Housing Bubble Correction Update: Geographic Regions Cascade

[EJ]

Are real estate prices in bubble markets likely to decline as projected in the Weekly Commentary: Housing Bubble Correction Update: Geographic Regions Cascade?

http://www.itulip.com/housingpriceregionscascade.htm

[Alfredo Dominguez]

I'm not sure I buy this.

A) The rate of diversion from the mean is much higher in highly populated urban centers. I bought a house in 2005 out in the hinterlands (well, sort of) with a thirty year fixed mortgage whose monthly cost is less than what I receive in rent from each of two of the three units it consists of. (Historic home split into a triplex near a state university, I live in one unit but still have a lease on it as I rent out the extra bedroom. This is not the unit that yields less than the mortgage payment, it actually exceeds it. The one that doesn't beat the mortgage payment is a one-bedroom efficiency but it's still ony twenty bucks away... for now.) As should be obvious with such a return on rental property whilst mortgage rates are so low, this market has in no way participated in the housing bubble. Where to fall from here? What doesn't go up....

B) I believe you make a mistake in labelling areas, though composed of large plots and with zoning that allows domesticated livestock, as "rural" when they are intrinsically tied economically to a nearby major urban center. Can it be said that Loudon County, Virginia is really a "rural" market? Hardly. Places like that are simply outer suburbs. Your anecdotal evidence proves this as it is the proximity to the major urban center that allowed the woman's husband to commute in the article you featured. As these areas are so closely tied with the economy of the major urban centers they encircle, I'm thinking there will be neglible difference in the rate of change downward once the reversion begins in earnest.

C) Contrary to "rural" areas suffering during this ending of the housing bubble, they should actually fare relatively well. First, let's redefine "rural" into something that resembles those areas where the housing bubble has had no effect: "Flyover-ville." With the housing bubble ending as well as the economic boom it brought to those areas where it existed (real estate agents, contractors, appraisers, designers, etc.), Flyover-ville will be the beneficiary from a flight to safety. That is, those looking to escape the downward reversion will need to move somewhere where no diversion had taken place to begin with. Unsustainable debt levels, stagnant real wages, increasing crime, etc. will provide the "push." Low cost of living, quality of life, and relative economic vitality (Remember, it is rural areas where manufacturing still exists. With all of the bemoaning being done about the automotive industry in the U.S., there is a place where it is thriving: the rural south. Nissan, Hyundai, Mercedes, BMW, Saturn, and Kia all have or have announced plants in the south. Toyota recently announced plans to open a plant in Flyover-ville, Indiana. When the great inflation has rendered U.S. manufacturing again a viable option in other sectors, it won't be taking hold in highly regulatory states with strong labor union presence.) will provide the "pull."

At least that's the bet I've made.

[jeffolie]

My observation is that metro (city central) condo towers are already in trouble and are reducing prices. Suburban construction by Centrix offer $100,000 discounts putting prior buyers underwater. I can not speak to the fringe, rural areas.


Condo Developers Building And ‘Hoping For A Miracle’

A Las Vegas developer talks about condos. “John Restrepo sat down with In Business Las Vegas to discuss the state of the Las Vegas..real estate market. ‘I think we are going to a period of a more realistic view of our high-rise condo market here. We’ve had a period of irrational exuberance on the high-rise condo market, where we thought the demand would be a lot higher than it has ultimately proven to be. Over the next five years, we’ll probably see 25 percent of the 60,000 (proposed) units actually built.”

“‘Most of the projects have been along the Strip corridor, they’re essentially projects that serve second homebuyers, investors and speculators. That’s why 80 percent of the time these units are dark.’”

“‘A lot of the speculative guys that would tie up a site temporarily and then start flipping it and using a Web site and put a trailer on a vacant lot, those guys have pretty much gone away, for the most part.’”

MSN real estate looks at ‘the great American condo glut.’ “After several years of gung-ho development in south Florida, San Diego, Las Vegas and other major markets, the once-hot condo market is headed for a slump. Condo developers say they have been forced to throw in perks.”

“‘I don’t think there’s a market out there in which developers are not offering some kind of incentives,’ said (lender) Arthur Nevid. Mountain and many other lenders say they have ceased funding most condo projects and are backing away from some projects they had already committed to. Some developers are even giving back the down payments or deposits paid by residents.”

“There hasn’t been a condo boom like this one, economists say, since the late 1980s when rising home prices and out-of-sight interest rates spurred developers to begin churning out a flood of condominiums. Many of these properties wound up back on the market, pushing prices down further. Economists are concerned that this same pattern is repeating itself in markets such as Las Vegas, San Diego and Miami, where investors, rather than residents have bought many of the units.”

“And more condos are being added this year, analysts say, putting more pressure on prices. In San Diego, 5,217 condo units were built since 2001, and another 7,235 are under construction or approved. Meanwhile, sales and prices in San Diego have peaked, agents say, and prices are beginning to head south.”

“Owners are now taking price cuts, or renting out their unit until the market improves. San Diego Realtor Cindy Davis is now leasing out a client’s condo that has lingered on the market for 80 days. ‘I’ve told him now he’s not going to get his price. Keeping it on the market and hoping for a miracle is stupid,’ she said. Likewise, Hamrick said, prices have stalled in Las Vegas, and are poised to dip, should more units come back on the market.”

“Even low-key Minneapolis, has been rocked by a condo boom that is threatening to go bust. Last year, 1,326 units sold in the area, up from 557 the year before. And there are currently 4,518 condos under construction or approved for downtown Minneapolis alone, said Mary Bujold.”

And Inman News has the results of a related study. “Single-family homes have the most appeal for aging baby boomers, according to a survey released today. Of those planning to move, 63 percent said they are looking to purchase a single-family home, while 18 percent would purchase a condo or townhouse.”


LAS VEGAS CONDOS

The Las Vegas Sun has this breaking news. “Sales have been suspended at another luxury condominium project in Las Vegas, as analysts said interest had dwindled in properties that were not close to the Strip. Letters were sent to nearly 100 buyers at the Curve project, located in southwest Las Vegas, offering to refund their deposits or extend their contracts by 150 days, said vice president Paula James.”

“Developers had set a 180-day period to sell 75 percent of the units before beginning construction, but the first tower of the project sold only 53 percent, or 97 units, James said.”

“‘We’re looking forward to building the project,’ she said. ‘We just need to regroup. We ran out of time .’”

“At least seven projects have now publicly folded or stalled in a little more than a year, a fraction of the more than 100 once proposed. Sheila and Bob Joseph, business owners from California, bought into the project soon after it was announced last year and canceled their contract in January when they didn’t see construction beginning as scheduled at the 45-acre site.”

“Construction of the $300 million first phase of the Curve, which would include two 18-story luxury condo towers and 12 commercial buildings, was supposed to start late last year. ‘We were just reading a lot about real estate in that area and taking a look while we were there at what wasn’t moving,’ Sheila Joseph said. ‘Not only reading, but the gut feeling we got about the project.’”

“(Realtor) Bruce Hiatt said his clients had little interest in the Curve because of its location. ‘It was quite expensive. What could you sell it for later? My clients decided they’d have better appreciation on the Strip.’”

“Paul Murad, a condo developer and author of ‘Manhattanizing Las Vegas,’ said the city was not ready for a high-rise project in the suburbs. ‘You can’t blame it on construction, you can’t blame it on architecture,’ he said. ‘We’re finding that people who like the suburbs like the suburban lifestyle and that means a single-family home. A high-rise in a suburban family setting is a bit premature.’”

“It’s much tougher to convince developers about projects in the suburban market, said (developer) Tim Sullivan. ‘My thought is if we had the Curve developed, it would be highly successful,’ he said. ‘But they’ve got to prove it. Right now, there’s a lot more hype than reality.’”

The Interest-Only ‘House Of Cards’ In Las Vegas

The Las Vegas Business Press has an update on that housing bubble. “As the home-loan delinquencies rise nationwide, Nevada’s numbers remain surprisingly strong. However, the pending interest-rate hikes by the Fed, the day-to-day fluctuations in oil prices, and the Silver State’s high percentage of interest-only and adjustable-rate mortgages have left some lenders and analysts wondering if the bubble will burst.’”

“‘Where you will probably have problems is with the no-down-payment, 100-percent-financed ARM (type of loans), and interest rates go up,’ Nevada State Bank Senior Vice President Jeff Bargerhuff said. ‘It’s kind of like the perfect storm of mortgage lending.’”

“Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages, including interest-only and products with ARM options, according to the FDIC. Nationwide, 49.5 percent fall into that category. ‘ARMs tend to have a higher rate of foreclosure,’ said an official from the MBA.”

“The year-end 2005 FDIC statistics show a sharp jump from the same time 12 months before, when Nevada’s interest-only and adjustable-option loans were more in line with the rest of the country. The state had 39.5 percent of its mortgages in that category at the end of 2004, compared with 31.1 nationwide.”

“Problems can show up when underwriting standards are relaxed, Nevada State Bank President Bill Martin added, ‘It just depends how tight the lender tied it and if they just didn’t care because they wanted the loan. You have to realize people have car payments and other things to pay.’”

“Some of the riskiest of loans, the subprime ARM loans, showed an increase in delinquencies at the end of 2005. The Mortgage Bankers reported 7 percent of such loans were 30 days or more past due in Nevada, compared with 5.2 percent the year before. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before. ‘It’s what we have been expecting,’ a MBA representative said. ‘There are so many new loans out there that haven’t been seasoned. Interest rates may play a role in the future, but right now, it is just the economy, job loss and low (home) appreciation.’”

“One realty broker, Linda Rheinberger believes there might be too much emphasis put on Nevada’s interest-only loan numbers anyway. ‘It’s just to maximize return,’ she said of the financing’s popularity among investment buyers. ‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”

[John Granville]

I think it mainly depends on inflation in general. And inflation presently is about 10 to 12 percent, which is much higher than the official "number". Further, I think inflation is going to increase. That will be our wonderful government's solution to the huge debt build-up both publicly & privately.

I lived in Seattle during the Boeing boom of the 60's and the bust that began in 1970. During the boom there was a big run-up in real estate prices. At the bottom of the bust, about 1972, local unemployment was 20%. It was actually worse than that because many, many people had left the area. For reference, in the depression year of 1932, unemployment in the U.S. was about 25% nationally. As you may recall, during the 1970's inflation nationally was pretty high. In the Seattle bust some people just vacated their homes & left the area. There were many foreclosures. Houses & apartments quit selling, but prices did NOT drop appreciably. Lenders just hung on to the properties on which they had foreclosed. This is similar to farms that were foreclosed in the 1930's depression. And farms that are not farmed go to seed - deteriorate -. Lenders on the farms finally liquidated them and took their losses, but after a significant period of time had elapsed (late 1930's). In the Seattle example, high national inflation saved the lenders. By 1979 house prices were double their 1969 prices.

So how the recent run-up in real estate prices will ultimately be resolved isn't clear. But I wouldn't bet on the bubble popping as it could in a stock market crash. The structure of the real estate & stock markets are very, very different. Stocks are "marked-to-market" every day but real estate is not, especially on the downside.


JG

[jeffolie]

John Granville

Yes, housing is illiquid. It does mark to market by comps.

When housing bubbles bust, they take 5 to 15 years to hit bottom. The 1990 bust took 5 years in the US and 15 years in Japan.

Regarding the Seatle example you give, over 10 years the inflation during that period accounted for all of the 100% gain. So, in real dollars adusted for inflation, it was a wash to hold the properties. The banks surely had to pay expenses such as property tax and maintenance; so, they probably did not do very well.

[Charles Mackay]

EJ, when I lived in California in the 70's and 80's I noticed that the SF bay area would bubble and then a year later the valley towns like Modesto and Fresno would bubble ...and back and forth like that. The downturns however seemed to happen simultaneously. When Volker squeezed everything game down.

If I were going to hypothesize a likely path and draw a graphic, the graphic would be a picture of the U.S.. And the concentric rings would start on both coasts with the bubble rippling into the interior of the country. The popping of the bubble would also start on both coasts and ripple into the interior.

And then the next bubble in 5 years would again start on the coast... like that.

CM

[Zeus]

Re: Housing Bubble Correction Update: Geographic Regions Cascade

EJ,

As a person currently directing a think-tank project in "Learning as a
Public Policy Concern", I emphatically appreciate your well reasoned
contrasting views. It seems we humans are terribly primitive when it comes
to learning not only about basic economic principles, but about how our own
emotional and psychological desires (influenced and reinforced by social
pressures) influence our judgment. Not only are you incredibly incisive,
relaxed, and on-target in your analysis, you have a rare gift for seeing the
larger cultural opportunity even in times of economic trial. A man who
grasps numbers, who is positive and funny, AND has an adroit grasp of the
cultural foundations of American society? You are truly a rarity and among
the few who "predicts"well what will be a major emerging need in society:
adaptability which is both creative and analytical. You present a very
compelling example of how life decisions might be made guided by a much more
multi-faceted learning that invites contrasting views and new ways to see
crises and opportunities. I especially liked your comment below, and I
happen to agree with it. One of the great missed opportunities is actually
failing to see economic downturn as a possible plus, which loosens us from
enslavement to material goods. (Because we can no longer afford them, we
have to find a newer basis of meaning that may actually be better and more
fulfilling for us.) Bravo on many fronts!

"One of my favorite positive features of U.S. culture is its creativity and
adaptability. Remember the hippy movement? Its key features were
anti-materialism and anti-consumerism. Flaunting wealth was very un-cool.Â
The pursuit of wealth was considered boring and shallow. This was a
convenient credo at a time when capitalism wasn‚t doing very well and no one
had much real income or credit to use to buy anything. Look for a new
social movement that makes being downwardly mobile not only socially
acceptable but cool, including renting versus owning. In fact, the movement
may have already arrived in the concept of „downshifting‰ and will
accelerate in the future. Many people will be forced to lower material
expectations, but a whole social movement will support a move away from
working 80 hours a week to pay the mortgage and I expect most people will be
relieved, and will find themselves much happier with more time for friends,
family and themselves. Psychologically the change won‚t be as painful as
you expect. As usual, you heard it here first!"

Are real estate prices in bubble markets likely to decline as projected in the Weekly Commentary: Housing Bubble Correction Update: Geographic Regions Cascade?

http://www.itulip.com/housingpriceregionscascade.htm

[jk]

Re: Housing Bubble Correction Update: Geographic Regions Cascade

this notion of "downshifting" and moving away from the rat race feeds right into the thread on "the end of employment as we know it."
http://www.itulip.com/forums/showthread.php?t=286

Men Not Working, and Not Wanting Just Any Job

http://www.nytimes.com/2006/07/31/bu...rtner=homepage