Real Estate Crash thread

**Core Shot** · 09-17-2006, 05:38 AM

Interesting data frm Comstock funds
http://www.comstockfunds.com/index.c...menugroup=Home

The Hard Landing For Housing is Already Here

September 14, 2006

The market is suddenly assuming that since energy prices are declining and mortgage rates are drifting down, consumer spending will pick up and the housing industry decline will end. In our view this outcome is highly unlikely. Our negative outlook for consumer spending is based far more on the end of the housing boom than it is on high oil prices. In turn, it is now evident that housing is already undergoing a hard landing that can’t be cured by a downturn in mortgage rates, and that the situation is likely to worsen. Here are some facts to consider.

32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000

43% of first-time home buyers in 2005 put no money down.

15.2% of 2005 home buyers owe at least 10% more than their home is worth.

10% of all home owners have no equity in their homes

$2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.
Ø
Homeowners face higher payments as mortgages are reset. Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.
Ø
According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.
Ø
The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.
New home sales are down 22% and existing home sales down 11%.Ø
The NASB housing market index has recorded an all-time decline.
Ø
The housing affordability index is at a 15-year low.
Ø
The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.Ø
The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.
Ø
According to the NAR the year-to year prices of existing homes are now flat. A short time ago they were rising at a yearly rate of 16%.
Ø
Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.
Ø
Sales incentives are now estimated at 3% to 7% of selling prices.

**powwow/asap** · 09-17-2006, 12:46 PM

I just got my house I have yet to close on appraised.99thousand askin price.125 thousand appraisal value.Crash?? not in my neck o woods.The old omage of location,location,bla,bla.Good resort property near a snowbelt out west probably will do nothing but appreciate.Thats all its been doin for 15 years plus.But Detroit thats a world away from unknown Idaho.

**Core Shot** · 09-18-2006, 04:44 AM

Originally Posted by powwow/asap

Good resort property near a snowbelt out west probably will do nothing but appreciate.Thats all its been doin for 15 years plus.

Nice mantra.
Good luck with that.

The real problem lies in the word "resort"
In order for your values to hold, you need yuppies believing in the economy and continuing to buy 2nd homes.
If they ever lose faith in the second home market and their jobs and the economy, lookout below.

Personally, I think you are fine for now, but never say "never"

**ANON-505** · 09-18-2006, 09:43 PM

okay, I'm not going to read through the previous seven pages which totally makes me a dick. But, I'm lazy and it's time for bed.

my theory:

More and more businesses are encouraging employees to work from home. The very idea of an office environment is changing as workers are able to complete all of their tasks from their kitchen, while employers don't have to pay for office space.

A side effect of this is that more people want to live in desirable locations, and less want to live everywhere else. I mean, if you're company was in cleveland, but you could work for them and live in Aspen...wouldn't you? So, property values in less desirable (aka places that suck) locations are dropping while at the same time property values are skyrocketing in nice places.

I live in Nothern NM, and it's absurd how expensive things are. We've definately seen a slight decrease in home prices, but mostly just in the homes over $600,000...houses less than $300k sell before they're even finished being built.

**Boomer28** · 09-19-2006, 07:40 AM

it's not widely published outside of the financial world, but some intersting stats from this week:

Homebuilder Confidence index plunges to 15 year low
Building permits fall to 4 year low
Housing Starts fall to 3+ year low

the hurt is coming...

**Tin Woodsman** · 09-19-2006, 08:15 AM

Originally Posted by ANON-505

okay, I'm not going to read through the previous seven pages which totally makes me a dick. But, I'm lazy and it's time for bed.

my theory:

More and more businesses are encouraging employees to work from home. The very idea of an office environment is changing as workers are able to complete all of their tasks from their kitchen, while employers don't have to pay for office space.

A side effect of this is that more people want to live in desirable locations, and less want to live everywhere else. I mean, if you're company was in cleveland, but you could work for them and live in Aspen...wouldn't you? So, property values in less desirable (aka places that suck) locations are dropping while at the same time property values are skyrocketing in nice places.

I live in Nothern NM, and it's absurd how expensive things are. We've definately seen a slight decrease in home prices, but mostly just in the homes over $600,000...houses less than $300k sell before they're even finished being built.

I presume you are pointing to this theory as evidence that there won't be a housing crash in those desirable places. That they are somehow "different". I point to several pieces of information which put the lie to that theory. First, this housing boom hasn't been about people moving en masse to the more desirable places to live. In fact, some of the most frothy housing markets have been in notorious shit boxes such as Sacramento, Bakersfield, and Fresno. Clearly, no one is moving there b/c they'd rather not live in Cleveland. Second, even the notion that those desirable places are somehow special is faulty to begin with. Many people would consider LA and NYC desirable places to live. Each city sees wave after wave of college grads and other young professionals moving in to try and make their fortune there each year. Yet, in just the last 20 years, both have experienced deep recessions in their housing markets, with reductions in home prices of 20-40%, and even more in some places.

Or look at Tokyo. It is the center of the Japanese universe. Anyone who wants to make it in Japan moves to Tokyo, as it is the political, financial, business, and cultural capital of Japan. And furthermore, they're not exactly dealing with a lot of open space in Japan either - a country with 110 million people the size of Montana. Yet real estate values there are currently 60-80% lower than they were during the big bubble of the late 80s and early 90s. Chew on that for a little while, then consider what drove that bubble - easy credit and lax or ill-advised lending standards. When you consider that a majority of mortgages in the hotter housing markets (California, PHX, Vegas, Florida, etc...) are interest-only or Option ARMs (lax lending), and that the US is just now emerging from the lowest interest rates seen in generations (easy credit), you begin to wonder what lies ahead. I'm not forecasting a Japanese style crash. But please don't trot out the "it's different here/this time" claptrap b/c it's not, and a lot of people are going to get hurt really badly. 2006 is just the beginning.

**mitch buchannon** · 09-19-2006, 09:06 AM

^^ I agree with much of this.

I've been thinking about what qualifies as 'lax lending'. Lenders wouldn't do it if it wasn't profitable, so perhaps it's not that relaxed? I certainly think margins are shrinking in the lending business, but for the larger houses (Lehman bros, DBank, et al.) there's still a spread.

Is the constant demand for bonds to hedge foreign exposure to the dollar keeping the rate market too attractive for the lenders?

Just pondering the nerdier banking side of things... who knows.

**Tin Woodsman** · 09-19-2006, 09:50 AM

Originally Posted by mitch buchannon

^^ I agree with much of this.

I've been thinking about what qualifies as 'lax lending'. Lenders wouldn't do it if it wasn't profitable, so perhaps it's not that relaxed? I certainly think margins are shrinking in the lending business, but for the larger houses (Lehman bros, DBank, et al.) there's still a spread.

Is the constant demand for bonds to hedge foreign exposure to the dollar keeping the rate market too attractive for the lenders?

Just pondering the nerdier banking side of things... who knows.

I'm not sure I understand the first half of your post. It is most definitely profitable for everyone in the lending value chain to keep things as is - realtors, appraisers, mortgage brokers, and lenders. They all get a cut when there is a transaction. With home values increasingly out of whack with median net income, the industry has had to use increasingly ingenious, and risky, ways of shoe-horning people into houses they really can't afford.

The apex of this trend is the increasing prevalence of I/O and Option ARM mortgages. They are great for everyone named above. For the realtors and appraisers, they enable the transaction to get done in the first place - otherwise the monthly payments would be too large (more onthis later). The mortgage brokers and lenders are doubly happy b/c the former gets a fatter commission for these types of products, while the latter happily pays this fatter commission b/c of the juicy margins these loans generate. And what do the lenders care about the loan anyway? They almost inevitably turn around and securitize this loan, along with a bunch of others, and sell them off to some hedge fund or insurance company.

The problem with all this is as follows - Traditionally (meaning, in all of US history prior to five years ago), people with $40,000-$50,000 household incomes wouldn't be eligible to take out $400,000-$500,000 mortages. Even at 5% interest, that's $20-25K per year in interest payments. Normally, you'd want your interest payments to represent only 1/4 of your gross income at most. In addition, as both a lender and a sane human being, you'd want to make a down payment of around 15-20% so as to immediately acquire some equity in the home and reduce the debt burden you are faced with. These days, 100% loan-to-value mortgages are quite common, even for people with lousy credit scores. When you combine this with the risky loans that will adjust dramatically upwards after a year or three, you've got a toxic recipe for the housing bubble blues. These loan products/trends are helping to drive this phenomenon b/c the borrowers focus only on the artificially low payments they need to make in the first 1-5 years and count on home price appreciation to bail them out of trouble when the ARM adjusts. There is a very good reason why these products have existed for decades but were, until recently, limited to only the very well off. Noting the general level of financial literacy in this country (we have a negative savings rate), one has to conclude that many people who sign up for these loans have no idea of what the consequences could be if the housing market flattens, let alone goes down.

**4matic** · 09-21-2006, 12:03 PM

4.65% today on the ten year note. Down 75 points in two months. I can see below 4% next year..

**LegoSkier** · 09-21-2006, 12:40 PM

As far as the "nice places" theory goes, there is also the fact that a lot of the action in those place is investment. Rich people buying second and third properties instead of putting it in the market because real estate offered better returns and you can even get a week or two ski vacation out of it and rent it out when you're not there. When that stops they will dump the properties like they dumped stock at the end of the dot com bubble. Money will just go to where it will make the most for its master.

**Core Shot** · 09-21-2006, 12:52 PM

Bwaaaa
Haaaaaa!

**divegirl** · 09-21-2006, 01:24 PM

Originally Posted by LegoSkier

When that stops they will dump the properties like they dumped stock at the end of the dot com bubble. Money will just go to where it will make the most for its master.

Yay!! And then we can actually buy a place about 4 years from now for cheap (relatively)!

**rideit** · 09-21-2006, 01:30 PM

Probably not.
As Global warming really strikes, the affluent will start heading to altitude...wealthy environmental refugees, if you will. We are starting to see it here...people selling out of L.A., N.Y., TX, N.O., etc, just to get away from the weather. This is a very real phenomenon, IMO.

**mitch buchannon** · 09-21-2006, 01:31 PM

Originally Posted by Tin Woodsman

They all get a cut when there is a transaction. With home values increasingly out of whack with median net income, the industry has had to use increasingly ingenious, and risky, ways of shoe-horning people into houses they really can't afford.

...They almost inevitably turn around and securitize this loan, along with a bunch of others, and sell them off to some hedge fund or insurance company.

The problem with all this is as follows...

I'm not disputing the fact that people are pretty much financially retarded and purchasing FAR too much house, but unless there's a reason for the lenders to stop offering these products, these products aren't going away. Banks are in it for the profit. When the housing values decline due to oversupply, the trusts of these securitized mortgages takes the loss, not the bank. The bank may indirectly suffer by enjoying smaller margins on the bonds that make up the trusts, but there's still a huge amount of bps in it for the issuer.

My point is that for the foreseeable future, there is no incentive for lenders to change their ways.

**assgasorgrass** · 09-21-2006, 02:24 PM

"In Truckee, Calif., about 15 miles north of Lake Tahoe, 67% of flippers lost money on their sales, the largest percentage of any metro area. Last winter's snowfall was nearly 40 feet, which may have caused some investors to think twice about the market."

**schindlerpiste** · 09-21-2006, 02:53 PM

On the other hand...I have a friend who was a scout for an NHL team. He just received a promotion to coach its AHL affilliate. He placed a sign outside of his home on Saturday. It sold on Sunday for the asking price. His house appreciated 55% in 6 years.

**Hutch** · 09-21-2006, 02:55 PM

Originally Posted by rideit

Probably not.
As Global warming really strikes, the affluent will start heading to altitude...wealthy environmental refugees, if you will. We are starting to see it here...people selling out of L.A., N.Y., TX, N.O., etc, just to get away from the weather. This is a very real phenomenon, IMO.

Not to mention all those rich Panamanians and Venezualans that will be moving to teton valley, right?

**rideit** · 09-21-2006, 02:56 PM

My contacts are Peruvian and Chilean...I'll have to work the Venezuelan angle.

**Hutch** · 09-21-2006, 03:06 PM

Its always nice to have a Peruvian connection.

**4matic** · 09-22-2006, 09:07 PM

As interest rates fall off a cliff.. The long term trend for lower rates is very powerful. Most pundits have been wrong and will continue to be wrong. Weakness in real estate prices will only fuel lower rates which will eventually support current high prices. A 10 or 20% pullback in extended markets? Sure.. that would be healthy and good to eliminate the weak hands. A crash. Not likely.

**Benny Profane** · 09-23-2006, 11:05 AM

http://www.nytimes.com/2006/09/24/realestate/24cov.html

"The increases have caught many homeowners in a “can’t pay, can’t sell, can’t refinance” vise, in which their ARM payments are outpacing their incomes and their homes have not appreciated enough to help cover the cost of a refinanced mortgage or to allow them to sell and walk away. For them, foreclosure looms."

**mr_gyptian** · 09-23-2006, 01:26 PM

Originally Posted by Benny Profane

http://www.nytimes.com/2006/09/24/realestate/24cov.html

"The increases have caught many homeowners in a “can’t pay, can’t sell, can’t refinance” vise, in which their ARM payments are outpacing their incomes and their homes have not appreciated enough to help cover the cost of a refinanced mortgage or to allow them to sell and walk away. For them, foreclosure looms."

This has gone past an attempt to prove a point. Is this some sort of anti-jinx?

**Benny Profane** · 09-23-2006, 06:23 PM

Hey, I'm obsessed, It's true. But just following it week by week. The psychology of it is the most fascinating thing to watch. Some like me have been waiting for it for 3 or 4 years, and many others are in various states of denial, either clueless or thinking the party is still on. I thought it would happen faster, but the rates actually dropping this year has slowed that. But it's still happening. And, I'm guessing, will be around for a long time, since this part is so slow.
I drove by a little development today that was built in late '04 and got gobbled up at way too high prices, with salespeople giving me attitude and rushing me when I looked. Today, I thought, poor suckers.