housing crash

http://piggington.com/

"2.8.05 - Population Out-Migration, Pundit Desperation

Our beloved Union-Tribune today ran an article concerning the fact that, for the first time since the mid-90s, San Diego County experienced a net out-migration from July 2003 to July 2004 (in other words, during that period, more people moved out to other parts of the country than moved in from other parts of the country).

This actually is a bit of a non-event, real estate market-wise. As I've noted many times, San Diego's real estate runup has had very little to do with population growth and everything to do with easy mortgage credit and manic levels of homebuyer optimism. Whether people are moving into or out of San Diego is just not very relevant, because that's not what this market is about. In fact, it is interesting to note that the market reached its very hottest at a time when San Diego had been experiencing a net out-migration for almost a year!

While not interesting from a timing perspective, this data point is just one more nail in the coffin of the ubiquitous "everyone wants to live in San Diego" thesis, which postulates that home prices will forever continue to grow ten times faster than local wages because San Diego has nice weather.

As a matter of fact, the most interesting thing about the UT article is the complete lack of understanding on the part of anyone interviewed as to what is actually going on. For instance, a "senior demographer" with the San Diego Association of Governments is quoted as saying that the out-migration will only get worse "because the housing prices aren't going down"--as if home prices will just keep rising forever even as everyone moves out of San Diego, until there is just one guy left who's living in a really, really expensive house. Yes, it's true that home prices have recently gone up even despite out-migration, but to maintain that this trend will continue ad infinitum is absurd. Someday fundamentals will matter again, as they always eventually do.

Later in the article, an economist with a local real estate advisory firm is quoted as flatly denying that the population data is even correct! This gentleman notes that 65,000 homes were sold in San Diego country last year, and posits that "you can't do that based on an out-migration pattern." I can't even begin to respond to such overt and desperate denial of the facts. I'm just stunned."
 
Quote from vitajex:

http://www.nytimes.com/2005/02/03/garden/03turf.html

Condo Fever Turns Buyers Into Early Birds
By MOTOKO RICH

ANGELINA UMANSKY, a 39-year-old spa owner from San Francisco, was visiting a friend in Miami two weeks ago when she heard about a new condo development downtown. Hoping to find a vacation home, but worried that others were interested, too, Ms. Umansky arrived at the sales office at 8 a.m. the day after seeing some model units.

About 50 other buyers were already in line. Two hours later, a sales agent summoned her and said she had four minutes to decide which unit to buy. She acted fast, offering $350,000 for a two-bedroom, two-bathroom unit.

Ms. Umansky thinks she got a bargain; when she called on behalf of a friend less than eight hours later, she was told the asking price on a unit like hers had climbed to $380,000, a nearly 9 percent price increase.........................
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scary. When the retail media is awash with such stories regarding a market, usually is sign of being near a top. How will cascading mortgage defaults, along with the twin deficits, effect the economy in the long run?
 
Quote from mhashe:

scary. When the retail media is awash with such stories regarding a market, usually is sign of being near a top. How will cascading mortgage defaults, along with the twin deficits, effect the economy in the long run?
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Yes but ... with yield curves in UK, Aus, NZ already inverted we may get a recession BEFORE inflation gets a strong foothold. that would send rates down to new lows and set up the mother of all rallies in commodities. It will be interesting anyway ...
 
Quote from BlueHorseshoe:

Yes but ... with yield curves in UK, Aus, NZ already inverted we may get a recession BEFORE inflation gets a strong foothold. that would send rates down to new lows and set up the mother of all rallies in commodities. It will be interesting anyway ...
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Which commodities do you think will benefit the most?
 
Quote from mtzianos:

Which commodities do you think will benefit the most?
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Ask me when we get there 。。。

I will be looking first at energies, and then metals w/ major industrial demand, like copper.
 
Interesting chart showing builders might be peak building the maximum number of new homes at precisely the wrong time, and further shows that we have now reached the historical time where the legs could be taken out from the builders and the home market and a correction could begin.

Of course Greenie could still huff and puff until....? But once everyone has bought a house that can sign and has a pulse, should he bother to keep pulling the strings any longer?

http://www.gold-eagle.com/editorials_05/bangalore020305.html

bangalore020305c.gif



http://yahoo.reuters.com/financeQuo...tfh39609_2005-02-11_16-59-07_n2b529237_newsml

RESEARCH ALERT-Smith Barney cuts six home builder stocks
Fri Feb 11, 2005 11:59 AM ET
NEW YORK, Feb 11 (Reuters) - Smith Barney analyst Steve Kim on Friday downgraded six home builders to "hold" from "buy," saying he doubts the recent run-up in the sector will translate into higher valuations.

"It is important to note that this is our first home builder downgrade in over three years," he wrote in a research note.

Kim cut the shares of Beazer Homes USA Inc. (BZH.N: Quote, Profile, Research) , Hovnanian Enterprises Inc. (HOV.N: Quote, Profile, Research) , KB Home (KBH.N: Quote, Profile, Research) , Pulte Homes Inc. (PHM.N: Quote, Profile, Research) , Ryland Group Inc. (RYL.N: Quote, Profile, Research) , and Toll Brothers Inc. (TOL.N: Quote, Profile, Research) .


© Reuters 2005. All Rights Reserved.
 
even if home prices stabilized at these levels rather than dropping, homebuilder profits will decline. the cheap dirt has been developed and sold, when the rurn comes, they will be carrying expensive dirt with dropping home prices -

developers get paid to develope, and thats just what they will do, try and build their way out. it didnt work last time, it liekly wont this time either
 
Nothign in the past real estate booms has mattered except the type of mortgage variable vs fixed and how leveraged they were for the next property to flip.
This time variable rates are a problem and speculation is pretty heavy especially in vacation second homes areas , mountains ,beach ,etc.
I don't know when but the current pricing in house stock in many areas in this country will not be sustained. Don't be long unless you are planning on living in it with no mortage or a fixed rate. My two cents.
 
http://www.palmbeachpost.com/news/content/news/epaper/2005/02/13/m1a_house_prices_0213.html

BEHIND THE HOUSING BOOM
Buyers can be wealthy . . . or just savvy
More people are financing big houses with new loan options such as interest-only mortgages. They're banking on fast profit, not future security.

By Barbara Marshall

Palm Beach Post Staff Writer

Sunday, February 13, 2005

Since 1999, median home prices in Palm Beach County have skyrocketed 125 percent (to $301,000) while median family income has risen only 6 percent (to $57,000).

That begs the question: Who is buying all these expensive homes?

"A house at $500,000 or even $800,000 is not even considered extremely high anymore," said Brad Hunter, an economist with Metrostudy, a West Palm Beach-based housing consultant. "Five or six years ago, that was filthy rich."

But houses costing $500,000 or more are now common, especially in the many new developments along the State Road 7 corridor such as Olympia and Versailles in Wellington, in north county developments like Abacoa and with older homes in coveted neighborhoods along the coast.

"$500,000 is where the new upper median has moved," said Randy Bianchi, co-owner of Paradise Properties in West Palm Beach.

Developers and agents say most buyers in this price range fall into one of three camps.

Many are retirees who come bearing cash they made when they sold their homes in booming markets in the Northeast.

"Our clientele is not really Floridians," said Monica Gorban, sales manager at Versailles, where homes started around $300,000 four years ago but now sell for $700,000 to $2 million. "The majority of our buyers are from the North."

Some are locals with good jobs who traded up when housing prices exploded.

"We get a lot of two-income families, where one of them is a doctor or a lawyer," said Mike Brown, director of marketing for DiVosta homes, the developer of Abacoa, where homes are priced from $400,000 to more than $600,000.

And some are among a new breed of homeowner who has been capitalizing on creative mortgage options and Florida's unstoppable real estate market for years to leap-frog into ever-more luxurious digs.

Dave Adeimy and Raul Puente count themselves among the latter.

Ordinarily, a guy who earns $35,000 a year cleaning driveways couldn't afford real estate worth $800,000. But Adeimy, a West Palm Beach native, and his girlfriend, Wanda Stan, a secretary, have mastered the real estate game.

Two years ago, they sold their modest homes and used the profits to buy new houses at preconstruction prices. One is a townhouse in Abacoa purchased for $240,000.

"It was the last one and the salesperson said, 'We've got a doctor waiting to buy it, but he's still in surgery,' " said Adeimy. "I said, 'Here's my money right now.' "

They are also building a house in Abacoa. When it's finished this fall, they expect to pay for most of it in cash.

The money will come from $115,000 in profits made last month from selling a Palm Beach Gardens house purchased at preconstruction prices. They expect to pocket another $160,000 from selling the townhouse, whose value has appreciated to $400,000.

Frosting those yeasty investments is the fact that Adeimy's unfinished Abacoa home went up $70,000 in value before the foundation was poured.

Meanwhile, Puente, a low-income housing builder, traded up from a $149,000 house in Royal Palm Beach to a $360,000 house in Wellington. When he sold that one for $500,000, he put the equity down on his current residence ? a $1.3 million mansion in Wellington.

And he did it all in five years.

When it's NOT

the principal of the thing

Used to be, the goal of home ownership was to . . . well, own the house. But for homeowners like Adeimy, Stan and Puente, the object of owning a house is to sell it ? after holding it just long enough for its value to increase.

Puente now has an $800,000 mortgage, but he's not worried. Thanks to new mortgage options, his monthly payment is the same as it was on his previous $300,000 loan.

"People who buy big homes don't use regular 30-year fixed(-rate) mortgages. The payments are just too high," said Rob McElroy, president of Boca Raton-based Family First Mortgage. "There are much better alternatives."

The most popular of those alternatives is the interest-only loan, an adjustable rate mortgages with an introductory low-payment period, typically of five years.

While the interest-only feature is in effect, 100 percent of the buyer's mortgage payment goes toward interest; nothing is applied to principal. Since interest-only loan rates also run about 1 percentage point lower than fixed-rate loans, the result is a significantly lower initial mortgage payment.

For example, the monthly principal and interest payment on a $500,000 fixed-rate mortgage at 6 percent is $2,998. The interest-only payment on the same amount at 5 percent is $2,083.

A related product, the deferred-interest or negative-amortization loan, reduces initial payments even more by letting borrowers pay only part of the interest they owe. These loans offer initial "teaser" rates as low as 1 percent, several points below the true rate of the loan.

The difference between the teaser rate and the true rate is added to your principal, so while the loan is in its deferred-interest phase, borrowers are actually going deeper into debt despite making regular payments.

Payments increase monthly with such loans and balloon after a few years, but many buyers don't care because they can get into a lot of house for very little money, at least to start. On a $500,000 deferred-interest loan at 1 percent, the first month's payment is just $417.

No similar magic can alleviate property taxes, which average about 2 percent of the purchase price (or $792 a month on a $500,000 home), but interest-only mortgages can soften the blow of trading up and are a major reason so many people are suddenly buying so much house.

Or, in the case of Jamey and Gregg Ackerman, so many houses.

Interest-only loans allow the Wellington residents to own four luxury homes: one in Lake Worth's Winston Trails community; and one each in the Wellington subdivisions of Olympia, Versailles and their current residence, The Isles at Wellington.

Renters cover the bare-bones mortgage payments, while the Ackermans sit back and let Palm Beach County's surging housing market make them rich, at least on paper.

"We paid $379,000 for the Olympia house, and it's valued at $740,000," said Gregg, who works in Muvico's Fort Lauderdale office. "The Versailles house was $408,000, and it's now worth $710,000."

Like most interest-only borrowers, the Ackermans intend to sell their homes before their loans' five-year, interest-only periods end. That's when payments balloon to make up for the delay in chipping away at the principal.

Risky business

For disciplined, savvy buyers, creative financing options like interest-only and deferred-interest loans can be wealth-building tools, allowing them to hop from middle-class bungalow to gated country club community to McMansion in five or six years.

Financial experts warn, however, that such loans can be fiscal suicide for those on fixed incomes or borrowers who can't qualify for a conventional mortgage.

Because of their misleadingly low initial rates and their potential to increase debt quickly, deferred-interest loans in particular are considered so risky that many lenders refuse to write them. Analysts say they should be used only by people who have a specific, short-term goal, such as a renovator who plans to sell in six months when remodeling is completed.

But all forms of pay-later loans carry risk because they force borrowers to rely on increasing property values to offset their lack of old-fashioned, pay-down-the-principal security.

If home prices continue to rise, owners can sell at potentially huge profits in a few years without paying a penny toward principal. But if appreciation slows or mortgage rates go up ? or both ? they might find themselves facing two unpleasant options: Sell low, or deal with a skyrocketing payment.

Many feel it's a risk they have to take. According to a recent study by the Florida Housing Data Clearinghouse at the University of Florida, more than 32,000 county residents are already in over their heads, paying more than 50 percent of their income for housing.

At the same time, Americans are further in debt. In 1981, Americans saved 11 percent of their incomes, on average. Today, the average American saves nothing. Meanwhile, credit-card debt has climbed from 4 percent of income to 12 percent. Middle-class families' credit-card debt load increased 75 percent in the 1990s. Personal bankruptcies reached an all-time high of 1.6 million a year in 2002.

Experts say all fixed debts, including housing, car payments and credit cards, should not exceed 45 percent of income, but the county's critical shortage of affordable housing is tempting middle- and low-income buyers to sign up for high-risk mortgages before prices increase further.

"First-time buyers are saying, 'Wow, if I don't buy today, I'll never have the chance.' They're running up their credit cards to make downpayments," said Metrostudy's Hunter.
 
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