Sunday, April 24, 2005

Housing Experts Wary of Bubble Fatigue

By Ilaina Jonas

NEW YORK (Reuters) - Bubble or not, the U.S. housing market has stayed afloat at a high altitude for the past two years.

So what do experts look for as the first signs of fatigue in a frothy housing market?

Mark Zandi, chief economist for, said it won't be buyers who will disappear. Instead, he believes disgruntled sellers will bring the market to a halt.

"People will start pulling their homes off the market if they think they can't sell it at a 'fair price,' which is now perceived to be a very high price," he said.

While debates about whether the robust housing market will burst like a bubble or land like a slowly deflating balloon dominate discussions everywhere -- from think tanks to cocktail parties -- most agree that what goes up must come down.

"You'll see transactions fall off very rapidly," Zandi said. "It's not that prices are coming down. It's that there's nothing selling. The first piece of data where you get a sense of that is not home sales. It's mortgage applications."

If applications fall, particularly in periods where interest rates rise, a housing freeze is likely to arrive.

"That would indicate to me after a week or two (of lower mortgage applications) that something fundamental is going on in these markets," he said.

According to the Mortgage Bankers Association's latest survey, applications for U.S. home mortgages decreased last week. Its seasonally adjusted index of mortgage application activity fell 1.6 percent to 672.6 in the week ended April 15.

The dip in mortgage applications came despite a drop in fixed mortgage rates, which some analysts believe is an indication of waning housing demand.

Fixed 30-year mortgage rates averaged 5.83 percent last week, excluding fees, down 12 basis points from 5.95 percent the previous week, according to the MBA.


Douglas Duncan, chief economist at the Mortgage Bankers Association, believes the biggest factor that will drive a decline in housing demand will be interest-rate changes, particularly a sharp shift higher.

"Rates have been so low for so long. But if the 30-year fixed-rate mortgage rate passed the 7 percent mark any time soon, we may see a pause in housing," he said.

Zandi and Duncan are in the camp of those who believe that there is a housing bubble in certain markets that are "infected" by speculative buyers. These are markets in which buyers have no intention of living in the house. Instead, they plan to quickly sell the property and reap the benefits of rapidly rising housing prices.

An increase in aggressive borrowing, practiced by those who look for interest-only or variable-rate loans, also would signal a housing bubble about ready to burst, those in the bubble camp said.

The housing bubbles exist in California, the Pacific Northwest, parts of the Mountain West, all of Florida and along the East Coast from Boston to Washington D.C.

"Bubbles don't pop overnight," Zandi said. "They continue to build for long periods of time. Look at our experience with the stock market. We were worried about a stock market bubble for over three years before it actually burst."

Others look at not so conventional signs.

"When developers start talking about a housing bubble bursting," said one New York developer, who did not want to be identified, "that's when you have one."

Van Davis, chief executive of Foxtons North America, is in the other camp that believes there is no bubble. He said that yes, housing prices will go down, but the demographic demand from immigrants and children of aging baby boomers, will rule out the bubble-and-bust scenario.

"California has been frothy over the past 18 months," Davis said. "I hear things are cooling down significantly."

Davis keeps an eye on inventory -- measured in the amount of time it would take to sell the current number of homes available -- to gauge the market. Right now, it would take about 4.2 to 4.3 months to clear the current inventory.

"By any historic measure, a balanced market is six months," he said.

During the tough real estate times from about 1988 to 1993, inventory levels approached 13 months.


At 10:37 AM, Anonymous Anonymous said...

Aloha! I have to agree with Ms Jonas as to her post. The influx of new people to the country, and new generations wanting homes, will keep housing in demand and prices high. However, has anyone looked up the foreclosure lists on the net? Here in the Los Angeles, San Fernando Valleys area, in prominent neighborhoods the lists are long and shocking. Living in Hawaii and trying to move back to the mainland now seems like impossibility as I'm being priced out even in my former neighborhood. I'm stuck on the volcano on the Big Island of Hawai'i.

At 11:01 PM, Anonymous Anonymous said...

I really feel sorry for the people that think there is no bubble, when in fact at the moment when the interest rates increase, the demand will decrease. It all boils down to SUPPLY AND DEMAND. Think about it.

At 11:02 PM, Anonymous Anonymous said...

I currently live in So Cal and When the bubble burst, The banks will pay a hefty price.

At 1:24 AM, Anonymous Anonymous said...

yeah housing will stay in demand (as always) but prices will have to come down or we'll find multiple families buying homes together and turning them into communal situations... which immigrants do you think can afford a 300 - 500k home? most of the people I know buying these 300 - 500k homes cannot afford them, they include firemen, police officers, teachers, medics, all your basic working class - just because they were given the loan doesn't mean they are living within their means..sales at a loss and foreclosures will be on their way... everyone up here in alaska is starting to buy to "sell it next year at a huge profit", well pretty soon everyone will be a speculator and they will only have each other to sell to and no-one will buy at such high prices... I'm only sorry I didn't buy the 33k piece of land 2 years ago now selling for 175K!

At 8:53 AM, Anonymous Anonymous said...

The onlt thing driving the real estate bubble is GREED. Both developers and banks. I can't wait till both industries look for bailouts. Has anyone seen the new 40 year loan that allows you to use a family member's rent payment so that you can qualify. This allows an extended family a chance to get into the greed market also.

At 1:46 PM, Anonymous Anonymous said...

My view of finances changed dramatically after I read Rich Dad, Poor Dad a few years ago (great book). That's one of the reason I decided I was going to invest in porperties for myself and my family. Luckily, my wife and I got a nice 2 family here in CT a couple of years ago. Now? I'm just waiting for the market to collapse. The more I read about people going for interest-only loans and speculators driving prices through the roof have me convinced a loud POP is coming. And when it does, I'll be one of those picking up good scraps. We're seeing 2 family houses on our block going for $200,000 more than we paid for ours two years ago! It's insane! You can't even make a profit on an "investment" like that because your rents won't cover the mortgage.

When we refinanced after a year, we opted for a cheap 5-yr ARM. However, unlike most people, we're paying an EXTRA $2400/mo towards the principle. Our goal is to pay off this first home in less than 15 years. I hope we can do it.

Anyway, there are going to be a lot of hurting families come the next few years. I see it with people I know and they're in way over their heads. The person who said the growing immigrant population is going to drive more demand and higher prices for years missed the point: most of those people coming in CAN'T afford a home and many are using these new interest only or reverse mortgage schemes to get a home. They're going to be the FIRST to suffer when the market collapses. This is going to be a lot uglier than the internet stock bubble, that's for sure.

The guy who said greed is driving this crazy market is spot on. Welcome to America..... :-(

At 11:47 PM, Anonymous Anonymous said...

Listen up folks. I have an announcement to make. By now, many of you are aware that the current situation in the real estate market will be ending soon. I feel that it is appropriate to warn the participants of this blog that this will all be coming to an end very soon. The exact date and time are unknown. Wait...This just in. The crash will happen in exactly 40 days. Please mark your calendars. You will be notified shortly of your next assignment. That will be all.


At 11:07 AM, Anonymous Anonymous said...

It's a bubble and it's going to end in disaster. The prices are out of range for most left renting. Others, like myself, refuse to enslave my family to thirty or more years of debt for something so grossly over-valued. Is that house really twice the true value of five years ago? Of course not. It's the same damn house, just older. The vast majority that are both wanting and able to buy a home have. And many who are not really able.

At best housing will go flat without any interest rate changes or external stimuli. Without all the activity of sales, loaning and building; not to mention spending driven by borrowing against home appreciation: the economy will slow down. Then unemployment will go up and many people will be unable to keep up payments due to less income and/or increased payments as they have to start paying principle as well as higher interest rates. At best they will spend less on everything else. At worst they will lose their home.

And that's the happy ending. With the dollar sinking, all that investment in our government debt will slow or stop by Japan, China and Korea among others. They may even sell, leading to panic. The Fed will have no choice by to raise rates. Housing will suffer.

And let us not forget oil. Worldwide demand is climbing fast. Reserves all over are declining. The oil is much more expensive to extract. And it's mostly in countries that are unstable and/or hostile to us.

At 11:10 PM, Anonymous Anonymous said...

Hello. Ok, I've never blogged in my life before, but here I go. I try and pride myself as being a smart person, but some of the economics are out of sorts when it comes to housing. I have owned a home since the age of 19, and my family and I now find ourselves renting for the first time. We live in Southern CA, and feel that it would be a much to risky thing to get back into the housing market. We recently sold our house in March, and are renting for 1/2 the price in a better area with excellent schools. It's not that we can afford to buy a house, we have a pretty comfortable living and are modest family, but it's a judgement call for everyone to make on their own. (My husband currently stays home and raises our two children) Now I have to say that the there are challenges to overcome with a family living in a rental situation, and it's not my preference, but you have to do what makes sense for your family and situation. I'm from the old school that says you get a 15-30 year fix morgage and put as much towards the principle and limit the interest payment. There are a couple of factors that I believe are affecting the market, and those factors have not been in play I don't believe that anyone has a crystal ball to read what really will happen. You have the new 2 year rule about capital gains, if you live in the home and then are not subjected to pay the taxes on appreciation upto a given amount. Look back at 1998, and you will find that the market started taking off after that law came into effect, and that was with higher interest rates then we have today. You also have that coupled with low interest rates, and that spells opportunity for most people who can add. Now, I have to say that the economy is not limited to just a couple of factors, and a multiple and complex system, so to say that this or that will make a difference, you need to take a step back. Stastics will not lie and facts are facts. The housing industry has created more jobs in the last 7 years, and I believe that the rough number is about 50%, now say that you take out(slow down their incomes) those jobs from the market place, and also those who believe that now they are financially free to leave their jobs because they have "invested" in the realestate market. Even if the pricing of the market slows down or stabilizes, there still will be effects for those people in the market, and their new found incomes which will now be lower then expected. I have run into more realestate agents who own their homes for only 2 years, then sell, and have multiple properties, and I have to say that if they don't get the sales in or out, they will not be able to support their past endeavors. There are so many markets that will be affected by a "slow down" or even a leveling off, I am not looking forward to hearing how this might play off.(Home improvement, construction,appliances, wood and home construction materials, etc.) I personally work in the biotech sector, and when investors pull out of investing it's the same as the banks saying they will not lend more money, who will they have to go to for funding? I know that this is a long winded message, so I hope that you are getting some enjoyment out of it, so my apologizes. One other factor to consider is that businesses today are not the same as they were in the past. I am taking an extended learning class on economics at UC Berkeley and with the influence on shareholder value, businesses are trying to run lean as ever and that is not a good sign for job creation. Business are staying on their cash and benefiting from the tax incentives which is suppose to spark job creation, but rather they are placing that money back into a pot and putting some of back to those who invest with their company..shareholders. More companies are paying a dividen today then in the past, and you can't say that it's because they want to, but it is what makes them more desirable as an investment candidate. The message for any sector should not be how cheap or expensive it is, rather look at who will be buying and how much does anyone need (cars, houses, etc.) Something is only worth what someone else is willing to pay for it, and when there isn't income to support those purchases we all know the answer might come about.

At 4:25 PM, Anonymous Anonymous said...

Finally, someone who knows what they are talking about ... bravo!

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