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October 8, 2006

Today's Housing Bubble Post - Recession in 2007?

-- by Dave Johnson

At NewsWEEK: The Worrying Housing Bust ... The danger: a 2007 recession.,

We are at the endgame for housing. Until recently, our national motto has been "in real estate we trust." Just last week, the Census Bureau reported that median home prices after inflation rose 32 percent from 2000 to 2005. In some places, the gains were huge: 127 percent in San Diego, 110 percent in Los Angeles and 79 percent in New York. But real estate—which has acted as a national piggy bank, with homeowners borrowing and spending against rising house prices—no longer looks so trustworthy. On this, more than falling oil prices or a record Dow, hangs the economy's immediate fate.

[. . .] Construction workers, real estate agents and mortgage bankers will lose jobs. Consumer spending (computers, cars, vacations) will also suffer, as the borrowing and buying against rising real-estate values subsides. Indeed, the end of the cheap credit that fed the boom means that many borrowers will face higher monthly payments.

Fox News: Real Estate: House of Cards or Dose of Reality?

Boston: Fear and anxiety in the housing market:

The Reagans are experiencing the wrenching consequences of being home sellers at the wrong time. They've had several buyers fall through, and have been forced to pull out from buying their own new dream home. They've packed and unpacked, explained to their children why they had to call off a move, and spent many a sleepless night talking about money.

[. . .] Though in a different price zone, Stephen and Dianne Greenstein can relate to Reagan's deflated spirits. The couple's four-story waterfront home, on Nahant's craggy coast, has been on the market for nearly a year. It boasts sweeping views of the Atlantic, several seaside decks, and three fireplaces. But for all of its amenities, the three-bedroom contemporary home has yet to sell -- despite a drop of $326,000 in the asking price. [ephasis added]

Why the Fed is dead wrong on US housing slump?,
The housing market slump has just begun. The market is far weaker than it feels. The builders are nervous like never before. Most importantly many people have started defaulting on their mortgage loans especially the investors.

Normally a bubble like this takes at least a 50% retracement in price before any bottom is over.

... Here is the problem. The real estate market in US in a 70 year cycle. For seventy years the market went up. Baby boomers caused it to happen. Population demographics is always behind any dramatic move in real estate market. However, the cycle down in real estate markets are normally sharp again based on demographics. Unless massive immigration reform takes place in US, the real estate market is destined to accelerate downwards for at least thirty years.

Minnesota: The housing glut

Wallkill NY: Cool housing market drives hot incentives,

Sure, the Orange County housing market is cooling down, but few would ever have thought it would come to this: a free vacation as an incentive for buying a home.
Yep, that's right, get a feww vacatin. You'll need it because you're paying $160,000 for a house that will be "worth" $100,000 next year -- but you will still OWE $160,000!

Posted by Dave Johnson at October 8, 2006 12:23 PM

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Comments

Housing Bubble? As far as I know a Bubble burst happens on the stock market, when investors, who were buying stocks at higher than true value price, in expectation of future profits. Burst happens when that expectation pops and *ALL* investors would try to sell their stock to return whatever they invested. With housing, there might have been some investors buying homes and condos, expecting the price to go further up, when they saw market switching from sellers to buyers market, they canceled construction contracts and put their houses on market, doubling housing supply overnight. HOWEVER, investors are only small portion of all home buyers and rest of us are NOT going to sell homes short when we see that house prices are going 1-2% below what they used to be a year ago. Even 10 and 20%.. Your bank made sure that you are NOT paying for the mortgage more than you could afford, by checking your financials and credit, before issuing a mortgage. When you see people saying.. "I dropped price 300,000 and house noone is still buying it", had most likely priced their home originally WELL above what it really worth. Nothing stops me from putting my house I bought for 100,000 in 2003 for 600,000 and hoping that someone will buy it. Now, I am dropping half off.. Still doubling my money if I can find someone to buy it. So housing bubble? I don't think so.

Posted by: Kireev [TypeKey Profile Page] at October 9, 2006 3:03 AM

Housing Bubble? As far as I know a Bubble burst happens on the stock market, when investors, who were buying stocks at higher than true value price, in expectation of future profits. Burst happens when that expectation pops and *ALL* investors would try to sell their stock to return whatever they invested. With housing, there might have been some investors buying homes and condos, expecting the price to go further up, when they saw market switching from sellers to buyers market, they canceled construction contracts and put their houses on market, doubling housing supply overnight. HOWEVER, investors are only small portion of all home buyers and rest of us are NOT going to sell homes short when we see that house prices are going 1-2% below what they used to be a year ago. Even 10 and 20%.. Your bank made sure that you are NOT paying for the mortgage more than you could afford, by checking your financials and credit, before issuing a mortgage. When you see people saying.. "I dropped price 300,000 and house noone is still buying it", had most likely priced their home originally WELL above what it really worth. Nothing stops me from putting my house I bought for 100,000 in 2003 for 600,000 and hoping that someone will buy it. Now, I am dropping half off.. Still doubling my money if I can find someone to buy it. So housing bubble? I don't think so.

Posted by: Kireev [TypeKey Profile Page] at October 9, 2006 3:04 AM

That's just silly. There are fundamental ways of valuing housing, much as there are fundamental ways of valuing stocks.

And the prices are WAY out of whack in many areas, they must correct, that's the nature of markets.

No, the bank did NOT make sure that everyone could pay. Why do you think Interest-Only and option ARMS, and negative amortization loans exist? They are for the sole purpose of making companies rich, and people hopelessly in debt. And then people walk away from monster mortgages, leaving banks and builders with tons of either empty houses or non-performing loans.

Yeah, that's the way a housing bubble works, very different than a typical capital/commodity market bubble, but the cause is the same, and the result is the same...

Posted by: Jason [TypeKey Profile Page] at October 9, 2006 12:21 PM

To Kireev. Brother, DO YOUR RESEARCH!!! Investors we're practically the only people buying houses from about 02 and up. The record sales in singe family homes were purchased with refinanced first homes on ARM's! What Jason posted is ABSOLUTELY CORRECT! You obviously don't have any sneaky, deceptive, GREEDY friends in the real estate biz. You're Naive and that is not an insult. A ton of my friends from San Diego whom almost all are in Real Estate in one form or another, especially loan officers have let me on to their dirty little secrets and how they can get just about anybody approved so they can receive a nice fat check. They tried to convince me in 00-01 to move back to San Diego and get in on it. I live in New York. I declined their offer and heard all the bragging for the last few years. Jason was correct, Banks DID NOT MAKE SURE EVERYONE COULD PAY. There is a BUBBLE. The BUBBLE DOES NOT affect people who own a HOME, it affects people who purchased a HOUSE that they're trying to FLIP with money they really didn't have and loans they cannot afford to pay back and did not plan on owning past 2-3 years. The BUBBLE is going to destroy people who were purchasing houses as if they were casino chips and slightly hurt everybody else due to the overall effect on the economy. Kireev, don't listen to people in the real estate biz, They're the modern day used car salesman. Smiling and shaking your hands and laughing as they walk away. I know, unfortunately some of them are my friends I grew up with.

Posted by: PaulArihara [TypeKey Profile Page] at October 9, 2006 1:17 PM

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