Hi , I enjoy your articles and hope you will continue with them. In this sundays paper you stated the Real Estate party is over,so over. Do you mean Texas too.??? or were you referring to other parts of the country.?

Thanks, Lee

  

From Scott Burns:

The home price bubble has been driven by two main forces, speculative buying and the combination of unnaturally low interest rates and creative financing. Speculative buying is a big part of the problem in California, Arizona, Florida, and much of New England. It does not appear to be part of the problem in Texas. In Texas prices are still comparatively low and hardly a day goes buy that someone doesn't leave California for Texas. My bet is that Texas will have some casualties from adjustable rate mortgages and creative financing but that net in-migration will keep prices on an even keel.

It's hard to believe that Texas will weaken badly when you see the affluence and continuing growth in areas like Boerne, most of Hill Country, etc.

Scott- I hear the sky may be falling soon as well.

Michael

  

From Scott Burns:

Funny, I got emails like yours back at the top of the Internet Bubble when I wrote about how overpriced Amazon was…

This column is hardly a prediction of doom. It's rather tempered compared to a good deal of commentary on the web, including economist Gary Shillings call for a 25 percent fall in residential real estate prices.

Weak holders and speculators are going to get creamed. The rest of us will muddle through, but bemoan the days when we made our fortunes by the ZIP code in which we chose to live rather than what we did for a living.

Dear Scott,

While looking through the Globe, I noticed your article. What caught my interest- we have recently relocated from Naples, Fl ( Obviously over priced and full of speculators ) to Boston. After looking to buy and going through a horrendous experience of the seller saying "no" at the last minute( closing) - turns out they were annoyed they we selling for 22% off the high of 5-8 of 05. They decided to take the house off the market - do a few repairs- then put back on in the Spring hoping to get the higher price ( the realtor told us this story). So we rented a house with an option to buy. My wife tells me the market has bottomed ( Wellesley, Ma.) ---- she is tired of hearing it but here is my theory and tell me what you think of it!. Actually, it not my theory-- two years ago while at work ( Naples, Fl ) our office had a speaker come in ( don't remember who ) but anyway, they did a study of cycles ( looking at charts ) of different things , the stock market, corn futures, real estate etc… The bottom line - after a cycle has peaked ( and you don't know that for awhile afterwards). From the peak date to the bottom of a cycle is a constant at APPROX 2 years . I thought this interesting. If you look at charts of the stock market- it did peak in 3/00 but did not bottom until 10/02.

So back to my theory- if the peak of the RE market was 5-8 of 05 then we should see the bottom sometime next spring or summer. Maybe a better time to buy????

Housing stocks can be another good bellwether for the industry-but if you look at their charts they are telling you that they may have bottomed- unless they take another leg down which could spell real trouble ( recession).

I enjoyed you article- keep up the good work!

Brian

From Scott Burns:

The rise in prices in this cycle overshadowed all previous bull markets in housing, so this may take a bit longer to work off.   During the last automobile industry crisis it was popular to ask how many Americans could afford to buy vehicle made by workers who made $60 an hour. The housing market faces a similar problem: how many workers can afford to buy a home close to where they work? In areas where a marginal entry level home now costs $500,000 (much of California and New England) the answer is, "Not many."

In a recent article you gave a web site, www.trulia.com, and said that going to that site would allow the viewer to track real estate prices "by Zip Code". Well I live in the Houston, Texas area and typed in my Zip Code. All the site then listed was sales information, etc. for all of "Houston", not for the Zip Code I had typed in. In other words the information given on this site for real estate sales is not specific enough to really be useful to an individual homeowner since as with most metropolitan areas there are large differences in real estate values from place to place within the metro area.

Craig

  

From Scott Burns:

I had the same problem with Santa Fe. I did get plenty of information on Santa Rosa and a number of other locations. I have to assume that the data will eventually be provided--- Houston is too big an area to omit.

Scott, What is your take on the market in NYC? There has been talk of a bubble burst for years here, and I just don't see it happening at all. It's unlike anywhere else in the world. There has been a lot of new development here, much like Florida and Las Vegas, but while those markets became saturated and thus many projects were pulled, we have absorbed the new development and just keep growing.

PS-The sky already fell with the dot com crash. We all just stopped looking up to notice it!

  

From Scott Burns:

I don't have an opinion on that.

I respectfully ask your consideration to what I am about to say and perhaps include it in a sort of different perspective, if you will.

Your reference point...."This may be a good time for Califorians to talk to Texans who went through the Texas real estate crash in the late '80's and early '90's".

California real estate took a giant hit at the exact same time Texas did. I had relatives in Austin and Dallas then and visited during those years several times. I remember dealing with our problems here while talking with family in Texas about the similar market. The dynamics of that time are completely different than today. Additionally, the loan products available then were completely different than those in place today. I'd like to explain why this makes a difference.

In the late 80-'s and early 90's the national economy was hurting bigtime. Worse yet, the California economy was crushed when the expenditures in the aerospace and defense based businesses was cut drastically by Congress. A huge portion of our local economy was then defense and aerospace based.

So what was going on then?

Here is how it looked. Interest rates on 30-year fixed mortgages were double digit and rose to around 12-1/2% or higher! Nobody wanted to go fixed rate. Everybody went with a natural response to the rising market...an adjustable rate loan. Buyers started with adjustables at maybe 8-1/2% vs. 12-1/2%. It seemed like a no-brainer at the time. Unfortunately, it was a no-brainer. Why, because there did not exist in those mortgages the same protections that exist in current products, nor the same payment options. Consequently, buyers rates and payments continued to climb.

Why was this a problem? Well, the issue of payments and rates increasing is in itself not a death toll for an owner of real estate making payments on that loan. But, the problem became compounded. What exasperated the problem was that the economy went into the tank. Salaries were cut........jobs were eliminated......people were fired. Homes were not being bought because buyers didn't know if....when the Friday paycheck came, it would be stapled to a red slip indicated that they need not come back on Monday because they had been fired. Fear of a possible lost job, or the reality of a loss of income, froze buyers. When buyers don't buy.....sellers don't sell....unless they give their homes away.

What happens next is that property values began to drop. So here you have owners of homes with mortgage products that continue to make the payments go up while their property values were going down and they didn't know if they would keep their jobs from week to week. Properties went "upside down". As you said this means that the homes are worth less than is owed. This was a problem only when the owners of those homes could not afford to keep them because their incomes were chopped.

Flash ahead to today.........

Is it different....and if so......how so?

It's completely different. The economy is strong. Job security is excellent. Interest rates are low, which is great, because the property prices are so high.

Here is maybe the biggest difference. between then and now. The common belief (and that which I see in many articles) is that most of the loans people have on their homes now are hybrid, oddball adjustable type loans. Recently, the Chief Economist of the California Association of Realtors (CAR)came to speak at my office's weekly meeting. Why us? Well, we have some people involved in the state association and we do a load of business. Anyway, she spoke of the ticking time bomb of those hybrid loans that have gotten so popular in the last 3-5 years. Her office department tracks the origination of those loans and know that there were a significant number of them, percentage-wise, that were originated vs. fixed rate loans in the last 3-5 years. People accepted these loans in order to be able to buy in an appreciating market. But, her comments just didn't sift through cleanly in my mind. I knew she was missing something but I wanted confirmation. I turned to the wonderful mortgage lender who was sitting next to me who works for Platinum Capital in Manhattan Beach. I asked Kira a question. I said, "In the last 3 year what percentage of those people who took out hybrid or teaser type of loans have since refinanced into fixed rate mortgages?" She said, "almost all of them". I knew it was high. I didn't know it was that high. And, even if she was exaggerating a little it is a huge number nevertheless. I next emailed Leslie Appleton-Young, the economist with CAR and told her of my perspective and asked for a comment. I never heard from her. I think I know why. They don't check on refinancing. I never liked economics in college.

I put you to the task. Walk down your own street or the halls of your townhouse/condo project. Take a poll. Ask each owner whether they have a fixed or adjustable mortgage. Ask about their payment security. Even the adjustables these days are often fixed for 3,5,7,or 10 years. And, they all have payment options that can be anywhere from less than the minimum amount of interest (a negatively amortized oan) to full principle and interest payments. There can be 3-5 options for payment on some of these loans. Yesteryear? Almost everybody had adjustable with rates and payments climbing through the stratosphere.

My point in all this is to explain that the mortgage instruments in existence today provide an insulating factor vs. those of yesteryear. Many, many more of those in place today are either; 1) low interest, fixed rate mortgages, or 2) adjustable mortgages with components that keep payments manageable for a good number of years even in a rising interest rate market (which we are not in).

Why is this important? Well, for starters I think it's right, which should be cause enough. But, the other reason is that perception can become reality. Personally, I would hate to think that I contributed to people making decisions........wrong decisions....based on my angle.

Respectfully,

John

From Scott Burns:

Thanks for your note and very interesting observations. I don't think our views are that far apart. In the recent column I worked very hard to point out that a speculative buyer would be in danger. And I think that view is correct--- all those people in Naples, Miami, and many places in California who were buying to flip are likely to take major losses before this is over.

"All those people" however, is not that big a group. Nearly 40 percent of all houses are owned mortgage-free, a fact seldom mentioned in the worry reports. Another slug of people have enough cash to pay off their mortgages: This morning, one of my breakfast buddies told me he had a mortgage because the interest rate was 4.5 percent. He had the cash to pay it off but thought it was better having the cash and a low interest rate mortgage. He is not alone.

So there are lots of very well financed people out there. And there are more people who have relatively secure jobs.

We have two questions to answer: First, how large is the inventory in "weak hands" and how long will it take to work it off?

The bigger question is how long will it take for incomes to catch up with housing prices?

One thing that gives me pause is the housing price data gathered by economist Robert J. Shiller at Yale.

The graph was taken off his website and shows the extreme rise in prices of recent years. It dwarfs the price rise of the 70's or 80's booms. Indeed, it dwarfs the price rise that followed World War II.

Source: http://www.irrationalexuberance.com/index.htm

From reader:

Thanks Scott for the time you took to respond. I agree that you and I are not too far apart. I guess what worries me is when people read a column....more accurately part of a column and the heading and then decide that the sky is going to fall.

In terms of your two points below I agree wholeheartedly ...."how large is the inventory in the weak hands". I think this is key and I'm not sure it can be measured for a number of reasons. And, there is no doubt but that many lenders made loans to people that shouldn't have had them by helping them fraudulently get the loans.

I still don't see a crash. Going back to Texas....they were then and still are building the heck out of the Austin area. And, there is still plenty of land to sell to developers. An abundance of buildable acreage will always keep the prices lower on newer construction......or kill the market should that market over build. We don't have that problem in most of Southern California, where there is not much undeveloped land.

Lastly, and I just had this conversation with an associate today; our current inventory in three key areas that I have historically kept track of is far less than during the last recession. During those years there was an average of 100 single family houses for sale in each of those three areas (Hollywood Riviera area of Torrance, Manhattan Beach Tree Section, and the city of El Segundo) for a total of over 300 houses always for sale. Currently there are 28 for sale in the Riviera, 43 in the Tree Section, and 21 in El Segundo for a total of 112. A total of 23 are under contract and not yet closed. This is not bad at all.

One of our problems here is success. You see, a great number of the real estate agents in the business currently got into it within the last 5 years. They were drawn by the facility of making deals and the commissions that went with it. Today, those agents have a slanted point of perspective that excludes normal and awful economies. So, many of those agents communicate Armageddon to others around them and it is simply not accurate. And, it has always been...and always will be...easier to be negative than positive.

From Scott Burns:

I've learned from decades of reader mail that most people think in a binary way about unfamiliar and uncomfortable subjects. They seek all-or-none. The more they learn, the greater their capacity for calibrated thinking and responses. One of the things I try to do in my column is add calibration, or at least the foundation for it.

Sadly, in things economic, most people simply aren't willing to put in the time to acquire a base of knowledge that will lead to reasoned opinions. That's why speculators will get wrecked. And why careful observers will find bargains. It's another version of "weak hands."

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