We’re Forever Seeing Bubbles

Month: June 2013

The recent jump in home prices – near record month-month and year-year increases reported for May by the National Association of Realtors – has led to speculation that the rapid surge in home prices could be the sign of a new housing bubble of the kind which led to the Great Recession.

Is it? The not-so-short answer is, not yet.


Indeed, through May the median price of an existing single family home has risen  by double digits for seven of the last eight months (and in the eighth, the year-year increase was 9.4 percent).  For comparison sake, note that in the run-up to the collapse in 2006, the median price of an existing single family home rose by double-digits year-year for 11 straight months.

An increase in prices itself does not signal a bubble. An unsustainable increase, not supported by other data, however, would.  In the run-up to the 2006 collapse, the higher prices – which had been trending up for four years – led to a sharp uptick in construction wholly unsupported by demographics. Baby boomers were aging, transforming home buyers into sellers, and there weren’t sufficient numbers of “echo boomers” to replace them.

Nonetheless, in the last 12 months, the year-year increase in single family starts has averaged about 26 percent, four times the average year-year increase in the 12 months just prior to the bubble bursting in 2006. When housing prices fell when the bubble burst, the construction jobs they supported disappeared along with hundreds of thousands of others as housing wealth vanished, seemingly overnight.

Even though the demographics haven’t changed – the 55-plus population is growing faster than the 25-34 population — builders in the last 12 months have completed 31 percent more single family homes than they sold. Prior to the housing peak, completions were about 26 percent more than sales, adding to inventories and further depressing home prices. While the “gap” between completions and sales was wider before the 2006 collapse than today, it has been expanding rapidly, growing in eight of the last 12 months.

So, what happened to the overall economy when the housing bubble burst? As prices and values dropped, so did consumer spending, a function of the “wealth effect.” According to some estimates, the decrease in home values reduced consumer spending by upwards of $400 billion and GDP by about 2.5 percent. That jobs fell as well only made a bad situation worse!

The slowdown in housing prices in beginning in 2006 came just as baby boomers – born between 1946 and 1964 — were approaching retirement, a time when they might be looking to use their homes as a retirement nest egg, finding themselves with more house than they needed. About a year later, employment began to sag along with wages and salaries so there were fewer people with less money to spend on buying a home.

Despite the fact we still theoretically have more potential sellers than buyers, which should drive prices down, the inventory of homes listed for sale has remained low. That low inventory, combined with low interest rates keeping affordability high – has driven prices up.

That doesn’t necessarily mean a bubble unless sales increase with the higher prices – and they have even with regulatory changes in the wake of the housing collapse designed to stop banks from making loans borrowers could not afford. Just how effective those changes have been though is still open to question. According to the Federal Reserve’s most recent Senior Loan Officers Opinion Survey, mortgage demand is climbing and more banks are easing lending standards.

Those factors combine to drive prices still higher a cycle which, if incomes fail to keep pace, could inexorably lead to a bursting bubble.

Perhaps more significant than the question of whether we’re in or headed to a bubble and are we prepared for it to burst; what happens if prices again suddenly and dramatically collapse?

Many analysts contend the current prices are justified by low rates which keep home affordable even as prices rise. This would suggest that as rates rise, prices will move in the opposite direction, a replay of the post-2006 economy. That’s not though what history tells us. If prices fall in response to .higher rates, it would mean market behavior has changed, a phenomenon for which we may not be prepared.

Asking prices are rising at an especially fast pace in the least affordable housing markets, according to Trulia.

Nationally, asking prices increased 9.5 percent year-over-year in May, but in the ten least affordable metros, asking prices spiked 16.3 percent during the same time period.

Trulia also found out of the 100 largest metros, 98 saw asking prices increase over the last year.

Among the least affordable markets, seven were in California. Honolulu was found to be the least affordable metro, where 74 percent of monthly household income is used to pay a mortgage. In San Francisco, households spend 55 percent of their monthly wages on their mortgage. In the 10 least affordable markets, households spent at least a third of their income towards their mortgage. The calculation assumed a 3.8 percent interest rate on a home that is 1800 square feet.

Approximately 850,000 more residential properties returned to a state of positive equity during the first quarter of 2013, according to the CoreLogic first quarter home equity report.

The total number of mortgaged residential properties with positive equity stands at 39 million, the research firm found.

“During the past year, 1.7 million borrowers have regained positive equity. We expect the pent-up supply that falling negative equity releases will moderate price gains in many of the fast-appreciating markets this spring,” said Mark Fleming, chief economist for CoreLogic.

“The negative equity burden continues to recede across the country thanks largely to rising home prices,” said Anand Nallathambi, president and CEO of CoreLogic.

The recovery is still far below peak home price levels, but tight supplies in many areas coupled with continued demand for single family homes should help close the gap, Nallathambi said.

Meanwhile, 9.7 million or 19.8% of all residential properties with a mortgage were still in negative equity at the end of the first quarter of 2013 with a total value of $580 billion. Last month, the released number was 10.4 million mortgages.

This figure is drastically down from 10.5 million, or 21.7% of all residential properties with a mortgage, at the end of the fourth quarter of 2012.

Additionally, of the 39 million, 11.2 million have less than 20% equity, with the average amount of equity for all properties with a mortgage currently at 32.8, the report said.

Looking at individual states, Nevada had the highest percentage of mortgaged properties in negative equity at 45.4%, with Florida and Michigan following behind with 38.1% and 32%, respectively.

OCT_TopTenlegalmistakesofsellers2With fewer homes for sale and more buyers coming onto the market, sellers are less willing to negotiate on price like they were during the housing bust. According to the survey, 42% of the people shopping for homes have placed offers in the past six months, yet only 11% of the bids were accepted.

That has caused buyers to rethink their positions: 85% said they’re willing to compromise to get deals done. Just over half said they would be flexible on the closing date; 31% said they would purchase a home “as-is;” and 29% would pony up more cash than they originally planned.

The home shoppers said they are also willing to let go of some of the items on their “wish lists.”

Say goodbye to ultra-low mortgage rates. In the past month, rates have been on the rise and they are expected to continue to climb. This week, the average rate on a 30-year fixed-rate mortgage jumped another 10 percentage points to 3.91 percent and are up from 3.3 percent in early May, according to mortgage giant Freddie Mac. Meanwhile, those seeking a 15-year loans received an average rate of 3.03 percent, up from 2.56 percent — a record low.

“It’s unlikely that rates will ever be that low again,” said Doug Duncan, Fannie Mae’s chief economist. Those who didn’t take advantage of record-low rates have missed the boat — at least for now. Here are three reasons why:

1. The Fed is going to stop bolstering the housing market. The Fed has kept rates at rock-bottom levels by buying up to $85 billion a month of Treasury bonds and mortgage-backed securities. That has enabled lenders to sell mortgage loans at low interest rates and recoup their money immediately — plus profits.

“Up until recently, expectations were that the Fed would begin to taper purchases of mortgage-backed securities and Treasury bonds late in 2013, but that time frame appears to have moved to September, possibly sooner,” said Keith Gumbinger, vice president of HSH.com, a mortgage information company.

If the Fed stops purchasing the securities, private investors will have to pick up the slack. For investors to do that, the loans will have to offer a better payoff. And that would mean raising rates for borrowers, said Duncan.

2. The economy is no longer reeling. During the recession, the Fed lowered its short-term interest rate to near zero in order to stimulate the economy. But now conditions have improved considerably since the economy emerged from recession four years ago. As the economic revival gains traction, it is creating a tailwind for interest rate increases, according to Gumbinger.

Low rates happen when the economy is in distress. But now, the market believes the economy is getting stronger, said Wendy Cutrefelli, a vice president in the Mortgage Banking Division of Bank of the West. Job gains have picked up lately, averaging about 202,000 a month over the past six months. That hiring is advancing rather than retreating is good news for the economy, and any positive future reports are expected to push rates higher, according to Gumbinger. Even mediocre news might not cause any meaningful decline in rates.

3. 3.3 percent rates are unprecedented. “The 30-year

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hit a 37-year low in 2003 at 5.23%,” said Gumbinger. “That was the previous low-watermark prior to this financial crisis, and it’s likely we will move closer to that mark as we grind forward.” Any return to normal conditions, therefore, will likely be accompanied by higher mortgage rates.

Even if they go up a percentage point or two, however, mortgages will still be relatively low. Historically, 30-year loans are usually 5.5 percent or higher. For clues to the direction of mortgage rates, look at the daily movements in 10-year Treasury bond yields. Mortgage rates track Treasury yields with the difference between them holding fairly constant.

These days, Treasury bonds have been on a jumpy uphill climb, with the 10-year hitting 2.21 percent on May 31, its highest closing since April 2012. On Thursday, the yield was about 2.10 percent. Since the interest rate on a 30-year is usually 1.7 to 2 percentage points higher, it indicates that mortgages should be at between 3.82 percent and 4.12 percent this week.

Construction spending during April rose 0.4 percent to a seasonally adjusted annual rate of $860.8 billion compared with March’s revised estimate of $857.7 billion. The April figure is 4.3 percent higher than a year ago.

In the Inland Empire we are seeing new construction again. This should be assist the buyers that are not the winning bid on listings that are being purchased by investors with a pocket full of cash.

However, the builders are getting greedy increasing home prices 2-3 times a phase or putting a ridiculous lot premium on a home that is not yet built and pricing the “First Time Homes Buyer” right out of that market.

Are we headed for another bubble?


Visualize Rising and Falling Rents and Where Flood and Earthquake Risks Are Highest

A leading online marketplace for home buyers, sellers, renters, and real estate professionals, today released interactive map visualizations that show distinct new categories of information for house hunters to provide insight on the best place to live. The first new map is dedicated to rentals and visualizes rental cost-per-bedroom in cities across America, so that renters can easily pinpoint neighborhoods that are within their desired price range. The second set of maps visualizes historical earthquake and flood data to depict the risk of these natural disasters on a block-by-block level.

With today’s launch across Android mobile and web platforms, rental prices and natural disasters join Trulia’s robust suite of interactive visualizations, which already feature home values, crime, school rankings, commute times and local amenities such as banks, gas stations, restaurants and grocery stores.

“At Trulia, we use interactive map visualizations to present large amounts of information in an easy-to-understand format. With our new rental maps, consumers can browse through color-coded neighborhoods and quickly focus their search on neighborhoods that meet their budget,” said Lee Clancy, VP of Consumer Products. “After considerable damage in recent years, many consumers likely feel as if the frequency and severity of natural disasters is increasing across the United States, but up until now the risk of these events has traditionally been hard for home buyers, sellers, and renters to find. Now house hunters can use our maps to see flood zones and understand where earthquakes are more common in order to make informed decisions about where to move.”

Details of the New Trulia Map Visualizations

  • Rental Rates: The rental rate visualizations incorporate a year’s worth of data to show the average cost-per-bedroom at the neighborhood level. Deep reds indicate high-cost areas, and yellow and green designate more affordable neighborhoods.
  • Earthquakes:  The earthquake map layer incorporates USGS and the California Geologic Survey data to show seismic hazard, also known as ground shaking potential. Blues and greens show low shaking potential and reds show high-potential areas.
  • Floods: Using FEMA data, Trulia’s flood hazard maps outline a community’s different flood risk areas, determined by topographic surveys and statistical data for river flow, storm tides, and rainfall. High risk areas are identified by dark blue shading and show the areas where there is at least a 1 in 4 chance of flooding during a 30-year mortgage. Light blue designates the lower-risk flood areas.

Trulia’s visualizations are accessible on the web by visiting http://www.trulia.com/local. Select a city and then utilize the menu on the left-hand side to see properties, home values, crimes, schools, commute times, amenities, rental rates and environmental risks of floods and earthquakes. On Android mobile, click on the layer icon in the upper right corner and select heat maps from the menu.

More than 80 percent of Generation Y home buyers—people born in 1977 or later—said in the National Association of Home Builder’s 2012 consumer preference survey they prefer a highly energy efficient home that results in lower utility bills during the home’s lifetime over a lower-priced home without energy efficient features. Today’s new homes feature ENERGY STAR-rated appliances; windows, doors and insulation that better control the home’s interior climate; and other modern components such as tankless water heaters and HVAC systems that save costs on utility bills.

And cost-conscious young buyers will be happy to hear that a new home actually costs less to maintain than an older home. An NAHB study found that homes built before 1960 have average maintenance costs of $564 a year, while a home built after 2008 averages $241. Plus, mortgage rates are still very low, bolstering affordability for home buyers.

Washington, DC – The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to extend two programs that help troubled borrowers stay in their homes. Both the Home Affordable Modification Program (HAMP) and the streamlined modification initiative will now be extended through year-end 2015. Eligibility for HAMP was scheduled to sunset at the end of this year, while the streamlined modification initiative was originally expected to run through August 2015.
This follows an announcement earlier today by the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development that they are extending HAMP for non-Fannie Mae and Freddie Mac loans. FHFA’s directives make the extension applicable to loans owned or guaranteed by Fannie Mae and Freddie Mac.
“One of FHFA’s priorities is to provide assistance to struggling borrowers who are at risk of losing their homes,” said FHFA Acting Director Edward J. DeMarco. “These extensions keep two valuable foreclosure prevention programs available to those who need them. The extensions also align the end date for three key assistance programs that were developed in response to the housing crisis.”
HAMP helps homeowners who are struggling to keep their loans current or who are already behind on their mortgage by lowering their monthly payments. The streamlined modification initiative, announced by FHFA on March 27, gives borrowers who are at least 90 days late another path to avoid foreclosure and lower their monthly payments without requiring financial or hardship documentation.
Since the first full quarter in conservatorship (4Q08), Fannie Mae and Freddie Mac have completed more than 2.7 million foreclosure prevention actions. Approximately half of these actions are permanent loan modifications, including more than 435,000 permanent HAMP modifications. With the extensions announced today, these numbers are expected to grow as borrowers continue to benefit from these programs.
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.5 trillion in funding for the U.S. mortgage markets and financial institutions.