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    Default Housing Bubble dangerously close to popping ...

    Home prices 'extremely overvalued' in 53 cities By Sue Kirchhoff, USA TODAY
    Wed Aug 17, 8:05 AM ET

    Single-family home prices are "extremely overvalued" in 53 cities that make up nearly a third of the overall U.S. housing market, putting them at high risk of price declines, according to a study released today.

    The report, by Richard DeKaser, chief economist of National City Corp., examined 299 metro areas accounting for 80% of the U.S. housing market.

    DeKaser terms a market extremely overvalued if prices are 30% above where he estimates they should be based on historic price data, area income, mortgage rates and population density - a proxy for land scarcity.

    Based on those criteria, Santa Barbara, Calif., is the nation's most out-of-whack market, with houses 69% overpriced. Rounding out the top five: Salinas, Calif.; Naples, Fla.; and Riverside and Merced, Calif.

    College Station, Texas, is the most undervalued, priced 19% below where the data suggest it should be. Other inexpensive communities include El Paso, Odessa and Killeen, Texas, and Montgomery, Ala.

    The highest-risk markets are in California; Southern Florida; parts of the Boston area; the Long Island, N.Y., counties of Nassau and Suffolk; and Ocean City, N.J.

    The big culprit: in 85% of the cities surveyed, home-price gains outpaced income gains during the past year. In Bakersfield, Calif., prices rose 33% while incomes increased 3%. In 29% of areas, prices outpaced income growth by at least 10 percentage points.

    Just 2% of markets were in bubbly territory at the start of 2004, vs. 31% in the first quarter of 2005.

    Some of the most expensive areas or those with the fastest growth aren't necessarily the most overpriced, according to DeKaser's model. Pricey Honolulu, Hawaii, for example, isn't in the top 53.

    DeKaser says his study doesn't mean big corrections are imminent, though he sees evidence the housing market could be at or near a crest.

    "For the U.S. as a whole, I expect we're going to have an orderly correction. But that doesn't mean it's going to be equally orderly in all places," DeKaser says.

    He says it's rare for property to depreciate, even in overvalued markets, without an economic shock such as rising unemployment. Price corrections might not occur at the same time, and declines in one area could be partly offset by gains elsewhere.

    DeKaser's 30% threshold for overvalued markets is based on prices in 63 areas since 1985 that later had housing price declines.

    ------------------------------------------------------------------------

    This could be downright scary if the following is accurate ...

    ------------------------------------------------------------------------

    Greenspan’s Role in the Housing Bubble
    by Mike Whitney

    August 17, 2005

    "(snip) The American public is presently mortgaged up to the hilt with most of their personal wealth invested in their homes and with the highest level of personal debt in any period since the Great Depression.

    Not good.

    Especially when we consider that the current bubble is “larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stock market bubble in the late 1920s (55% of GDP).”

    Or, when we consider that “over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP.” (The Economist)

    Or, when we consider that 2 out of every 5 jobs in America are now related to construction. One blip in the housing market and we’ll all be hawking pencils on the street corner.

    Regrettably, this Greenspan-generated pyramid scheme is headed for the dumpster. The fundamentals for securing a loan have all been abandoned, putting traditionally unqualified applicants in a position to buy a home. 42% of all new home buyers cannot even come up with a few thousand dollars for a down payment. Equally disturbing is the fact that “nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half)” (NY Times)

    The Fed’s “cheap money” policy has spawned a “creative financing” monster and the speculation in the housing market has grown accordingly. A full 36% of homes are bought either for investment or as second homes; “the very definition of a financial bubble.” (The Economist)

    “Speculation”? Not according to Colonel Greenspan. According to him, it’s just a bit of “froth” in the market." (big snip)

    " The nation now faces the end of the Greenspan epoch and the very real prospect of an economic tidal wave greater than 1929. The bubble was manufactured by Greenspan and his colleagues at the Fed to swindle millions of working-class Americans out of their life savings and to facilitate the greatest transferal of wealth in American history.

    The lesson of the housing bubble is simple: whenever monetary policy is put into the hands of privately owned institutions like the Federal Reserve, those policies will invariably reflect the narrow interests of the men who own them and the members of their class.

    That’s why Thomas Jefferson warned, “Banking institutions are more dangerous than standing armies.”

    He undoubtedly had the Federal Reserve in mind. "

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    Default Re: Housing Bubble dangerously close to popping ...

    What's going to be more interesting for me after the bubble does burst, as it must...is what will happen to the California state & local governments which are being kept afloat, to some extent, by the current housing market. Or is this too political a post for here?

    People never seem to learn from history, as I know there is a well-known book about a run on, of all things, tulip bulbs in what was then known as Holland. This was a few hundred years ago, and I wish I could remember the book title, but I just can't right now.


    PhaedrusZ

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    Default Re: Housing Bubble dangerously close to popping ...

    I hesitate to blame the banks on this one. It'll be similar to blaming the gun manufacturers for killings. I definitely blame the speculators and the irresponsible home buyers. People cannot be going into debt without knowing reasonably well that they can pay it off.
    The only thing necessary for the triumph of evil is for good men to do nothing. - Edmund Burke
    For rest and relaxation, I command a Panzerarmee Division.

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    Default Re: Housing Bubble dangerously close to popping ...

    I assume you're referring to 'Famous First Bubbles' ...


    And yes, as mod of Dollar Den, I'm afraid that shifting gears from a straightforward warning about future housing price declines, future bankruptcies of overextended creatively financed homeowners, and future economy wide distress ---- towards a discussion of California's over-reliance on property taxes on new and recently sold homes (versus legislated tax rate caps on existing homes) to fund their already deeply red state budget is clearly on the Political Poo side of the line.

    However, as a financial fact, I will point out that any area where only 17% of residents actually have sufficient incomes to be 'financially qualified' to purchase a median priced home (as is the case in California), and any area where 50% of new mortgages are 'interest only' (as is also the case in California), is headed for DEEP trouble !

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    Default Re: Housing Bubble dangerously close to popping ...


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    Default Re: Housing Bubble dangerously close to popping ...

    People cannot be going into debt without knowing reasonably well that they can pay it off
    Unfortunately, at this particular moment in time, nothing could be further than the truth. Those 'interest only' home buyers, who have next to nothing in the way of a down payment/equity at stake, can simply go bankrupt when faced with rising interest rates/monthly payments that they can't afford to make. The mortgage holder, prevented from evicting the bankrupt home buyers by state bankruptcy laws, is thus stuck with an ever increasing pile of 'non-performing' mortgage loans. The mortgage lenders then very quickly tighten credit standards to prevent additional would-be 'no money down - interest only' home buyers from adding to the pile. Tighter credit standards 'erases' 50% or more of potential buyers in the housing market. Lots of sellers and few 'qualified buyers' causes housing prices to drop. This is only phase one though, because ...

    Other homeowners with little or no equity in their own homes will see a confirmation that the value of homes in their area is falling. The 'smart' ones will figure out that the only way they're going to avoid an 'upside down' situation (i.e. they'll owe more money on their mortgage than they can get from the sale of their home), is to sell their home before real estate prices drop even further. This will create a glut of supply when these homes are put on the market, starting a snowball effect that will depress area housing prices even further.

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    Default Re: Housing Bubble dangerously close to popping ...

    Agree with everything being said here.

    If investing were that easy we'd all be worth millions.

    Anybody want to buy a condo in Jersey City? haha
    www.pocktlounge.com/grandview.htm

    I also got a small house for sale (with tenants) in Madison, NJ

    Run for your lives.

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    Default Re: Housing Bubble dangerously close to popping ...

    If investing were that easy we'd all be worth millions.
    Well, these articles have got me seriously considering the wisdom of buying put options on 'homebuilder' stocks like Pulte. If, or more likely, WHEN the housing market starts tanking, demand for building new homes should tank even faster.

    Of course the risk factor with the homebuilders is that the majority of their money is made from constructing new million dollar McMansions for affluent customers. Even if the housing market tanks and the economy with it, this does not mean that the 'rich' buyers of new McMansions will also be financially strapped, does it ?

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    Default Re: Housing Bubble dangerously close to popping ...

    nearly one third of all new mortgages this year call for interest-only payments (in California, it's almost half
    This is frightening. What is scary is that a lot of people don't even know what it means to have an interest only loan. I was talking about this with my boyfriend and he goes "What is an interest only loan?"

    I think house prices are totally outrageous right now. I'd be scared to buy one at the moment although eventually it would rise in value even if it takes several years after a drop in value. I'll wait until there are a bunch of forclosures and look for a deal.

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    Default Re: Housing Bubble dangerously close to popping ...

    You certainly won't be alone in wanting to 'troll for bargains' after the real estate markets wind up glutted with foreclosures, forced sales, etc. However, by then the economy in general may be so bad that extremely few buyers will have the 'job security' and income level that gun-shy lenders will then consider necessary to obtain financing !

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    242_fair
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    Default Re: Housing Bubble dangerously close to popping ...

    Mel, clearly you've been watching the market trends a lot closer and longer than I, so help me out with an estimation - Can you take a guess as to where the interest rates will be at in 3-5 years, when the majority of the 5 year terms that were locked in at 3.5%-4.5% come time to refinance at the new (higher) rates?

    Do you see rates getting as high as 7-10% by 2008-2010? Higher?

    I know you're no fortune teller but whaddya think?

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    Default Re: Housing Bubble dangerously close to popping ...

    From DeKayser's actual report.
    "None of this is to say that the adjustment won’t be difficult, especially for borrowers and lenders caught unaware. But the most likely scenario is that of an orderly correction, not a disruptive crash."
    Disclosure : I know Richard. He is a client of my company and used to work there 20 years ago.
    Click on the Beginning of the End at http://www.nationalcity.com/corporat...es/default.asp

    The other guy is just a polemic writer
    his pub is titled "A Radical Newsletter in the Struggle for Peace and Social Justice"
    From his web page About "DV editor Sunil K. Sharma is a musician, writer/researcher, and merry agitator based in Santa Rosa, CA. ...His articles have appeared in Z Magazine, CounterPunch, Yellow Times, Palestine Chronicle, and Left Turn among others. He often pontificates before captured audiences at colleges and other reputable soapboxes, and welcomes requests for speaking engagements".

    His 90% comment is off the wall since those two sectors are 75+% of GDP by share in 2002
    http://www.bea.gov/bea/newsrel/gdpnewsrelease.htm
    It is a misapplication of data. Consumption is a piece of GDP and includes imported items. Since 2001:Q4 consumption rose a cumulative contribution to growth of 7.78% out of 11.5%. Housing was 1.54%. See table 1.1.2 on page http://www.bea.gov/bea/dn/nipaweb/Se...asp?Selected=Y
    This absolutely neglects the fact that much of the gain was imports (consumption is everything you buy, not what is made here for consumption) which contributed a -3.6% so your 7.8% is more like 4.5-5% out of 11.5% GDP growth. If I felt like doing the messy math I would tell you exactly.


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    Default Re: Housing Bubble dangerously close to popping ...

    Can you take a guess as to where the interest rates will be at in 3-5 years, when the majority of the 5 year terms that were locked in at 3.5%-4.5% come time to refinance at the new (higher) rates?

    Do you see rates getting as high as 7-10% by 2008-2010? Higher?

    I know you're no fortune teller but whaddya think?
    You're absolutely right that I'm no fortune teller. Your particular question is extremely hard to guess at because there are two distinctly different schools of thought in regard to future US economic conditions.

    The first scenario is that, due to future US gov't action, action by Asian central banks who hold literally tons of US$ denominated bonds, and action by foreign investors in US$ denominated stocks and properties, that the exchange rate for the US$ will drop precipitously. This will cause massive 'price inflation' of worldwide commodities like oil and raw materials, which will in turn lead to price increases for almost everything else, causing general inflation and rising interest rates.

    The other school of thought is that growing financial stresses will simply cause the economy to slow down, leading to people losing jobs and being forced to sell off houses, cars and other assets, leading to lower prices but very few potential 'qualified' buyers, thus causing general deflation and falling interest rates.

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    Default Re: Housing Bubble dangerously close to popping ...

    While I know it's bad for the economy and a large number of homeowners, a bursting bubble is good for those of us who practice sound financial planning. I have over 40% equity in my home right now, all other debt paid off, and by next summer I could be sitting on enough cash to lay out a nice down payment on a condo as an investment. As prices are right now, I wouldn't touch a condo. But if they tank, I would go for it, especially a beach condo. Viva la bargains!

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    Default Re: Housing Bubble dangerously close to popping ...

    Quote Originally Posted by 242_fair
    Can you take a guess as to where the interest rates will be at in 3-5 years ... ?
    I'll guess they won't be much higher. The big reason why inflation is as high as it is (which is not much, really) is because of oil. If you remove this component in the CPI, you'll see that inflation is negligible. As for the rest of the goods and services, I don't see them increasing significantly higher relative to wages.
    The only thing necessary for the triumph of evil is for good men to do nothing. - Edmund Burke
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    Default Re: Housing Bubble dangerously close to popping ...

    Quote Originally Posted by Melonie
    I assume you're referring to 'Famous First Bubbles' ...
    http://www.amazon.com/exec/obidos/tg...73538?v=glance

    ...
    Yes, that's the book I couldn't remember.

    And for everyone, here is an article about this topic from yesterday's "Los Angeles Daily News," although this is only about California

    article link

    PhaedrusZ
    Last edited by PhaedrusZ; 08-19-2005 at 08:29 AM. Reason: Corrected link

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    Default Re: Housing Bubble dangerously close to popping ...

    I agree. In some areas there is a serious bubble. In the midwest, (until recently) there
    were still restrictions on what you were allowed to mortgage to go into the mortgage amount, which may help a bit.

    On the market side, people in the mutual fund pension industry tell me that clients are
    cashing out their 401 ks and mutual funds and putting the money into buying houses and fixing them up to gain a greater return. While if you did that in 1999 it was probably a good bet. In 2005 the Merry go round is about to stop on higher values.

    Reason. Inflation. Higher energy costs, and higher prices for everything mean higher ingterst rates. GThe dollar now needs to be supported and the fed will continue to raise short term rates. One sign of trouble for all to look at is if an inverted yield curbe appears like the one in 1979-1980. Look for short term rates to be higher than long term fixed mortgage rates. It would mean that mortgage rates and the bond market are slow learners.

    The ability to pay in housing is always important. However lenders have totally disregarded value in their hunger to earn commisisons. (Did you know that most mortgage lenders are commisison only? No salary. As dancers you guys know what that means. Unfortunatley the finance system does not. Also slow (but always trendy) learners in investment banks) It is amusing that mortgage decision makers are downgraded in their evaluations for asking too many questions on underwriting.

    With increased outsourcing there is a steady down migration in salary on US jobs.

    We appear to be shooting ourselves in the economic feet.

    Don't get on poor Alan Green too hard. He has held up the economy and the stock market after 9/11 by inflating real estate housing. Fannie Mae and Fredie Mac the quasi public mortgage players are adding liquidity into the market in huge sums that I beleive is not measured. He is correct in trying to pull them in a bit. But it is not for the reasons in the newspapers. They are basically shoveling cheap money into the economic system on
    refinances that the treasury can't control. No other country in the world has this funny money frankenstein. Meanwhile Bush does nthing. ) (Its called presidential leadrship on the
    economy George. The train wreck is coming, at least slow the trains at the signal crossing)

    Wall street doesn't know what to do. They only act like everything is under control.

    Finally. A word on CPI statistics. Lately the airlines, cruiseships and my pizza delivery
    have started adding a fuel surcharge to the bill. In the 1970's and 1980's the companies just increased prices and the CPI couted this as an increase.

    I'll bet that a "temporary fuel surcharge" is not counted in CPI. Did this accounting
    slight of hand come from the Conference Board or is it an effort to create an expense category that the IRS can't tax as income? Any comments fromMelonaie of Monty?

    When people in ther 60s from suburban Chicago buy 5 condos in Miami with their retirement money using heavy debt to do it... trouble is ahead.

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    Default Re: Housing Bubble dangerously close to popping ...

    And for everyone, here is an article about this topic from yesterday's "Los Angeles Daily News," although this is only about California

    PhaedrusZ
    Again not wanting to stray too deeply into the political, but I simply laughed out loud when reading about 'zero income loans' i.e. creative financing lending institutions actually writing home mortgages for people who are unemployed.

    IMHO every bit of the 'irrational exuberance' in these overheated real estate markets is based on the 'Greater Fool' theory ... that no matter how much a person pays for a house relative to its "fair value", if that person wants to/is forced to sell that house there will be an even 'Greater Fool' waiting to buy that house for an even higher price. The 'Greater Fool' theory also explains the willingness of creative financing lenders to write ridiculously insecure loans with a high probability of going belly up - because the lender would be able to repo and resell the property and still be money ahead, as long as the lender can unload the property to a 'Greater Fool' to get their bad loan money back (lately with a tidy profit to boot).

    However, once tomorrow's 'Greater Fools' figure out that the new bankruptcy laws are going to prevent them from walking away clean (as they can today), once creative lenders figure out that there may not be any 'Greater Fools' to bail out their bad mortgage loans, the whole 'house of cards' could come crashing down very rapidly.

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    Default Re: Housing Bubble dangerously close to popping ...

    "Peter, did you take Stewie to a strip-club? He smells like sweat and fear." - Lois and Stewie (Family Guy) ... "Through early morning fog I see, Visions of the things to be, The pains that are withheld for me, I realize and I can see..."

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    Default Re: Housing Bubble dangerously close to popping ...

    Quote Originally Posted by Melonie
    Other homeowners with little or no equity in their own homes will see a confirmation that the value of homes in their area is falling. The 'smart' ones will figure out that the only way they're going to avoid an 'upside down' situation (i.e. they'll owe more money on their mortgage than they can get from the sale of their home), is to sell their home before real estate prices drop even further. This will create a glut of supply when these homes are put on the market, starting a snowball effect that will depress area housing prices even further.
    ^^ you wrote that just for me huh? Jk lol Im not too good with the housing money talk. Thats nice and simple to understand there. I worry about this as Im guessing 10 years will go by in a flash and I want to be ready to buy a house by then. Right now, even if I had the money to buy a house I wouldnt do it only b/c its just ridiculously priced to the point that I dont want a shack for 700K or a condo for 200-400K. Screw that.

    I guess over here were in a good position to keep renting instead of buying.
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    you can only survive by clinging onto trees
    that's your flaw
    put down some roots so you can stand on your own
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    Default Re: Housing Bubble dangerously close to popping ...

    I guess over here were in a good position to keep renting instead of buying.
    In San Diego ? You Betcha ! Why buy a place today for $600,000+, when you can pay rent for five years and then buy the exact same place for $400,000 ? Of course you'll have to run your own numbers on the cost of paying rent, versus the cost of paying property taxes plus mortgage payments minus the tax savings of deducting mortgage interest plus adding back any additional taxes if/when AMT kicks in.

    But I'd bet that right now the rent option involves less monthly cash flow overall ...

    not to mention the fact that if you buy now you'll still probably owe $400,000 or more on a property which will only be worth $400,000 five years down the road - i.e. those 5 years worth of mortgage payments won't build equity, they'll just offset the declining market value of the property !

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    Default Re: Housing Bubble dangerously close to popping ...

    Yes it sure would be great to be in Miami or LA in about 18 months with 20 mil or so in the bank to spend on real estate.

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    Default Re: Housing Bubble dangerously close to popping ...

    The bursting bubble will take more than 1.5 years. Think 2.5 to 3 years.

    I love when the investor types and Alan talk about "froth" on TV. Froth in beer is a bunch of small bubbles all together.

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    Default Re: Housing Bubble dangerously close to popping ...

    The bursting bubble will take more than 1.5 years. Think 2.5 to 3 years
    You're probably correct from a technical standpoint. However, the point at which the 'pinprick' occurred which started the bursting housing bubble was probably last spring, meaning that the 2.5-3 year clock has already started running. IMHO the reason that the housing bubble collapse is just now starting to draw heavy press and talking head commentary is that there are now two quarters worth of financial data which essentially confirm that the downturn has begun.

    Yes it sure would be great to be in Miami or LA in about 18 months with 20 mil or so in the bank to spend on real estate
    Actually, any 'smart' investor has the option of buying into regional REIT's, where they can take advantage of the real estate market bottom without having to pony up hundreds of thousands of dollars to actually buy spec properties in these 'hot' markets.

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    Default Re: Housing Bubble dangerously close to popping ...

    Quote Originally Posted by Melonie
    You're probably correct from a technical standpoint. However, the point at which the 'pinprick' occurred which started the bursting housing bubble was probably last spring, meaning that the 2.5-3 year clock has already started running. IMHO the reason that the housing bubble collapse is just now starting to draw heavy press and talking head commentary is that there are now two quarters worth of financial data which essentially confirm that the downturn has begun.
    .
    Melonie,
    What is this pinprick to which you refer? What is the 2 quarters worth of financial data? Spring is the second quarter and there is no 3rd quarter data since it is not over with (barely half over--7/13 weeks).
    IMHO the reason the press is harping on real estate is because they have a psuedo-Calvinistic guilt complex and believe we all should be punished for prosperity. Oil has moved farther faster than home prices and the press has said nada of the bursting of the oil bubble because they believe high oil prices are a punishment for our sins of driving SUV's.

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