by Calculated Risk on 8/23/2005 01:48:00 AM

Bruce Bartlett, in an article for Townhall.com discusses "Bubble fever". Although Barlett does not take a position, he writes:

Today, many of the same economists who correctly predicted the bursting of the stock market bubble, such as Yale University's Robert Shiller, are saying that the housing market is in a bubble. If it should collapse as the stock market did, the impact could be even more painful. Consider this evidence.

-- Homeowners are much more leveraged than they used to be. According to the Federal Reserve, Americans' home equity has fallen to 56.3 percent of their real estate, from 75 percent a generation ago. Another Federal Reserve study found that 16 percent of the money taken out was simply consumed.

-- According to Freddie Mac, people are taking more and more money out of their homes. Cash-out refinancings have risen to 18.1 percent of all refinancings, from 7.2 percent in 2003. In the last four years, homeowners have taken $559 billion in equity out of their homes.

-- More and more homeowners are buying and refinancing with unconventional loans, such as adjustable-rate and interest-only mortgages, rather than traditional fixed mortgages. Such loans have lower initial payments, but will rise automatically when interest rates rise. The Federal Reserve says that 47 percent of all residential mortgages by dollar volume are now non-traditional.

-- A new study by National City Bank found 53 cities in which home prices were in bubble territory -- defined as 30 percent above where they should be based on local income growth, population density and other factors. Santa Barbara, Calif., ranked as the city with the most overpriced real estate -- 69 percent above fundamental value. Based on the ratio of rent to home prices, prices nationally are now almost 40 percent above where they should be.

-- A new study by the Public Policy Institute of California found growing numbers of homeowners paying as much as 50 percent of their income for housing, including mortgage, taxes, insurance and utilities. In California, 15.4 percent of homeowners fall into this category -- including 20 percent of recent homebuyers -- and 10.6 percent nationally. Almost 40 percent of Californians pay at least 30 percent of their income for housing, with 29 percent doing so nationally. According to Fannie Mae, 28 percent is the most one ought to pay.

According to the National Association of Realtors, 23 percent of homes last year were sold as investments, and another 13 percent were vacation homes. With rapid appreciation being a prime motive for both, any falloff in housing prices could cause many of these properties to be dumped on the market quickly, potentially turning a housing downturn into a crash.

by Calculated Risk on 8/23/2005 12:32:00 AM

The Denver Business Journal reports on a new study by University of Colorado-Denver graduate student Christi Icenogle showing that foreclosed properties are costly to a city. After reviewing the direct costs to the city, the article points out that the combination of "loose" financing and slow appreciation has apparently led to higher foreclosure rates in Denver:

Foreclosure rates have been increasing in Denver, [Zachary Urban, Brothers Redevelopment Inc., a housing counseling nonprofit] said, partly because of adjustable rate mortgages with increasing payments over time, and partly because of job losses. He foresees foreclosures continuing to rise as interest-only loans come home to roost.

Phil Heter, broker/owner of Arvada-based Heter & Co., said he's also been seeing foreclosures increasing, and thinks it's because of loose qualifications on home financing.

"Most of it is 100 percent financing," said Heter, whose Web site is REODenver.com. With no money down and low appreciation, the owners may have little, no, or negative equity in the house and "have a tendency to walk," he said.

In metro Denver, looking at basic homes for first-time homeowners, Heter estimated appreciation was 1 percent last year, and "that's being generous."

Lower appreciation tends to make foreclosure rates higher because the lack of increase in value makes it tougher to sell the home for more than the amount owed.

When housing slows, this could become a widespread problem.

A related problem for local governments, discussed at the The Housing Bubble, is that revenues have been increasing rapidly for cities in boom areas. But the local governments are, in the opinion of Scott Ellis, Brevard County, Florida Clerk of Courts:

"... dangerously sinking much of the newfound windfall into recurring expenses, mainly raises and additional employees. When the real estate bubble pops, the tax rolls will march backwards ... there will be weeping and gnashing of teeth by the time next tax year rolls around."

When housing slows, it appears costs will be rising and revenues falling for cities and local governments.

by Calculated Risk on 8/22/2005 04:18:00 PM

Reuters reports: Stretching mortgage to 40 years can be risky

"This (40-year) loan product screams of a budget-constrained consumer desperate to get into a home," says Gary Schatsky, a fee-only financial adviser/attorney. "This trend is disturbing to me, especially since it feeds into the growing obsession by consumers to get credit.

"They need to think through this mortgage's implications because in many cases, it will become their children's mortgage," says Schatsky, who is based in New York.

I think a 40 year fixed rate loan is better than an option ARM. But I do agree that they are symptomatic of desperate "budget-constrained consumer[s]" trying to buy a home.

... Bankrate.com, notes that interest rates on 40-year mortgages are generally 0.25 to 0.50 percentage point higher than on traditional fixed 30-year loans. That difference negates some of the benefits of the lower monthly payment.

Here is an example: A $300K 30 year loan with an average Freddie Mac interest rate of 5.8% has payments of $1,760.26 per month.

For the same amount financed for 40 years with a 0.375% higher rate, the payment is $1,687.38. A buyer has to be desperate to pay the higher interest rate for that small reduction in monthly payments.

"This all stems from affordability and borrowers stretching themselves beyond their reach to get into a home they can't afford," says Economy.com's Chen. "What's next, a 50-year loan?"

Recent anecdotal evidence indicates that home price increases are beginning to decelerate, a sign the housing sector is starting to cool.

"When housing cools, so will these loans," Schatsky says. "If a consumer has to take out this loan to qualify for a home, their goal of homeownership needs to be seriously re-evaluated."

by Calculated Risk on 8/22/2005 11:43:00 AM

Reuters reports:

Prices in the hot U.S. housing market are poised to decline as demand dries up due to the inability of first-time buyers to afford a home, a Merrill Lynch analyst said in a research report on Monday.

"The housing market has become so stretched that the affordability ratio for first-time buyers, the folks who drive the incremental demand in the real estate sector, has deteriorated to levels last seen in the third quarter of 1989," wrote David Rosenberg.

The price of an average starter home in the United States has climbed 14 percent over the past year, while the average income for the first-time buyer family has risen just 4 percent, Rosenberg said, calling that an "unprecedented gap."

In the third quarter of 1989, bids evaporated and new home sales dropped 20 percent the following year in response to lofty prices that first-time buyers could not afford, the analyst said.

The inventory of unsold new homes rose to a 8.4 months' supply from 7.1 months' and that inventory buildup led to a 5.8 percent drop in the median price of a new home, he said.

by Calculated Risk on 8/21/2005 09:06:00 PM

My most recent post is up on Angry Bear: Signs of the Times.

"Sign, sign, everywhere a sign
Blockin' out the scenery, breakin' my mind"
Signs, Five Man Electrical Band


Click on photo for larger image.
Orange County, CA Aug 21, 2005

This photo shows four houses in a row for sale. Two spec houses are being built, the one on the left nearing completion, has a "For Sale by Owner" sign.

For the 3rd and 4th houses, I've blown up the offering signs (upper right corner). The 3rd house is an older home with a For Sale / For lease sign. The last home is a newer resale with a small sign reading "New Listing".

Although three or four listings in a row is rare, a house for sale on every block is common. And when I drove around my neighborhood this morning, there was an open house sign on almost every corner. This may just be a temporary surge in inventories, but it feels like a sea change.