Saturday, April 22, 2006

Bubbles, Bubbles, Toil and Troubles

From the front page of the Washington Post:

Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.


Nobody knows exactly how much of the real estate boom was driven by investment and speculation. Experts say that between 15 and 30 percent of all purchases were made by investors, rather than by people who bought homes intending to live in them. Some bought the properties for cash, sometimes with equity they pulled out of their own homes, so there is no loan record. Other buyers pretended on loan applications that they would live in homes they really intended to flip, so that they could qualify for better loan terms or get around developer restrictions on investor-buyers.

Some projects became particular investor magnets, and, more recently, the subject of real estate blogs criticizing speculative excesses. For example, the local Internet blog Bubble Meter focused last month on what it called "the bubblicious bench." At one recently completed condominium called the Halstead at Dunn Loring, a luxury condominium complex in Fairfax County, a park bench outside the building bristles with real estate agent lockboxes to permit vacant units to be shown to prospective buyers or renters. On a recent morning, there were 49 lockboxes there, outside a building that has about 200 units.

Manuel Tagle, a real estate agent with Fairfax Realty in Falls Church, is representing two units there, both owned by investors, one of which is for sale and one for rent. He owns a unit there himself, which he has rented out.

"There's a very high concentration of investors," he said. "I have seen a lot of investors selling now. They see values going downhill."

The prevalence of investors -- and now their disappearance -- is causing real problems for owner-occupants who want to sell, sometimes against competitors willing to cut prices substantially because of profits they made in 2003 or 2004. Mike Pugh, a real estate agent with Re/Max Allegiance in Arlington, is trying to sell a condo at the Halstead for a woman he says bought it for her retirement home, then became ill and went to live with family. Pugh said his client, who he believes was one of the few purely owner-occupants in the complex, is likely to lose money she had saved over a lifetime.

"We aren't investors, but we are being punished by the market as though we were," he said.

They face plenty of competition. Delta Associates, an Alexandria real estate research firm, said there are about 25,853 new condos being marketed locally now. But only about 1,996 new condos were sold from January to March, down from 3,520 in the first three months of last year. And the area's multiple-listing service, which lists mostly previously owned properties, showed about 5,500 condos and co-ops for sale in March in Washington and the close-in suburbs. That was about a fourfold increase from about 1,400 listed in March 2005 with the service, Metropolitan Regional Information Systems Inc.

Is Washington market the only bubble area in the country? Not according to Housing Bubble:

Here is a partial list of the housing markets that are particularly interesting.

Los Angeles - Aka 'Epicenter of the housing bubble.' Huge market where prices are way out of whack with median incomes.

Las Vegas - Not only do they gamble in casinos, but here they gamble in the mortgage broker's office. The Las Vegas economy continues to be VERY dependent on the housing industry and tourism.

Bakersfield - Central Valley, California. Incomes way out of line with housing prices. Price have more then doubled in the past 5 years. Where are the high paying jobs to support the surge in home prices?

Miami - Where the construction crane is the unofficial bird of Miami. The condos developments have inundated by flippers looking for a quick buck. Inventory has rapidly risen in the past year especially for condos. The hurricane season starts in a month and a half.

I dunno if New York is on the list of "interesting markets," but I do know that a piece of shit studio (400 square feet) in a piece of shit pre-war building in some neighborhoods in Brooklyn costs $315,000+.

I also know that I can't currently afford to buy an apartment in New York without spending the rest of my days eating stale, outdated food from Jacks 99 Cents store.

But I'm kinda glad I haven't been able to afford to buy real estate in the last two years or so, because I'd hate to be living in a piece of shit studio in a piece of shit pre-war building in Brooklyn or Queens that I paid $315+ for, living off stale Super A boxed macaroni and cheese and Corn Flakes from Montreal with an expiration date that's strangely obscured on the box top, wondering how much value my apartemnt has lost since I bought it.

Again, I'm not an economist, I'm not in the real estate business, but it sure does sound like a major "correction" is coming for many real estate markets across the country.

When and if that happens, a serious drop in consumer confidence is sure to follow. Much of the recent consumer spending has been supported by people flipping homes and pulling equity out of thier own houses.

Thanks for your comments over on my site.

Enjoy your weekend.
I see what you mean about consumer confidence, praguetwin. Until people vote with their wallets and stop spending (or accumulating credit card or home equity debt in order to spend), Wall Street figures everything is all right.

So here's a question: when does the America consumer finally stop spending? As I think you pointed out in a previous comment, Americans already have a negative savings rate. Mortgage rates are rising. Gas prices and energy prices are rising. Real Estate values are not rising at such drastic rates anymore and there is a very real fear that values could stagnate or even fall in many areas around the country.

So at what point do people say, "you know what, I can't spend anymore money, I can't take on any more credit card debt, I can't take out another home equity loan, I have to put my nose to the grindstone and only purchase stuff I need for the forseeable future"?
That is the point. It doesn't matter to the corportations how people get the money, just so long as they spend it.

The real estate bubble may not burst. The market may weather the storm. I seriously doubt that, but a funny thing about property is that price rarely goes down significantly when the population is increasing. For all the whining about immigration, California adds 500,000 to their population per year, and mostly from immigration. Rich, poor, or otherwise, that puts upward pressure on the rental market which in turn drives property prices.

So when does the American stop spending? When he or she runs out of options. I suspect that this real estate thing, if it happens, will expose alot of people. This has been driving spending for nearly a decade. If you take that away to a large degree, it will be difficult to maintain current levels of spending. It will be interesting to see on a personal level, the friends who set themselves up well, and those who got overextended.

If a lot of people get burned, maybe they'll be once bitten, twice shy. Maybe a new culture will take root. The kids of the people who thought they had it all, but found out it was all a house of cards, for example.

But this is all a big IF. If the bubble bursts. If.
I'm a homeowner, and I would love to see the bubble burst, and values to topple. All in all, it would be a good thing for working people like the writer of this blog to be able to afford a home.

As for people like me, the value of my home on paper is virtually meaningless, as I need to live in it, whatever its value. Homeowners wishing to trade up will also benefit from a softening market.
The problem is that tons of people have litterally pulled equity out of their houses and spent it. This is the ultimate in fantasy money, and has been the leading driver for consumer spending over the last 5 years. When and if that dries up, consumer confidence will take a serious dump.
Isn't the home equity fantasy money already drying up?

With interests rates rising so much in the last two years (I think I saw home equity loans going for 7.49%), who could possibly be taking out home equity loans nows to get some extra "around the house" cash?

I understand that compared to the 70's and 80's, rates remain at pretty historic lows, but it seems to me that the time to take out a home equity loan has already passed.

Or do people not think that way? Do they say instead, "Sure rates are higher than they were a year or two ago, but there still pretty low and I need to fix the roof and take the Caribbean vacation and add on to the deck, etc."?

I also wonder, considering the new bankruptcy laws, how many people will be up in arms when they realize the credit card companies and mortgage lenders wrote the new bankruptcy laws and they are pretty harsh for individuals (though not for corporations, of course.)
I think alot of that equity is still floating around.

As long as someone gives them the loan, they take it. It is pretty clear that should a bubble burt, it is going to hurt.

Psychologically too, when and if equity dissapears, the perception that one has a lot of money may come into play as well.

We will see.
As a renter, it's amazing to me that people actually count the value of their home when they're figuring out how much money they have on hand. Not because a home isn't a legitimate investment or anything like that, but simply because it's a dicey thing to be gambling that tyou can keep tapping your home for equity without getting caught short at some point.

But as you say, as long as banks are offering the loans, people will line up to take them. And as long as poeple have the money in hand, they're going to spend it. Which will keep the whole deck of cards going for another while.
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