Friday, December 23, 2005

Some End of the Year News

Catching up on some news here. Nationally, new house sales plunge and the West coast has been hit the hardest:
New-home sales fell as mortgage rates reached three-year highs during November, reversing a surprise surge in another sign of housing sector cooling. Sales of single-family homes decreased 11.3% to a seasonally adjusted annual rate of 1.245 million, the Commerce Department said Friday. That was the largest drop since a 23.8% plunge in January 1994.

Commerce's report Friday showed new-home sales rose by 13.4% in the Northeast, but fell elsewhere, down 18.3% in the Midwest, 5.5% in the South and 22.1% in the West. The average price of a home decreased to $283,300, down from a revised $290,600 in October. The median price sank to $225,200 from a revised $234,800.

There were an estimated 503,000 homes for sale at the end of November, a record high. That represented a 4.9 months' supply at the current sales rate - the highest since 5.0 in December 1996. In October, an estimated 487,000 were for sale, a 4.2 months' inventor
And also here. Apparently the national price appreciation is only 0.3% which is much less than the rate of inflation (Fed stated or otherwise):
...analysts are forecasting sales will decline in 2006 as the housing boom quiets down. Analysts are looking for home sales to dip by around 6 percent next year under the impact of rising mortgage rates.

Some economists are worried that housing prices in some areas have been driven higher by a speculative frenzy that could see prices plunging as sales slow in the hottest markets. That scenario would evoke memories of the sharp declines that occurred when the stock market bubble burst in early 2000. But other economists contend that housing is unlikely to exhibit the same collapse that the stock market did although they believe that the declines in sales expected next year will act as a drag on the overall economy.

Some of that price moderation was evidenced in the November report, which showed that the median price of a new home sold was $225,200 last month. That was up just 0.3 percent from November 2004, the weakest year-over-year price change in two years.

By area of the country, sales were actually up by 13.4 percent in the Northeast, the biggest percentage increase in this region since January 1994. However, sales fell in all other areas, led by a 22.1 percent drop in the West, the biggest decline in this region since February 1995. Sales were down 18.3 percent in the Midwest and fell 5.5 percent in the South.
And the situation in California?
The median price of an existing home in California in November increased 16.2 percent and sales decreased 11.2 percent compared with the same period a year ago, the California Association of Realtors trade group reported today.

CAR's Unsold Inventory Index for existing, single-family detached homes in November 2005 was 3.9 months, compared with 2.8 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
And why is the housing market beginning its decline? Because no matter how you cut it, no matter how you write it off or otherwise try to explain it away, affordability is abysmally low which is a state of affairs that cannot be sustained even with "New Economy" or "New Era" thinking. If the supply of first-time buyers dries up then the market freezes up and even Marin cannot be immune to that.
Soaring house prices and higher mortgage rates have put homeownership out of reach for more people than at any time in more than a decade.

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.

Mortgage rates, though edging higher, are still relatively low by historical standards. And lenders have helped to offset declines in home affordability with creative mortgage products, such as interest-only loans, that allow borrowers to stretch into a more expensive home, while keeping their monthly payments down. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1 percent and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26 percent by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage, according to Moody's

But rising short-term interest rates are eroding the effectiveness of many such mortgages....and...have made many affordability mortgage products more expensive and the flow of new, creative mortgage products has begun to lose steam. On Tuesday, bank regulators proposed controls that would limit the mass marketing of some creative mortgage products.
Gosh! So the reason why people have been able to pay ridiculous prices is because the lenders are offering "exotic" loans? What happens when these things essentially go away (and here and here)?


Anonymous said...

Thanks for a great write up. This should all be obvious to everyone. I am hearing the RE industry doing great PR on this, but I am sure even many of them have or are unloading their own personal sites. Anyway, inventory is up and hey - it's the downcycle for inventory right now Nov-Jan.

Anonymous said...

Anyway, inventory is up and hey - it's the downcycle for inventory right now Nov-Jan. - outsider

I would hope so that it is a seasonal thing for the RE industry. Or the Fed finally succeeds in pricking the bubble by raising interest rates multiple times.

In the near future, caution is warranted for any types of investment. A change of guard at the Fed will occur in the coming spring. There have always been financial jitters when that happened. Therefore, be safe and prudent is my advice for next year.

Anonymous said...

Builder gets 2 years in mortgage fraud. Federal investigation showed conspiracies to inflate selling prices.
Smith pleaded guilty in September 2004 to three counts of mortgage fraud after a federal investigation showed that he and more than 12 real-estate professionals conspired to inflate the selling prices of homes in subdivisions near Lake Norman, north of Charlotte.

So, how much of this do you want to bet we see fall out of this bubble?

Anonymous said...

Judge baffled at loans made to Vero homeowner Lewis Barton.
VERO BEACH — A judge whose ruling could allow the foreclosure of Vero Beach businessman Lewis Barton's oceanside home said he is astonished Barton was able to obtain huge loans from banks despite his sketchy credit history and that he was facing a lawsuit over his home loan.
"I thought we learned from the savings and loan fiascos of the 1980s," Circuit Judge Robert Hawley said Thursday during the third day of the nonjury trial in the lawsuit by City First Mortgage Corp., which is seeking to foreclose on Barton's property because he allegedly defaulted on a $900,000 loan.

No sense robbing a bank with a gun. A loan application provides better results with less risk.