Real Estate bubble bust may be worse than Dot Com bubble bust

hello, non-union and immigrant labor!

i'm just glad i finally got out of the mortgage industry.

Presumably if there's a burst it will be due to rising interest rates and people with variable rate mortgages having to foreclose right? So along with the low prices will come high rates and the end result might not necessarily be that much cheaper for you.

oh yeah, and if any of you still have variable-rate mortgages, i'd recommend getting them fixed as soon as possible, if not 2 years ago.

Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.

Well, there's this quote about the dot-com bubble that they play over and over again on NPR spots, something like "Everyone thought it was perfectly reasonable for a company selling dog-food on the internet to be valued more than General Motors."

Let me tell you what I saw:

1) A two-bedroom in a "new" (read "ugly") building in a shitty neighborhood in Jersey City heights with almost no commercial stuff, but granted it had its own parking space, for $375,000.

2) A one-bedroom in a "luxury" building (read, it feels like a Ramada) that happens to have a terrace with a great view of Manhattan (read, you also overlook the holland tunnel and all the visual chaos around it) for $450,000

3) A studio apartment in a converted loft warehouse building. Granted, it's really nice, has exposed brick, a cool layout, and a nice view, and it's close to the PATH and to the waterfront. $520,000. By the way, we looked at the same one six months ago when it was still being finished, and it was $380,000, which already sounded absurd. But that was before an investment group bought it. Now they're re-selling before anyone's even lived in the thing.

If you can't afford to buy now, BE THANKFUL.

My coworkers who have just purchased condominiums in Fairfax + Arlington, I'm just like "you know my fiancee and I have a balcony view of Georgetown for less than half your mortgage payment? Right?" But they're building equity. And they plan to stick around the area for a while. At least one of them I know for sure made sure to get a fixed-rate loan. The popularity of ARMs could make a coming recession twice as drastic as it might seem on the surface.

http://calculatedrisk.blogspot.com/ is still my #1 source for the hotness. By which I mean, the data.

(Ally is really tired of hearing about this)

it's such a pain in the ass. size vs. schools vs. price vs. comfiness vs commute vs. suburban/urban/look/age. you really have to pick two or three and damn it if you don't get fucked on all other fronts in the process.

we've paired it down to two options, it's either:

a) live in suburban lame-o land with an association and a horrible commute and liveable schools, but a lot of house and fairly new house for a reasonable price that won't eat us alive. the chance our house will retain value and be any kind of unique is nil. my wife refers to these as the middle class projects. (so you can tell that i'm probably going to end up in b, which irks me just as much for other reasons...)

b) live in gentrification central with amazing public schools with bilingual immersion programs, but tiny cute homes for a fuckload that guarantees i'll never have fun money again, yet meanwhile, i can ride my bike to the grocery and mexican popsicle store and walk my kids to a great park. while i'm not going absolutely insane because my office is in my bedroom (i telecommute) and our kitchen is so small we'll never have a dishwasher and and and...

it's so frustrating. where's the magic middle? oh that's right, none of those houses are for sale.
m.

I think people are forgetting that there is a limited supply of echo boomers willing to leverage 2/3rds of their income over the next 30 years just because a couple of real estate ground-pounders are yammering on about how things never stop appreciating ever and if you can BARELY afford to buy NOW you'll NEVER be able to afford it LATER!!!

Which is mostly what I get from that SF article.

In DC, for example, you have 3 main tiers of income, in my limited experience:

1. People who sell things to the government/tell the government what to do. Contract specialists who close the deals, GSA salespeople, owners and partners in outsourcing companies, lobbyists and law firms who work with the representational branch. Profit creators skimming off taxes allocated for work the government can't be bothered to do itself.

2. People who do cost control on these outsourcing deals, like me and everybody else I work with, hired to fill a requirement and keep things on budget/on schedule etc, and some private industry worker bees who fulfill the ancillary needs of companies like mine or the other businesses mentioned in #1.

3. People who work directly for the government and non-profits in the area, holding down the fort, slugging it out year after year being polite to the people in categories in #1 and #2.

Categories 1 and 2 are totally subject to the winds of change. It's happened before and will certainly happen again, no matter how many stupid motherfuckers keep calling this area "recession proof." We aren't doing anything value-added here, we leech off the sweat of the IRS. People who lived here fifteen years ago remember. When housing gets to the point where everybody in category 3 has to go find a roommate to share an english basement 20 minutes' walk from a subway stop (or worse, leverage 3/4ths of their entire household income for the next 40 years to get a starter rowhome 70 minutes away from work), it's a fucking bubble.

I'm surprised the Bay Area, having seen a MASSIVE overbuilding situation in the dotcom boom, can seriously consider the current appreciation rate anything close to sustainable or rational.

Anyway. Back to cost control.

fuck, we need to move somewhere cheaper.
m.

http://money.cnn.com/best/bplive/winners.html

this also assumes the value of the property is stagnant. if it goes up, you've got that as equity.

as to it's popularity, the economist recently reported that 60% of new mortgages in california are interest only.

Yup, sounds about right. Many, many people are going to be very, very fucked down the line.

We're at the point where the line bet/w predatory lending and "easy mortgages" is blurred out of existence...

Money Magazine's 100 Best Suburban Hellholes to Live 2005

I think half my office lives out in that shit.

yeah, that's what my wife talks about when she mentions the middle class projects... or .... more and more common, the upper-middle and upper class projects. i'm seeing these developments spring here in nashville and parts near that "HOUSES starting at $600K!!!"... big brick palaces... ugh.

of course, that same house in the gentrificombobulated hood would be $1M easy.
m.

They should just call these places "golf course towns." It would get far more hits on CNN.com if worded that way, anyway.

since it is still hilly farmland surrounding the lake, cows will sometimes come down to the water to go bathing, so you can tootle up in your boat next to them.

see here

i know the house we almost bid on last weekend would've put us back around maybe $1600 a month and that same house on the rental market in that hood would've been more like $1800 at least. (i'm looking at craiglist.) of course, paying extra on the princple of the interest only 20% loan would throw us well over $1800.

so perhaps there is wisdom in your strategy. i think we may just need to consider living in a cheaper hood for 5 years. the schools might not be AS good, but... parents make more difference at the younger ages. there are magnet schools... but the enrollment's lottery oriented. something'll work out.

the worst part is patience.
m.

They're not. I've seen the finishes and fixtures in these places, and they're appalling. They most certainly are NOT built to last - I think a lot of the value is in the land, not the shitty house they bought. Also, the buyers are not taking into account aesthetic value, which adds to the long-term value of the house. Poetic justice, though, for those who live for "conspicuous consumption" and little else.

Seriously, you are better off buying a little fifties ranch house - those things can be lovely if fixed up properly. People have got to learn to do without so much space.

Not taking into account, or failing to grasp?

I'm no expert on on 1920's housing! Factories owned housing - don't have any of those anymore, of course. And local authorities - hardly anymore. And landowners - still got them.

Housing wasn't the motor of the economy as more people rented, there was factory housing as tom says, social housing. the way that the owner occupancy class grew postwar in UK and anglosphere (to a much larger degree than in rest of Europe) is pretty fascinating - and has come to represent the largest motor for money creation in the economy.

Not really sure when this all began to take off - if it was immediately after the war or if it wasn't until the 1950s (obviously a lot of house building at that time). I guess another big change was the gradual decline of inner city terraced housing and then subsequent gentrification - which must be a huge motor for price rises over the last 40 years - dragging other stuff up in its wake. and then thatchers selling off of all the social housing the 3rd big push

Laxalt, I still don't see where you're going with this.

To use some invented figures, let's say that at some point some decades ago in Britain 40% of the population lived in privately-rented accommodation (owned by the fraction of the population who were landlords), 30% lived in council housing, and 30% lived in owner-occupied housing. For the sake of argument let's say those in owner-occupied housing were in various stages of paying off their mortgages, evenly distributed from those who had paid off nothing (so effectively the bank owned the property) to those who had paid off everything (so they owned the property outright), so that approximately half of the owner-occupied property was owned by the owner-occupiers and half by the banks (so we could say 15% of all housing was owned by the banks).

And to use some more invented figures, let's say that now the situation is that just 10% live in privately-rented accommodation, only 20% in council housing, and 70% are owner occupiers. Using the same distribution as before (i.e. 50/50 between the banks and owner occupiers) that would give mean that now 35% of all housing is owned by the banks.

So, yes, in this model the banks own more of the nation's housing than they used to (35% instead of 15%), but so do owner occupiers (35% instead of 15%). The ones who own a smaller share than before are landlords (10% instead of 50%) and to a lesser extent the government (20% instead of 30%). I'd agree that the latter is a problem (a lot of social housing has been sold off and not replaced), but I don't see why we should care about the former. Why is it a problem if lots of property that was formerly owned by rich landlords is now owned by banks?

I think it is the fact that the percentage is continuing to increase - ie we are becoming progressively more indebted.

Also i think the bit I would dispute from your post is that the banks owned half the 30% and now half the 70% (of your invented figures) - i think this is where the major growth in bank ownership is rising (within this subsection)

the other main problem is that secure rented houses (via social housing) has been sold off - further encouraging debt as a means of 'security'

government finances when the council houses were flogged off were not exactly secure. the thing you have to grapple with is that it was not just the evil thatcherite yuppies in their suits and ties who wanted that stock to be sold -- that shift in working-class votes to thatcher can't be wished away.

I agree totally - and many did very well out of that - the true cost felt later

Why is it a problem if lots of property that was formerly owned by rich landlords is now owned by banks?

Risk.

omfg

http://www.oregonlive.com/business/oregonian/index.ssf?/base/business/1210987521306830.xml&coll=7&thispage=1

The upstart operation, led by its intense 29-year-old founder, Tyler Fitzsimons, is under siege from lenders, suppliers and contractors who say they've been stiffed for millions of dollars.

But Desert Sun's problems go well beyond clamoring creditors, The Oregonian found in its examination of the company. It offered a homeownership program to more than 30 people, mostly employees, that has left many participants deeply in debt for houses that aren't complete or even started.

o_O

wikipedia:
According to the U.S. Department of Commerce's Bureau of Economic Analysis, in 2005 construction and real estate accounted for 17.3% of all jobs in the Bend metropolitan statistical area (MSA), which constitutes all of Deschutes County.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?

this thing fucking rules!!!
apparently there is no way on god's green earth I should buy this year unless I find an absolute steal that I'm in love with. Wow, I feel kind of dumb for needing that confirmed, but goes to show how sentimental people are abt property

With all the dough sharp renters save after using that tool, there needs to be another that graphs hookers vs. blow.

lol buyerz remorse

i feel dirty playing with the home appreciation slider

"Did you touch it...there?"

if you enter inflation you can make it look like a butt

lol absolute steal for me = begins something around about 250K and below...

exactly. I would need to find something with the kind of amenities which beat my current address at $310K or below to make it seem remotely worthwhile at this point. buyer's market my ass, we have a long way to go

lol absolute steal for me = begins something around about 250K and below...

good luck finding THAT in the NYC metro area ... at least anywhere WORTH living anyway.

I think that is both of our points

omfg
http://bigpicture.typepad.com/comments/images/2008/06/02/bogof_flyer1.jpg

lol ... of course, you have to buy a (grossly-overpriced) mcmansion ($1.6M upwards) to get an (otherwise grossly-overpriced) townhouse gratis:

Buy a Home Get One Free

Yeah there were roffles about this elsewhere this week. I love SoCal. It's so wrong at times.

i can hardly wait for similar "deals" to start popping up here in NYC, too.

That's really just incredible. So, what's the word, though: imagine, for the sake of imagining, that you have 20 mil lying around. Isn't getting two of these babies for one a sound investment - is the market not expected to turn around within 20-30 years? Or what?

Not necessarily. You still have to look at what you're getting for what you're paying. I could sell you a Toyota Corolla for $28,000 and throw in a free scooter, after all.

here's the problem. If the developer has managed to already offload any of his units in prior years, than I can probably get two idiotic/misinformed/out-and-out-scammed families to let me take their properties off their hands for less than 1.6M combined. So as an investment, yes, that's a bad deal.
And if I'm going to go long on something with an eye for 20-30 years, socal real estate is not fucking it, to be kind of blunt.

lol my payment just went down $30 a month.

(mortgage unchanged; surplus in taxes/insurance escrow acct)

http://www.elliottwave.com/images/marketwatch/figure5.JPG

For those that still think this is a US problem

Wow, if I understood that graph I bet I would be really shocked about something.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?

this thing fucking rules!!!
apparently there is no way on god's green earth I should buy this year unless I find an absolute steal that I'm in love with. Wow, I feel kind of dumb for needing that confirmed, but goes to show how sentimental people are abt property

-- El Tomboto, Wednesday, May 28, 2008 12:44 AM (3 weeks ago) Bookmark Link

one thing thats not being appreciated in this equation is the forced fiscal discipline associated w/home ownership - people will do a lot of things to hang on to their homes that they wouldnt do in other investment situations

but basically im psyched to see tools like this that contradict the omg real estate is always a good investment conventional wisdom

also lol UK ^^

I admit to also being confused by that chart. Does it refer to securities backed by mortgages in the respective countries? Like does the Portugal graph equal securities linked to Portuguese mortgages?

I think the graph is just the average amplitude level of the parties that happen in each country celebrating the debt.

Meaning the UK is just off the fucking script right now. Party central!

"OI DEBT. KEEP THE FEEL FLOW. OI DEBT! DEBT! KINGSTON HOLLA! THIS IS THE SHIT!"

do you guys fuck with bloodhoundblog? It's a collective of seller's agents mostly.some good writers on there.

http://www.bloodhoundrealty.com/BloodhoundBlog/?p=2181

this guy reminds me of tombot in a good way. he fucking hates redfin and then the redfin founder joined the collective, should be interesting.

http://farm4.static.flickr.com/3031/3026233313_08c9bf0fdd_b.jpg

this is from the british pavillion at the Venice Architecture Biennale. It shows average room sizes for new construction. The UK is the smallest and the biggest three are Denmark, Austria and The Netherlands.

http://www.theage.com.au/national/housing-prices-its-all-relative-20090125-7pgu.html

Australia has among the least affordable houses in the world, according to an international study that suggests (its) price "bubble" is due to burst.

A comparison of median house prices with median household incomes in Australia, Canada, Ireland, New Zealand, Britain and the United States found that Australia had the most cities in the "severely unaffordable" bracket — in which prices are more than five times incomes.

The Sunshine Coast in Queensland was the least affordable area, ahead of the Gold Coast, ranked third, Sydney, in fifth place, and Melbourne in 12th place.

These were all deemed less affordable than New York, London, Dublin and Miami.

The report, by international public policy group Demographia, said affordability in Australia was worsening relative to Britain, Ireland and New Zealand — where prices had collapsed recently. Australia would be next.

HURRY THE FUCK UP THEN

Well one area of the real estate market is booming again:

http://www.buzzfeed.com/mjs538/zombie-proof-condos-sell-out-in-kansas

Bottom floor, our in-house scientists from the Umbrella corporation will be working around the clock to find a cure!

last-resort-style amenities

Damn. Looking back at my contributions to this thread, I was wrong enough to feel pretty ridiculous. (puts on his dunce cap)

This thread is kind of fascinating to read with hindsight. And I was mostly OTM in 2005.

BTW, I will make another call right now: there is a mini-bubble in Brooklyn condos, fueled by low rates and tax abatements. Prices will momentarily appear to be heating up, but then will slow down again (although I don't expect a huge drop either).

I am guessing same is true in some other markets as well -- low rates are enticing buyers but overall credit is not flowing like it used to and any bump will be shortlived.

IT IS HAPPENING...AGAIN

http://online.wsj.com/article/SB10001424052702303296604577450810342727388.html

By NICK TIMIRAOS
Federal officials are broadening their investigations of mortgage lenders that use a popular federally backed mortgage program, a move that could force more banks to pick up some of the rising tab for losses at the Federal Housing Administration.

U.S. attorneys already have reached settlements with four banks, Bank of America Corp., BAC -1.48%Deutsche Bank AG, Citigroup Inc. C +0.37%and Flagstar Bancorp Inc., FBC +0.13%recouping $1 billion for the FHA.

Last month, the inspector general for the Department of Housing and Urban Development, which oversees the FHA, issued subpoenas seeking information from additional lenders, including MetLife Inc., MET -0.17%SunTrust Banks Inc. STI -0.09%and U.S. Bancorp, USB +0.24%among others, according to people in the banking industry.

The FHA doesn't make loans but instead insures lenders against losses on mortgages that meet its standards. In the past, the FHA has looked into whether lenders ignored cases of potential fraud and failed to properly verify borrowers ability to pay. The subpoenas could be used to uncover potential violations of FHA program rules. If they discover violations, the findings could be used to strike a financial settlement with the lenders.

The moves are the latest sign that officials are trying to protect the FHA from needing a taxpayer bailout by recouping losses from lenders. Representatives for HUD and the inspector general's office declined to comment.

Representatives for the banks declined to comment. MetLife, which disclosed the receipt of two subpoenas in a federal filing last month, earlier this year said that it would exit the mortgage business.

The scrutiny also raises the possibility that lenders will become more cautious when underwriting government-backed loans. "Lenders are practicing the mortgage equivalent of defensive medicine," said Brian Chappelle, a former FHA official who runs Potomac Partners, a mortgage consultant. "Instead of requiring more tests, lenders are excluding more borrowers to protect themselves from liability that they feel they could not otherwise protect themselves from."

Last month, Wells Fargo WFC -1.12%& Co. told lenders that it would no longer purchase FHA-backed loans with credit scores below 640 beginning June 11, though it continues to make those loans available through its retail division. A bank spokesman said the change was the result of regular adjustments of credit policies.

U.S. Bancorp originated $3.3 billion in government-insured mortgages during the fourth quarter, making it the fourth-largest lender of government-insured loans during that period, according to Inside Mortgage Finance, an industry newsletter. MetLife and SunTrust ranked 12th and 15th, respectively.

The FHA wasn't heavily involved in the mortgage bubble because private lenders provided credit on easier terms. But the agency saw a surge in business beginning as the private market seized up in 2007 and later as Fannie Mae and Freddie Mac tightened standards. The FHA allows buyers to make down payments of just 3.5%, which has made it the last major outlet of low-down-payment mortgages.

Fannie and Freddie can more easily force banks to buy back delinquent loans that are found to run afoul of their lending standards, and banks have imposed tougher lending standards than what the mortgage companies require in order to deter against those costly buybacks, which have cost lenders billions of dollars.

The FHA insured more than 700,000 mortgages that were 90 days or more past due or in foreclosure at the end of March, representing about 9.4% of all mortgages it guarantees.

While the agency had $32.3 billion in reserve at the end of March, its independent audit last fall estimated that after expected losses on its current business, it would have just $2.7 billion to cover unexpected losses on more than $1 trillion in loan guarantees.

A more conservative forecast by the White House's budget office in February found that without the recent settlements, the FHA would have been short nearly $700 million, requiring a taxpayer infusion for the first time in its 78-year history.

great

From 2009:

http://www.nuwireinvestor.com/articles/the-next-subprime-mortgage-bubble-courtesy-of-the-fha-53733.aspx

This seems really, really fucking bad. FHA is propping up the housing market. FHA takes huge losses on its insured loans = double whammy. (1) Taxpayers on the hook for bad loans.(2) No more FHA propping up housing market = further price declines, further defaults, same shit all over again.

FFS