able to afford a median-priced home in August, down from 13 percent a year ago. Statewide, affordability dropped to 14 percent from 18 percent, according to the association."

"Rising interest rates contribute to making it more difficult for households to buy a home."

Latest from The Marin Real Estate Report

We bubble watchers here in Marin I am sure are all well aware of The West Bay Marin Real Estate Report. They are usually so obnoxiously bullish. Last year there was an interview with the head dude there. He was asked by a RE sceptic whether he really thought the typical house in Marin was really worth the astronomically high price tag. Naturally, he wholeheartedly said "yes". I wish I could locate that interview for you; in retrospect, it was a classic as they are eating their words now. But lately they've been changing their tune. This month's report has some very bearish statements and says things that I am not proud of.

Some choice quotes:

"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."

"Of the 3,500 homes sold past 12 months, 2,327, or 2/3 were below $1m. Rising prices is rapidly drying this market segment up, and we have finally priced ourselves out of the entry-level market."

"The median price of single-family homes peaked in July at $1,033,500 and has fallen each month since."

That last statement is incorrect. The peak of $1.0335 million was in June, not July. So prices have declined each month since then.

It Was Just an Illusion On Paper

Mortgage rates are rising. Cheap mortgages are history. Thank goodness. Maybe sanity will finally outpace hubris.

Some choice quotes:

""The era of cheap mortgages finally ended yesterday. After fueling one of the most free-spending decades on record, the cheap, fixed-rate mortgage jumped virtually overnight from its historic 40-year lows to root permanently beyond the psychologically important 6 percent level yesterday, where economists believe it will keep rising dramatically."

""The new jump in mortgage costs, when combined with weaker incomes, the national deficit, skyrocketing energy prices and overpriced houses, are driving a stake into the housing bubble, analysts say."

""People had felt rich but they're seeing now that they aren't, it was just an illusion on paper,' Johnson said.""

""Peter Schiff (said), 'We've been living in this fantasy bubble for too long. People are going to find out their pensions and homes aren't worth what they thought.'""

Don't Worry, I've Got an Angle

This is nothing new for us "bubbleheads" or folks who have "seen this all before", but it's a good article to put on the record anyway.

* * *

People keep saying that these interest-only loans, etc., are no problem because they plan to just keep refinancing when their payments convert. Yeah, right, whatever you say. This LA Times article makes clear how such vaguely formulated plans have a way of not turning out as anticipated and may in all likelihood worsen a housing decline.

Some choice quotes:

"Even though he had no steady income, the 33-year-old computer consultant and his wife were able to purchase a $416,000 house in Los Angeles’ San Fernando Valley two years ago using an “interest-only” mortgage that guarantees low monthly payments for the first five years. After that, Wolynez’s payments could rise sharply – making him a prime candidate for default or, even worse, foreclosure."

"But like many financially stretched home buyers, Wolynez has a way out: He plans to refinance before his payments balloon"

"For many recent home buyers, it’s become a nerve-racking fact of life knowing that their term for paying a reasonable monthly payment will be short-lived – unless they change loans."

"The necessity to refinance complicates the calculus of whether Southern California’s housing market is vulnerable to a downturn. Federal Reserve Chairman Alan Greenspan warned last month that “exotic” loans could subject borrowers and lenders to “significant losses” if home prices fell."

"Over time, repeated refinancings could increase the risks of a more severe slump. Already, many fear that homeowners with interest-only mortgages will find themselves “underwater” – owing more than their homes are worth – if prices soften. For the borrower who has refinanced repeatedly, the amount of the debt is likely to be even greater, particularly for those who converted their equity into cash with each new loan or who have paid little or no principal."

"But lately, interest rates have ticked higher and there are indications that lenders are starting to tighten requirements, which would make it more difficult for highly indebted homeowners to refinance. Homeowners feeling pressure to find new loans may have no choice but to do so on less favorable terms."

"“I don’t think refinancing is something people should be doing frequently,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “In a falling interest-rate environment you may be saving enough to make it worthwhile. But the mortgage could go bad in the future and, in a higher-rate environment, there may not be a loan to bail you out.”"

Of Bubbles Past II

Over at FinancialSense.com there is a comparison of the things people were saying before, during, and after the stock market crash of 1929 with what's been going on recently since about 1996; it has some rather nice charts. This is, of course, in general relevant to today's housing bubble and is particularly relevant for Marin as San Francisco is a financial center of the US after New York city.

Marin Address Pricing History

I was having an on-line discussion with a fellow blog reader and he suggested that this blog should have an entry where people who track the pricing history of specific Marin addresses can post their observations. So here it is; this is the place.

For example, if you have been watching the pricing history of, say, 123 Somewhere St., SomeMarinTown, CA 9494x, then this is the place to post your observations.

Other than basic common courtesy and human decency, etc., there are only two rules: 1) be on-topic, 2) no trolls. Unlike all other posts on this blog, off-topic posts in this category will get deleted.

This could prove to be both very interesting and informative. It's up to you, the three readers ;)

Thanks,

Marinite

Mass Denial and Complacency

According to a recent survey conducted by RBC Capital Markets (Royal Bank of Canada), most people expect real estate to continue appreciating and believe that rising RE appreciation has not affected their spending habits despite the fact that the economic data says otherwise. The people at RBC Capital Markets are clearly worried and justifiably so.

The only word I can use to describe this level of complacency and lack of self-awareness is "shocking".

Some choice quotes:

"Despite fears in the marketplace about a U.S. housing bubble, about 60 percent of homeowners expect the value of their homes to increase by at least 5 percent annually during the next several years, according to an online survey of 1,001 American consumers."

"...24 percent of respondents said they expect annualized gains of 10 percent or more over the next few years. About 3 percent of respondents said they expect their home values to decline over the next few years."

"...about 10 percent of the respondents said rising home values have affected their spending habits. And over half of those surveyed disagreed with the notion that real estate gains impacted their spending even though 51 percent either sold their home or borrowed against their home equity in some fashion."

""Not only are most people expecting big real estate gains to continue, the vast majority of people don't believe these gains have impacted their spending. These opinions run contrary to most data in the marketplace regarding the real estate wealth effect," said Scot Ciccarelli, managing director of equity research for RBC Capital Markets."

""We believe these findings raise a major question. In our minds, the question is whether people have spent more freely than they otherwise would have because of their real estate gains and don't even recognize it. If that's the case, a simple slowing of real estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns.""

""This outlook seems to cut to the heart of the American consumer. People seem to be conscious of the macroeconomic headwinds facing them like rising energy prices, the war on terror, and the growing federal deficit and the impact it can have on others. However, they are less inclined to believe they can be affected by these same factors."

Add on top of that rising energy prices which are here to stay, increased regulation on loose lending practices, the new bankruptcy and credit laws, a higher rate of inflation than what has been previously acknowledged, rising mortgage rates, and we have some interesting times ahead to say the least. I'd hate to be a debtor now.

Marin County House Price Adjusted by Income for the Years 1969 to 2004

The following graph plots the ratio of the average price of a house and per capita income for Marin County for the years spanning 1969 to 2004, inclusive. The green line shows the upper bound while the red line shows the lower bound.

(Click on the image for a larger view.)

This ratio (price/income) is basically a measure of housing affordability in Marin; the larger the ratio, the less affordable.

Just for fun... given the mean income of the average Marin resident as of 2004 (the last year for which I have complete data), how far would house prices need to fall so as to achieve maximum affordability based on the historical trend line for Marin (the red line)? Well, the calculated price/income ratio of roughly 13.1 for 2004 corresponds to a projected maximum affordability ratio of about 9.25 on that red line. To achieve that point the average house price in Marin would have to drop by approximately 30%.