Are we headed for a mortgage default induced real estate crash?

Great Debates
21

It’s also worth remembering that housing bubbles are regionalized. Home values in Texas, where our friend bump lives, are not as over-inflated as ones in California, or heaven forbid, Washington DC. Fortune Magazine had an interesting article mid-year this year about how the markets were doing in 19 major metropolitan areas in the US. Homes in both Dallas and Houston were considered “fair price” homes.

Depending on your market you may still be fine to buy. Especially if you plan on making it your primary residence(versus as an investment or rental property) and can hold it for five years or so. I’d read economic sections of your local paper for more details and back it up with independent research against the local economic indicators rather than worry about a nationwide “bubble” bursting. People in CA, and DC will probably be hurting soon, especially those who are buying property as an investment, but homesteaders are at less risk as long as they don’t buy more than they can afford and make sure they understand the true costs(including ARM adjustments upwards) of the home they’re buying.

Enjoy,
Steven

22

[QUOTE=Voyager]
What appears to be happening is that buyers and sellers are playing chicken. Sellers who don’t have to sell are waiting until spring, when the market rebounds a bit, and buyers who don’t have to buy are waiting for the prices to drop. In our market the cards from the real estate agents with recent sales are coming less frequently with fewer sales on them, but the prices seem to be holding reasonably well. We’ll see in the spring.

[/quote]

Prices were very close to flat year-over-year for last month for the entire state. San Diego seems to have been the first area to be hit, and prices there are now down year-over-year after a couple years of gradual slowing of increase, then flat, and now down. My understanding is that actual statistical decreases in price lag behind the true state of the market. The boom has been generally considered to be over in San Diego for quite some time, but prices have only recently actually shown as negative year-over-year. I don’t think prices are holding; I think we’re just seeing the statistical lag. Homes are sitting on the market for month after month. Sellers are still in denial, and most are refusing to lower their asking prices below their fantasy of what they could have gotten last year. Foreclosures are up 362% year-over-year. Seems like something’s gotta give.

Of course I could be wrong. For the last 5 years, this crazy real-estate market has defied all logic.

23

House prices are a bit peculiar.
The true volume of houses traded is a small proportion of the overall stock

  • as such it is easy to create market volatility

In a high market people tend to ‘realize’ some of their assets by taking out additional loans or refinancing, but they are really just borrowing against income, their ‘asset’ is just security.

If there were a housing crunch, then only a small proportion of the population would really suffer - although a lot of people would be p/ssed off.

24

[QUOTE=lowbrass]
Prices were very close to flat year-over-year for last month for the entire state. San Diego seems to have been the first area to be hit, and prices there are now down year-over-year after a couple years of gradual slowing of increase, then flat, and now down. My understanding is that actual statistical decreases in price lag behind the true state of the market. The boom has been generally considered to be over in San Diego for quite some time, but prices have only recently actually shown as negative year-over-year. I don’t think prices are holding; I think we’re just seeing the statistical lag. Homes are sitting on the market for month after month. Sellers are still in denial, and most are refusing to lower their asking prices below their fantasy of what they could have gotten last year. Foreclosures are up 362% year-over-year. Seems like something’s gotta give.

[/QUOTE]

Markets are different. My unscientific survey of my neighborhood shows me that houses are staying on the market longer, but not month after months - except when the seller has unrealistic expectations. Both houses near me that got rennovated to be flipped seem to be going nowhere, and a woman who put her house on the market just to test it took it off. The real estate agents used to put Days on Market on their lists - I don’t remember seeing it on the last ones, but I’ll check the next one that shows up.

I live fairly close to the center of Silicon Valley. There was a big boom an hour or two out, for people who couldn’t afford to live close. I wonder how that market is - anyone know?

25

[QUOTE=Voyager]
Markets are different. My unscientific survey of my neighborhood shows me that houses are staying on the market longer, but not month after months - except when the seller has unrealistic expectations. Both houses near me that got rennovated to be flipped seem to be going nowhere, and a woman who put her house on the market just to test it took it off. The real estate agents used to put Days on Market on their lists - I don’t remember seeing it on the last ones, but I’ll check the next one that shows up.

I live fairly close to the center of Silicon Valley. There was a big boom an hour or two out, for people who couldn’t afford to live close. I wonder how that market is - anyone know?
[/QUOTE]

Well I’m in Southern California. The homes I’m tracking have mostly been on the market for many months and have not sold. That’s not scientific either, though. I don’t know how to get “days on market” info without being a realtor, but friends who are realtors tell me homes are staying on the market longer.

Santa Clara county is up 3%, but volume is down 22.9%. My gut instinct of how economics works is that if you have 22% less demand, that the price isn’t going to keep going up.

Some areas already have been hit pretty hard. Here are the worst ones:
(first % is volume, second % is median price, third % is high price, year-over-year for October)

Community Zip Sales % Chg Median$ % Chg High Price SqFt % Chg

Los Altos 94022 14 -22.2% $1,453,500 -14.6% $3,000,000 $718 -3.6%
Los Gatos 95033 9 -10.0% $529,000 -27.3% $1,235,000 $484 -1.8%
Milpitas 95035 72 -26.5% $612,500 -3.8% $1,175,000 $439 0.4%
Morgan Hill 95037 58 -1.7% $727,050 -7.4% $1,875,000 $413 7.5%
Palo Alto 94301 7 16.7% $1,050,000 -13.6% $1,910,000 $860 0.1%
San Jose 95110 18 -14.3% $475,000 -3.8% $781,500 $488 -7.0%
San Jose 95117 16 -38.5% $519,500 -21.6% $840,000 $521 -0.4%
San Jose 95119 9 -50.0% $660,000 -8.1% $865,000 $532 19.1%
San Jose 95121 48 -26.2% $610,000 -6.6% $1,260,000 $432 4.6%
San Jose 95125 67 -24.7% $739,000 -7.5% $1,810,000 $543 2.6%
San Jose 95131 34 -47.7% $575,000 -10.5% $845,000 $468 -0.7%
San Jose 95133 22 -56.0% $580,000 -10.7% $818,000 $482 21.2%
Santa Clara 95051 52 -7.1% $497,000 -23.5% $1,038,000 $513 -6.3%
Santa Clara 95054 26 -21.2% $643,000 -13.1% $1,425,000 $500 5.3%
Sunnyvale 94087 43 4.9% $768,000 -5.2% $1,205,000 $564 9.2%

Entire chart here: http://www.dqnews.com/ZIPSFC.shtm

26

[QUOTE=lowbrass]
Well I’m in Southern California. The homes I’m tracking have mostly been on the market for many months and have not sold. That’s not scientific either, though. I don’t know how to get “days on market” info without being a realtor, but friends who are realtors tell me homes are staying on the market longer.

Santa Clara county is up 3%, but volume is down 22.9%. My gut instinct of how economics works is that if you have 22% less demand, that the price isn’t going to keep going up.

Entire chart here: http://www.dqnews.com/ZIPSFC.shtm
[/QUOTE]

I live in Fremont (Alameda County) , and prices are all over the place


Fremont  	94536  	64  	-48.0%  	$628,250  	-3.0%  	$910,000  	$465  	3.1%
Fremont 	94538 	71 	10.9% 	$566,000 	-6.9% 	$1,025,000 	$503 	8.1%
Fremont 	94539 	37 	-32.7% 	$837,000 	16.3% 	$2,300,000 	$468 	-6.8%
Fremont 	94555 	32 	-38.5% 	$665,750 	0.9% 	$986,000 	$413 	-10.4%

It’s taking longer, but given the absurd increases in prices in house in the past few years, a 5% drop shouldn’t hurt anyone except those who have just bought and need to refinance. The employment picture around here has improved a lot in the past couple of years, which will help, as well as the runup in the stock market. So, I predict a small correction this spring, as sellers figure out they have to cut prices, but not a crash. We’ll see.

27

[QUOTE=Voyager]

It’s taking longer, but given the absurd increases in prices in house in the past few years, a 5% drop shouldn’t hurt anyone except those who have just bought and need to refinance. The employment picture around here has improved a lot in the past couple of years, which will help, as well as the runup in the stock market. So, I predict a small correction this spring, as sellers figure out they have to cut prices, but not a crash. We’ll see.
[/QUOTE]

Look at volume, though. Down 48% in one zip code. Doesn’t look good. I don’t know that a rising stock market will help the housing market. The reason people were investing in real estate was because they were scared off of the stock market. If people decide to go back to the stock market, they are going to take their money out of the real estate market, and it will be flooded with homes for sale.

28

[QUOTE=lowbrass]
Look at volume, though. Down 48% in one zip code. Doesn’t look good. I don’t know that a rising stock market will help the housing market. The reason people were investing in real estate was because they were scared off of the stock market. If people decide to go back to the stock market, they are going to take their money out of the real estate market, and it will be flooded with homes for sale.
[/QUOTE]

I’m not aware of a lot of investment per se, especially not in the zip with the 48% drop. There is a little bit, but most purchasers are coming based on location and school system. A year ago a lot of houses sold in a week, now a month or six weeks would be more likely. I’d have to work the numbers, but that could explain the decrease in sales. Every so often a block gets a lot of for sale signs, but I haven’t noticed a lot that couldn’t be explained by the increase in DoM.

Those who did buy for investment purposes, recently, are going to take a bath. That I agree with. That’s not a lot of people, and they are appealing to a high end market.

29

Where are you getting your data that houses are selling in a month to six weeks? I think it’s much longer than that. Also consider that affordability is extremely low. I think it might even be into the single digits now. The median price is so far out of line with the median income, it doesn’t make any sense. If only one out of ten people can afford to buy a home, it seems like something is going to change. It’ll be interesting to see what happens in the coming months.

30

I found some info. Although when I was looking for DOM info and I ran across this blog:

http://socalbubble.blogspot.com/2006/04/deceit-subterfuge-treachery.html

Not an objective source, of course, but according to this person, and if you read all the comments, it’s common for DOM to simply be “reset” to zero. That might explain why what you’re saying doesn’t jibe with my own experience in tracking listings in my area.

I couldn’t find Fremont, but this site says Hayward DOM was 72, so over ten weeks even if you assume it’s accurate and there hasn’t been any “resetting” trickery. Considering that houses were selling literally hours after being listed, I think that’s significant.

31

[QUOTE=lowbrass]
Where are you getting your data that houses are selling in a month to six weeks? I think it’s much longer than that. Also consider that affordability is extremely low. I think it might even be into the single digits now. The median price is so far out of line with the median income, it doesn’t make any sense. If only one out of ten people can afford to buy a home, it seems like something is going to change. It’ll be interesting to see what happens in the coming months.
[/QUOTE]

Like I said, the agents don’t seem to including DOMs on their fliers anymore. My perception is purely from observing the time between a sign goes up and the sign has an offer pending on it. That may be less than DoM - I don’t know when the clock stops.

I’m not discounting trickery - the house we bought ten years ago was taken off the market after the owners decided to do rennovations :confused: - good for us, since we got a good deal since it was not a hot house when it went back on. But agents around here are quite local, and I think too much trickery would get noticed, since a lot of people pay attention to what houses are for sale. Fremont (south of Hayward and higher class - bigger too) got mentioned as having the most people walking of any place in California, so an agent pulling that trick too often would get a bad reputation as the numbers on the newsletter don’t match the perceptions of the people who might list with her.

Home prices have been out of line with incomes for years now. Maybe my skepticism about a crash comes from expecting one and not having it happen. When the bubble burst, unemployment went up, and people stopped being able to buy with options I was sure we were going to see a correction - but prices kept on rising. That’s what I’ve never understood.

32

Hmm. CNN reports that foreclosures in Nevada in October '06 are up 557% over the same month last year. They also showed listed other states with triple digit increases.

33

All signs point to bubble burst, everyone is talking about a bubble burst - but that was also true half a decade ago.

34

[QUOTE=Capa84]
so as someone who is going to begin looking at homes soon,and buy one next year, and happens to be in a formerly hot real estate market that has cooled (Jacksonville, FL), should I sit tight til the end of next year? There is a glut of homes available here. As recently as 18months ago, people were pretty much listing a home and selling it in 1 week, tops…now they sit and sit.
[/QUOTE]

Really? I would love to find a 1920’s spanish revival manse on an acre grounds along the St. JOhns, for retirement purposes, you know. :wink:

You got it! and if they lose their security/income/job their ass is in a sling.

I predict the next housing boom will be small box, co housing and prefab communities. Next up rezoning single family maga manses into mutliple family dwellings. :wink:

35

[QUOTE=Malthus]
All signs point to bubble burst, everyone is talking about a bubble burst - but that was also true half a decade ago.
[/QUOTE]

Please explain. We weren’t seeing this level of foreclosures five years ago.

36

I agree mainly with China Guy’s double post above. I personally think people lie about income, and that the surveys are pretty inaccurate. However, that doesn’t really factor in my overall analysis (just my quick and dirty one). I would say that if a buyer/seller is in a bubble market (Southern Cali, D.C., Florida), then he would see large swings and bubble burts in that area. More stable regions will most likely see less/longer home turnover and static/slightly declining prices. However, bubble bursting in the housing market won’t be as overall serious as a true market crash, which is why I’m not expecting too much doom and gloom. We’re in a very strong economy now (at least in the US) with much stronger fundamentals than in the 90’s (e.g. our market is based on performance and efficiency and low costs), rather than the smoke and mirrors of internet and tech stocks. Also, interest rates are trending downward which means we don’t have to worry too much about inflation (market down with prices stable is much better than market down with increasing prices), and we have some room to grow. Unlike most of this board, I’m ok with borrowing. Our economy is large and sound enough, we can handle it.

37

[QUOTE=spoke-]
Please explain. We weren’t seeing this level of foreclosures five years ago.
[/QUOTE]

Certainly, things have changed over the last five years. I would agree that a market downturn is much more likely in some places, perhaps even overall.

I merely point out that many very cogent economic arguments were advanced half a decade ago as to why the housing market was in a bubble and prices were certain to fall. I remember this very distrinctly, as I was thinking of buying at the time and was told by everyone to wait for the market. :frowning:

38

[QUOTE=Malthus]

I merely point out that many very cogent economic arguments were advanced half a decade ago as to why the housing market was in a bubble and prices were certain to fall. I remember this very distrinctly, as I was thinking of buying at the time and was told by everyone to wait for the market. :frowning:
[/QUOTE]

But there seems to be a lot of evidence that low interest rates and crazy loans that allowed people to buy beyond their means have propped up the market and kept it going this long, and also that this housing market momentum has propped up the economy overall. So perhaps the fact that it didn’t fall yet means that in areas where there are bubbles, that the bubbles are that much more overinflated, and subject to that much more of a fall? Like if you’re blowing up a balloon, and you say, “Hey, it should have popped by now - I guess it never will; I’ll just keep blowing”.

Look at the tech market. It should have popped long before it did, but it kept going on sheer momentum. Then when it did pop, it was catastrophic. From what I understand, a lot of places don’t have prices that are too far out of line with fundamentals. But the volatile places might be a different story.

39

Still don’t know if I should buy now or not… Interest rates have ticked up, still historically fairly reasonable, but what about next couple years? Have managed to save up a fair amount of cash, more than enough for the traditional 20% down and 30 year fixed rate.

What happens to folks who default on their loans? In the 80’s, the midwest took a big dump, manufacturing jobs dried up, and a hell of a lot of folks just sent the bank their house keys and moved to Texas, or wherever. Doesn’t the bank hit the mortgage holder up for the difference? I’ve also read that if one has re-financed a loan, then this fundamentally changes the nature of the loan, and lenders can go after personal assets in the even of a default, which is not the case otherwise.

40

One thing about the ARM’s that I don’t think has been mentioned is that the amount that they can go up in a year as well as how much it can go up total is typically capped no matter how much interest rates increase. People’s payments are not going to suddenly double. When I refinanced a year ago the ARM that they were offering me couldn’t go up more than two points in a given year or five points over the life of the loan. I, of course, got a fixed rate loan though.