Friday, March 31, 2006

Business Week: Is housing set to blow?

Buyer (And Seller) Beware

Is housing set to blow, or are there more gains ahead? Here's how to navigate an anxious market

Confused about the direction of the housing market? It's no wonder. You hear stories about sellers slashing listing prices to attract buyers, but home prices nationally have risen more than 10% over the past year. Inventories of unsold homes are on the rise, yet homebuilder Lennar Corp. just reported a 34% jump in earnings. And the much feared rise in 30-year mortgage rates seems to have stalled. Advertisement

In this muddled situation, what should you do, whether you're on the buyer's end of the seesaw or the seller's? Cut your price now or hold out for more? Rent or buy? Go for a bigger house or a smaller one? In the New York City suburb of Larchmont, N.Y., where prices are off their peaks, confusion reigns. Says Realtor Carol Higgins: "Buyers are complaining that prices are astronomical, but sellers are still thinking they'll get what they saw their neighbors get last year."

See 2005 Bay Area Stats

Let's be honest: No one can predict with certainty which way home prices will go in the next year or so. Over the past several years almost everyone who has tried to forecast the direction of the housing market has been wrong (though BusinessWeek Chief Economist Michael Mandel takes a shot).

We can, however, tell you how to avoid some critical psychological and financial mistakes in today's anxious markets. No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. "So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller.

What follows is a set of practical guidelines for navigating today's choppy and uncertain real estate markets. The suggestions come from behavioral economists, who study the kinds of erroneous decisions people tend to make repeatedly, as well as from hands-on real estate experts. In addition we'll tell you which cities are more vulnerable to a drop in prices and which are less at risk.


A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset: "You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind," says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they?

Also, behavioral economists have discovered in laboratory experiments another attraction of herd behavior. Misery really does love company: People seem to worry less about losing a lot of money if they think everyone around them will suffer the same fate.

Still, the rewards of thinking independently can be high. Richard X. Bove put on his green eyeshade and concluded that Florida real estate was overpriced. So earlier this year he bailed out. Bove sold his 5,600-square-foot St. Petersburg (Fla.) home for $1.2 million, twice what he paid for it a decade ago. The plan was to rent while he waited out a housing decline. But Bove couldn't find a suitable rental, so he lowballed a four-bedroom house in Tampa and got it for $740,000 -- 30% below the asking price.

In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices.

Indeed, real estate agents often have a much clearer idea than sellers that demand has softened. "The hardest thing is to convince the sellers of the change in the market," says Alfonsina Rechichi "There's a sense of fear among brokers that you sense at open houses," says Saul Greenstein, a renter, who suspended his house search because prices were too high. "The self-confidence you saw a year ago has been replaced by fear and pandering."

Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking. New research shows that sellers set their listing price, in part, based on information six months to nine months old. That means if you don't pay close attention, you will tend to underprice in a rising market and overprice in a falling one.

Two smart people who just might be guilty of that in the New York City suburbs are Joe Watson, a neurosurgeon, and his wife, JoAnn, who has a PhD in genetics. In relocating from New Rochelle, N.Y., to McLean, Va., they planned to come out even by selling and buying at roughly the same price: $1.2 million. Now they're getting stung on both ends of the transaction. The Virginia house is costing them "significantly more" than $1.2 million, and they can't get what they want for their 1937 Tudor in New Rochelle. Says JoAnn: "We were advised by two brokers to price it initially at $999,999, but my husband and I wanted to start at $1.19 million because we thought we could get it." Even after nudging the price down to $1.09 million, though, there haven't been any offers. JoAnn has taken to blaming the shoppers. "It's a great house," she complains. "Why doesn't anyone realize it?"

The gravest danger of dragging your heels on price cuts in a sinking market is that you can "follow the market down," never managing to sell because your price is always just a little too high, says Christopher J. Mayer, a Columbia Business School economist. He and David Genesove of Hebrew University in Jerusalem found that when prices were falling in Boston in the early 1990s, two-thirds of the houses that came on the market were eventually withdrawn without a sale.

In parts of the country where the market is still strong, a common sin continues to be overconfidence. Owners typically don't seriously consider a wide enough range of potential housing market outcomes, including the possibility of a steep decline. That leads people to take more risks than they should.

Nordstrom Inc. managers Robert J. Gelb, 50, and his wife Cindy, 47, of Mercer Island, Wash., own the house they live in as well as two they bought for their children. Gelb says last year's appreciation on the house his son occupies was greater than his son's salary at Nordstrom's. For the house they bought for their college-student daughter, they put down 3% and got a negative-amortization loan, which Gelb says makes it a better deal than renting her a dorm room. "Worst case is that I sell it for what I paid for it," he says. His take on housing is nonchalant: "Even if it is a would be a slow leak. Maybe some people would say I'm naive, but I don't see a downside."

Optimist Gelb is well-off enough to take a slump in stride. Still, he might want to have a conversation with Linda R. Fink, 57, who manages a city park with a bicycle-racing track in Indianapolis. She knows all about slow leaks. Fink bought a house in November, 2000, for $120,000. At the time, Fink says, she viewed the purchase as an investment and reassured herself that "if something happens five or six years down the road, I'll be O.K. I can sell it and get out."

Instead, Fink watched home prices in her neighborhood fall and fall. She bailed out in 2004 for $92,000 in a "short sale," meaning the lender got the proceeds of the sale but not all it was owed. Says Fink: "It all just blew up on me."

Rent-vs.-buy decisions are a perfect example of what the housing market can learn from behavioral economics. If financial efficiency were all that mattered, more people would be renting nice houses instead of buying them, even taking into account the home mortgage-interest deduction. But there's something comforting about owning the place where you lay your head on the pillow each night. "It's worked out so phenomenal," exults first-time buyer Obrey M. Minor, a 27-year-old special education teacher who bought his first house last year with his wife in the Houston suburb of Katy.

You can hear how much homeownership matters by talking to people like Annapolis (Md.) renter April McKinley, a health-care consultant who recently moved with her police officer husband from Pittsburgh to the Washington (D.C.) area and ran smack into a wall of high prices. "Here I am, a productive citizen, and I can't afford to own a piece of it," says McKinley.

Especially in upscale communities, social pressure to buy is intense. Jonathan Miller, recalls that when he and his family moved to upper-crust Darien, Conn., 15 years ago and rented for a year, "we were absolutely second-class citizens. It was very unpleasant."

Call it "castle thinking" -- the notion that a home is a fortress against a cruel world (table). And it's perfectly defensible. But in many markets the total monthly costs of renting are far below the total monthly costs of owning the same property -- 62% cheaper in San Diego, for example, according to Torto Wheaton Research. So you owe it to yourself to be aware that your castle thinking can be a costly predilection.

Neuroscientists have even discovered the place in your brain that makes you spend too much on a house. Far from behaving perfectly rationally, real people are pushed and pulled by signals emanating from below the neocortex -- the primitive "lizard brain." That may be why there are so many homes with empty marble foyers, faux Roman columns, dust-collecting Jacuzzis, and exotic drooping conifers on the lawn.


What people can do is be aware of their human tendency toward status-seeking. Cornell's Frank suggests channeling the drive more productively. If getting your kids into a good school district is a priority, for example, try to satisfy your lust for status by buying a smallish house in a prime school district instead of a showplace in a worse one. "You have some choice," says Frank. "There's room to do better."

A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment.

In fact, except for the past few years, house prices have risen only 1% or so faster than the rate of inflation. But just try telling that to Ron DeLucia of Jacksonville, Fla., who at the age of 68 is selling his current home and buying a bigger one across town, in part because he and his wife think a house is a more trustworthy asset than shares of stock. Says DeLucia: "We all went through the crash of the market. I lost $150,000. You never get that money back. I think the stock market is going to go down. I'd rather put the money we have in hard assets like property."

And finally, it's easy to lose your head over housing if your thinking isn't disciplined. To find your moorings, try to focus on the fundamental factors that determine value. On that score it's somewhat reassuring to realize that prices in the U.S., though high, are not out of line with other major countries. Finding properties that are exactly comparable is difficult. But in an unscientific survey, BusinessWeek correspondents rounded up listings for a few homes for sale around the world. There's a four-bedroom in Kleinmachnow, a pricey suburb of Berlin, going for $525,000. In the upscale Golders Green neighborhood of London, 20 minutes from the city center, a four-bedroom house is on the market for $1.56 million. And in Tokyo's Suginami Ward, three bedrooms squeezed into a cozy 987 square feet go for $566,000. These kinds of prices have a familiar ring.


Within the U.S., however, prices in some housing markets do raise red flags. A good starting point is to look at the affordability of homes for ordinary families. By that measure greater Los Angeles was the worst in the nation in the fourth quarter of 2005. Only 2% of homes sold there were affordable by families earning the area's median income, according to the National Association of Home Builders. New York wasn't much better at 6%. Other expensive big cities included San Francisco at 7%, Miami at 14%, Boston at 24%, and Washington, D.C., at 27%. Tops in affordability among big cities were places like Dallas, with 60% of homes sold affordable by median-income families, San Antonio and Houston at 57%, and Chicago at 48%.

Of course, unaffordability is a chronic condition in cities like New York, so it's not necessarily evidence that a sharp correction is in the offing. Economists at Global Insight Inc. and National City Corp. deal with that by looking at whether metro areas have departed from their own historical trends in affordability. They conclude that in the fourth quarter, 42% of the top 299 metro markets were "extremely overvalued and at risk for a price correction." Florida and California dominate this historically adjusted list. Boston and New York look more reasonable by this measure, and San Francisco appears a bit less bubbly. Texas still comes out looking cheap.

Yet another way to identify a problem area is to compare rents to sales prices. The idea here is that if people's monthly payments to own a house are much higher than what they would spend to rent the same place, tax considerations included, then they must be banking on prices going up so they can sell for a profit someday. That leaves them exposed if prices don't rise. By this measure, San Diego is one of the frothiest areas of the country. But Tampa, Orlando, and New York, which come out as expensive by some other measures, aren't so costly by this one.

This year millions of American households will buy a home. The process will always be lengthy and a big deal. But whether you are a buyer or seller, you don't have to feel quite so lost.

Wednesday, March 29, 2006

Jim Cramer: similar to Dot Coms

He is said to be worth somewhere between $50 and $100 million. Except for the stake he has in his Web site, he only plays the stock market now for his charitable trust, from which he does not personally profit. Always an optimist, he nevertheless believes that the real estate bubble is about to burst.

“I think real estate is very similar right now to what the dotcoms were like in 2000. Everybody thinks you can’t miss with real estate. Actually I shouldn't say that. In the last five months, I think it's starting to dawn on people that real estate can go wrong,” says Cramer.

On weekends, Cramer now assumes the role of gentleman farmer, feeding his animals, clearing his pumpkin patch and finding time to relax and unwind. But, come Monday, it’s show time.

Tuesday, March 28, 2006

Ponzi Scheme

Ponzi Scheme over. Financial collapse imminent. Bloom off the rose. Incompetence exposed.

You know what's coming, now what are you to do? How do you best protect yourself, your family, your financial well being and your future? Duck and cover?

Preparing for an Uncertain Future – Economy of Illusion

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s or that of the late 1920s.

San Diego County resale house prices fell in December by the largest monthly amount in 18 years. The median resale price for existing single-family homes dropped $15,000 from November to December to stand at $550,000, the largest month-to-month decline since Data Quick began keeping records in 1988.

The 42% of recent buyers who put no money down when buying their homes have no equity. What will happen to them if the value of their real estate falls? If these homebuyers have been using interest-only loans, they will have no protection against any kind of adverse move. Many people in this situation will have no choice other than to walk away from their property and mail the unwanted keys back to the lender.

Speculation has been increasing along with home prices. The history of markets shows us that asset markets become ever more treacherous as the number of leveraged participants increases. Leveraged participants possess no capacity to withstand adverse trends. They become forced sellers into a falling market, which pressures prices even more. This forces more speculators to sell.

To prepare, I would suggest taking the following steps as soon as possible to minimize the effects of a severe downturn.

Pay off all credit-card debt. Liquidate all debt except your mortgage. Only buy vehicles that you can afford to pay for with cash. Put as much money as you can into your annual tax-free retirement savings, whether in the form of an IRA or, preferably, using your company's 401k allowance, taking advantage of any matching corporate payments. Start saving money for college when your kids are born. Put at least 20 percent down when you buy your home, using a low-interest, 30-year mortgage. Try to make an extra mortgage payment every year. Reduce your standard of living now to a manageable level based on your income, while you have the economic freedom to choose how you wish to do this, rather than having change imposed on you later by force of circumstances.

The state's hottest housing market: ~Crashing~

The Land of the Open House
Merced, once the state's hottest housing market, is headed back to being, well, Merced again.
By David Streitfeld, Times Staff Writer
March 28, 2006

MERCED, Calif. — Where did everyone go? Real estate agent Mark R. Gregory is holding an open house to sell a nearly new three-bedroom on a corner lot, and it's as if the Earth had been emptied.

Last year, this Central Valley city enjoyed the state's hottest real estate market. Sure, things have slowed since then, but Gregory possesses a salesman's indestructible optimism.

He put a sign on the lawn, a note on the Internet, an ad in the paper. He's hoping for investors from the coast marveling at how much house you can buy here for $359,000. Or local couples looking to move up into something nicer. Or Bay Area workers willing to make the long commute.

Three hours quietly pass. At 4 p.m., the agent pulls up the sign and locks the door. Total visitors: zero.

"It's like everyone got together and said, 'Let's not buy for a while,' " Gregory says.

After five increasingly wild years, the great real estate boom appears to be coming to a close. The Commerce Department reported Friday that sales of new homes nationwide plunged 10.5% in February, about five times the drop analysts predicted.

In places such as Los Angeles, which have diverse economies, the consequences could be mild. In other communities, where prices became untethered from reality long ago and real estate not only drove the economy but virtually became the economy, the fallout could be much more turbulent.

Merced — a farming town once known, if known at all, as a place campers turned off California 99 on their way to Yosemite National Park — is falling into the latter category.

The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all.

Just a little while ago, Merced was an investor's dream. The Office of Federal Housing Enterprise Oversight reported this month that prices in the city and surrounding area increased 31% in 2005. The housing agency ranked Merced first in price appreciation in California and ninth in the nation.

That already feels like ancient history, an era when agents would list a property and within hours people would be madly bidding against one another. In five years, Gregory never had a listing that lasted longer than four days.

The number of agents registered to sell in Merced went from 200 to 1,200 as property prospered. Mortgage brokers, title companies and other processing firms flocked to town. One new complex, the Plaza at El Portal, accommodates Chicago Title, Wells Fargo Mortgage, New Freedom Mortgage, First American Title, Building Showcase Interiors, Moonlight Development and Sunlight Development. There's almost nothing that isn't connected to housing.

The phenomenon occurred throughout the Central Valley. According to the Housing Enterprise Oversight numbers, the leading edge of the nation's real estate mania was not San Francisco or Manhattan or Miami, no matter how giddy those markets seemed to their residents, but in some little-known agricultural communities.

The housing agency's No. 1 U.S. city for price appreciation over the last five years was Madera, an old logging town northwest of Fresno that rose 144%. Yuba City, north of Sacramento, was second. Third place went to a Florida city, Port St. Lucie. Fresno and Merced, both at 142%, rounded out the top five. (Los Angeles prices increased 131%, still above the state average of 117%.)

Andrew Leventis, a Housing Enterprise Oversight economist, contemplated this ascending arc in a region that is not a tourist destination or retirement haven, where incomes are not growing and unemployment is perpetually high. He then used an un-economist word: "Shocking."

"It's difficult to know what was driving these high rates of appreciation," Leventis said.

To people in Merced, however, there's little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the "greater fool" theory.

In 2003 and 2004, carloads of investors would come down from the Bay Area and up from Los Angeles. They would see a $200,000 house and say, "Wow, if this were on the Westside or in Berkeley, it would be worth $750,000, easy. Let's offer $225,000 to make sure we get it."

Then the seller across the street would say, "If that place was worth $225,000, I'm going to ask $250,000."

It helps that Merced is a pleasant place, with an appealing main street and lovely spring evenings. The first new UC campus in 40 years is being built in stages on the outskirts. Twenty-five thousand students will eventually study there, greatly benefiting the community.

Friday, March 24, 2006

Home sales: biggest plunge in nine years

WASHINGTON - New home sales fell by the biggest amount in almost nine years in February while home prices declined for a fourth straight month, raising concerns that the once high-flying housing market could be in for a rougher-than-expected landing.

Wednesday, March 22, 2006

How to make money renting

I see renting in the current market as a profitable arbitrage opportunity. Arbitrage opportunities arise when market inefficiencies exist: apples are selling downtown for $1/lb and uptown for $1.50/lb An arbitrageur can make a risk-free profit of fifty cents per pound by buying downtown and selling uptown.

The same can be said of the rental market. In an efficient market, the cost of renting closely approximates the cost of owning, with some nominal premium on ownership for tax benefits, pride of ownership, etc. However, when the price of ownership deviates from that of renting by as much as 100% or more, there’s an opportunity to profit from the price imbalance. My rental unit costs $2300 to rent and would cost approximately $4500 to own. My landlord is actually paying me roughly $2000/mo to live here (allowing for an ownership premium) by continuing to rent the unit rather than selling it out from under me (yes, he bought the unit for much less than the current going-rate, but he incurs an opportunity cost by not selling for a profit and investing the proceeds elsewhere). I take that $2000/mo and invest it in the stock market, where the long-term gains are much better than in real estate. It’s really a great opportunity. Where else can you get $2000/mo risk free just by occupying a building? Thanks: Marin Housing Bubble Blog

Monday, March 20, 2006

Mortgage Rates: overseas investors

Monday 03/20/2006: Most mortgage interest rates are pegged to the U.S. government Treasury bond yields. Bond price and yield have an inverse correlation - when price goes up, yield goes down. Some of us know that foreigners' purchase of the Treasuries has kept the bond prices high and interest rates low. However, this may come to an end soon. As shown on the chart above (figures are in millions of dollars), prior to April 2004, the net foreign purchases of the Treasuries only dipped below 0 sporadically. For the past 2 years, the net foreign purchases have mostly been staying in the negative territory, which means there have been more selling than buying. This is the reason behind the rising long-term mortgage interest rates. Courtesy of Realty World Cal.

Friday, March 17, 2006

Bay Area home sales: FALL for 11th straight month

SF Chronicle
Thursday, March 16, 2006

Bay Area home sales tumbled in February for the 11th month in a row and prices appreciated at their slowest rate in two years, as the region's real estate market showed further signs of cooling.

The median price for a single-family home in the nine-county area was $637,000 in February, up 12 percent year over year, but well below November's peak of $656,000. A total of 6,206 condos and houses changed hands, nearly 17 percent below last February's tally, according to real estate information firm DataQuick.

In part, experts attributed the current slowdown to the previous large number of transactions that had been spurred by rock-bottom interest rates. Now that rates are rising, the pool of potential buyers has shrunk.

"The market could go into a lull phase for a while where prices flatten out because we've pulled a lot of (sales) activity from the future," said DataQuick analyst John Karevoll.

Karevoll, whose monthly reports are based on filings with county recorders' offices, expects annual appreciation rates to sink into the single-digits by later this spring.

Wednesday, March 15, 2006

Housing stages: 15 years from now

Step A: You are here. Whether the rate of home equity extraction implodes from here (as shown) or decreases more gradually is a matter of debate, although in past boom-bust cycles, the bust rate of decline has been significantly more rapid than the boom rate of growth. What is not debatable is whether the rate of home equity extraction will revert to the mean rate of about zero, from the current rate of more than $250 billion annually. It will.

In fact, the rate of home equity extraction will tend to overshoot the mean to reach an extreme negative rate of equity extraction (building equity) that's twice the rate of positive extraction that occurred during the boom phase. This relationship occurred in the previous two cycles, which bottomed in 1982 and 1995, respectively. This implies negative equity extraction of minus $500 billion per year at the cycle trough. Chart 2 shows a more optimistic prediction of negative $250 billion occurring between 2015 and 2020. This more prosaic estimate accounts for government efforts to mitigate the impact and minimize the overshoot, by offering specialized loans, making direct purchases of securitized mortgage debt, and so on.

Step B: As housing prices begin to decline, sales will continue, though more slowly and less frequently. Old habits die slowly. One year into the decline, housing speculators will have left the market, but home owners will generally still believe that prices will either resume their rise or at least flatten out, not continue to decline. Remember the first year of the stock market bubble decline, when most people hung in there until they'd lost all of their money? The first lesson of behavioral finance is that the most common mistake made by market participants is to hang on too long and fail to cut losses.

While home owners at this stage will borrow less against their houses, and loans will be more difficult to come by, the average home owner will still make frequent trips to Home Depot or hire contractors to make home repairs and improvements, believing they'll "get their money back" in an increase in the value of their home at least equal to the cost of fixing it. Some home owners will put their home up for sale—if they purchased early enough in the boom so that they can still realize a profit, even selling at five to twenty percent below the peak price.

Step C: After prices have declined for two years, large numbers of buyers who purchased near the top of the market will begin to feel the psychological effects of being underwater on their mortgage. They will be less inclined to borrow money, or to spend money fixing up their home, as home improvement value increases will be swallowed up by general market price declines. There will still be profits to be made by those who bought very early in the previous boom cycle, but fewer people will have this option.

As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.

Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.

Step E: Five years into the downturn, rising unemployment will begin to more seriously affect the market, as indicated in Chart 1. As unemployment rises, homeowners will leave housing bust regions to move to areas where there are more jobs. Many houses will be sold at a loss, or even abandoned, as the market price falls below the loan value. Given the choice between paying cash out of pocket to sell their home or leaving the keys with the bank, many home owners will make the latter choice.

Step F: Ten years into the downturn, real estate will be widely regarded as a terrible, "can't win" investment. McMansions will be subdivided for rental as multi-family homes.

Step G: Ten to fifteen years after the start of the decline in housing values, prices will bottom out, setting the stage for the next boom. Time to buy.

Saturday, March 11, 2006

Contra Costa inventory on the rise

Thursday 03/09/2006: As a follow-up on the median price chart yesterday, here's looking at the inventory level. After a very brief decline in November and December, the inventory has been rising after the New Year. As of the end of business day yesterday, the number of total properties for sale in the East Bay had just exceeded 8,000 units once again. It's now looking to break the previous high of 8,075 units, which was reached on November 11, 2005. Courtesy of Realty World Calif.

Wednesday, March 08, 2006

Loan rates: up sharply

Mortgage rates make biggest jump in 22 months
By Holden Lewis •

Mortgage rates boomed this week. Blame it on a bunch of bank bureaucrats in Japan and Germany.
- advertisement -

The benchmark 30-year fixed-rate mortgage rose 18 basis points to 6.45 percent, according to the national survey of large lenders. It was the biggest one-week rise since May 2004. It is also the highest rate since September 2003, when the 30-year fixed rate was 6.47 percent. A basis point is one-hundredth of 1 percentage point.

The mortgages in this week's survey had an average total of 0.34 discount and origination points. One year ago, the mortgage index was 5.87 percent; four weeks ago, it was 6.32 percent.

The 15-year fixed-rate mortgage rose 16 basis points to 6.09 percent. The 5/1 adjustable-rate mortgage rose 11 basis points to 6.13 percent. Yes, the rate on a five-year loan is higher than the rate on a 15-year loan.

Mortgage rates are influenced by the same market forces that set the interest rates on federal government debt. They are global market forces. Vast amounts of money slosh to and fro, chasing the best bang for the buck, euro or yen. Some of that money has been moving out of the United States, and rates are rising to entice it back in.

The European Central Bank, headquartered in Frankfurt, Germany, is that continent's version of our Federal Reserve. Last week it raised short-term rates by a quarter of a percentage point. Naturally, investors took advantage and parked their money in Europe.

The action in Europe affects U.S. interest rates because it creates less demand for American bonds. Whether you're talking about mortgage-backed securities or U.S. Treasury notes, demand for those securities softened as demand for their European counterparts grew. In reaction, U.S. bond prices fell -- and when bond prices fall, yields rise. Mortgage rates are another link in that chain: As yields rise for mortgage-backed securities and U.S. Treasuries, mortgage rates go up.

The bank of Japan was expected to raise that country's short-term rates this week. Japan's expected action is a big deal, because its short-term rates have been near zero percent for five years. The mere prospect of a slight rise in Japanese short-term rates was enough to exert upward pressure on U.S. bond yields.

"Those yields need to rise just a bit to attract capital from abroad," says Frank Nothaft, chief economist for Freddie Mac. He's talking about yields rising in Europe and Japan, but he just as easily could be talking about the United States, too.

Mark Lefanowicz, chief executive of Pleasanton, Calif.,-based E-Loan, believes there's another factor at work, too: The growing realization that the Federal Reserve is going to increase short-term rates late this month and probably again in May.

The Fed's rate-setting committee meets roughly every six weeks. Usually, investors conclude five or four weeks in advance that the Fed is going to hike rates, and so the Fed increase is "baked in the cake" long before the central bank meets. "I think that happened a little bit slower than it happened in the past," Lefanowicz says, so the accompanying increase in mortgage rates happened in one week instead of over several weeks.

The sharp rise in rates hasn't scared borrowers away from mortgage offices. Mortgage applications held steady, according to the Mortgage Bankers Association.

Sometimes a jump in rates acts as a lure, as homeowners jump off the fence and refinance before it's too late. That hasn't happened this time.

"No, I don't see folks going, 'Oh, last chance, last chance.' Activity has been relatively the same," says Dan Green, regional vice president of 21st Century Mortgage Bankers in Westmont, Ill.

Monday, March 06, 2006

Realtors: uneducated and overpaid

It’s not a house it’s a home.
Buy now or you’ll be priced out forever.
Renting is just throwing your money away.
You have to live somewhere.
They’re not making any more of it.
Real estate never goes down.
You’re just kidding yourself if you’re waiting for prices to fall.
Never a better time to buy!
I think you have a deep-seated fear of commitment.
Never try to time the market (when it’s falling).
It’s different this time.
_(insert location)_ is so desirable, people will want to live here no matter how expensive it gets.
Boomers/immigrants/rich people will keep prices permanently high.
Prices have achieved a permanently high plateau/new paradigm/soft landing.
_(insert location)_ is land-locked.
If you’re waiting for the perfect time to buy, you’ll be waiting forever.
You can’t lose in real estate –it’s a no-brainer.
Real estate’s seasonal; after _(insert holiday)_ things will return to normal.
The last housing drop was caused by _(insert unique, non-repeatable event: 9-11, collapse of Soviet Union, earthquake, hurricane, etc.)_; it’ll NEVER happen again.

Realt-whore quotes I’d like to see:

Past performance is no guarantee of future results.
Why, yes, I do drive looking through my rear-view mirror. Why do you ask?
Prices are not falling; they’re just appreciating in a different direction.
It’s perfectly normal for inventory to quintuple this time of year.
Pay no attention to that man behind the curtain.
These are not the droids you’re looking for, move along.
Didn’t I tell you NOT to low-ball?! STOP IT ALREADY!!!

Have any favorites of your own? Discuss, enjoy…

Friday, March 03, 2006

Central Valley Housing Bubble Ready to Burst?

Central Valley Housing Bubble Ready to Burst?

March 1, 2006 - The Valley housing boom is over, with home prices in some neighborhoods dropping $50,000 in just the past two months.
The median price of an existing home in the Central Valley in January of this year was $347,000. That's a 13% jump from the same time last year, when the average price was $307,000.

Valley home prices have been going up so fast, your home is still worth more than it was a year ago.

But when Action News broke down the numbers, we found that in the past couple months, the bubble appears to be bursting. To realtors, it's a market adjustment. But to some analysts, it's a full-on correction.

Local housing prices have come tumbling down over the last two months, erasing months of drastic increases.

Just two months ago, the median sale price for homes in Clovis' 93611 zip code was $439,000. But in just 60 days, those homes plummeted $51,000, to $388,000.

Over the same time frame, Fresno homes were unchanged, while homes in Merced lost a little more than $4,000 in value.

The correction hurts worst for people who flip homes, buying them and selling them again within a matter of months.

"You can drive through any brand new subdivision. You will see just as many for sale signs and for rent signs as you see people living in the homes," said Joan Jolly, from the Fresno Association of Realtors.

Realtors say the adjustment is great news for buyers, who are all of the sudden paying a lot less for the same homes.

But even though homes are staying on the market longer now, people are still going to extreme measures to get their dream homes.

Kasey Krouskup stood in line for two days to buy a new half-million dollar house in a Copper River development, even though she knows the market is a little soft at the moment, "It's not about the market now. It's about finding a piece of real estate we'd like to stay in for a while."

Sanger homes are in the top 10 in the entire state for appreciation over the last year. They're up 54%.

But for the last two months, they've been on the way down too, by almost $17,000.

Thursday, March 02, 2006

Expired listings: off the chart AGAIN

Thursday 03/02/2006: The progression of the higher highs of the number of daily expired listings continue to impress. Only 6 months ago, we posted this chart with great interest seeing the expired listings rose to 42 units on September 1. That was a record then, but that's nothing compared to 176 units on February 1 and now 177 units on March 1. September 2005 turned out to be just the beginning. Higher number of daily expired listings indicates weakening of the housing market. And, customarily, there's higher number of expired listings in the beginning of the month.