[Eug]

Taking Stock

Plenty of folks scoffed when John Talbott came out with his 2003 book, The Coming Crash in the Housing Market. Here we go again — another prophet of gloom cashing in by stirring up panic.

But three years later, the former investment banker with Goldman Sachs must be feeling a measure of vindication. The U.S. housing market hasn't crashed yet, but the creaking is getting louder.

This week, the U.S. National Association of Home Builders said confidence among its members tumbled to a 14-year low in July as buyers cancelled contracts and speculators exited the market. A day later, the Commerce Department said housing starts fell 5.3 per cent in June — the fourth drop in five months.

Want a glimpse of how ugly things could get? Take a look at shares of U.S. home builders, which are collapsing like a cheap roof as customer orders fall and companies slash earnings forecasts.

Consider D.R. Horton, one of the largest U.S. builders, whose stock has been cut in half since January. This week, Horton reported the first quarterly profit drop in its history. Even chief executive officer Donald Tomnitz couldn't put a positive spin on the numbers.

“Every downturn is longer and deeper than people expect,” he said on a conference call. “We are assuming the worst.”

[Cody Dawg]

I think it depends on the area. Real estates sales will not "crash" in nice areas: Hawaii, San Diego, coastal California, Manhattan, and coastal areas in Florida. They are destination locations with tourism to prop them up. Florida has the added bonus of being a place where people want to retire or want a vacation home especially since we have no federal income tax and homestead protection for homes. We have the beach, theme parks, warm weather, and lots of golfing...it's pretty darn nice here despite the occasional hurricane. Who wouldn't want to be here?

I recently read how in the Seattle area there is still a huge shortage of entry-level housing ($300K.)

In my area in Palm Beach Florida we have what I would term a flat market right now, but prices are not dropping in response to the end of the buying frenzy that characterized the last couple of years.

[Eug]

Personally I think some of the nicer areas are particularly at risk, because some of them are where the prices were the most inflated. In fact, that's what it suggests right in the article:

According to Mr. Talbott, there are more new and existing homes for sale — about 3.6 million — than at any time in U.S. history. And that number will only grow as homeowners with adjustable-rate mortgages — more than $1-trillion (U.S.) of which come up for renewal at sharply higher interest rates this year and next — discover they can't afford to pay the extra $1,000 or more in monthly payments.

“That is going to force a lot of people to sell into a down market and make a down market a lot worse,” he said in an interview. No wonder his follow-up book, published earlier this year, is titled Sell Now!

As he sees it, we're still in the early stages of an unwinding that could take five to seven years, during which time prices in the most overheated markets — coastal areas in particular — could plunge 50 to 60 per cent.

However, I'm not convinced it will be a sudden crash either. I think they will plateau and then some areas will decline.

Interestingly, the same signs are not apparent yet in Canada. Housing starts in Canada are still big numbers here. Actually, I'm annoyed at this, because I WANT a crash. I wouldn't make as much money on my current home when I sell, but it'd make a purchase of a much larger home that much easier.

Originally Posted by Cody Dawg

I recently read how in the Seattle area there is still a huge shortage of entry-level housing ($300K.)

Yes, condo prices in Seattle are simply outrageous (although they're even higher in a few other US cities). A friend of mine who moved there paid more for his 2 bedroom condo than what I'd guess most Americans pay for a 4-bedroom detached home.

[chabig]

I think that as long as our population continues to increase, real estate will become more valuable.

[Eug]

Originally Posted by chabig

I think that as long as our population continues to increase, real estate will become more valuable.

Yes of course, in the long run.

However, the current real estate market is thought to be overpriced in many areas, considering that prices in some areas have increased by as much as 50% or more in just a few years, spurred on by various things not the least of which are low interest rates.

I would not be surprised to see a drop of say 25% vs. current prices in the coming years in some areas. That would still mean an increase of 20% vs. 5 years ago, which agrees with your statement of real estate becoming more valuable... in the long run.

[Cody Dawg]

Eug:

Some "coastal areas" that this guy may be referring to are areas known as the "rust belt." But the coastal areas in Florida have generally all been insulated from any price degradations or depreciation. They are flat right now, but prices are in no way depreciating in the single family home market. I know - I just finished home shopping and bought a new home and we were a) Shocked at prices (again) for the average home and b) Shocked that the owners complaining about the lack of buyers would also not budge on their asking prices.

They may not be selling as fast, but they are holding their own. That's for homes and not condos or townhouses - which I am SO glad we are not in because that is the most volatile market. They can always build up but as far as land goes, that's a limited resource. In fact, in some areas in San Diego and in Hawaii for example, you can only lease the land your house sits on...for up to 99 years for example.

[E's Lil Theorem]

I'm not sure "costal" areas are completely exempt from this. I'm not a real state buff, but I do recall that the early 90s were pretty horrible for real estate in southern california (especially in the OC).

Originally Posted by Cody Dawg

... especially since we have no state income tax ...

Fixed™.

[Eug]

Originally Posted by Cody Dawg

Eug:

Some "coastal areas" that this guy may be referring to are areas known as the "rust belt." But the coastal areas in Florida have generally all been insulated from any price degradations or depreciation. They are flat right now, but prices are in no way depreciating in the single family home market. I know - I just finished home shopping and bought a new home and we were a) Shocked at prices (again) for the average home and b) Shocked that the owners complaining about the lack of buyers would also not budge on their asking prices.

They may not be selling as fast, but they are holding their own. That's for homes and not condos or townhouses - which I am SO glad we are not in because that is the most volatile market. They can always build up but as far as land goes, that's a limited resource. In fact, in some areas in San Diego and in Hawaii for example, you can only lease the land your house sits on...for up to 99 years for example.

The article isn't suggesting the crash is now. It is suggesting the crash is coming, and that stagnant prices are just the first signs. That's the way it often happens. After the price increase honeymoon, things slow down, and then flatten out... and then they may just drop.

Now, the analysts could very well be wrong of course, but I do think there will be a decline in many areas currently "holding their own". I don't know your particular area, but in other areas it really does seem like the pricing tiers are out of whack, and will head downwards once interest rates rise more.

Originally Posted by E's Lil Theorem

I'm not sure "costal" areas are completely exempt from this. I'm not a real state buff, but I do recall that the early 90s were pretty horrible for real estate in southern california (especially in the OC).

Yes. I'm no real estate expert either (and in fact I have zero money in real estate besides my home and via some mutual funds), but I was specifically thinking of parts of SoCal (where some friends of mine live).

[Cody Dawg]

Who knows. I sure don't have a clue.

Maybe you're right (or your expert) Eug. The home I bought was brand new construction that the buyer was unable to complete payment/building costs for with the builder and we got it for $150K less than we would have because he lost his applicable deposit and we paid off the remainder of the building costs and moved in. Upon moving in the home has about $100K in equity. We looked at some homes to purchase then decided to go with the previous formula we've used: Buying a foreclosure. In the case of our current home it was basically a form of foreclosure so we bought it. Love the house (LOVE IT) and love the price even more.

[Eug Wanker]

Yeah, around here, the foreclosure types don't seem to be as common. Either that or the real estate agents and speculators are snapping them up before I even found out about them.

It may be that they are less though, since traditionally Canada hasn't been as aggressive in loaning out money for real estate as the US. (Interest costs on mortgages are not generally tax deductible here.) The banking system is also very different. Most stuff is done through a series of very large national banks, and they tend to bend over backwards in giving people leeway in paying off mortgages for primary homes, something I've noticed that some small US banks and mortgage companies aren't as willing to do.

Plus the demographic is different where I am. I'm looking smack dab in the middle of a large urban centre.

Originally Posted by Eug

Yes. I'm no real estate expert either (and in fact I have zero money in real estate besides my home and via some mutual funds), but I was specifically thinking of parts of SoCal (where some friends of mine live).

P.S. The same bust did happen in Canada in that time period too. My friend's family got a great big house in the 80s in Vancouver (which is just north of Seattle for those who don't know), and by the 90s the price had dropped by something like 40% - hundreds of thousands of dollars.

[analogika]

Originally Posted by Cody Dawg

we were a) Shocked at prices (again) for the average home and b) Shocked that the owners complaining about the lack of buyers would also not budge on their asking prices.

They may not be selling as fast, but they are holding their own.

Doesn't that indicate precisely that current prices won't be actually sustainable for long?

[Cody Dawg]

I don't know.

The median home price here is now $400K. That's for an average so-so home.

For anything that is a little nicer you're looking at $500K to $600K.

Just because I personally think that homes are outrageously priced for what you get in terms of home value and just because I personally think that people are stupid to not lower their prices a couple hundred thousand dollars to meet my perception of what is a "realistic price" doesn't mean that they should.

[Kerrigan]

Originally Posted by analogika

Doesn't that indicate precisely that current prices won't be actually sustainable for long?

What does that mean? As a rule property prices never decline, maybe you mean the rate of price increases?

People have been talking about the looming real estate bubble for 2-3 years now, and it hasn't happened.

[analogika]

Originally Posted by Kerrigan

As a rule property prices never decline

Woah.

[itai195]

Originally Posted by Kerrigan

What does that mean? As a rule property prices never decline, maybe you mean the rate of price increases?

People have been talking about the looming real estate bubble for 2-3 years now, and it hasn't happened.

As a rule? Property prices often decline in certain areas for certain periods of time. Even in the ridiculously expensive Bay Area, property prices declined for a couple years during the dot-com crash.

[Eug]

Originally Posted by Kerrigan

What does that mean? As a rule property prices never decline, maybe you mean the rate of price increases?

No, prices. Your rule has already been broken in North America in recent times. I mean I already mentioned a friend whose home value declined a couple hundred thousand dollars in just a few years, back in the 90s.

BTW, this is what Forbes suggests could contribute to a real state price decline, with my uneducated comments:

1. Bird flu soars <-- I'm not sure I buy this one
2. Another terrorist attack <-- Plausible
3. Taiwan declares independence <-- Probably won't happen in the near future
4. War <-- Probably won't happen on American soil in the near future
5. Oil at $120 a barrel <-- Not anytime soon, but it doesn't have to reach $120 a barrel. $99 would be bad enough.
6. Recession <-- Helped push the last real estate crash
7. Interest rates spike <-- Helped push the last real estate crash
8. Currency crisis <-- I don't think there will be a US currency crisis, but I do think the Chinese yuan comment is a reasonable one. Unpegging the Chinese yuan would affect the US economy.
9. Bank crisis <-- Gotta wonder...
10. California slides into the sea <-- Heh. If you read the text they just mean repeated natural disasters would affect home prices in those areas, not that California would actually slide into the sea.

[BRussell]

With so many people leveraged into homes they can't afford, with silly interest-only and other crazy mortgages that assume fantastic growth to be feasible, I think a lot of people are going to get into trouble. It feels like the 1999 stock market.

[davesimondotcom]

Originally Posted by BRussell

With so many people leveraged into homes they can't afford, with silly interest-only and other crazy mortgages that assume fantastic growth to be feasible, I think a lot of people are going to get into trouble. It feels like the 1999 stock market.

I think this is spot on. I've felt this for a while - that people are ignoring the facts and just assuming real estate to be a rocketship that will never come down.

The only real estate holding I have is my home, which we have no intent on leaving. And because we're here for the long haul, we'll be here through any downturn in the market.

But just in my area, there are quite a few "for sale" signs while more and more homes are being purchased. I have to think that there is a tipping point where there is a flood on the market and prices will begin to go down.

[itai195]

The problem isn't IO mortgages specifically, in my opinion. It's that prices in some areas just have no fundamental basis in the first place. There's no reason for prices to skyrocket in Phoenix the way that they have, for example, given that there's an unlimited supply of land. In other parts, like the Bay Area, parts of FL, NY, etc there are long term trends of price growth and real fundamental reasons for prices to be high.