Housing Bubble Busted

[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]

Originally Posted by 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.

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]

Originally Posted by 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.

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.

[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.

[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.

[cyrnel]

Originally Posted by 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%....

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.

[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.

[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.

[aceventura3]

Originally Posted by 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.

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.

[kutulu]

Originally Posted by Cynthetiq

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 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:

http://realtytimes.com/rtapages/20060112_arello.htm
ARELLO Announces Number Of Licensees For 2005
by Blanche Evans

If you think everyone you meet is a real estate agent, you're not far wrong. According to new figures from ARELLO, the licensing officials, <b>there are more than 2,636,783 licensees in the United States.</b>

With a U.S. population of about 297,889,053, <b>that's about one licensee for every 113 men, women and children.</b>

A lot of optimism, or "hope" in the posts here. IMO, it's "only the beginning....only just the start......

From today's WSJ:

http://www.post-gazette.com/pg/06138/691241-28.stm
or if you subscribe:
http://online.wsj.com/google_login.h...googlenews_wsj
Studies find that late payments on mortgages rise

Thursday, May 18, 2006
By Ruth Simon, The Wall Street Journal

....To be sure, mortgage delinquencies remain low by historical standards. But experts worry the trend could worsen. With the housing market cooling and interest rates rising, "by the end of the year you could see a substantial increase in delinquency rates" for mortgages, says Thomas Lawler, a former Fannie Mae economist and now a private housing consultant.....

Twenty-nine percent of borrowers who took out mortgages last year have no equity in their homes or owe more than their house in worth, according to a study completed this year by Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, a unit of First American Corp. That compares with 10.6 percent of those who took out loans in 2004.

An analysis by Bear Stearns found that delinquencies on loans originated in 2005 were in most cases far higher than on loans issued in previous years at the same point in their life cycle. "The numbers are clearly worse," says Gyan Sinha, a senior managing director at Bear Stearns. The reason: Lenders were "able to generate a lot more volume in the face of rising rates" by loosening lending standards, Mr. Sinha says. "More aggressive lending was clearly taking place," he says.

A separate study by Credit Suisse reached similar conclusions. That study looked at borrowers with good credit who were at least 90 days late on their mortgages. Credit Suisse found that borrowers who took out adjustable-rate mortgages in 2005 were three times as likely to be delinquent on their payments after the first year as those who took out ARMs in 2003 and 2004. Payments on ARMs can adjust after as little as a month, or after several years, depending on the terms of the loan. (The study didn't include borrowers with option ARMs.)......

<b>Past Due</b>

Recent studies highlight some early warning signs that could affect mortgage borrowers.

Delinquencies are sharply higher for loans that were issued last year, when lenders were aggressively courting business.

One study shows 29 percent of borrowers who took out mortgages last year have no equity in their homes.

Higher interest rates and a cooling housing market could further push delinquency rates up in coming months, experts fear.

http://www.realtytrac.com/pub/articl...2006Q1.asp?m=1
Foreclosures Up 72 Percent From Last Year
Georgia, Colorado and Indiana Post Nation’s Highest First-Quarter Foreclosure Rates

National foreclosure filings continued to climb in the first three months of 2006, evidence that more U.S. homeowners are struggling to stay current on their monthly mortgage payments......

.........Georgia, Colorado and Indiana post highest foreclosure rates
Despite a 19 percent decrease in new foreclosures in March, Georgia documented the highest state foreclosure rate in the first quarter of 2006 — one new foreclosure for every 127 households. The state reported 24,419 properties entering some stage of foreclosure, more than two times the number reported in the previous quarter and nearly three times the number reported in the first quarter of 2005.

Colorado’s quarterly foreclosure rate of one new foreclosure for every 138 households registered as the nation’s second highest state foreclosure rate. The state reported a total of 13,267 properties entering some stage of foreclosure in the first quarter of 2006, more than twice the number reported in the previous quarter and a 96 percent increase from the first quarter of 2005.

With one new foreclosure for every 165 households, Indiana documented the nation’s third highest state foreclosure rate in the first quarter of 2006. The state reported 15,261 properties entering some stage of foreclosure, an 84 percent increase from the previous quarter and more than twice the number reported in the first quarter of 2005.

Other states with first-quarter foreclosure rates ranking among the nation’s 10 highest included Nevada, Michigan, Texas, Ohio, Tennessee, Utah and Florida.

Texas, Florida and California report most foreclosures
Texas reported the most first-quarter foreclosures of any state, 40,236, and Florida reported the second most with 29,636. California was a close third with 29,537 properties entering some stage of foreclosure in the first quarter of 2006, but the state’s quarterly foreclosure rate of one foreclosure for every 414 households was below the national average.

Also among the 10 states with the most foreclosures in the first quarter were New York, which reported 13,795 properties entering some stage of foreclosure, and Illinois, which reported 13,691 properties entering some stage of foreclosure.

The RealtyTrac 2006 U.S. Foreclosure Market Report provides the total number of homes entering some stage of foreclosure nationwide and by state for each month. RealtyTrac’s report includes properties in all three phases of foreclosure: Pre-foreclosures — Notice of Default (NOD) and Lis Pendens (LIS); Foreclosures — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and Real Estate Owned, or REO properties (that have been re-purchased by a bank).

http://www.washingtonpost.com/wp-dyn...050501516.html
Sold -- or Not: When Home Buyers Walk
Some Will Give Up Thousands to Get Out of This Market

By Sandra Fleishman
Washington Post Staff Writer
Saturday, May 6, 2006; Page D01

........Hanley Wood Market Intelligence, a home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier, jumping to 12.7 percent from 5.1 percent.

"But 10 to 15 percent of people deciding to cancel is not going to be unusual most of the time," said Jonathan Dienhart, Hanley Wood's director of research. "It's just that in the last couple years when we had unusually high demand, where people could just buy a property and flip it, there were fewer cancellations. It's not a cakewalk anymore."

<b>The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago.</b> When the statistics are looked at by a single county or type of housing for one month, however, the number of transactions is small..........

http://www.canada.com/topics/news/wo...666921&k=70496
Jacqueline Thorpe, Financial Post
Published: Saturday, May 13, 2006

......."I think, in 18 months, as sad as it would be, there will be 30% fewer mortgage brokers in this business," says Richard Shaffer of Prestige Mortgage and Investment Group in Palm Beach, Fla.

<b>An estimated 25% to 50% of all U.S. jobs have been connected to the housing industry in recent years, but jobs are not the only thing at stake.</b>

Consumers have used the rising value of their homes to tap equity and fund spending in a way unknown a decade ago. A slump in prices could turn that tap off, causing a sharp slowdown in the economy, which could sideswipe Canada..........

......."People are mentally spooked and the argument is: 'Why does the Fed have to continue to beat it to destroy it?' " he says. "I don't get it."

Mr. Rodstein neglected to mention one crucial factor -- oversupply. Across the United States, there are 3.5 million single-family homes and condo units up for sale, a record, and <b>up 30% from a year ago.</b>

In Miami-Dade County alone, there are 25,000 condos under construction and another 25,000 that have already got their financing and are likely to go forward, says Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield, Fla. In addition, 50,000 more have been announced.

<b>In the whole period from 1995 to 2004, only 9,079 units were built in Miami Dade........</b>

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:

http://www.pimco.com/LeftNav/Bond+Ba...of+Housing.htm
May 2006
Bond Basics: The Role of Housing in the U.S. Economy

.....<b>The Economic Impact of the Housing Boom</b>
As home prices have risen, an increasing number of homeowners have tapped the equity in their properties one of three ways: via cash-out mortgage refinancing, home-equity loans, or outright sales of their homes. A significant amount of this liquidity has gone to power consumer spending. Federal Reserve survey data show that between one-quarter and one-third of the value of home-equity loans and cash-outs go directly to financing personal expenditures.

In a paper published in September 2005, Federal Reserve Board Chairman Alan Greenspan and staff economist James Kennedy attempted to quantify the impact of this liquidity on overall consumption.<b>1 Greenspan and Kennedy found that borrowing against home equity accounted for 6.9 percent of all personal disposable income in 2004, or roughly $600 billion.</b>

Against a backdrop of weak wage increases and a negative national savings rate, home equity extraction provided consumers with a new source of spending money. <b>Greenspan and Kennedy did not suggest how much of the $600 billion in borrowing flowed through to spending but, as Bill Gross noted in his October 2005 Investment Outlook, people don’t borrow money to deposit it in the bank. They borrow money to spend it.</b> Assuming 50% of that $600 billion in borrowing went to consumption, Gross estimated that home equity withdrawals have added one-half to one percent annually to U.S. economic growth in recent years.....

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:

<a href="http://www.tulving.com/goldbull.html">90% Silver Coin Bags</a>
Price quote is near the bottom of the page....

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]

Originally Posted by host

aceventura3, this time, it is different. The excess has been unprecedented, and the consequences will be in proportion...in the opposite direction:

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.

[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.

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.

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.

[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.

[aceventura3]

Originally Posted by kutulu

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...

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.

[Hardknock]

Originally Posted by 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.

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]

Originally Posted by Hardknock

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.

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.

[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.

[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":

http://www.realtor.org/PublicAffairs...ges/MarchEHS06

.....“We now see appreciation cooling to single-digit rates of price growth – another sign that the market is normalizing,” Lereah said. The national median existing-home price2 for all housing types was $218,000 in March, up 7.4 percent from March 2005 when the median was $203,000. The median is a typical market price where half of the homes sold for more and half sold for less. .....

....Total housing inventory levels rose 7.0 percent at the end of March to 3.19 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace.....

........Single-family home sales rose 0.3 percent to a seasonally adjusted annual rate of 6.07 million in March from 6.05 million in February, and were 0.5 percent below the 6.10 million-unit pace in March 2005. The median existing single-family home price was $217,300 in March, up 7.8 percent from a year ago.

Existing condominium and cooperative housing sales increased 0.2 percent to a seasonally adjusted annual rate of 854,000 units in March from a level of 852,000 in February, but were 2.0 percent below the 871,000-unit pace a year ago. The median existing condo price3 was $225,500 in March, up 6.1 percent from March 2005..........

<b>........Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings.</b> This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. <b>In addition, existing-home sales, which generally account for 85 percent of total home sales,</b> are based on a much larger sample – nearly 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions.........

http://www.realtor.org/PublicAffairs...6?OpenDocument
Housing Market Taking A Breather But Staying Strong

WASHINGTON (May 9, 2006) – The housing market is settling but should experience its third best year in 2006, with job creation and a growing economy offsetting some of the effects of rising interest rates, according to the National Association of Realtors®.....

Existing-home sales are likely to fall 6.4 percent to 6.62 million in 2006 from a record 7.08 million last year. New-home sales are projected to drop 11.6 percent to 1.13 million from last year’s record of 1.28 million. Housing starts should decline 3.7 percent to 1.99 million this year compared with 2.07 million in 2005.....

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.

http://www.realtor.org/PublicAffairs...3?OpenDocument
March Existing-Home Sales Ease More Sustainable Pace

WASHINGTON (April 25, 2002) – After surging to an unprecedented record at the beginning of the year, existing single-family home sales declined in March but remain at a historically strong level, according to the National Association of Realtors®.

Existing-home sales fell 5.6 percent to a seasonally adjusted annual rate* of 5.53 million units in March from an upwardly revised pace of 5.86 million units in February. Last month’s sales activity was 2.0 percent above the 5.42-million unit level in March 2002, and was the 11th best month on record......

........The national median existing-home price was $163,100 in March, up 6.5 percent from March 2002 when the median price was $153,200. The median is a typical market price where half of the homes sold for more and half sold for less.

Housing inventory levels at the end of March rose 7.4 percent from February to a total of 2.31 million existing homes available for sale, which represents a 5.0-month supply at the current sales pace.

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:

http://www.elitetrader.com/vb/showth...6&pagenumber=1
Question: Does it pay to purchase a house for a "tax shelter"?

U.S. median home price: $232,500 (Mar '06)
Down payment: 20%
Loan amount: $186,000
Interest rate: 6.13% (Mar '06)
Term: 30-year fixed
Total interest paid over 30 years: $275,609

Average annual interest paid: $9,187
Average annual interest deduction: $2,756 (30% tax bracket)
Difference: $9,187 - $2,756 = $6,431

Answer: The interest payments are much greater than the interest deductions. The notion that a home is a tax shelter is a myth.

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]

Originally Posted by 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.

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

The average car payment is $378 over 63 months. I tend to work with people whose car payment is over $500 per month. Let’s say that you invested $378 every month, instead of making car payments from age 30 to age 65 (35 years). If you average a rate of return of 12 percent (which is doable), your money will grow to $2.4 million. Do you still want the car?

I understand that a car is a necessity. That, however, does not imply that we need car payments or that we take the butt whooping on depreciation. Below are some guidelines you should follow when you’re in the market for a car, if you want to drive away from poverty and into wealth.

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.

[aceventura3]

Originally Posted by host

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.

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.

[Hardknock]

Originally Posted by 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.

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]

Originally Posted by 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.

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.

[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

Housing Starts Conform to Fed View
Of Moderate Slowdown in Sector
By BRIAN BLACKSTONE
June 20, 2006 5:04 p.m.

WASHINGTON -- Housing starts increased 5% last month, the first increase since January, suggesting that the sector is cooling in a gradual fashion despite rising interest rates.

The increase, which was well above analyst expectations, conforms to the Federal Reserve's projection of an "orderly" and "moderate" softening in housing, and provides further evidence that the central bank can nudge official rates still higher without doing significant damage to rate-sensitive sectors.
[ecocharts-hstarts.gif]

May housing starts rose 5% from the previous month to a seasonally adjusted 1.957 million annual rate, the Commerce Department said Tuesday. Starts were down 3.8% from May 2005. Housing starts in April dropped 5.5% to a 1.863 million rate, which was revised up from an original estimate of a 7.4% decline to 1.849 million.

"The series over the past few months remains on a downward track, but the cooling in the official data remains very mild so far," said Ian Morris, economist at HSBC.

For May, the median estimate of 15 economists surveyed by Dow Jones and CNBC had housing starts up 1.7% at a 1.88 million annual rate.

Reflecting the recent mixed picture on housing -- new home sales rose in April while existing home sales fell -- Tuesday's report on housing starts showed permits for future building dropped by 2.1% in May to a 1.932 million annual rate. Permits, a leading indicator of activity, had been projected by economists to fall 2% to 1.933 million.
SLOWING HOUSING

[it_house.gif] • Ahead of the Tape: Foundation Crack
06/20/06

• Home Builders Expect Weaker Sales
06/19/06

• Bernanke Sees Smooth Slowdown
05/18/06


"Despite May's good numbers, starts will continue to fall in the coming months," noted Global Insight economist Patrick Newport.

Tuesday's housing figures may quell fears of a more dramatic decline suggested by other reports. For instance, the latest National Association of Home Builders confidence index fell four points to an 11-year low in June. NAHB expects single-family housing starts in 2006 to decline about 9% versus 2005. And though higher borrowing costs weigh somewhat on housing, the sector remains supported by positive consumer fundamentals like steady job and income growth.

According to the Federal Reserve's latest studies of regional economies, known as the "beige book" reports, "residential real estate markets continued to cool across much of the country -- with most districts reporting slower home-building and sales of existing homes." Fed Chairman Ben Bernanke last month called the housing slowdown "orderly and moderate."

The "generally declining trend" evidenced by the housing starts report "supports the [Federal Open Market Committee's] outlook for a modest slowing in economic growth," said Steven Wood of Insight Economics.

With core inflation accelerating and data showing continued economic growth, Fed officials are widely expected to raise interest rates a 17th straight time, to 5.25%, when they meet in late June.

Regionally, home construction last month rose 8.5% to 960,000 in the South and jumped 15.8% to 520,000 units in the West. Starts climbed by 1.7% to 183,000 units in the Northeast and dropped 15.8% to 294,000 units in the Midwest.

Breaking down the rate of 1.957 million overall for U.S. starts in May, single-family housing rose 2.1% to a rate of 1.586 million units, while starts of housing with two or more units increased by 19.7% to 371,000 units. Within that category of two or more units, groundbreakings of homes with five or more units -- or multifamily -- increased 25.4% to 321,000 units.

Nationwide, an estimated 189,300 houses were started in May based on figures unadjusted for seasonal factors. An estimated 182,700 building permits were issued last month, also based on unadjusted figures.

[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.

[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]

Originally Posted by Rodney

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).

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.

[Rodney]

Originally Posted by 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.

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]

Originally Posted by 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.

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.

http://www.foreclosure.com/
Last update: 6/22/06 1:10 PM
Foreclosures: 112,513
Preforeclosures:234,619
Bankruptcies: 346,208

http://realtytimes.com/rtcpages/2005...peculation.htm
Speculators Could Be The Pin To Pop The Housing Bubble
by Broderick Perkins


......Investors accounted for what's likely a record 23 percent of all home sales last year, according to the National Association of Realtors' recently released "2005 National Association of Realtors Profile of Second-Home Buyers".

NAR says only three percent of all home buyers sell their homes within a year but, while the investor purchase portion is 23 percent, other second home buyers who become aware of the perceived potential for a return on their property may very well take a more speculative approach. <b>The second home market now accounts for 38 percent of the existing housing stock and 36 percent of all homes purchased last year, NAR said.....</b>

http://www.realtor.org/publicaffairs...JuneForecast06
Home Sales Settling Down and Appreciation Slowing

WASHINGTON (June 6, 2006) –

.....Existing-home sales are projected to drop 6.8 percent to 6.60 million this year from the record 7.08 million in 2005. New-home sales are forecast to fall 13.4 percent to 1.11 million from a record 1.28 million in 2005. Housing starts are likely to decline 6.2 percent to 1.94 million in 2006 compared with 2.07 million last year......

http://www.chicagotribune.com/busine...i-business-hed
Builders' confidence lowest in 11 years

Bloomberg News
Published June 20, 2006

WASHINGTON -- Confidence among U.S. home builders dropped this month to the lowest level in more than 11 years as higher mortgage rates caused sales to fall.

The National Association of Home Builders/Wells Fargo's index of builder confidence declined to 42, the lowest level since April 1995, from 46 in May, the association said Monday.

A number below 50 means pessimists outnumber optimists. The index has not increased for the last eight months, the longest such stretch since 1994. Economists had expected a reading of 45 for the index, which averaged 67 in 2005.

.......... The overall decline "is not inconsistent with the reasonably orderly cooling-down process we're projecting for home sales and single-family housing starts in 2006," said David Seiders, chief economist at the National Association of Home Builders.

The number of homes available for sale is 35 percent higher than it was a year ago, according to a recent Wachovia Securities report, which called the housing slowdown "worse than we thought."

The housing slowdown is prompting an exodus of speculators, who buy homes and quickly "flip" them for a profit, said John Herrmann, director of economic commentary at Cantor Fitzgerald LP in New York.

"The home-flipping culture that we've had in the last three years, that is clearly being rapidly eliminated," he said. There is also a "slowing of traffic by people looking for second and third homes."

The average rate on a 30-year fixed mortgage was 6.63 percent last week, according to mortgage giant Freddie Mac. That compares with an average of 6.60 percent in May and 5.6 percent in June of 2005.

[aceventura3]

Originally Posted by host

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".

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.

Don't Blame the Latte: The Real Reason
You're Not Saving More Is Closer to Home
June 21, 2006; Page D1

It's time to put our house in order -- and maybe the garage, too.

The U.S. savings rate has fallen sharply since the mid-1980s. In fact, last year, it was negative for the first time since 1933.

At first blush, this collapse in the savings rate seems puzzling. Our incomes have climbed at a healthy clip over the years, easily outstripping growth in spending on key items like food and clothing.

So why do we find it so tough to save? We can't, it seems, blame it all on morning lattes and evenings out. Instead, the big culprits are our two largest expenses: The roof over our head and the cars in our driveway.
• Signs of struggle. Some pundits have argued that the savings rate isn't as low as the official statistics suggest, or that Americans don't need to save so much because they are wealthier than ever. But when I look around, I see plenty of signs of financial distress.


A study sponsored by Putnam Investments estimates that seven million retirees have chosen or felt compelled to return to work. A Pew Research Center survey discovered that 20% of baby boomers had provided financial help to a parent within the past year. Families are also finding it tougher to pay for college, with College Board data showing a 194% increase in annual borrowing through college loans over the past decade.
[Expenses Graphic]

All this suggests folks are struggling to make ends meet. But why? Consider a new study from the U.S. Department of Labor titled "100 Years of U.S. Consumer Spending." The study draws on the Bureau of Labor Statistics' consumer expenditure survey.

It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, however, the portion of our spending that's devoted to food and apparel has fallen sharply over the past century.

Tobacco and booze also account for a shrinking share of spending. Meanwhile, the slice of our budget that goes to entertainment and health care isn't much changed from 40 or 50 years ago. Indeed, if you look at all these categories, you might imagine families have ample financial room for maneuver.
• Road to ruin. Yet we struggle to save -- and the blame seems to lie with two other expenses, transportation and housing.


Our transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03. It's easy to see why: The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one car, van, pickup truck or sport-utility vehicle for every adult.

"The automobile is no longer a luxury item," says Michael Dolfman, the Bureau of Labor Statistics' regional commissioner in New York and co-author of the new BLS study. "Cars became a necessity to get to work," with working couples often needing two cars.

Meanwhile, housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending.

More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%.
• Saving ourselves. Put it together, and houses and transportation accounted for 52% of all expenditures in 2002-03, up from less than 41% in 1950.


You probably need to have a car, and you've clearly got to live somewhere. Still, it strikes me that housing and transport expenses are ripe for cutting, if only because they are such plump targets.

But how are you going to cut back? Consider this: We may be spending more on cars and homes, but we are also purchasing cars and homes that are far more luxurious.

"The trend has been to buy the most house you can afford, rather than the amount you need," notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards in St. Louis. "It's the same thing with cars. You see a lot more luxury cars on the road. While you can get by with a $20,000 car, people buy the $40,000 SUV with the leather seats and the TV. There's a lot there that's discretionary."

Indeed, if you're willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did -- and you will free up money that can be saved.

This suggestion may puzzle some readers. Sure, cars might be money losers. But houses appreciate over time, so shouldn't you buy the largest home possible?

That might have been true during the recent housing boom -- but it isn't likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation.

Admittedly, you could goose your home's return with the leverage from a mortgage. You also, however, have to factor in the mortgage's cost, plus all the other expenses of homeownership, including maintenance, property taxes and insurance. The bottom line: Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your 401(k) plan.

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

[NCB]

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