So is the air going out of the balloon? And if so, how much is left to go – and how fast? And everywhere?
I dunno, I dunno, I dunno.
But I shorted a housing-related stock (symbol NVR) at $273 a share on October 10, 2002 – at least I did you the courtesy of not telling you – only to see it rise to $747 a share a couple of years later, where, wincing, I doubled down (doubled up?), and then to $938 last July – where I should have told you about it, because it closed last night at $426.
Which is a long way of saying that investors seem to think the future is not as bright for housing stocks as they did a year ago.
Or take WCI Communities, whose stock closed last night at $15.48, down from $35.20 less than a year ago.
If the stock market is a barometer, predicting storms ahead – well, there may be some.
(Then again, investors don’t always get it right. And when they do, they often over-react. So maybe these stocks are ‘oversold’ and maybe the worst of the slump in residential housing is actually behind us. I don’t think so, but what do I know?)
Thanks to Michael (below) for pulling together some interesting tea leaves for us to read.
Pieter: ‘Living in an overpriced house in LA, it would be great to be able to lock in current profits, without having to sell – and also be protected against the coming downturn. What do you think of these options and futures, tied to specific real estate markets (Los Angeles, Miami, New York, etc.)?’
☞ I haven’t used them and will be interested in the thoughts of others. A few basics though: (a) futures are a lot riskier than options, so if you do this, use options; (b) any profits you do make will likely be taxed at short-term rates (from what I could see on the CME site, these options don’t go out past next May, not long enough to take a long-term gain); but mainly (c) you and I are not the only ones thinking prices could drop – so that expectation will be built into the price of the options. (If it’s not, they could be a bargain – or the market could simply be smarter than we are, foretelling a further rise in home prices we don’t see.) You could do okay hedging against a sharp drop in home prices; but these are not easy games to play and win.
Michael Monahan: ‘Looks like the days of reckoning have finally arrived. Are the stars in alignment for this to be the perfect storm? Teasers gleaned from Housing Tracker:’
Greater Miami area:
Greater Phoenix area:
☞ Aha. Triple the inventory overhanging the market. That can’t be good. And Michael has more. (I won’t translate all the terms . . . I think you’ll get a sense of what they mean from the context. Just picture chickens coming home to roost.)
‘Data collected from the Mortgage Brokers Association for Responsible Lending:’
As of September 2005, Adjustable Rate Mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the sub-prime sector.
49.3% of ARMs with interest-only features originated in 2004 lacked full documentation.
In 2006 97.5% of borrowers are likely to face a payment shock of at least 25% and 75% of borrowers could face a shock of 50% or more. [This strikes me as impossibly high, unless it refers specifically to adjustable-rate mortgages taken out recently, with teaser rates. – A.T.]
These changes do not include additional shocks that would result when monthly principal repayments kick in on loans that began as ‘interest-only.’
Payments will increase on 41% of the outstanding subprime loans in 2006 alone.
In the San Francisco Bay Area, almost 75% of mortgage loans taken out last year (2005) allowed borrowers to delay the payment of principle. Negatively amortized loans jumped to 29% of the Bay Area mortgage market from less than 10% in 2004.
70% of borrowers with ARMs that allow negative amortization are currently making minimum payments. [I.e., their mortgages are actually growing slightly, not shrinking slightly, each month.]
[And speaking of increasing indebtedness:] In 2004 $600 BILLION of consumers’ spending power was from borrowing against home values – double that year’s tax cuts, as estimated by Brooking Institution scholar Peter Orzag.
2nd homes accounted for 14% of new mortgages in 2004; in 2000 it was only 7%. Mr. Greenspan said that the fact that someone can sell a 2nd home without moving, “suggests that speculative activity may have had a greater role in generating the recent increases than it customarily has had in the past.”
‘For more, check out thehousingbubbleblog.com.’
☞ More? You think we can take more and still breathe? Well, perhaps we can if we’re renters flush with cash waiting for the possible bargains.
And yet Michael presses on:
‘Some other links that might help your readers: piggington.com has two articles at page top that strike me as really good: Evidence of a California Housing Bubble and Risks of a Serious Home Price Decline.’
☞ Those are about Southern California. Fortunately, you live in New Jersey.
Oops. Michael points us to this ‘beautiful historical document‘ – from the Northern New Jersey Real Estate Bubble Blog (motto: keeping a watchful eye on our small part of the largest asset bubble in history.)
And then there’s this (do not click if you are offended but thinly-veiled four-letter words): housingbubblecasualty.com.
Finally, Michael clipped this July 13, 2006, post from piggington:
I am a Realtor here in San Diego and I am continually amazed at the depth of misconceptions in our industry. I have usually abstained from postings on-line but in the past few months, usually after listing appointments [i.e., where he meets with a prospective seller about listing his home], I have felt more and more compelled to do so. …
First let’s look at the source of data which is Dataquick, who in turn gathers numbers from the sold entries that realtors like me enter into the MLS.
Rule 1, when you enter a sold price, you DO NOT subtract credits. Now, in today’s sales, I would estimate that, due to declining conditions, credits and rebates, are present in 30-50% of home sales. So right off the bat, the Dataquick numbers are not even accurate [because they don’t reflect those credits].
Consumers go to ALL of these sites to value their home. Well do any of you readers know how these sites make their valuations? They simply use the MLS information. However how far back to they go? Listen guys, most of my listing appointments consist of trying to demonstrate what the market is doing. That entails reversing peoples opinions that they are entitled to a certain price of their home because that is what the house down the street sold for in 2004 or that is what Zillow told them.
When I ask them how Zillow came up with the valuation they do not know. When I ask them how many expired, cancelled and withdrawn listings are in their mapcode, they do not know. Having a degree in electrical engineering has made me totally anal about data. If you do not use accurate data, your analysis is flawed and soon becomes pointless.
As for the run up in prices and who is to blame… That is EASY…The buyers are to blame. YOU DO NOT HAVE TO BUY A HOME.
As far as I know nobody has ever held a gun to a buyer’s head and forced him to sign a contract. Don’t blame appraisers, realtors, mortgage brokers, or even Uncle Sam.
In the past 3 days I have gone to 3 listing appointments … all speculators who bought a few months ago and want to spin the properties. In each case I simply showed them the stats of their neighborhoods. In each case they were all severely disappointed.
One guy got a 4/2 in Escondido for 525k after it had been on the market for 70 days back in March. It was listed at 525k to 610k. (Obviously a Prudential listing) So when he tells me he wants to get 625k for it (and he did some nice work inside) and I tell him I can price it at 625k, but I don’t think it will sell, he doesn’t understand why… Well if nobody touched it at 525k for 70 days what does that tell you? When I asked him why he didn’t try to get it at 475k he said they wouldn’t do that because it would have been a short sale. So what? Let it foreclose and buy it then.
I lost A TON of money on stocks in 2001… I could have blamed my money manager, I could have blamed Wall Street, I EVEN INVESTED IN ENRON. It was simply stupidity and greed on my part. Nobody forced me to do these stupid things. Bad decisions are usually motivated by emotions such as greed or paranoia. Generally they are not motivated by hard analysis, patience, and/or data. Yes through the past 10 years most realtors told you if you don’t buy now you may never get in… but you didn’t have to buy. I have no sympathy for overextended homeowners. Is it too much to simply put a budget on paper BEFORE you buy? Most buyers I work with have already been on-line looking for homes for weeks and even months before they contact me. When I ask them if they have written up a budget for their financial future that would include a mortgage, property taxes and insurance over 90% of them say NOT AT ALL.
Yes I represent sellers but also homebuyers and yes I encourage them to finance their purchases with standard 30-year fixed rate mortgages. When they cannot afford the payment my first sentence to them is, maybe you should wait until you can afford the payment rather than buy now. Yet that statement is more than likely met with deaf ears. The response to that is, what about some of these new loan programs I hear about? So I point them to a mortgage broker and let them do their thing… In all cases I do review their loan program and sit down with them to point out the risks of what their payment will be in 3, 5 and 7 years. I tell them I don’t LIKE those vehicles but as long as THEY KNOW the possible outcomes, then I will not feel I acted improperly.
My name is Adam Rappoport and my brokerage is G & R Realty.
Finally, my read on the market is that we will continue to stay flat with single digit depreciation in low and mid range housing for the next few years. A wild card may be an impending recession that I feel should come upon us soon and we may see a cash infusion into the economy as soon as next summer. The other wild card is stagflation which may be an ugly reality as it would force the rates to stay high and that would definitely accelerate home depreciation. Just….my….guess.
☞ My Dad used to say, ‘Life is not a business.’ If you view your home as a home, not a speculation – and if you can afford to live in it – who cares what happens to real estate prices over the next few years? Otherwise, it seems to me there could be pain ahead.
Quote of the Day
What if everything is an illusion and nothing exists? In that case, I definitely overpaid for my carpet.~Woody Allen
Request email delivery
- Oct 17:
Hurtling Toward The Future
- Oct 16:
He’s Baaaaaack . . .
- Oct 13:
Mikey’s Last Breakfast
- Oct 12:
- Oct 11:
Why Corporate Tax Cuts Won’t Create Jobs
- Oct 10:
A Letter From Secretary Albright
- Oct 9:
- Oct 6:
- Oct 5:
The Kids Pay The Price
- Oct 3:
Warren Buffett’s Heavily In Cash; Stephen Colbert For President
- Oct 17: