As we noted in our commentary on Monday — Real Estate Begins to Cool — there are several signs that the most robust sector of the economy is finally chilling out a bit.
Today, a front page WSJ article has picked up the same meme:
"The number of homes available for sale has increased sharply in some of the nation’s hottest real-estate markets — one of several recent signs suggesting that air may be seeping out of the frenzied U.S. housing market.
Home prices have surged an average of about 50% in the U.S. in the last five years, largely thanks to the lowest mortgage interest rates in more than four decades and what has been a shortage of available homes in many markets. But some economists and housing-industry analysts believe supply is catching up with demand — a trend that could cause home-price appreciation to slow down in the months ahead.
In San Diego County, for instance, where the median home price has more than doubled in the last five years, the number of homes listed for sale totaled 12,149 on July 8, more than twice the 5,995 available a year earlier, according to the San Diego Association of Realtors.
In northern Virginia, an area dominated by the fast-growing suburbs of Washington, inventories are up 26% from a year earlier. "Sales have slowed down for sure," says Tip Powers, president of Realty Direct Inc., Sterling, Va. He says home prices have flattened out and speculators are starting to shy away from the market because they no longer can count on quickly unloading properties at a profit.
A similar rise is being seen in Massachusetts, where home inventories are up 31%, according to officials of real-estate organizations there. Real-estate brokers say inventories also are up in such markets as Chicago, Las Vegas and Orlando."
Perhaps you are wondering why inventory has ticked up. Not surprisingly, there are many elements contributing to this:
Several factors point to a possible cooling of the market. Mortgage interest rates have been edging higher in recent weeks, raising the cost of purchasing a new home and knocking some potential buyers out of the market. The average rate for a 30-year fixed mortgage is 5.89%, said Freddie Mac, a mortgage-finance company, this week. That’s up from 5.53% in late June.
In some markets, such as California and Florida, prices have surged past the ability of many people to afford a home. Additionally, banking regulators have begun to raise questions about whether mortgage lenders are being prudent enough — which eventually could prompt some lenders to tighten credit standards.
In addition to Inventory, affordability, and mortgage rates, we noted other factors helping to identify the slow down: Prices paid (relative to asking) had slipped, and Homes were on the market longer. Lastly strong Condo sales typically occurs late in the RE cycle. That’s on top of the anecdotal evidence coming form Real Estate agents.
Ironically, yesterday’s WSJ piece on Econ blogs noted how "It’s all about the ‘memes . . . Those guys say it and about a week or two later, the guys on Wall Street pick it up."
Apparently so . . .
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Source:
Rise in Supply of Homes for Sale Suggests Market Could Be Cooling
By JAMES R. HAGERTY and KEMBA DUNHAM
Staff Reporters of THE WALL STREET JOURNAL
August 12, 2005; Page A1
http://online.wsj.com/article/0,,SB112381117394311632,00.html
One of the top arguments for rising prices has been that land is getting scarce in many prime areas.
In the short term I agree but in the mid to long term term it’s a bad argument.
One just has to look at a picture of Hong Kong in the 1800s and a recent one. When there is no more space, highrises mushroom. Nice expensive homes start to lose some value as they start to fall in the shade and lose their views.
And since real estate has gotten expensive we are being told to buy for the long term because we have to live somewhere!
Booming condos are a sign.
I wrote a toy monte carlo simulation of renting vs owning the other week. I was surprised to find that it is pretty difficult to justify not buying. Even in the current climate, where comps to my rent-controlled SF flat sell for 30-40x my annual rent, renting is not a slam-dunk.
The bull in the china shop is tax treatment of residences. In California the government pays up to 44.3% of your mortgage interest, no questions asked. When you sell, you can shield up to $500k in capital gains from taxation every two years. It is very hard for any market ecology to make that a bad deal.
Good regulators might be concerned.
Danielle wrote, One just has to look at a picture of Hong Kong in the 1800s and a recent one. When there is no more space, highrises mushroom.
Problem with that argument is zoning. Land is kept scarce that way.
Me, I’m all for upzoning as well as drastically increasing taxes on land and decreasing them on improvements. But that doesn’t mean it will happen.
Not sure I agree
Tax treatment of residences just lowers the effective interest rate. If appreciation is going to be zero or near zero for a while and if rents are lower than PITI, the $500K tax exemption is not very meaningful and it will take a LONG time for you to acquire enough equity to compensate for the approx 10% in-out transaction costs.
It is very hard to make that a good deal if the market is indeed cooling off.
At 30x rents, a place with $3000 monthly rents sells for $1 million, give or take. Put 5% down and 6% mortgage, your PITI will be about $6600.
If interest is a little more than 80% of first year payments, then the monthly benefits are going to be about 30% ($2100) in tax writeoffs and about $1000 in equity. Leaving you with netpayments of maybe $3350. Compared with $3000 in rents, this is negative cash flow. And we haven’t even touched the maintenance costs associated with ownership, which might be another $400/mo (maybe .5% per year). So you are $750 in the hole each month.
As time goes on, you pay a little less in interest (lowering that benefit) but more towards equity (increasing that benefit), and your rent will increase eventually, but also recall that your initial cash outlay and negative cash flow could be sitting in some tax free bond fund collecting maybe 4% per year. So it would take a long time to catch up.
But you can paint the walls of your living room any color you wish.
It still amazes me when I see people quote the 30yr fixed mortgage as “the” interest rate people are buying homes with in todays market. Nothing could be further from the truth. The reason why teachers, policemen, etc are able to afford homes is that a) they’re buying homes below the average price (because theres plenty of those that still exist) and b) they’re getting low interest only payments for 3-5 yrs. I’m sure this could pose a problem at some point in the future but who cares.
With fha getting in on interest only loan market the real estate market will soon see another uptick or at least years of sideways movement.
Every high in real estate prices has been exceeded and will always be exceeded. There will never be a top as long as people need a roof over their head. This is not the nasdaq.
I didn’t say “buy!” I said, renting is not the
slam-dunk I assumed it was going in.
My “good” model is on a PC that I turn off when
I go to work, but I have an older copy to run.
To your inputs: $3k rent, $1M price, 5% down,
6% mortgage, add the following:
– real rent appreciation -1% (rent control)
– stdev of same 0.5%
– renter’s insurance $100k (real constant) @ 0.5%
– trading costs 0.2% on investments
– no points on the mortgage
– real estate transfer tax 0.68%
– closing costs 1%
– eventual selling costs 3%
– property tax 1%, prop-13 style
– maintenance 0.5%
– homeowner’s insurance @ 0.4%
– tax shield 37.3% Fed+CA
– real investment returns 4%, stdev 13%
– real property return 0%, stdev 3%, 0.5 cor/inv
(yep, 0% real return and it’s not a slam-dunk)
– standard deduction $9700 (real constant)
– inflation 3%, stdev 3%
Then make random normal vectors, 4096 trials,
and loop this month-by-month for the renter
who invests all his excess cash vs the owner.
By the end of year three, one in four trials
have the owner coming out ahead, and this is
before considering paying capital gains to
exit investment positions.
Me, I can already paint my living room whatever
color I want. Our landlord is nice.
The Pin Is Poking the Housing Bubble
Real Estate Begins to Cool The Big Picture As we noted in our commentary on Monday — Real Estate Begins to Cool — there are several signs that the most robust sector of the economy is finally chilling out a bit. Today, a front page WSJ article has pi…
Hmmm… I sold a 675,000 tract home in So. Cal for 989,000 after two years ownership, and moved into a comparable home where I’m renting for 3,200. I’m saving something on the order of 20,000 a year on insurance, taxes, and maintenence, so the real cost of my rental is 12,000 a year, and my mortgage write-off on federal taxes has grown increasingly insignificant of late. I’ve got several hundred thousand earning modest interest, and homes in my neighborhood are now sitting on the market, not getting offers, and selling for less than the asking price, indicating that prices are correcting in the direction of sanity.
Maybe one of the mathematicians out there could answer: given some amount of reduction in home prices, how high would interest rates have to rise (if I buy a new house) before it fails to continue to be ludicrously cost effective for me not to own?
As long as people need a roof over their head?
In some hot markets speculators are the chief purchasers. In the Miami condo market, they may be 80%+ of the buyers. The only way these investments make sense is if double digit appreciation continues, since rents don’t come close to covering costs. If prices “go sideways” there will be a stampede for the exits.
Stampede for the exits?
Actual there are a few developments where 100% of the precon has been purchased by speculators. Of which many developments have allowed individuals to purchase dozens units provided they had the down pmt. Theres no rules or regulations governing this. And this is not new.
Every time a development closes theres a “stampede to exit” and there are buyers waiting to purchase with low interest, interest only payment loans. Sure some day this insanity will end. But as long as there continues to be an influx of wealthy foriegners buying up cheap US property and as long as lending companies are willing to faciltate the loans even though prices are jumping through the roof it can go on much longer than it has. And by the time its over any pullback will be so much higher than current prices that it was a waste of time talking about a top in the market. A waste of time and missed opportunity.
And you still need a rof over your head, even if its a very expensive roof.
Zoning?
Call me a cynic, but if, let’s say, Bush switched from oil to real estate investing and decided he wanted to build a few high rises somewhere along the coast, I’m sure he’d manage to get the zoning.
You need a roof over your head impies a shortage of housing. If that were true rents would be rising with housing prices. They are not. Condos bought be speculators are going begging for tenants in many hot markets.
And inventories are starting to rise. It took 10 years for prices to recover in the hot markets after the last real estate bust. I bought a house after the last bust in the NY metro area for 20% less than the previous owner (a relocation agency that went bankrupt soon after) paid for it 18 months before.
This time round it’s likely to be worse as the excesses have been greater. Don’t drink the kool-aid -with every bubble promoters claim the rules have changed that this time its different. That is until the inevitable happens.
“The number of homes available for sale has increased sharply in some of the nation’s hottest real-estate markets — one of several recent signs suggesting that air may be seeping out of the frenzied U.S. housing market.”
FOLKS: This is very good news for the Health of the real estate market. More inventory (choices) can help realtors representing buyers because maybe the bidding wars (multiple offer environment) can can begin to subside and the playing field can return to more balance.
In fact, hasn’t part of the problem with the big price run up been the lack of inventory?
Fact is, demand is still very robust, so now realtors can start to actually get paid for their work. Realtors don’t get paid for writing offers. They only get paid upon closing deals.
Possible soft landing? Probably.
roserta: It has never paid to rent vs own.
Danielle wrote: “One just has to look at a picture of Hong Kong in the 1800s and a recent one.”
I REMEMBER!! IT WAS BRUTAL.
Larry:
Sorry if the time frame is a little too long for you. People in my family tend to live a long time. I guess that’s what makes the difference between those who think long term and those who don’t. But coming back to HK, I’m sure there are a few high rises more today than there were 3-5 yrs ago. Actually, they have expanded the coastline with landfill to create more space.
BTW, the US government has recently shown itself open to expropriating private property for the “good of the people”. So much for long term zoning guarantees
Danielle wrote: ” BTW, the US government has recently shown itself open to expropriating private property for the “good of the people”. So much for long term zoning guarantees.”
DO NOT WORRY. STATE GOVERNMENTS ARE MOVING QUICK TO SHORE UP EMINENT DOMAIN LAWS.
Folks: I have heard that the lines to buy new luxury condos in Florida are drying up. If that’s true, I suggest that people look at the next hot area of real estate investing: OFFICE CONDOS.
I live in SF Bay Area and currently rent. We’ve been watching the ‘bubble’ for two years and only recently have we seen signs of a peak. All of my information, other than reading online, is subjective.
I think things are peaking here in SF Bay. More houses are listed with ‘For Sale’ and ‘Open’ signs on them than I have seen in many years. Plus every friend who I talk to that rents states that they would not buy now as prices are too high or “insane” and interest is high also.
Who would not love to own and not rent? Most of us, I think. Housing shortage? Not in my area. I have BofA beating down my door to get me to buy, and lining up places. Now there are more rental homes and apartments on the market here than I have ever seen. I can rent a 4 bedroom home in a nice area for $2K/mo, but cannot buy for that price. I am going to rent.
Every buyer within the last two-three years that I know of personally has taken ARM+ loans instead of fixed 30’s. Every one of them thinks they will sell in a few years and make a profit.
Things do indeed look upside down and I don’t think I’ll rely on the Real Estate Association or their like to give me accurate information at all. Fundamentals always win; sooner or later. Stats for #homes for Sale and #loans plus personal observation give me most all the information I need.
Where are you getting your information from and where is that information in the Real Estate (bulider, agents, loans, etc) food chain? Is it truly independent?
Prices will drop, it’s just a matter of how long it will take. There may not be a huge decline, but I would guess a modest 20% drop over time is if anything on the conservative side. People who have purchased investment property recently will get burned when the prices start to drop or even level off. Many people are looking to make a quick buck (much like the tech stocks in the late 90’s), and you know the market is inflated when people that have no clue are getting in on it.
I feel bad for some of these people but when I’m ready to buy a place in 2-3 years, things should certainly be more reasonable. One big problem is that wages are not rising on avg, but housing is going up significantly. Rent not rising also means people will have to dump their investment property to cut their losses. Keeping a place to rent out long term won’t be possible, because they will be short a lot of $ each month.
Going by the theory that you sit it out and wait for prices to drop by 20%, how many of you did this is the early 90s when the prices dropped in the bay area 15-20%? I am and will continue to be long term bullish on real estate. I just purchased another property this month with small negative cash flow. I haven’t been able recently to find any property worth owning that has positive cash flow. All I know is that over the long term no one has ever complained that they should have sold out earlier or wished that they had sat it out waiting for some prices to drop. If you honestly think you are going to buy some fantastic property for 20% cheaper you are kidding yourself. If you are looking for 20% cheaper those properties are out their now but who would own them? Good luck waiting. “Too many people are thinking of security instead of opportunity. They seem more afraid of life than death” James Byrnes
Well, I wouldn’t really consider myself “sitting it out and waiting,” since I won’t be in a position to buy a place for a few more years, being relatively young. I’m merely pointing out what will happen over the next several years. I know someone that purchased a 350k place and makes 40k a year. I won’t even comment on how overpriced this place is.. but.. Can they afford it? No. Many people are doing this because banks are giving anyone a loan, and if the market doesn’t continue to rise, these people WILL get burned. You have to ask yourself though, WHY are people even buying things they can’t afford? Because of hype. That’s dangerous. These people will cause prices to drop in a few years. If you can afford a place w/ little to no negative cash flow and live comfortably that’s fine, but many people are not in the same position as you.
Real estate has cycles just like other investments. Too many people think “this time will be different.” It reminds me of the stock market when it started to drop people were saying “oh it will go back up.” The same will be the case w/ real estate. You don’t hear people complaining about not waiting in the past because things are different now. Interest rates were never this low, and prices were relatively flat compared to now. With everyone scared from the tech stocks crashing, real estate has been the new hot thing.
A 20% drop in many markets would be considered “moderate” to many people. Considering the market has grown close to 100% over the last few years, a 20% drop is very realistic. The housing market has clearly become inflated. All the interest only loans and ARM’s have simply helped push the market to even more inflated prices and just delay the market decline. Keep in mind, certain areas will be more susceptible to a “pop” than others.
In a good neighborhood in New Jersey 15 minutes from Manhattan one could by a nice 3-4 bedroom house for $350K four years ago. Same house today costs $950K and more. I rather pay 8% or 10% interest for the right priced house than 5% for an over priced house. I prefer to own the bank $350K than $950K and more for the same old house house.
Ah, memories are short. I purchased a new California home in 1992, just as prices were peaking. New out of college, had no idea about market cycles. We were given incentives to upgrade the house and given closing costs in order to keep the purchase price artificially high… same as is happening now. Three/four years later, entire cul-de-sacs in our neighborhood were in foreclosure, as all mortgages were new and upside down. I recall talking with some poor kids on trikes in one cul-de-sac where they were the only inhabited house, about all their friends being gone. We were under water in our home for years – but the % underwater was still only about 20% of our annual average income – prices then were not as inflated as they are now. It still felt like a lot, though. Can we imagine how families will cope if a recession hits, and they are upside down to the tune of their entire annual income or more? Families that could otherwise have continued their payments will walk away.
one wrote: “if the market is ‘indeed’ cooling?” i don’t know what planet you are on pal and i hate to wake you up – it is freefalling. the general public just hasn’t caught the reality of it…yet, and when they do? wow…we are going to see the biggest financial storm ever to hit this nation.
The money, as economists are already making clear is and was an ‘illusion’ a drug induced illusion. The first drug was called “dot.com,” that crashed…the new one was called “LIRE or low interest real estate..a drug which induces hallucinations and alters perceptions. It is amazing….if not hilarious how many average people with average lives can calmly chat about 500K or 900K. Have any of you considered how much real money that is? to owe and legally have to pay back? I guess these people want to rent from the bank all the way to their graves because Lord help any of them in that position if the bank has to foreclose (which is already happening) – with the new laws. Let’s sing “Financial Storm.” I say sit back, rent, pay down other debt, watch the financial storm with the safety of NOT being in deep on something you cannot get rid of.
Entering the Dead Zone
The great housing bubble has now come to a point of deflation. The five years of price gains saved America from the collapse of the stock market. It has placed billion’s to consumers and cause ignition of a building boom. This case bolstered the U.S. economy.The latest figures show that home sales, both new and existing, has risen in March. Local housing experts say that they are not forecasting the collapse of the nationwide housing. Monthly sales went down 11% to 25% in Miami, Boston, San Diego and Virginia.
Frantic market went calm with the hovering beyond of most potential buyers. People who listed their hones are not taking their houses off the market. At present, home values’ ratio to incomes in the bubble zone is around 40%. In scenarios like these, housing prices drop 10% to 15% in the bubble zone. They then remain flat only after three to four years while incomes catch up.
By Marbelle Sese
Miami Florida Real Estate
Real Estate Dropping
Prices are compared year-over-year by NAR. This is to remove the seasonal effects in home rates. Median prices across the country dropped on the first quarter from last year’s fourth quarter of $225,300 to $217,900. This is a fall of 3.3%.
Washington D.C., Los Angeles, and Chicago are just few of the major cities that experienced slight declines.
Gainesville, Florida, Ocala, Florida, Deltona – Daytona Beach – Ormond Beach, Florida, and Eugene, Oregon are the big winners.
On the other hand, Danville experienced most of the drop of home prices. South Bend, Indiana has experienced a double-digit decline.
Condo prices continue to fair less every year. It only gains 5.2% every year. In the West region, condo prices dropped by 0.8%. However, the Midwest had a gain of 0.8%. The regional gainer on condo prices is the Northwest where there was a big 9.2% gains.
Phoenix condo prices had the largest gains for the year at 38%.