unlawflcombatnt

April Housing Starts were MUCH less than predicted. Though a slight increase had been predicted by the "experts," April Housing Starts actually declined significantly. April's 1.849 million annual rate is a decline of 7.4% from March's 1.996 million rate. This is the 3rd consecutive monthly decline in housing starts. The last 3 months' give a cumulative total change of -18%. This is the lowest number of Housing Starts in 17 months. (Briefing.com)
Though the Northeast and Midwest showed increases, these were more than offset by declines in both the South and the West. Below is a graphic representation of the decline in Housing Starts over the last year.


It is also interesting to note the large excess of new home completions vs. New Home Sales. March's annualized new home sale rate was 1.213 million. In contrast, March's annualized new home completion rate was 2.077 million. This is a surplus of new home completions of 864,000 per year.

For March, there were 194,000 new homes completed. In contrast, only 119,000 new homes were sold. This leaves an increase in surplus homes of 75,000 for the month of March alone. This can be seen from the charts below from the U.S. Census Bureau.

New Home Sales



This information can be found at the U.S.Census Bureau site at: http://www.census.gov/const/newressales.pdf


New Home Completions


This information can be found at the U.S.Census Bureau site at: http://www.census.gov/const/quarterly_sales.pdf

The supply of Existing Home is also increasing faster than sales. According to the National Association of Realtors, the supply of existing homes for sale has increased 37.5% since March of 2005.

With a supply of new and existing homes increasing faster than sales, there is nowhere for prices to go but down. And prices ARE declining. Median home prices declined 3.3% during the 1st quarter of 2006, according to CNNMoney article Real Estate Cools down. Median prices fell from $225,300 in the 4th quarter of 2005 down to $217,900 in the 1st quarter of 2006. This quarterly price decline of 3.3% follows a 1% decline during the 4th quarter of 2005, marking to consecutive quarterly price declines. Thus, median home prices have declined 4.3% in the last 6 months.

unlawflcombatnt

Elphaba

Unlaw, the housing bubble is of great concern to me so I appreciate this thread. One impression I have had over the years is that sales slow down in the first quarter, then pick up substantially when kids are out of school. A June to June comparison may tell a less grim story than we see so far this year.

Is anyone prognosticating expected sales for the next quarter?

kutulu

It sucks for people like me that bought several months ago but I have zero sympathy for asshole investors that buy houses and flip them for profit. They increased demand and therefore, prices while people like me are doing all we can to get into houses. Capital gains taxes should be MUCH higher for real estate purchases and extend for a period of at least 5 years (I'm not sure how long they go for).

There are plenty of ways to make money out there that people shouldn't have to mess with others' ability to buy a house. That is the net result of things, first time buyers get screwed.

Seaver

Everyone knew the bubble was going to burst, many people were surprised it lasted so long.

People will ALWAYS want to buy houses, the demand will never fade. It's the over-inflated prices caused by part time real estate investors who buy/sell wherever they can that causes the bubbles. They will take the largest hit by this, so I dont have much sympathy to be honest. However there are many people (my brother included) who simply wanted to own a house will suffer as a result.

Elphaba

Seaver, I agree with you and I would also give the lenders some responsibility for this. They got first time buyers into homes with very shaky mortgage conditions, such as variable rate, interest only payments. It's legal, but I wonder if it should be.

unlawflcombatnt

I completely and wholeheartedly agree with you on this. These investors have made it impossible for many people to buy homes at all. You're so right about capital gains taxes on real estate. I'm not sure about this, but my understanding is that they are much less than they are on capital gains in other areas.

Elphaba

The confluence of low interest rates and building opportunity created the building/selling spree. Kutulu, look closely at your remarks and then consider the axiom of "buyer beware." I am not singling out you or anyone else that got caught up in this spree of inflated home buying/building. Sometimes, if it looks too good to be true, it is. I am equally concerned, because my home equity depends on the perceived value of my property. Trust me when I say that it isn't only new home buyers that will be affected by this.

cyrnel

That so much can be based on home equity, it's not unlike buying stocks on margin.

I'm feeling it.

__________________
There are a vast number of people who are uninformed and heavily propagandized, but fundamentally decent. The propaganda that inundates them is effective when unchallenged, but much of it goes only skin deep. If they can be brought to raise questions and apply their decent instincts and basic intelligence, many people quickly escape the confines of the doctrinal system and are willing to do something to help others who are really suffering and oppressed." -Manufacturing Consent: Noam Chomsky and the Media, p. 195

aceventura3

Let's say the market value of your house is up 50% over the last five years and then we have a 10% correction (which hasn't happened yet) you are still up a net 35%.

Let's say you bought recently and experience an immediate 10% drop, then over the next five years the value goes up 25% (less than 5%/yr.) you would be up a net 12.5%.

Now let's assume you put down 20% and financed the rest and assume your after tax costs are equal to market rents - your return on investment in the first situation is 175%, the return on the second is 62.5%. And if you financed with a fixed rate mortgage your principle and interest payments are fixed not subject to year to year increases like rent would be. There ain't many investments the average person can make to beat those numbers.

A bursting bubble would suggest big losses and negative returns on investment that can nver be recovered. If you define the real estate bubble bursting as a short term decline in prices of less than 5%, I'll take it.

Increases in inventory occured because the market was too hot in some markets. Builders got too aggressive, now they are selling off thier excess inventory, which is a normal and short-term correction.

People have to live somewhere, land is limitied, government gives favorable tax treatment to property owners, our population is growing and youcan highly leverage real estate investments. Overtime the real estate market will go up, as it has always done. Long live the real-estate boom.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

JumpinJesus

I'm not sure how far-reaching the effects of this are or will be. For some reason, I've never been of the mind to want to own my own home. What with the taxes and the constant upkeep and repairs and such, I've concluded that if I ever decide to own, it will be a condo. For now, though, I'm content to rent.

__________________
"I can normally tell how intelligent a man is by how stupid he thinks I am" - Cormac McCarthy, All The Pretty Horses

cyrnel

No doubt. It remains the most important material investment (jumpinjesus - hint ). Still, buying near the edge of a market swing can sure force lifestyle changes. I feel for the first-time buyers who let themselves be swept into buying at their absolute limits only to find themselves in a precarious position. Market-wide this only serves to depress prices and prolong the recovery.

__________________
There are a vast number of people who are uninformed and heavily propagandized, but fundamentally decent. The propaganda that inundates them is effective when unchallenged, but much of it goes only skin deep. If they can be brought to raise questions and apply their decent instincts and basic intelligence, many people quickly escape the confines of the doctrinal system and are willing to do something to help others who are really suffering and oppressed." -Manufacturing Consent: Noam Chomsky and the Media, p. 195

highthief

The people who are affected are people who A) anticipated flipping their newly bought homes in the near future to make a buck, and B) people who qualified for, say, a maximum 300,000 mortgage and then proceeded to use all 300K and further get themselves into debt with now higher rates.

For the average person, it all evens out in the end, and 3 or 4 years from now, prices will be going up again. Just sit tight and don't lose your head.

We just bought (prices are still rising in our area but we know its nearing the current limit) but we're planning on being there for at least 5 years, so no worries.

__________________
Si vis pacem parabellum.

Cynthetiq

I've been waiting for this moment so that I can buy some more properties, those people who bought on margin using their inflated equity to continue to fuel their extravagant lifestyles, cars, credit card debt reduction, vacations.

Before someone like kutulu says they hope that the investors get theirs, I'm going to say that I learned that investing in real estate is a long term investment. My family purchased properties and rented them out for a fair price and then sold them for a fair price. No expectations of "getting paid", "hitting the lotto", "striking it rich" were expected, just a modest gain above prime rate.

My current property in Las Vegas, I rent out for almost $200 less than all the comparables that have inflated the housing and rental market. I could ask for more, but it is already a fair margin above my costs and maintenance of the property.

If I was to be taxed at a greater amount, then I would not buy properties to rent out at a fair markup. I already see here in NYC just like other major metropolitans one either has to be extremely rich inc $200k+ or poor making less than $40k, with exceptions, pay penalties and allowances that cap can be pushed to $85k.

__________________
I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not.

aceventura3

I agree. Also real estate markets are local. Looking at national numbers is almost a waste of time. If a person lives in Edgar Springs, Mo. market conditions in San Jose, CA will have nothing to do with what is happening in Edgar Springs. And both of those markets may be vastly different than the national numbers. I would bet a higher percent of people in San Jose are on the edge than in Edgar Springs, and because of that San Jose is going to be more volatile and much more prone to a bigger corrections.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

kutulu

My beef isn't with people who buy a property and rent it out. You are providing a necessary service to people. Often people can get more house for the money when renting.

My problem is mostly with the people that buy houses for construction and sell them once they are built (for a huge profit of course). I'd strongly be in favor of laws that keep investors trying to make an easy buck out of the housing market. Their profit does nothing positive for anyone but themselves and it comes at the expense of everyone else.

host

aceventura3, this time, it is different. The excess has been unprecedented, and the consequences will be in proportion...in the opposite direction:
A lot of optimism, or "hope" in the posts here. IMO, it's "only the beginning....only just the start......

From today's WSJ:
So what you have here is a liquidity "pump" that mitigated the effects of the bursting of the tech "bubble" in 2000. The Nasdaq index of 2000 stocks fell from a high of 5148 in March 2000, to a low of just over 1000, three years later....an 80 percent drop that swallowed fortunes.... and dampened demand, but...thanks to home equity refi cashouts facilitate by the real estate "bubble" that was rushed along side of the "tech wreck", the negative effect on the economy was postponed....until now......

The negative effects of the postponed impact will be much worse than if the Fed and government regulators had not allowed the loosening of credit standards for mortgage approval to the extent that they have, and had not allowed the sheer volume of new loans to increase the money supply and the stability of the dollar's value in exchange.

The Fed presides over a "fractional reserve" banking scheme. New "money" is created out of "thin air"....by the origination of new loans. Every "first time" borrower creates a "new loan" situation....as does every "refi cashout" on the increased portion of every new, larger refinanced mortgage, fueled by the artificial demand from "first timers" who qualify for home mortgages because of relaxed lending requirements and low interest rates, justified by altering the CPI qualifiers to the point where inflation "disappeared", justifying a Fed interbank rate that was lowered to one percent. The "first timers" bid up the limited supply of entry level properties, and the profits of the sellers pushed demand and prices up.....all along the line....and the Freddie and Fannie accomodated by increasing "Jumbo" mortgage lending limits and convenient "low doc" and "no doc" loans.

Now....this ponzi scheme is unraveling....and along with the loss of employment and accompanied loss of economic demand from the newly jobless with less money to spend....by the folks who built, marketed, and financed the homes and sales and the new and refi cashout mortgages and the vacuum created by the loss of the consumer spending on new furniture, home appliances, landscaping, etc. etc.....and from the refi cash out's:
We enter this new era of depressed consumer spending and mountainous debt with higher enegy prices and diminishing dollar purchasing power. Our currency has been intentionally destabilized by the PTB because they plan to massively inflate the value of all assets to relieve the impact of overall debt obligations on the debtors. As much debt as possible has been transferred to foreign lenders and derivatives have been created to lessen the impact on domestice lenders, like the GSA's (government sponsered entities), Fannie, Freddie, and Sallie....Mae.

The escape plan is for borrowers to pay back lenders with inflated and easier to come by....dollars on fixed loan debts. Those who owe credit card debt or have variable rate mortgages will face bigger challenges, aggravated by new "banrupcy reform".

I predict that the scheme will ulitmately fail... the housing market, home values, consumer spending, and the value of the dollar will all be depressed in the deflation that will follow the failed inflation to escape from the debt burden plan. Rising interest rates....and when inflation is finally universally perceived...the rush to "buy now before prices go up" will temporarily prop up demand....and prices for everything from houses to vehicles to big screen HDTV's.

There is still time to sell your home at a fair value if you can justify selling into the offers that you get....then renting...and if you have profits....buying pre-1965 U.S. silver coins as a hedge....prices are down today:
The political leadership will end up using the U.S. military to attempt to shore
up the purchasing power of the eroding dollar, and to control foreign petroleum and other raw material reserves. I believe this is inevitable and that they will wait until it is too late to intimidate and dominate rival powers to the degree of success that they could achieve if they implemented a sudden and total effort into doing it now. They will end up doing it....but if they did it now, they might pull off disarmament and submission of U.S. rivals without firing a (nuclear) shot...or by attacking and making "examples" of just one or two resistant nations.

I don't endorse the scenario above. It is simply the conclusion that I reach after considering where we find ourselves, where we've come from, and what experience tells me we have done...and will do in reaction to it all. There is a plan, but it will be too little or too late to reverse consequences in every stage where it is implemented.

aceventura3

You have provided a lot of reading material and support for your view of the market. You are not alone in your view that the real estate market is facing a major correction. You could cite mountains for sources reflecting that view. I don't dispute that one second. I generally come to my own conclusions based on how I see market forces converging. When someone says the sky is falling, I usually look up to see for myself rather than assuming it is true because a supposed academic expert wants to be quoted in the paper or appear on the evening news (we know they have to take extreme positions to get attension).

Here is how I see it.

Real estate markets are local - some markets will experience big corrections others will not be impacted.

There has been a recent influx of high risk loans in the last 3 years - these loans represent a high percent of loans in the last 3 years but a low percent of the total loans outstanding. The impact of default will depend on local markets, but overall will be small.

Very few banks take on large percentages of high risk loans. Most large banks are diversified geographically. Many banks package loans and sell them in the secondary market. Banks manage risk. The folks active in the secondary markets manage risk. The ripple affect of defaualts will be absorbed between diversified banks, the secondary markets, and some federal agencies. The impact will be small. Some argue that the federal agencies have assumed too much risk, but they have the full faith backing of the federal government and they are adjusting their exposure.

When speculators default, new buyers will step in and buy bargins. Millions of long-term investors have money on the sidelines waiting for these opportunities. The downward impact on prices will be short-term in most markets.

People who have no equity are locked into their homes unless they default. Most don't want to default and will do whatever it takes to keep their home. When defaults occur they all won't happen at once. The impact will be small and spreadout. Also banks don't want defaualts. If a bank financed 100% or more of a house, they don't want pennies on the dollar - they will do what it takes to get full value, even if it means being more flexible with high risk buyers on the verge of default.

If our economic growth was in part due to the real estate boom, and the boom stops - other sectors of the economy will pickup, i.e. dollar weakens and exports pick up and foreign investment here increases. The Fed thinks the economy is growing too fast any way, the steps they have taken where intended to cool the real estate boom. If you have faith in our economic policy, thier goal is moderate long-term growth in real estate.

Baby boomers are still in their peak earning years, they want bigger, more luxurious homes, they want vacation homes, they want retirement homes. Those in the baby boomer echo are buying starter homes. Market shifts are occuring, those ahead of the curve will make money, those behind the curve may loose money. The market forces are too strong to ignore.

In the end for everyone who agrees that the real estate "sky is falling" should act now and sell. For everyone who takes a moment and looks at the "sky", they should hold and expand their real estate investments if they are so inclined.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

SteelyLoins

Such a lot of class envy in the beginning messages. Also, a philosophy was expressed in which laws should be passed to prevent people from making "too much money," whatever that is.

Why would such a law be necessary? A person who speculates on housing can win big, and they can lose big. They assume the risk. There is NO risk in sitting back, complaining, and trying to penalize these people.

A well-informed person should be THANKING speculators, because said person can now pick up a distressed property at a great price, if the oversupply is as great as it has been presented.

Instead of penalizing people who turn a profit, perhaps an effort should be made to rise to the financial level of the profit-makers, rather than trying to drag them down to the level that makes some people so unhappy.

Or you could just complain.

kutulu

SteelyLoins:

I think its a cheap shot to boil objections to home investors as class envy. Besides, it's such a cliche card to play.

First of all, when investors go out and snatch up homes they cause a false increase in the demand for housing because they are buying a property that they have no use for. This causes prices to climb at a faster rate, which in turn, forces actual prospective homeowners to have to pay more than they should. Then when the market correction happens, you have more people selling because they want out before they lose too much. This causes the prices to fall farther because the supply is much higher than it would be without them. As a result, people selling their houses because they actually want to leave and go somewhere else get less than they normally would. If we didn't have the investors buying and selling property like it's a monopoly game, the market would be more stable.

Buying and selling a house is the single largest purchase most people will ever make. Their entire liveleyhood is connected to the bottome line. It tells them where and how much they can buy and sets the amount of income they have to disperse in the rest of the economy.

There are lots of ways to make money. People can find ways to make money without messing with the lives of everyone else.

This is an idealistic statement that has no basis in reality. It's like saying 'Poor people are poor because they are lazy. If they just got off their asses, they could be rich like us'.

Cynthetiq

Yes, I'm hoping to pick up on some of the fire sales because people over extended themselves.

Again, my goal is to work the system as it's designed. I buy a property for a fair price (hopefully a bargain or at least some savings of market becuase seller needs to sell) and then rent it out at a modest incresase to cover my costs and make a small profit. My profit isn't in the monthly rents, it's in the end game sell in the far future. In the interim, I'm willing to take the risk of tenants, maintaining a liviable and habitable property, in exchange for modest profits when I sell. I also expect to be taxed at a fair rate on the income generated from the monthly rent and the capital gains. My accountant will use whatever legal loopholes are available, but they are not my manipulation, just what is fair and by the book.

I wouldn't say that poor people are lazy, but I'd say that there are some aren't doing all that they can in order to better their situations.

__________________
I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not.

kutulu

Again, Cyn, what you are doing is a completely different than someone who buys a house and flips it a couple months later.

stevo

Most of the people flipping houses put a lot of effort and resources into them. You don't just buy a house and sell it for more without adding value to that house. Most are run down and need a lot of work. These people are putting houses back on the market that most people wouldn't touch.

__________________
"If I am such a genius why am I drunk, lost in the desert, with a bullet in my ass?" -Otto Mannkusser

aceventura3

In some cases speculators create hot markets. Example there are many inner city urban areas that were in decay. Speculators came in, did some improvements, and flip the properies at a high profit. If not for those investors taking the risk and creating a demand, regular buyers would have passed on some great homes in urban areas.

I also believe most of the "flipping" is the end result of housing shortages. In markets where supply is equal to demand you don't get "flipping" unless there is value added by the investor. Inadequate supply is usually the result of either poor city planning or existing homeowners wanting slow or no growth.

"Speculators got to eat, same as worms" (an almost quote - Clint Eastwood from Outlaw Josie Whales). Speculators serve a needed role in our economy.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

Hardknock

I'm different. I feel no sympathy whatsoever for those individuals who let themselves get suckered into those interest only and negative amortization mortgages. They deserve whatever they get. This is where market research before buying comes into play. Stretching yourself to the limit just to buy a house is something you NEVER want to do.

Especially in a "hot" market that has nowhere to go but straight down.

I like to play the waiting game myself. I’m just sitting on my 30 year fixed rate home (in a local non "hot" market that will survuve the brunt of the bubble burst) that still has equity looking out on all the other homes in my neighborhood waiting for all the interest only fixed rate periods attached to them to expire. When they do, and they’re backed into a corner and forced to sell at a loss or walk away, I’ll trade up at a bargain price.

Cynthetiq

We had the opportunity to trade up, but we like the view we have now better than the terrace and large deck. We'd have a better view of the city, but we'd lose the view of the river and the park, getting to see trees in the city of Manhattan is worth lots more to us.

But I agree, those that decided to use the equity for stretching themselves is just crazy, but there are lots of people starting to lose their shirts.

I just lost my tenant the other day, will I be forced to sell my property now? No, because I knew that I could afford the place on it's face without the leverage of the renter, something people do not consider at all.

__________________
I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not.

roachboy

this is not an area that i particularly care about in general--on the other hand, my family is obsessed with it , and so i find myself in conversations about real estate markets from time to time. these are often conversations that find me focussing on other things--the state of my beer at the time, the strange obsessive quality of the talk, etc..

the conversation above mirrors those i sometimes get into with them, however--and because this thread is easier to escape than social situtations with my family, i can pose a question that has bugged me for awhile now: the op presented indices of new housing starts as an index of the state of the housing market as a whole. i have never really understood how this index functions and why new housing starts are isolated from other types of data and presented as if they served to give a coherent picture of the aggregated housing market. can anyone explain why these indices are seperated as they are, and what utility there is in new housing starts as index? it would seem to me that this index is more about the state of the residential construction industry and secondarily about property values. but much activity in real estate is resale of already exisiting stock--where is that information?

second (related to the first): in the absence of a coherent picture of the aggregate, you get above (like in conversations with my family) anecdotal information that gets either a happy face or a sad face tacked onto it as a function of dispositions rather than information. is this the only possibility for this kind of discussion---some kind of tedious sequences of claims that shake out around the question of whether you prefer to see yourself as optimistic or not? if so, why are these conversations interesting?

what i get from ace's posts so far here is basically that in the area in which he operates, things appear to be ok--and that he personally makes out in that situation financially--so either (a) the aggregate must be also hunky dory or (b) aggregated information is meaningless in this context.
these are two different arguments.
both could obtain, but there is no way to tell.

__________________
a gramophone its corrugated trumpet silver handle
spinning dog. such faithfulness it hear

it make you sick.

-kamau brathwaite

host

RB....maybe these will answer some of your questions. The NAR seems to lump residential "resales" into what it calls, "sales of exsiting homes":
National average selling price is up 33 percent between March, 2002, and March 2006.....$163100 vs. 217300. Unsold inventory of existing homes is 3.19 million in March, 2006, an increase of 38 percent vs. the 2.31 million inventory of existing homes for sale in March, 2002.

NAR does not track the number of foreclosed units available for sale, or the closing of foreclosure sales.
There is a lively debate here as to whether, at today's prices...it even pays to purchase real estate to occupy....or to rent, instead:
Disclaimer: "Mrs. host" and I make a monthly mortgage payment. At current valuations in our market, we own a 30 percent equity stake in "our" property.
We have no plans to sell or move. We expect and accept that....in the next five years our equity will be reduced to zero in the coming collapse of real estate valuations. Our view competes with our other view that the dollar will collapse to a level that will lessen the impact of fixed mortgage payments and will increase the valuation...measured in inflated dollar terms of our home.
....if our income stream can keep pace with inflation caused by collapsing dollar purchasing power.

By about 2012....there should be enough strain on the economy, aggravated by the collapse of U.S. spending power and energy and raw material scarcity to initiate <a href="http://www.kwaves.com/kond_overview.htm">a sustained period of massive deflation</a>....as the Fed's losing strategy to inflate the U.S. economy out of it's debt woes, inevitably fails, demand collapses, and money (not "fiat paper") is king.

aceventura3

Interest only products need to be put into perspective.

On a 30 year $300,000 mortgage @7% the payment is $1995 of which $250 goes toward principle reduction in the first year per month. The same at 6% is a $1798 payment of which about $298 goes toward principle in the first year per month. Unless you buy at the worst time in the worst market real estate appreciates.

According to this article (GOOGLE search: 'Average car payment') the average car payment is $378.
http://www.finalcall.com/artman/publ...cle_2267.shtml

Interest only can make the difference between a person being able to buy a home and start building financial security, they may be risking about $300/month in the example above. Some will say this is risky and unwise. I don't. If that same person buys a new car and finances it they are going to pay on average $378/month and some will compliment that person on his shinny new ride while they don't really own anything and have no networth.

Do you really believe interest only loans are that risky or is it just hype.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

aceventura3

I suppose you could look at what happened during the Great Depression as a guide. There was massive price appreciation in real estate with massive amounts of speculation in some markets. This was followed by massive declines in values during the depression. Investors who had the ability to buy when everyone else needed to sell made tons of money. Those who could hold, did o.k. over time. If what you think is going to actually happen, you should sell now, buy gold and wait for the buying opportunity of all buying opportunities. I am opptimistic about our national ability to avoid a major financial catastrophy, I am going to keep putting my savings into a mix of investments including real estate. My regret is that I did not know 20 years ago what I know today.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

Hardknock

Are trying to convince me or you? Real numbers aren't hype by the way. Depending what local market you're in, one has the potential to get severly reamed in the ass by these products.

You mean to tell me that a fixed only period of say, 3 years with forewarning that rates will rise when that period is over and it's just a question of how much your payment will rise is not risky? And I don't see what the average car payment has to do with any of this. One doesn't normally live in their car. Sounds like apples and oranges to me. There are people out there who have interest only loans in the neighborhood of 3-4% for their fixed rate periods. I know because they were offered to me when I was shopping two years ago. I turned them down like they were the plague they are. With the rates creeping beyond 6% now, they're looking at doubling the amount of interest that they have to pay which will increase their payment substantially.

That's not risky? Depending on your specific situation, you can risk a lot more than $300.

aceventura3

Interest only loans are not inherently riskier than any other kind of loan. All the variables are known. The only difference is the level of discipline a person applies when they take one of these loans. In the hands of the right person interest only loans are less risky. If I get a 6% interest only loan, if I am in a 40% tax bracket (Fed and State), the after tax rate is 3.6%. If I put the money saved with the lower payments in tax free, AAA rated, municiple bonds paying 5%, I am going to be 1.6%/year ahead of a principle and interest loan.

But you say - what if the value of the property goes down. If I have a interest only loan and the property declines, none of my money is at risk. I could walk. So if I saved $300/month on an interest only loan over 3 years, I have $10,800 of my money and I go back to renting. If I did a priciple and interest loan and I have to walk, the bank gets the $10,800 and I go back to renting. Which is less risky?

If you have a $300,000 home and it drops 20%, thats $60,000. No matter how you look at it, the $60k is either your money or the banks money. If you have to walk, which is less risky? Walking from your down payment and principle or walking with none of your money in the house?

I agree that most people will not bank the money the save with interest only loans and some don't know all of the variables contaned in thier loans and how they actually work. Those people could get hurt. On the otherhand they could get lucky. No matter how you look at it - its not about how the loan is structured, it all about the indiividual. If you think most of the people getting and giving these loans are stupid, the doom and gloom predictions will come true. I tend to give people more credit.

P.S. - The average car payment was used to illustrate how the average person think nothing about a $400/month car payment on a depreciating asset, which is much riskier than buying a home no matter how you do it. Also would a person give up their car payment before their home? I would. In a crunch, I'll get a beater that burns oil or keep a car that has been paid off. Also think about how much people spend on coffee/lunch/finger nails most people can lower their expenses enough to come up with more money for a mortgage if needed.

P.S.S - In a way I have been convencing myself. This thread has made me actually think about the numbers in a different way - Thanks for your help. I going to see if I can get a few interest only loans lined up for the bubble to burst.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

aceventura3

Guess what I saw today. May housing starts 1.957 million. The OP showed March at 1.99 million, April at 1.8 million. Perhaps the downward trend will begin to reverse or perhaps there will be a smooth soft landing to the bottom before a new upward trend. I guess the important thing is that new housing start data doesn't support a bubble bursting. No matter how you look at the raw data building close to 2 million new homes is a lot of new homes being built in a single year, considering there are about 70 million households in the US that about 3%. Wow.

http://online.wsj.com/article/SB1150..._whats_news_us

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

raeanna74

I've heard this was coming for a while. I am glad that we bought our home a year and a half ago. We were lucky to find it being sold as a forcloser from Manny Mae. Now, even though the market is dropping, we've grown equity in our home.

We chose a fixed rate loan instead of balloon or any other kind because I knew rates would eventually go up. When and how much was the only question and we preferred not to take that risk.

It seems wasteful to me that so many homeowners are buying newly built home when there are many homes that are preowned that are in just as good a condition and less expensive at times even.

I wonder how much the hurricanes last year affected new construction in the south. I would like to see a region by region tally like the one in the first post. I have a feeling that in the midwest our market would not be falling so quickly and may even be rising. Our town is growing so rapidly and there aren't enough old homes to house the new people. I cannot recall many vacant homes except for in the new developments that are starting up.

__________________
"Always learn the rules so that you can break them properly." Dalai Lama
My Karma just ran over your Dogma.

Rodney

The U.S. may be in for a weird ride. The 1930's may be a model of what could happen, but not a complete model. We could end up with deflation in some areas, but inflation in others.

Deflation will probably take place in real estate, certainly -- either by actual price drops, or by a prolonged stall in real estate prices while general inflation continues to rise. (So a $500K house today is a $500K house in seven years -- but the price of all other things has gone up by 50 percent).

Inflation could happen largely in the realm of imported goods and resources, _if_ the dollar continues to lose value against other currencies. If dollars grow less valuable, eventually the sheiks will up the price of oil to hold their profit margin. And this could ripple through society, reduce discretionary spending and thus perhaps cause job losses and a substantial recession.

In addition, much of the foreign capital that has supported the real estate boom would dry up if the dollar began to falter, or would at least demand a much higher interest rate. There might be higher interest rates in general, which would also have a deleterious effect on the economy.

Through the '80s and early 90s, interest rates were much higher than they are even now. If we went back to those rates in a hurry, this economy would take a major body blow. Our economy just isn't fundamentally as strong anymore.

aceventura3

The US population is going to grow by about 30 million people in the next seven years.

Using an average of 4 per household, we will need to build 7.5 million new homes in the next 7 years simply to keep pace with projected population growth.

If we factor in homes needing replacement/second homes for baby boomers/vacation homes/and Oprah, I guess we would need to build close to 1.25 to 2 million homes per year.

With that kind of demand in the face of limited land resources and increasing slow or no growth cities, I don't see how we could have a prolong stall in real estate.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

Rodney

The problem is not necessarily in demand, but in the ability to buy. Higher interest rates and an end to easy mortgage credit, if it comes to that, will reduce the ability of people to pay high prices.

What happens then? What's alread happening: an increase in renters. More housing might be built, but as rental housing by developers with deep pockets who are looking for a good cash flow instead of shorter-term appreciation. More apartment complexes might be built, more houses acquired as rental property (perhaps then subdivided or with "gramma" units added in the back yard, etc.)

Additionally, what homebuilding there is might trend away from megahomes to smaller, more affordable developments. There's even a trend called the generational home, where a couple starts out with a small house and gradually adds a wing here and there for the children they have, then for the grown children to live in, and so on.

I will not argue that more capacity isn't needed, but it may show up in a different form (and based on a different business model) than we have come to expect, and with an emphasis on lower price and greater affordability in the face of higher interest rates.

host

The following data indicates that, "in the best of times", new housing starts at a rate of about 2 million per year, was enough to supply, albeit, at rising prices, speculators and second home buyers with 760,000 of the 2 million homes built, and of course, these purchasers did not all buy new homes.

Home ownership reached 68 percent of all households recently, and is now declining....so you should deduct your demand "forecast", by one third, and if you concede that purchases by speculators and second home buyers will drop by at least 50 percent in a market of declining demand and price, drop another 380,000 units from your upper end estimate of 2 mllion. These adjustments bring your population driven demand forecast down to one million new units "needed".

Now....consider that dropping new housing starts in half will effect a negative ripple throughout the economy, as will rising interest rates. Consider that the U.S. Treasury is the largest short term debtor in the world. It has issued a huge sum of short term, "Arm" like debt at low rates, that it will be compelled to refinance at higher rates. Consider that the U.S. is nearing a $3 trillion "run up" in new debt, on top of $5.5 trillion in prior debt, in just seven years! The previous debt service cost, in a low interest rate environment was only $318 billion from the annual federal budget.

The point is, that all of this debt demand will keep interest rates high, even if the dollar was strong enough to compete with rising EURO central bank interest rates, which it isn't. The Fed must match all future EURO interest rate increases, in order to lure foreign investors into rising sums of U.S. Treasury bonds.

Consider that no one has to own a home, let alone two or more, and that you have no idea how many existing second homes are owned by non-speculators, and that we can only guess how many newly started of planned to be built homes will end up in unsold inventory, to further dampen your one million per year, home creation projection.

You can't know how many foreclosures and bankruptcies in the now accelerating climate of default, will push new foreclosures on the market to compete, at low prices with retail MLS inventory, or the effect on price that this pressure on inventory and retail prices, will have....<b>or how many folks will no longer qualify to purchase homes because of poorer credit scores, unemployment, or bankruptcy.</b>

Would you invest in industries that you claimed would be supported, at a level of at least 1.25 million housing starts, for the next seven years? That is an optimistic forecast that leaves home builders to build and market into declining demand and prices, a building rate that is only 5/8 of the current rate, AT BEST!!

During the 1930's depression, my grandfather worked for a local gas untility co. He supported, and housed his wife and three kids, his in-laws, and their son. There is nothing that precludes households "doubling up", if the economy declines the way I expect that it will, in the coming years. I see nothing in your post that "stands up", given the fundamentals faced by the U.S. in the near future. We live in a bankrupted country with a near worthless fiat paper currency, that has not begun to erode, the way that gold and silver buyers, and the folks who hold oil reserves in the ground, expect that it will.

aceventura3

In aggregate it doesn't matter who has title to the home. Renting or owning, people have to live somewhere, that is what will drive demand.

I agree you can have households "doubling up", in my state (California) that is already happening. On the other hand the population growth projection doesn't include the impact of illegals in this country, so it is possible demand is materially understated.

You use the term "speculator", I use the term "investor" to charactorize people who buy, collect rent, and sell. True market "flippers" are speculators - people who buy today and immediately try to sell the next. I think "flippers" make up an extreme small amount of the demand in real estate.

Here is an interesting article in today's WSJ. I looks like housing and autos take up 52% of houshold expenditures compared to 41% in 1950. At some point this trend up has to stop, supporting the "bubble bursting" theory. However, people can easily purchase less house and demand for housing can still be high. The average family can do without 3000+ square feet, 4 bathrooms, 3 car garage, media room, and granite countertops, etc.

http://online.wsj.com/article/SB1150...ml?mod=mostpop

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

NCB

Since when does a 3.3% decline in home prices consititute a bubble burst? Sounds like to me a little wishful thinking

__________________