Tuesday, May 30, 2006

Equity Appraisal

Christopher Cagan of First American Real Estate Solutions recently penned an extremely interesting (and lengthy) article entitled “Mortgage Payment Reset – The Rumor and the Reality”. Although, in this article, Cagan takes a fairly bullish position attempting to, in some ways, dispel any panic over the upcoming flood of ARM rate resets, he produces a colossal quantity of really interesting data that could be perceived as decidedly bearish.

For example, he shows that, as a percentage of the total asset value of all “household” real estate, home equity has stayed at the constant level of 58.7% for the last five years. That implies that as home buyers purchased, and homeowners refinanced their debt burden has stayed, on average, at a constant level of 42% of the overall asset price (market price of the home) of the home.

At first, this seems fairly positive, as it would appear that all the stories of home buyers overstretching their debt and homeowners piggy banking their home equity may have been a bit exaggerated.

Yet a second look at the chart does reveal something a bit startling if you’re inclined to foresee a bearish future.

Notice in the chart above, that the total asset value, the mortgage total and the equity total have all either doubled or nearly doubled in just five years. Taking a more bearish stance, one could wonder what the debt/equity ratio would look like if asset prices were to retrace back to 2000 levels. This would put the asset total back to $11,401 (all numbers are in billions) but the debt total would remain at the 2005 level of $8196 (obviously this is just a rough estimate to prove the point). In this scenario, equity would fall to a total of $3205 or just 28% of total home asset prices with debt jumping to 72% of the total asset price.

Not that this is some “Ahahhh” moment, since its pretty obvious that things would not look so good if home prices fell back to 2000 levels, but the point is, since the appreciation over the last five years has been so meteoric, it doesn’t take much backward movement… just a few years, to flip the numbers completely around. To me it seems precarious.

Additionally, Cagan plots home equity as a percentage of home asset prices in virtually every conceivable way possible. One interesting chart he produced (shown above) shows a cumulative distribution of the current equity in homes (either purchased or refinanced) with equity ranging from -40% to 100% equity. Additionally, he builds a column of this distribution for loans that originated in every year from 1985 to 2005.

So the key to this chart is that is shows the current standing of equity for homes purchased (or refinanced) from 1985 to 2005. Furthermore, it shows that there are homes that range from -40% to 100% equity. Notice also that the values in each column are cumulative so, for example, for homes purchased in 1985, only 1.3% have negative equity in the range of -35% to -40% and 6% of homes have 0 to -40% equity.

Now, look at the years 2003 – 2005. There are currently a substantial number of homeowners at 0 to -40% equity. Startlingly, 29% of loans originating in 2005 already have no or negative equity. Also, the chart shows that if homes prices fall 10% nationally, that would push 47.7% percent of 2005 loans into the 0 to –40% equity column.

Well, I could go on and on as there is PLENTY of interesting information in this article including equity distributions for many of the local housing markets as well as equity (including negative equity) distributions across different loan products (fixed, ARMs, etc).

This paper certainly seems to prove that home equity has risen very sharply, especially in the last five years and it seems to point to the fact that if you prefer to feel bullish on housing, you need to justify this outstanding windfall appreciation increases with some substantive reasoning.

Thursday, May 25, 2006

The Art of The Shpeal

Talk about adding some spin!! Here are some positive quotes from some very optimistic people.

David Wluka - President of the Massachusetts Association of Realtors (MAR)

“There may be more homes for sale, but there’s no excess supply either that could trigger a sharp market correction.”

“Our strong seller’s market has been replaced by a more balanced one that will help stabilize home prices.”

“Today’s improved supply levels have brought much needed stability to home prices,”

“To some, especially sellers, it may feel like the market has slowed dramatically, but that’s because we are coming off the record sales pace of the last two years.”

“The rapid price appreciation of recent years has given way to a period of relative price stability, which is good for buyers since it will allow incomes to catch up with home prices and help offset the recent rise in mortgage rates,”

“With a wider selection of homes to choose from this spring, buyers have become more discriminating. They’re taking more time to find the property that best meets their needs and being careful to stay within a budget,”

Robert Toll – CEO Toll Brothers, Inc. (TOL)

We believe the excess supply on the market is a short-term phenomenon,''

"Demand should once again exceed supply and prices should start to rise again,"

David Lereah – Chief Economist of The National Association of Realtors

"This may be the bottom. It appears May is a little better,"

Wednesday, May 24, 2006

A Closer Look at Today’s New Home Numbers…

The headlines read “New home sales stay strong in April”, “US home sales unexpectedly increase in April” or “Builders boosted on April home sales surprise” but before you get all excited and go plunk down a deposit on that new Toll Brothers (TOL) hulk, let’s take a closer look at those numbers and see what they may be actually saying.

First, the headlines should have read “New Homes sales down 5.7% year over year as compared to April 2005” or “New Home sales down 11.2% year to date” as either the year to date or the year over year figure is arguably a more substantial measures of the markets decline.

Additionally, only a few articles felt it important to report that the March 2006 figure was revised down from 1.213 to 1.142 million homes sold. That 5.8% downward revision yielded a new March 2006 year over year decline of 13.5% as compared to March of 2005.

Similarly, the April estimate of a 4.9% increase in homes sold carries with it an +- 11.5% sampling error so stay tuned for the revision next month to get a more accurate version of this number.

I’m not trying to rain on the parade of anyone hoping the housing bubble has been overstated but these articles were overly optimistic. Simply read the Census Bureaus report for yourself and consider the why most new sources choose to pump the monthly increase instead of reporting the year over year decline.

New Massacre in Boston?

With the release of the April home and condo sale statistics for Mass, I wonder how long it will be before people take to the streets with pitch forks and shovels in a frothing rage, demanding retribution.

Well maybe that’s going a little too far but the numbers do look bad. It seems pretty clear now that the 9 year run of solid year over year growth is now over.

Ill update this list with the additional information (inventory, multi family stats, days on market, etc.) when the data becomes available.

  1. Single family home sales down 16.5% in April.
  2. Condo sales for Boston down 15.3%.
  3. Year over year median single family home price remained flat at $335,000.
  4. Year over year median condo price declined .4% to $272,340.
  5. Single family Days on the Market increased to 127.
  6. Condo Days on the Market increased to 117.
Additionally, inventory of single families and condos was stated to be up 38.6% during last 12 months by the MA Association of Realtors.

Sunday, May 21, 2006

Stinking buyers!!

The following article entitled “Buyers Control the Market” published in a Fort Myers Florida paper details accounts of sellers in a particular development beginning to panic as they compete to the bottom while chasing little to no buyers.

As accounts like this start to become more commonplace it will be interesting to see how sellers (especially flippers), brokers, and anyone else left holding the bag will regard buyers.

If this article is any representation… not well as suggested by the following quote from Debbie Elentrio, a Realtor at ERA Falcone Realty Group who represents one of the sellers in the community:

"There are no stinking buyers around here and these people are panic-stricken — everyone can smell the fear,"

So beware you “stinking buyers” in Fort Myers Florida, times are tough, nerves are wearing thin, I wouldn’t turn your back on them during the next open house.

FDIC Roundtable sees Segmented Consumer Recession Ahead

The following charts were taken from a recent presentation and discussion given at the Federal Deposit Insurance Corporation (FDIC) 2006 Economic Outlook Roundtable entitled “Scenarios for the Next U.S. Recession”. A section of the presentation focused on how a “segmented” consumer recession could occur shortly. In this segmented recession, 10% of the U.S. population who have only recently accessed “unparallel levels of credit” could experience a recession over the next 24 months.

The point of this presentation is that there may be a real squeeze on the liquidity available to the average U.S. consumer that would especially affect those in a 10% segment that have only recently been able to access credit may be substantially overleveraged. This could result in a recession for this segment as they stop their consumer spending activities in an effort to maintain their current loan burdens or fall to default.

The key points being made in this discussion are as follows:

  1. Banks are now at record levels of real estate related loans (home loans and home equity loans).
  2. Although non-current loans (loans with payments at least 90 days late) are at historically low levels, the increase in sub-prime (loans generally given to applicants with poor credit who prior to a relaxing of lending standards in1994, would not have been qualified) loans are at historically high levels.
  3. Cash out refinancing is at historically high levels with a decline to a cease shortly on the horizon as interest rates hike up.
  4. As home equity trails off during the projected housing cooling, revolving credit card debt will overtake home equity increases.

This chart shows return on investment for commercial banks from the 70s to today. Apparently the green line in the upper right is present to reflect an overall change to ROI as a result of two big bank mergers that occurred in 2004. So as you can see, bank earnings are very strong, roughly 12% - 15% annually since the early 90s.

This chart shows bank growth from real estate loans vs. all other loan types from 2000 to the third quarter of 2005. Real estate growth played an important role in bank growth during this period.

This chart shows year over year national home price appreciation since 1976, and a projected decline to home price appreciation for 2006 consistent with a “flattening” outlook over the next few years. Notice, that the red dashes represent a projected decline in appreciation, not actual price declines.

This chart shows that banks are currently at an over 20 year low for percentage of non-current loans. A non-current loan is one that has a current payment more that 90 days late for payment. This chart would suggest that current credit quality of bank loans is very high with less than 1% of loans currently more than 90 days overdue.

Shows that as a percentage of total loans, real estate loans have increased to 30% of the average commercial banks loan portfolio.

This one is hard to read as the original content seems to have been formatted for an overhead projector but it shows the increase in owned homes and related home ownership since 1994 when apparently the underwriting standards for real estate loans were relaxed. Since 1994, an increase of 15 million new home owners which represents an 8% increase in the size of the home buying market. Note, the blue bars on this chart represent the number of “owned homes” and the dark blue line represents the number of home owners.

This chart shows the increase, in billions of dollars, of “subprime” loans. Subprime loans are loans that are given to applicants who have generally poor credit. Typically, subprime loans have significantly higher interest rates and are generally considered more volatile than conventional loans, Notice, that from 1996 to 2004, subprime lending has increased from $90 billion to $530 billion dollars.

This chart shows the growth in home equity loans from 1995 to October of 2005. The blue bars indicate the total amount of loans in billions of dollars, and the blue line indicates the percentage increase. Again, this chart demonstrates that bank exposure to real estate has dramatically increased and is now at peak levels.

This chart shows the growth and predicted decline of “cash out” refinancing from 1993 to 2006. The purple bars indicate the total in billions of dollars of cash out refinancing per year and the blue line indicates the percentage of refinancing origination amount. This chart would suggest that a major source (if not THE major source) of consumer liquidity (i.e. the ability of the consumer to get their hands on substantial cash) is going to dry up as interest rates rise and make these loans unaffordable.

Again, this chart is hard to read as it seems to have been formatted for a projector but it shows a comparison of year over year revolving credit card debt (blue line) vs. year over year home equity growth (magenta line). This chart would suggest that since 2000, home equity growth has far outpaced credit card dept but now seems to be headed to the reverse as home equity growth declines.

Thursday, May 18, 2006

The Inflation - Real Estate Connection

Although the “orderly and moderate” sentiment from Bernanke may offer some reassurance to those concerned about real estate stability, recent inflation indicators suggest (April Consumer Price Index up 0.6%, Core Prices up 0.3%) that Bernanke may have to resort to additional hikes to the Fed funds rate in June, possibly even by 50 basis points.

An interesting article written by Greg Robb of MarketWatch offers a possible scenario whereby the slowdown in housing is causing, at least in part, the current run-up in inflation.

It appears that the Consumer Price Index clearly factors in inflation in housing rental prices but has only a poor equivalent called the "owners equivalent" factor for measuring increasing owner occupied housing prices.

In order to prevent “inappropriate results for goods [housing] that are purchased largely for investment reasons” the CPI had to drop its use of an asset price method for measuring change in owner-occupied housing in the early 1980s in favor of a calculated equivalent method.

The owners’ equivalent “measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.”

Clearly, it cant be trivial to estimate rental price equivalents for owner-occupied housing and given how far out of whack housing prices are with respect to rents in many areas, it seems reasonable to conclude that during the housing boom years it may have been even more difficult to estimate the price inflation associated to owned housing by equating it to a competitive rental market.

This may have skewed the perception of inflation (the CPI itself) during the real estate boom years during which home ownership rose to its highest levels, keeping rental prices in check and thus keeping the housing rental and the owners’ rental equivalent components of the CPI low.

Use of the owners’ equivalent may have grossly under represented real home price inflation during this period by trying to equate two prices that are seemingly no longer associated.

Now that the housing market is reversing, rental demand and rental prices are increasing causing the CPI to show a significant increase in its housing component.

This would seem to create a possible viscous cycle whereby the Fed would attempt to control inflation (as partly perceived by the CPI) by raising interest rate, which would in turn depress the housing market, resulting in higher demand and prices in the rental market, thus causing more housing rental cost related price inflation to register in the CPI.

It seems the guys at the Fed must be sharp enough to recognize this catch 22 but it is an interesting conundrum.

The CPI seems to be a well regarded inflation indicator (arguably one of the most watched and anticipated) and it may have been distorting inflation throughout the last 10 year run-up in housing prices.

It would seem that in order to effectively “factor out” current inflation in house rental prices (so as to prohibit rental housing price inflation from creating a cause to increase interest rates) you would need to somehow readjust the CPI numbers to account for all the owner occupied housing price inflation during the real estate boom years.

Confirmation from Bernanke and Greenspan

Today Federal Reserve Chairman Ben Bernanke stated that a cooling in the nation’s real estate market was “pretty clear”. Bernanke noted that "We're seeing slowing in sales, slowing in starts. There also seem to be signs that prices are not rising as quickly as they have been for the past few years,”

He went on to say “Our assessment at this point . . . is that this looks to be a very orderly and moderate kind of cooling, ”

Bernanke also noted that the Fed is concerned about the recent proliferation of non-traditional mortgage products such as adjustable rate and no money down mortgages noting that they accounted for 30 to 40 percent of new mortgages in 2005.

Then later in the eavning, while attending the Bond Market Association's 30th anniversary dinner, former Fed Chairman Alan Greenspan, referring to the real estate boom stated that "This has been quite an extraordinary boom," He went on to say "Home sales are off, applications are off, everything is going in the same direction. The boom is over, and you can say that with a fairly strong degree of confidence."

Tuesday, May 16, 2006

Second look at Second Homes...

A lot has been made recently about the growing second home market and its relationship to Baby Boomer generation. The common premise is that, demographically, the Boomer generation is the driving force behind the second home sales by their newfound interest in leisure homes but taking a closer look at the numbers reveals a slightly different conclusion.

It’s certainly true that members of the Boomer generation (individuals born between 1946 – 1964) are currently the typical and even the predominate purchasers of second homes but the term “second home” needs to be put in a more precise context in order to gain a better understanding of what’s driving the upsurge in the market. Furthermore, a better examination of the statistics surrounding vacation home purchases may help to clarify the nature of these purchases.

The term “second home” seems to carry the implication “vacation home” (thus all the boomer coming of age articles) but the reality is that homes purchased specifically for vacation use are a small fraction of what are termed “second home” while homes purchased for investment purposes and rental income make up the majority of the market.

In its most recent survey of second home owners, the National Association of Realtors shows the following statistics for 2005:

  1. Second home sales made up 39.9% of all new and existing home sales in 2005. Thats up (way up!!) from 7% in 2000.
  2. 69.5% of second home sales were specifically investment properties with only 30.5% of second home sales going to vacation properties.
  3. Of the 30.5% of second home vacation properties, 13% listed “rental income” as a reason they bought the property leaving only 17.5% as purely leisure properties.
  4. Of the 30.5% of second home vacation properties, 40% were listed as detached single family homes while 31% were condos and the remaining 28% were listed as cabin, cottage, mobile home or other.
  5. Of the 30.5% of second home vacation properties, 6% were time share units.
  6. Of the 30.5% of second home vacation properties, 4% were said to be intended to be occupied by a child in the future when they went to school (presumably college)
  7. 21% of vacation home owners own two or more vacation homes.
  8. 65% of vacation home owners said their vacation homes were better investment than stocks.

The salient point here is that investment, not leisure, is the real motivator of the poorly named “second home” market with as little as 17.5% of second homes serving as purely leisure use homes. The overwhelming majority of second homes are specifically investment properties. In addition, even a healthy 13% of vacation properties are serving as rental income properties.

The key here is that, given the current real estate climate, the upsurge in investment properties is tantamount to speculation. As recently as 2000, second home sales only accounted for 7% of new and existing home sales with the percentage of vacation and investment homes divided evenly. Thats a whopping increase for 5 years... 415,000 sales in 2000 to 3.34 million sales in 2005 with the vast majority of homes specifically earmarked as investment properties.

It seems clear that the notion of strength of second homes sales coming from boomers looking for nice vacation getaways is really just poor perception and that the majority of the activity in the last few years has been related to the gross hyper speculation typical of the current real estate market.

Incidentally, the popular perception of the boomer vacation home seems a bit fictitious as well with 6% of vacation homes being listed as timeshare units and 28% being listed as essentially lower cost shacks. Not to mention the 4% seem to be occupied as the primary residence of a child attending college.


David Lereah’s NAR bio reads like an account of modern day Renaissance man. With “tenures with private industry, government and academia” this part PhD., part Chief Economist, part Author, part CEO, has apparently accrued quite a long list lists of significant achievements in his life.

Yet for all these shining accomplishments, his finest seems to have gone totally unrecognized.

That, of course, is his seemingly never ending, fine tuned, super-human abilities as an Industry Cheerleader.

Rather than going on and on why not simply let Mr. Lereah do the talking.

Here is a list of truly amazing quotes he has made recently:

"You don't need a boom for real estate to roar. The real estate boom is over but the real estate expansion is still here."

"There are no real estate bubbles, only balloons that expand and contract,"

"In 2006, we are cleansing the market of speculation."

"With the supply of homes picking up very nicely in many areas of the country, pressure is coming off of home prices," Lereah said. "By the time we report second-quarter data, I expect most areas will be returning to normal rates of price growth in the single-digit range. Consumers generally can expect normal price appreciation for the foreseeable future, providing solid returns over time."

Lereah called the slowdown healthy: "Prices got a little too high. We got ahead of ourselves. We needed to catch our breath."

"We now see appreciation cooling to single-digit rates of growth — another sign that the markets are stabilizing,"

"Real estate is not an irrational investment, but speculators purchased irrationally during the boom, especially in areas like Miami. This drove prices up, and many speculators took out interest-only loans. This produced a vulnerable real estate market," Lereah explained.

Asked about a recent study that indicates 35 percent of homeowners who have ARMs don't know how much their rates could jump from one payment to the next, and that 41 percent don't know how high their rates can go.

"I do expect some of these households to have trouble making the payments," Lereah said. "We're talking about an increase in delinquency rates and also maybe foreclosures on some of those homes."

Saturday, May 13, 2006

"The terms are fine... please sign at the dotted line."

Everyday, thousands of Americans find themselves relying on mortgage lenders and brokers in order to navigate the myriad of loan options and terms now available.

Unfortunately, many of these brokers/lenders are vicious, heartless people looking only to rake an unsuspecting, uninformed applicant across the coals in order to make a buck.

Either they slip in random and excessive fees or points, sometimes accounting for 5% or more of the loan, or produce lending rates that are well above prime, or, by contrast, push borrows into sub prime loans (usually ARMs, interest only, or negative amortization loans) that carry exorbitant prepayment penalties thus cornering a borrower and making conversion to a better suited loan costly, difficult, or even impossible. It’s been reported that some 80% of sub-prime loans (which accounted for 80% of all loans in 2005) carry significant prepayment penalties.

The frequency and cost of predatory lending practices are not insignificant. A California study by The California Reinvestment Committee (CRC) found that over a third of borrowers may have been the victim of predatory lending tactics. Its also, been reported that homeowner lose and estimated $9.1 billion each year as a direct result of predatory lending.

Sadly, the people who are most often and appreciably taken advantage of are also the most likely to suffer dramatic losses from these predatory lending practices. The articles listed at the bottom of this post chronicle countless cases where unscrupulous lenders or mortgage brokers ran roughshod over every one from first time home buyers (some were the first in their families) to the elderly, to non-English speaking citizens, and even the legally blind.

One can certainly say “oh well… buyer beware” but lets face it, were not talking about buying a used car. For most of us, our homes are the single most significant asset we will ever manage and the terms of the associated debt (and the debt acquisition), if not well suited to or understood buy the borrower, can prove have disasterous consequences.

Now that the housing downturn is in full swing, we are about to feel the real fallout of an explosive combination of runaway markets, poor lending standards and criminal lending tactics. Many people are already losing their homes, as well as whatever investments (down payments, etc.) they had in them, as the volume of foreclosures across the country continues to steadily rise.

One bright side though, it seems that many states are now passing pro-consumer laws that will help restrict some of the most egregious lender and mortgage broker abuses.

Hopefully, better protection for consumers, combined with a healthy real estate downturn (which predatory lenders, ironically, helped to engineer in the first place) will drive many of these ruthless bastards out of business for good.

Interesting Links:

Predatory Lending Findings

Predatory Mortgage Lending

Coalition Calls for Predatory Lending Legislation to Protect Minority Homebuyers

Stolen Wealth Report

Legislators optimistic about chances of predatory-lending bill

Realty spotlight shines on minorities

Borrow Wise Initiative Targets Predatory Lending

Family May Lose Home Thanks To High-Interest Loan

Senate approves crack down on predatory lending

State needs strong laws on predatory lending

Predatory lending displacing homeowners, destroying their dignity

Predatory lending hurts minorities

Thursday, May 11, 2006

A Slam Dunk!

Reports have been released recently suggesting that lenders are increasing scrutiny of new loan applications in an effort to decrease the risk of loan defaults. A decrease in the number of “Slam Dunk” loans are highlighted as a result of the greater scrutiny.

Slam Dunk loans are those that are provided with a “minimum of underwriting fuss” and, as illustrated by a memo entitled “Slam Dunk qualified loans… no questions asked!” issued by lender Triad Guaranty Insurance Corporation, a buyer is qualified based simply on a credit score, clean credit record and 5% deposit.

Furthermore, Slam Dunk loans seem to have accounted (and continue to account) for a substantial percentage of loan applications in recent times.

Slam Dunk loans account for:

  1. 66.5% of loan application nationwide.
  2. 44.1% of loan application in Colorado.
  3. 76.9% of loan application in Nevada.
  4. 79.6% of loan application in California (now down from 84%)
  5. 84.3% of loan application in Massachusetts

Some examples...

Triad would guarantee “Slam Dunk” approval for a fixed, balloon, or ajustable rate loan, with the following terms:

FICO Score: 680 or higher
Loan to Value: 90% (10% donw)
Max cash out: $100K (if refinancing only)
Loan amount: $650K

FICO Score: 660 - 679
Loan to Value: 90% (10% donw)
Max cash out: $0
Loan amount: $500K

FICO Score: 620 - 659
Loan to Value: 90% (10% donw)
Max cash out: $0
Loan amount: $450K

Interestingly, the Triad memo also covers a Slam Dunk program to qualify buyers that have no deposit…. 100% Slam Dunk financing with the Triad 100!

Wednesday, May 10, 2006

You want 50!... Ill give you 50!!!

Just in case there weren’t enough loan options for buyers who want to artificially afford artificially expensive homes in a housing market made artificially high by the use of a plethora of other exotic loan products, make way for the 50 year amortizing 5/1 ARM loan!

This normally amortizing loan has a lower fixed interest rate for the first 5 years, then it can adjust annually for the remaining 45 years.

Apparently, this option would be best for those who don’t feel comfortable with an interest only or negative amortization loan option but still like the feel of something a little bloated and crazy.

A small catch though... buyers will have to put at least 5% down… wow 5%!! Well… at least until they formulate the 50 year blended option!! whopee!!

So goes the vicious cycle of distorted loans distorting the market... requiring further distorted loans… etc. etc. … onward and upward?

I wonder how many poor bastards will rationalize getting into one of these loans on the premise that they could always re-finance or sell the property within the 5 year fixed rate period.

Oh well, just another one for the history books I guess…

Tuesday, May 09, 2006

Glassman Bullish on Real Estate!!

As if to inadvertently say “Sell Now!! Get the hell out while you still have a chance!!” James Glassman of the Dow 36,000 fame beats a resounding bullish tone on the current state of real estate.

In an article entitled “Economists Predict Soft Landing for Housing”, Glassman states “Housing won't continue to make the same contribution to the economy that it has. But when I think about where the economy is, I think we're in the fifth inning with a good chance of going into extra innings. This expansion may prove to be the longest one ever seen.”

Ok, we are in the 5th inning… so there’s 4 more left to go AND we may even go into EXTRA innings! That’s quite bullish sentiment indeed! We may be only half… wait… maybe less than half way through this current real estate expansion!! Whoopee!! I’m going to get me a Toll Brothers (TOL)!!!

If that isn’t a Dow 36,000 prediction on housing, I don’t know what is.

Monday, May 08, 2006


BusinessWeek.com recently published an article entitled “Why The Housing Bubble Won’t Burst” in which a purported veteran analyst Michael Youngblood of Friedman Billings Ramsey & Co. (FBR), an investment banking firm specializing in non-conforming residential housing mortgages, provided supposedly sound reasons for one to be optimistic about the current state of the real estate market.

Youngblood argues that the housing bubble argument is overblown because, in his words, “there is no national housing market, so there can’t be a national house-price bubble.”

Wow!! I never thought about it that way…. What a great counter argument!! There’s no way for there be a real estate bubble because there is no national housing market. Ok so we can all sleep easy, as it seems a technicality of the definition of the term “housing bubble” has prohibited its possible existence. We can all go out and spend spend spend on those Jumbo loans Youngblood’s firm handles.

Youngblood goes on to say “However, there are bubbles in 75 of the 379 markets I studied.”

Well that’s better. Lets all be optimistic as there is no national housing bubble, only 19% of the nation is experiencing housing bubbles. Certainly that’s something to feel very secure about as I’m sure that this 19% doesn’t include any areas that could have an greator impact on the economy.

When asked where those bubbles are, Youngblood replied “Most of the bubbles exist on the East and West coasts in such markets as New York, Los Angeles, Washington, Phoenix, Honolulu, and Tacoma Wash.

Ok... so I guess where not out of the woods just yet.

More interestingly, Youngblood sees certain areas of California and Florida as showing signs of being poised for even greater gains in 2006. Strangely though, when asked why these areas would do so well Youngblood responded “Bubbles can persist for very long periods of time…”

Ok, so the areas that aren’t bubbles actually are bubbles?

Youngblood finishes up this travesty by recommending people invest in homebuilding stocks as “the homebuilder stocks may continue to perform well for a while longer.”

Huh?? Last I checked, the whole homebuilding sector led by names like Toll Brothers (TOL) and Hovnanian Enterprises (HOV) was down like 30% year to date. What an analyst! Thanks Youngblood!

Is this a serious article? How does something like this pass muster at a legitimate media source such as BusinessWeek?

Sunday, May 07, 2006

Party's over in Boston...

Think the colonists were pissed over their unfair burdens?

Wonder what Bostonians will do after their current financial crisis sinks in...

Some key statistics for the Boston Market:

1. Sales of single family homes plunged 8.4% for the first quarter of 2006 as compared to the same period in 2005.

2. Sales of single family homes have fallen for 13 of the last 14 months when compared on a month to month basis.

3. The median single family home price dropped 1.5% in March to $325,000 from $330,000 in March of 2005.

4. Inventory is up 91% compared to 2005.

5. The average days on the market now stands at 91 vs. 69 in 2005.

6. Sales of condos declined 1.2% for the first quarter of 2006 as compared to the same period in 2005.

7. Sales of Multi-Family homes dropped 7.6% during 2005.

8. The average sale price of a Boston waterfront condo has plunged 40% in the first quarter of 2006 according to the current Listing Information Network (LINK) data.

Furthermore, when adjusted for inflation, the median single family home price in MA has declined a whopping 10.75% since its peak in June of 2005 as well as declining 4.85% on a year over year basis. Bravo!! to www.bostonbubble.com for using the CPI Northeast Urban numbers to convert the reported housing figures from nominal to real values thus deriving a more accurate picture of the state of the Boston real estate market.

Want more? Read the following articles:

Waterfront condo woes - Boston Herald May 4, 2006
Caution: slowdown ahead - Boston.com April 30, 2006
Housing Slowdown Deepens In Mass - Boston.com April 26, 2006
Housing strength shifts - Post Gazette.com April 26, 2006
Multi-unit home sales drop - Metro West Daily News April 22, 2006

Real Estate Slowdown Everyplace!

Investment guru Warren Buffet sees "slowdown everyplace, most dramatically in the formerly hottest markets." Buffet also declared that he would be "surprised if there aren't some significant downward adjustments...".

You can take this as a bit of sound empirical information as Buffets Berkshire Hathaway owns HomeServices of America, the nations second-largest realtor. Buffets comments were made during the Q&A session of the annual Berkshire Hathaway investor meeting.

This sentiment reinforces Buffet and Mungers prior comments on the real estate asset-price bubble.

Saturday, May 06, 2006

Could this be any funnier?

The following excerpt taken from a live Q&A session with the Washington Posts Real Estate Editor Maryann Haggerty on May 5 may shed some light on the current state of the US real estate market.


The Lovely Penn Quarter, D.C.: (Q) My friends and I came up with the idea last year that we could make a living by buying condos, living in them for two years, selling for a big profit and repeating. The appreciation would be more than we could make by working and the profits would be tax free. What could be better, right?

So I bought my first condo in Penn Quarter at the end of last summer. Now all my friends have decided to hold off. They say that they aren't sure real estate is "it" anymore. But I'm counting on my condo to appreciate significantly over the next two years to help me pay down some credit card debt I've been carrying for a while.

My condo hasn't really gone up in value since last summer, but I'm thinking the market is just taking a healthy breather before skyrocketing again. Should I be getting worried at this point or are my friends just being chicken littles during the market's pause in appreciation? I don't want to own my place if its not going to increase in value soon. Help!

Maryann Haggerty: (A) You, my dear, are a real estate speculator. In a normal market, no one would expect that owning a home for just two years would provide enough appreciation to cover the cost of selling, let alone to live on. But I'm assuming that you have a very high tolerance for risk, and that's why you decided to take this gamble. And it was a gamble, not an investment, right? You knew that?


Clearly this person can’t possibly be representative of a large number of buyers but I think that this is an instance of a story for the history books. After the bubble has deflated, we will all be telling our wild tales of the run up days… open house bidding wars, mega jumbo no interest no money down adjustable rate loans, block after block of gut rehabs, flippers, and poor bastards buying ridiculously inflated properties with the assumption that there is no downside.

Oh well, now that the media is starting to pick up on the burst (see the covers of this months Fortune and Harpers magazines) I wonder how long it will be before the notion of a potential “soft landing” gives way to widespread panic.