BizWeek on the new Housing Bubble

[bearishgurl]

[quote=no_such_reality]…There-in is problem in our current marketplace. The pool of people willing to pay premium price for fully gloss coated greatly outweighs the price of those willing to deal with good enough.

And hence, people that want to live there while they fix it are being out bid by people that want to flip it, because the people that want it fixed right now are outbidding all of them.[/quote]

I don’t think flippers will offer more than costs of acquisition + cost-of-flip + cost of sale + “reasonable profit” (15%+??). Because most of them are looking for a very quick turnaround (to minimize their carrying costs), they have to go by the current sold comps in the area when making offers, even though prices (in general) may be rising.

In any case, prices are rising at different rates depending upon micro-area.

This leaves a window for joe6p buyer to bid a little more than a flipper would and get the property … IF they have 20% down and can close in a timely manner.

nsr, your (emphasized stmt, above) is what I’ve been trying to tell lower-tier buyers here (ESP FTB’s) since before the holidays. I’ve been telling them to cease being “part of the problem.” In essence, I’ve been saying:

“Be pro-active, realistic, and make offers contingent upon a VERY TIMELY physical inspection. When your inspector in escrow doesn’t turn up any structural damage AND the repairs they turn up total under 1.5% of the sales price, just suck it up, remove the contingency and deal with it. If you throw the listing back to the market, YOU are back to square one, which could get more expensive by the month. The property you just threw back will sell to someone else, in very short order.

Even if the repairs are 1.5% to 3% of the purchase price, don’t ask for the WHOLE amount in concession from the seller in your counter-offer. If you really want the property, get an expert estimate (ex:. new furnace), present it to the seller and start out by asking them to reduce their accepted price by 70% of the cost of it.

All major cities are getting older and older and many of them have run out of land around their perimeters for new subdivisions.

And you really don’t want to shop 50+ miles away from work (to make offers on *newer* construction in your price range), as getting one of these properties will eventually make your life miserable.

As a lower-tier buyer (incl FTB’s), you can’t have everything. Get as much as you can for the price you can pay and move forward.

If you, as a lower-tier buyer, are stuck in a “dream” of “delusions of grandeur” for your modest price range (new appls, new floor coverings, granite, etc), you are looking at a “flipped house” which will likely get multiple offers and thus, it’s asking price will be run up, very likely beyond your price range.”

********

Flippers and owner-occupant joe6p serial rehabbers didn’t get where they are today by “sweating the small stuff” at the offer/counter-offer and acceptance/escrow stages. SFR buyers in the $320K-$400K price range can no longer afford to either . . . that is, IF they actually want to own their own home in SD County ASAP.

[CA renter]

[quote=bearishgurl]

I bought several of the calibur of properties (which are listed at $320K to $400K today) in a 9-12% mortgage interest-rate environment and ended up coming out just fine after selling 🙂

It isn’t going to get any easier to buy a roof over your head in SD County.[/quote]

It is MUCH easier to make a profit on an asset purchase (especially one that is usually purchased with debt) when interest rates are high and inflation is high. Buying when inflation and interest rates are at/near historic lows, and prices are historically high, does not bode well for capital appreciation going forward.

[sdduuuude]

[quote=The-Shoveler]In SD I think you have more of a wireless/SmartPhone Bubble than anything else.[/quote]

HAHAHAHA. +1 !!!

[CA renter]

[quote=Rich Toscano]Great post sdduuuude.

Things selling fast, or prices going up fast, don’t necessarily make for a bubble. To me, a necessary condition of a bubble is that valuations are extremely high on a historical basis. We just aren’t there on housing — not even close.

I have been meaning to update the long term valuation charts and will soon when I get some time. But, just extrapolating from last year’s chart, we are probably pretty close to “fair value” (which I define as the median historical price to income or price to rent ratio).

More charts soon-ish![/quote]

I wonder if the shift in market mix is hiding the price inflation of housing, though. In our neighborhood, and other mid to high-mid areas that I’ve been following, prices are pretty much back to bubble highs.*

The NINJA/junk mortgages were driving speculative activity during the early-mid 2000s bubble; but artificially suppressed inventories, historically low interest rates (held low for far too long…yet again) and the inability of investors to earn yield on other investments is what’s driving speculative activity this time around. They *might* have more staying power, but many/most of them seem to have a 5-7 year disposition plan…and everything I’ve heard or read from these people makes it sound like they are expecting some pretty hefty price appreciation in the interim.

It would also be interesting to see how cost inflation in other things like energy, food, healthcare, etc. might affect a home buyer’s ability to pay prices that are in line with historical norms. IOW, what if, in the distant past, housing took up 30% of a household’s budget, with food, healthcare, energy, etc., taking up 40%, leaving ~30% for savings and disposable income…how does that look vs today’s home buyers’ expense allocations? Also, DB pensions, job stability, expectations for future raises/wage inflation, the ability of a stay-at-home spouse to earn a second income (when they were accustomed to living on one income) etc., would all play a part in how much money a household could allocate toward housing costs. And then, there’s the interest rates that would greatly affect home price/income ratios.

*Edited to add that prices are actually all over the place. Not sure how appraisers are valuing things, but there are very large divergences between different sales (some strangely low, yet another similar house nearby might be $200K+ more, very near bubble highs). The presence of flippers along with the extremely low inventory in many areas is really adding to the wild pricing.

[no_such_reality]

[quote=CA renter]

*Edited to add that prices are actually all over the place. Not sure how appraisers are valuing things, but there are very large divergences between different sales (some strangely low, yet another similar house nearby might be $200K+ more, very near bubble highs). The presence of flippers along with the extremely low inventory in many areas is really adding to the wild pricing.[/quote]

Most of the actual sold are hitting at 2003 numbers. There is a lot of wishing on asking prices and huge disparity between the amount of deferred maintenance on homes for sale.

[quote=CA Renter]It is MUCH easier to make a profit on an asset purchase (especially one that is usually purchased with debt) when interest rates are high and inflation is high. Buying when inflation and interest rates are at/near historic lows, and prices are historically high, does not bode well for capital appreciation going forward.[/quote]

Who needs capital appreciation when you can get a cash return pushing 8% that is basically indexed to inflation and tax sheltered?

[barnaby33]

“Who’s left,” has naturally morphed into what’s happened. Where is Bugs with the appraisal angle when you need him?

I don’t believe we are in a bubble now either. I believe horrible monetary policy, deliberate collusion on the part of the banks and govt to force down inventory and a rapidly evolving pear shaped economy explain what’s happening without anything irrational. As noted investors have to choose between overpriced stocks, overpriced bonds, or slightly overpriced RE.

On that note though, does anyone have a strong opinion about when interest rates will rise, because that is the driver of all of this. Or rather when will the Fed stop fighting deflation? Sorry had to say it!
Josh

[Rich Toscano]

[quote=CA renter]

I wonder if the shift in market mix is hiding the price inflation of housing, though. In our neighborhood, and other mid to high-mid areas that I’ve been following, prices are pretty much back to bubble highs.
[/quote]

I don’t think that is much of an issue; I am using the Case-Shiller index which is uses repeat sales of the same home.

I suspect that outside of some “special” markets like CV, if you are seeing anything near peak prices on some houses, it’s due to massive upgrades.

[Rich Toscano]

[quote=barnaby33]
On that note though, does anyone have a strong opinion about when interest rates will rise, because that is the driver of all of this. [/quote]

Anyone who “knows” the answer to this question is delusional or a liar…

[Rich Toscano]

BTW, a sneak preview of the valuations… as of last month, price to income and price to rent ratios were both within 2% of their historical median values.

[SK in CV]

[quote=barnaby33]
I don’t believe we are in a bubble now either. I believe horrible monetary policy, deliberate collusion on the part of the banks and govt to force down inventory and a rapidly evolving pear shaped economy explain what’s happening without anything irrational. As noted investors have to choose between overpriced stocks, overpriced bonds, or slightly overpriced RE.

On that note though, does anyone have a strong opinion about when interest rates will rise, because that is the driver of all of this. Or rather when will the Fed stop fighting deflation? Sorry had to say it!
Josh[/quote]

Primarily addressing the bolded part…whether or not there has been horrible monetary policy remains to be seen. It has clearly been a boost to the economy as a whole, whether it’s been cost effective is an unknown. If we survive, then it worked.

On the supposed “collusion on the part of the banks and govt to force down inventory”, I think you give both lenders and policy makers too much credit. Government policy has been both inept and misguided, and mostly a waste of money, but other than minor timing differences, it hasn’t effected the inventory. Foreclosure moratoriums were temporary, and never would have happened if the lenders had their shit together in the first place.

Lenders “may have” intentionally slowed the release of inventory, but I think it’s more likely that again, it’s incompetence rather than strategy. Lenders have never done a good at managing REO portfolios. It has become pretty much accepted fact that REO’s sell for less than other properties. If there is any logic to that it escapes me. The only good explanation is that lenders are stupid.

More importantly, whether through malevolence or ignorance doesn’t really matter, it worked.

The price freefall ended and the current price rises notwithstanding, we’ve had a pretty stable residential real estate market for a couple years. If it had unfolded differently, and there was no government intervention to delay foreclosures, and no delay in lenders getting loans foreclosed and property to the market, prices would have fall faster and deeper than they did. Losses for both lenders, homeowners and probably the government would have been significantly greater.

But I’ve yet to see any logical argument that, had that happened, we’d be in a better place today. I suspect, just the opposite, we’d be in a much worse situation today. I think we’d looking at still very depressed prices, and more importantly, significantly less new construction.

Sometimes when we talk about real estate prices and the economy, they’re discussed as if the two go hand in hand. They don’t. With all due respect to all the agents here, resales of homes make only a miniscule contribution to GDP. As a whole, it means shit to the economy. Home construction, on the other hand, is a signficant GDP driver. And if prices were still 20% lower than they are today, builders wouldn’t be building. Unemployment would be higher than it is. And probably half of the GDP growth over the last year wouldn’t exist.

[Ren]

It was easier for a buyer to put in crazy offers during the bubble, when there was little or no money changing hands, and when they didn’t have any idea what was really happening. Now that the average intelligence of the people doing the buying is higher, and they stand to lose real savings, and the last burst is fresh in their minds, they’ll think twice. That will work against prices getting too bubblicious again.

[spdrun]

SK in CV:

Yep, let’s build more McHouses, rape more land, use more water, spend more energy to light and climate-control 2000 sf per person. Let the marketeers brainwash people that they actually need a 5000 sf McHouse.

Oh, and make sure that people are priced out of markets that actually have jobs, so they can have the orgasmic pleasure of commuting 2 hr each way from out in bumblefuck, sitting in a steel and glass cage that reeks of stale fast food and cola. Yep. Yep.

The goal should be affordable prices in areas that are actually livable and pleasant, not infinite expansion into the great inhospitable. Oh yeah, and FUCK the people in the construction industry. We shouldn’t base policy on preserving jobs that may or may not actually be needed — that’s what the Soviets did and it worked out really well for them.

[bearishgurl]

[quote=spdrun]SK in CV:

Yep, let’s build more McHouses, rape more land, use more water, spend more energy to light and climate-control 2000 sf per person. Let the marketeers brainwash people that they actually need a 5000 sf McHouse.

Oh, and make sure that people are priced out of markets that actually have jobs, so they can have the orgasmic pleasure of commuting 2 hr each way from out in bumblefuck, sitting in a steel and glass cage that reeks of stale fast food and cola. Yep. Yep.

The goal should be affordable prices in areas that are actually livable and pleasant, not infinite expansion into the great inhospitable. Oh yeah, and FUCK the people in the construction industry. We shouldn’t base policy on preserving jobs that may or may not actually be needed — that’s what the Soviets did and it worked out really well for them.[/quote]

Couldn’t have said it any better myself …. except for one caveat. In SD County, we already DO currently have hundreds of “affordable” residential listings within 20 miles of job centers. The areas they are situated in were “affordable” decades ago and are still “affordable” now.

The problem lies with most of Gen X-Y buyers (who are entering into or still in “family-raising” mode). These prospective buyers won’t even call their agents to view the “affordable” properties, for whatever (ignorant or misinformed) reasons. They would rather all flock to a handful of zip codes out in “slightly closer-in bumblefuck” and bid up each other’s “over listed-price” offers so they can then “win” one (yay!). After “winning,” they get to bend over to pay exorbitant MR into a “soon-to-be-BK” CFD, school district and (resultant) city.

More power to them. Hope their “net worth” is such at the age of 55+ that they will be able to at least ponder the idea of “retiring” someday, lol ….

The buyers who make offers on the “affordable” homes are the people that grew up nearby or they are bought with cash by their nearby parents (so they can place their children and grandchildren in them, for proximity). The balance are purchased by investors and flippers (who aren’t now and never were “stupid,” btw).

[SK in CV]

spdrun, are you arguing that increases in population don’t require additional housing?

I don’t think there’s any question that many areas were over-built for their current populations. The last real economic study I did (and got paid for!) almost 10 years ago predicted that same conclusion. That was 2004. But for at least 20 years, changes in sales of new homes v. existing moved almost identically. Through boom and bust. But for more than the last 4 years, new home sales have been roughly half of what would have been necessary for that track to continue. New home construction lingered at it’s lowest level in 50 years. For 4 years. It just rose in the last 90 days to the lowest levels reached 30 years ago. Yet population growth and more importantly, new household formation have continued.

There probably are still some areas that are over-built. More houses than are necessary. But not everywhere. And current construction levels, though a full third higher than the bottom of the trough, are still a third of the peak construction and would still require a 50% increase to get to average construction levels of the last 50 years.

You make some good points about the type of construction needed. I’m not a big fan of huge homes either. But that doesn’t mean that all new home construction is bad. Some of it is needed. People gotta live somewhere.

[sdduuuude]

[quote=Rich Toscano]BTW, a sneak preview of the valuations… as of last month, price to income and price to rent ratios were both within 2% of their historical median values.[/quote]

So – can a non-bubble pop ?

[Author]

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