Housing "bubble" leaking?

[Crazy Cooter]

http://moneycentral.msn.com/content/P131154.asp
"You can see how the housing bubble is bursting in places like Columbus, Ohio, where builders and lenders threw common sense away and enticed people to buy homes they couldn't afford."

The Freddie Mac chairman said [in regards to "luxery homes"]:
http://www.usatoday.com/money/economy/housing/2005-09-29-syron-bubble_x.htm
"...the drop could be big enough to affect the overall economy as owners of pricey homes see their property values decline and become reluctant to spend on other items, like cars. "

That's the first I've seen where they're talking about declining value, not just a slow-down in appreciation.  Just wondering if anyone has started seeing any prices falling around their area?  As far as I can tell, nothing has changed around here.  Anyone have any links to actual figures on sales quantities/prices/location?

[Stingray]

My wife and I bought the five acres that we live on ten years ago. Recently we considered buying the propertry across the road, but they were asking more than double what we paid ten years ago. Personally I hope the property value goes down. I'd love to buy that lot, but no way am I paying what they want for it.

-S

[Harry Potter]

The hosing bubble has burst here in Melbourne a while back. People have now realised that paying $600,000 AUS for a crappy 2 bedroom house, 20 kms out of the city may be a bit excessive.

[ChadTower]

http://moneycentral.msn.com/content/P131154.asp
"You can see how the housing bubble is bursting in places like Columbus, Ohio, where builders and lenders threw common sense away and enticed people to buy homes they couldn't afford."

Yeah, people had to be bound, gagged, and threatened at gunpoint to buy property. 

[DarkKobold]

http://moneycentral.msn.com/content/P131154.asp
"You can see how the housing bubble is bursting in places like Columbus, Ohio, where builders and lenders threw common sense away and enticed people to buy homes they couldn't afford."

Yeah, people had to be bound, gagged, and threatened at gunpoint to buy property.

[ChadTower]

I didn't even read the article, I read his quote.

His quote says that it is the fault of the builders and lenders that the buyers spent too much money.

That is simply not true.

[shmokes]

When a lender puts someone in a home that the person cannot afford they are, indeed, throwing common sense away.  To a lesser degree, perhaps, if builders are building more luxury homes than the market demands (i.e., than there are people who can afford them) they are, indeed, throwing common sense away.

Lenders and builders both will be facing extremely tough times if the "housing bubble" really does turns out to be a bubble and bursts.  If it does it will be largely due to their own actions, overbuilding and overlending.  The guy said that they enticed people to buy homes that they couldn't afford, which obviously they have.

I think that you are just so sensitive about people wanting to pass blame and individual responsibility around that you read into things like this.  The quote doesn't sound to me like the guy is lamenting those poor ---daisies--- who got hoodwinked into a luxury home.  It sounds like he's saying that the lenders and builders are responsible for the mess they are likely about to find themselves in.  He's saying that they are individually responsible for their own mess.  If you think about it, you might find that it lines right up with your overly black and white view of personal responsibility.

[ChadTower]

When a lender puts someone in a home that the person cannot afford they are, indeed, throwing common sense away.

[Zakk]

Interest rates are still good here, so the market, while slowing somewhat, is still good.  Of course, here the average price for a 1400 sq/foot 2 level home is $200,000 CAN.  $300,000 gets you a 3000 sq/foot premiere builder's home on a good lot, while $600,000 gets you a 7000 sq/foot mansion in the hills.  Mind you, the square footage never includes the basement, so many homes have another 1000+ sq feet of living space on top of that!

Real estate is always cyclical.  It's good, then it's bad, then it's good again.  There's no way around the fact that property will appreciate in most areas since we have a growing population.  Look at what you pay in Hong Kong for real estate...there just isn't enough to go around!

[ChadTower]

Eastern MA is now officially among the top three most expensive housing markets in the US, and has risen the fastest among the top 5.

Yuck.  Damn glad I was able to get my little house somewhere along the line.  I bought in 2001 and could never afford what it would cost me today.

[menace]

Our bubble is still holding strong--out house listed in the 260-270 range (1900+sq ft) and now they go for 310-320 just 2 yrs later.

[shmokes]

I'm not saying that people were forced to buy homes.  I'm saying that lenders have been taking far more risk than they should, and that builders are building WAY above demand -- or rather that the demand is artificial and created largely by the irresponsible risk that lenders are taking.  When the people in these homes are forced into bankruptcy the lenders get screwed, the people who can't afford to be in the market will move back out of it and demand for new home construction will collapse. 

I'm not even hinting at borrowers somehow being victims here.  They overextended themselves and for that they will lose their house and destroy their credit.  But there are consequences for the industry for doing exactly what the quote said: enticing people to buy homes they can't afford.  If I walk into a Fararri dealership and am able to walk out with a car, there's a manager who is going to lose his job.  I will lose the car eventually and my credit will be shot, but that doesn't mean that the employee at the Fararri dealership is blameless.  He's not to blame for my woes.  He is to blame for his own.

Or not.  Maybe there is no bubble.

[Bones]

Property investment is a thing of the past. The economy has become unstable due to the state of the world and there is much to loose.

People would be best speaking with their lender and overextending themselves to invest in areas that offer maximum return such as bacon and pornography that features large breasted gals.

[RayB]

I'm not saying that people were forced to buy homes.

[MameJunkie]

The bubble is still holding here in S.Cal area. 

[ChadTower]

I'm not saying that people were forced to buy homes.  I'm saying that lenders have been taking far more risk than they should, and that builders are building WAY above demand -- or rather that the demand is artificial and created largely by the irresponsible risk that lenders are taking.  When the people in these homes are forced into bankruptcy the lenders get screwed, the people who can't afford to be in the market will move back out of it and demand for new home construction will collapse. 

How exactly do the lenders get screwed when they foreclose?

Buy house, finance $150k.  Three years later, foreclosure.  Seizure of house.  House is now worth $245k.

That's one hell of a profit in three years.  That's how it happens here in MA.

[geomartin]

     Actually the lenders will have a lot of explaining to do.  They threw common sense out the window as was said earlier.  When housing prices rose, they began to remove the safeguards that were in place to prevent people from buying more than they can afford.  They used to require 10-20 percent down, because if you couldn't save that much than you probably were not able to afford the house.  Interest only loans will probably wreak the most havoc.  When large groups of people are suddenly hit with the new payment after the initial interest only phase ends there are likely to be large amounts of foreclosures. 
     I know that when I bought my first house 15 years ago, the requirement of having 10 percent down saved me from buying something I couldn't afford.  Later after selling that house and putting almost 30 percent down on the new one it saved me in costly PMI insurance as well as guaranteed me lower interest rates from the lender because of my reduced risk.

[ChadTower]

Yeah, they threw out the safeguards that prevented people from keeping track of their own finances.  People were apparently no longer responsible for their own actions, and since they spent more than they could afford, the lenders are to blame. 

 

People never want to be responsible, they always want to blame someone else. 

[shmokes]

You're talking about foreclosures absent the bursting of the housing bubble that mass forclosures would trigger.  When all the people who suddenly entered the housing market, creating the artificial demand, are forced to exit the market supply will suddly skyrocket while demand disappears.  Lenders will be sitting on properties that they cannot offload and that are rapidly losing value.  Each property that cannot be sold represents an enormous amount of money that the lender has tied up in the property, but that isn't bringing in any income, and is actually sapping income as it depreciates.  Every dollar that goes into a house is a dollar that the bank can't use.  If the bank loans you $300,000 today and forcloses a year later and watches the house depreciate to $250,000 and still can't sell it, that's $300,000 they've already taken a $50,000 loss (minus your mortgage payments for a year), but also represents now $250,000 they have tied up in equity that is costing rather than making money for them.  Multiply that by a few thousand homes and you're going to see some lenders in pretty sad shape.

Maybe it's not a bubble, but if it is it is not going to be good for lenders.  And if it isn't, well, they're just lucky....it doesn't excuse their irresponsible lending practices.  Again, irresponsible because it sets them up for collapse, not because they are failing to protect the poor innoccent borrower.  My Fararri metaphor applies perfectly.  The manager doesn't deserve to be fired because he allowed me to make a bad financial decision that will damage my credit and get my car reposessed.  He deserves to get fired because he signed off on loaning me far more money than I could afford to pay back. 

[Havok]

You're talking about foreclosures absent the bursting of the housing bubble that mass forclosures would trigger.  When all the people who suddenly entered the housing market, creating the artificial demand, are forced to exit the market supply will suddly skyrocket while demand disappears.  Lenders will be sitting on properties that they cannot offload and that are rapidly losing value.  Each property that cannot be sold represents an enormous amount of money that the lender has tied up in the property, but that isn't bringing in any income, and is actually sapping income as it depreciates.  Every dollar that goes into a house is a dollar that the bank can't use.  If the bank loans you $300,000 today and forcloses a year later and watches the house depreciate to $250,000 and still can't sell it, that's $300,000 they've already taken a $50,000 loss (minus your mortgage payments for a year), but also represents now $250,000 they have tied up in equity that is costing rather than making money for them.  Multiply that by a few thousand homes and you're going to see some lenders in pretty sad shape.

Maybe it's not a bubble, but if it is it is not going to be good for lenders.  And if it isn't, well, they're just lucky....it doesn't excuse their irresponsible lending practices.  Again, irresponsible because it sets them up for collapse, not because they are failing to protect the poor innoccent borrower.  My Fararri metaphor applies perfectly.  The manager doesn't deserve to be fired because he allowed me to make a bad financial decision that will damage my credit and get my car reposessed.  He deserves to get fired because he signed off on loaning me far more money than I could afford to pay back. 

Not to mention ongoing costs like taxes and utilities - can't turn off the heat in the winter up north, for example. A house that was foreclosed on and not sold is a definite drain on the bank...

[Havok]

The bubble is still holding here in S.Cal area. 

Until you sink into the ocean...

 

[RayB]

I agree with your position Chad, but I also agree with the other point of view. Let's face it, most people expect to be hand-held through everything in life.

[geomartin]

     Chad, I'm not trying to absolve everyone of their respsonibilites in this.  However the lending institutions know very well that what they are doing is risky to both themselves and the borrower.  When I bought my new house in April, the lenders tried everything they could to get me to out spend, and to use some very creative financing.  I resisted, but I can see where most first time buyers wouldn't.  You go to the lender at an unfair disadvantage, who really has the ability to research all the fine print in a contract for home purchase?  They are supposed to be the experts, and your real estate agent is supposed to be on your side.  In truth however, the agent is in cahoots with the lender to get you to spend more than you wanted.  Especially if you let your agent recommend a lender.  Bottom line is you hire an agent to represent your best interests in a very large and confusing transaction, most times they are actually selling you down the river if you take their advice.
     Our agent managed to get us pre approved for roughly two-hundred thousand dollars more than what we knew we could afford.  She then tried to only show us houses that were in this new range.  I basically took it upon myself to make lists of houses that I wanted to see based on internet searches and made her make appointments to see them. 
     The main reason for buying a house in my opinion is not as an investment, but as a hedge against inflation.  If you stay put your house payment will stay the same while rents are rising.  That is why, against my agents recommendation, I reinvested all the money from my old house into the new house.  My house payment is still less than most people around me pay for rent.
     

[AtomSmasher]

I'm a real estate appraiser in the Los Angeles area and prices are still skyrocketing like crazy.  Its now been over two years since it started going like crazy and most (if not all) houses have more then doubled in value in that time around here.  I'm in the process of buying a new constuction house that is still 6 months from being finished, but if things keep going like they are then when its finished it will be worth $80-100 thousand more then I paid for it, and no that is not an exaggeration because I've been appraising pretty much every resale of the new constructions in the area and they've all sold for that much more then originally paid, and there is already a model match to mine, that was just finished, on the market for $30,000 more then I'm paying for mine.  This is my first ever real investment, but I think it will be a good one.

In my area at least, I don't believe there will be a bubble to burst, it will just level off and just go back to the usual slow increase in value like it did for several years before the skyrocketing of the past few years.

[shmokes]

Can anyone who doesn't think this is a bubble explain the sudden expansion to me?  Where did all the new demand suddenly come from?  People aren't making more money.  The demand increase is completely across the board so it's not like people are all leaving the cities into the suburbs.  Can anyone actually say why they are optimistic about the real estate market right now?  I'm not looking for, "People have been saying it's a bubble for two years now and it has only grown..." or, "Look at Santa Fe.  They had a real estate boom in 93 and it just levelled off.  I want actual reasons for believing that prices are not artificially high and that they are not set to drop down to realistic levels....reasons for believing that current prices are realistic and will remain that way.

I just can't help feeling like many people believe it is true merely because they want it to be true.

[TOK]

     Chad, I'm not trying to absolve everyone of their respsonibilites in this.  However the lending institutions know very well that what they are doing is risky to both themselves and the borrower.  When I bought my new house in April, the lenders tried everything they could to get me to out spend, and to use some very creative financing.  I resisted, but I can see where most first time buyers wouldn't.  You go to the lender at an unfair disadvantage, who really has the ability to research all the fine print in a contract for home purchase?  They are supposed to be the experts, and your real estate agent is supposed to be on your side.  In truth however, the agent is in cahoots with the lender to get you to spend more than you wanted.  Especially if you let your agent recommend a lender.  Bottom line is you hire an agent to represent your best interests in a very large and confusing transaction, most times they are actually selling you down the river if you take their advice.
     Our agent managed to get us pre approved for roughly two-hundred thousand dollars more than what we knew we could afford.  She then tried to only show us houses that were in this new range.  I basically took it upon myself to make lists of houses that I wanted to see based on internet searches and made her make appointments to see them. 
     The main reason for buying a house in my opinion is not as an investment, but as a hedge against inflation.  If you stay put your house payment will stay the same while rents are rising.  That is why, against my agents recommendation, I reinvested all the money from my old house into the new house.  My house payment is still less than most people around me pay for rent.
     

You don't start with an agents advice, a credit check or the fine print on a contract to figure out what you can afford, you start at your income.

I think an old guidline used to be that your mortgage should be around your 1 week gross pay. I imagine most people are a bit above that now, my wife and I managed to stay at that point by not buying over our heads despite what we were told. When we first started home shopping and saw an agent, I asked out of curiosity what our cap was. His reply was "The sky is the limit". Basically telling  us because of our strong credit and relatively low debt we could get any amount we wanted.

Thats a scary thought for someone who goes in ignorant about their finances and responsibilities, but I can't blame an agent for that. If you can't figure out the very basics of what you can afford on your own, you're not going to make it anyway.

[ChadTower]

Can anyone who doesn't think this is a bubble explain the sudden expansion to me?  Where did all the new demand suddenly come from?  People aren't making more money. 

The people who can afford the houses ARE making more money.  In 1998 I was making less than half of what I made last year.

I don't think it's artificial demand.  Decreasing supply + increasing population = high demand.  Throw in that most of the people in the new high salary bracket, the tech people, are clustered in very specific areas of the country.  That makes those already tightly packed areas that much harder to build on as well as find a reasonable house in.

There is a bubble, but it is far smaller than most people seem to think.  In my area, the property is not going to decrease much simply because the amount available is constantly shrinking.

[abrannan]

Can anyone who doesn't think this is a bubble explain the sudden expansion to me?  Where did all the new demand suddenly come from?  People aren't making more money.  The demand increase is completely across the board so it's not like people are all leaving the cities into the suburbs.  Can anyone actually say why they are optimistic about the real estate market right now?  I'm not looking for, "People have been saying it's a bubble for two years now and it has only grown..." or, "Look at Santa Fe.  They had a real estate boom in 93 and it just levelled off.  I want actual reasons for believing that prices are not artificially high and that they are not set to drop down to realistic levels....reasons for believing that current prices are realistic and will remain that way.

I just can't help feeling like many people believe it is true merely because they want it to be true.

The boom started with the slipping economy post dot-com boom being kicked while it was down with Sept. 11.  When the Feds bottomed out the interest rates, people could suddenly afford a much better house than previously since rates were 4% or more less than the mortgage they currently had.  This spurred a sudden swing in both new home buyers (who found they could now afford a house they'd have had to save another few years to get otherwise) and people looking to upgrade.  That sudden demand started prices shooting up in many areas, which spurred a whole new group of people looking to cash out on their now "overpriced" homes and move up.  Once that went on for a few years, people lost sight of history, and are looking only at the past 3 years of (in many areas) home prices increasing 30% or more each year.  Suddenly property looks like a much better investment (at 20+% each year) than Stocks or CDs.  The lenders, who make a killing on interest (and plenty on closing costs) get in the act with all manner of "creative" financing options designed to stretch you into the highest price house you can barely afford, ensuring you won't make any headway on the principal (gotta keep those interest payments high).  They also use fear tactics (the feds are gonna raise interest rates again, get in now before the rates rise!) to get people to buy earlier. 

[ChadTower]

Yeah, there is a LOT of gotta buy now before the interest rates go up and we can't afford it again going on here.

[Stingray]

The bubble is still holding here in S.Cal area. 

Until you sink into the ocean...

 

It won't sink, the bubble can serve as a flotation device in the event of a water landing.

-S

[ChadTower]

Not if Lex Luthor has anything to say about it.

[Setabs]

In my area its a supply and demand issue.  Prices in town are rising at a normal rate.  Houses 5 - 15 miles south of town are almost doubling because everyone is moving out that way.  Business's are moving south.   A new highway is being built south of town that connects to the interstate.

My in-laws own 13 acres that they bought for about 50,000 10 years ago.  Their neighbor is making a subdivision out of most of his land and getting 30 -50 thousand for .5 acres.

I have some friends that bought their house at 90,000 2 years ago that are trying to sell it for 130,000 just to make money off of it.  Funny thing is it's backfiring so far.  They've found a new house, lowered the price on their old house and still haven't sold it.  Whatever lender is going to give them a loan is just plain stupid.

[ChadTower]

Once they work in taxes, broker costs, etc, they're not going to make all that much, that's for sure.

It is insane in my area.  I could sell my house for $100,000 more than I paid in 2001.  Sometimes my wife and I talk about doing just that, moving to another state and buying a better house outright with that money.

[JoyMonkey]

10-foot-wide shed sells for $269,100 in Dublin

When it bursts in Ireland it's going to hurt.

I'm told it's not 'bursting' here in the US so much as it's slowly 'loosing steam'.

[ChadTower]

That's where my wife is from.  Her family still owns a tiny little house in the middle of Dublin.  For two generations it was the poor section, the little ghetto houses that no one wanted and you'd get two families living in 3 rooms.

Now, oh man, those little houses are solid gold, value wise.

[Avery]

His quote says that it is the fault of the builders and lenders that the buyers spent too much money.

That is simply not true.

When you are the guy handing out credit, part of your job is to make sure you're not handing out too much credit or credit to people who can't, or won't even try to pay you back.

Convincing someone who makes $50,000 to buy a home for a half-million and lending them money on an "interest only" loan is easily as shrewed a business investment as lending $500 to a guy who lives in the bushes behind the 7-11. 

[Stingray]

... easily as shrewed a business investment as lending $500 to a guy who lives in the bushes behind the 7-11. 

Crap, now you tell me. Maybe I can get my money back if he's still back there.

-S

[ChadTower]

That's the thing, they won't make that loan.

They make the loan where, if the guy eats ramen and drives a Yugo for the next 20 years, he can continue to make his payments.  Basically, the guy will have a job specifically to pay his mortgage and nothing else.  The guy can afford that house.

It's a really stupid thing, though, to put yourself in that much debt.  Just because the lender will give it to you doesn't mean you should take it.  It is up to the buyer to determine how much they can realistically pay, not the lender.

[Crazy Cooter]

A lot of people (lender & seller alike) have been working under the assumption they would gain 20%+ equity each year though.  That's the basis for the "interest only" loans and those other oddball types.  That makes the loan "safe" in their eyes.

Too bad it doesn't always work like that.

[ChadTower]

Equity has nothing at all to do with your mortgage payment, though.

What it boils down to is that the people who make bad financial decisions pay the price...