NYt; "Speculators Seeing Gold in a Boom in the Prices for Homes"

[edhopper]

This article in todays Times makes it clear to me that we have an enormous housing bubble.

http://www.nytimes.com/2005/03/01/national/01spec.html?

Everything from rapid rise of prices to a large portion of real estate being bought by speculators. It's not if it will burst, its when and how big.

[nothingshocksmeanymore]

1. You need to edit and post the actual title of the article as the

header.

[bspence]

2. Wow, people are selling before they close on their mortgage

I own two properties myself. This is a good time to get in on it. My other property is a rental.

No slum lord cracks, please. :)

[no_hypocrisy]

5. I saw a lot of flipping properties when I worked in a law firm. A

client would come in with a "buy" and maybe a week later, we would be handling the "sell" on the same property before the first deal was even firm and solid. And yes, the price increased 15-20%.

Speculation, whether it be the stock market or real estate, is still speculation where the market price does come close to the "real" value of the commodity. If you're a player, you end up being either a robber baron or gambling your last dime. The rest of us end up as victims of a depressed economy that is the result of their massive speculation.

[d.l.Green]

17. I almost bought a property for twice the price that the person before me

bought it for only one week previous. Although it was still a good value I couldn't stomach knowing that and dropped out. They had a backup buyer right away.

I was lucky enough to buy 10 years ago, several properties in a depressed, but beautiful area. Sold one last year to pay for major restoration projects and the other is about to sell to pay off the mortgage on my home.

The speculators have swarmed for the past 5 years. The early ones made out but the recent ones are trying to flip them and they don't seem to be able to sell. It seems to have hit a ceiling but the spring will be telling sign.

I could never afford a home today even on my decent salary. I couldn't imagine someone starting out- with college debt and possible marriage expenses. We still have an overabundance of multi-families after a spat of forced and voluntary downzoning- but the rents don't make up for the inflated prices. And the taxes are precipitous, outrunning inflation. (They're now selling bond issues and tax raises by stating what it means PER DAY - maybe they'll have to go to per hour soon.) Even without a mortgage, expenses would be quite high. If this isn't a bubble then there are a lot of paper-rich people out there trading around and speculating. Until there's a better, more solid investment out there, real estate will always hold it's value, even if there are a few corrections along the way...

[BrklynLiberal]

3. Between the RE bubble, the $ on the downward slide, the job market here

combined with increasing outsourcing, rising fuel costs, the growing Fascism in the government.....very, very bad things are looming.
:(

EDIT: The interest rates are going to be going up very soon, as well.

[E-Z-B]

6. This is why I haven't bought a home yet

I've been thinking that once the rates go back up, it'll cool the housing market substantially. I figured I'd be better off buying a house with a higher interest rate, but lower market price, then trying to refinance years later when the rates go back down.

I live in South Jersey, and house prices around here have exploded. I'm an engineer making a good salary, but most homes are starting at $350k. New homes start at $500k. Honestly, how does the average joe make these payments? On top of that, property taxes run about $6500 to $8500 a year. This is why it's tough to leave my $700/mo. + gas apartment.

[TahitiNut]

8. Well, this is how 'housing bubbles' keep inflating.

The demand for housing doesn't go away just because prices go up. The 'market' is nowhere near either fair or free. In virtually every market with skyrocketing prices, the real estate interests themselves (realtors, mortgage companies, developers, builders) are the most influential in establishing zoning, extending sewage systems and public utilities, and controlling the permitting process.

What people do is depend heavily on continued price escalation. They partner on purchases, depending on multiple incomes to sustain a mortgage. Even unrelated people do this, but families and extended families are prevalent. Making the lowest down payments, they depend on leveraging that down payment in making a major gain, and relatively quickly. That gain, in turn, becomes the down payment on the next properties. People with significant equity in an appreciated property in a lower price area can cash in and move to the higher price area. In states with high income taxes (e.g. New York and California), the mortgage interest is subsidized by tax deductions at both the state and federal levels.

When the housing bubble bursts, lots of younger people (25-35) get hit hard ... real hard.

[bspence]

20. I'm assuming you're throwing your money away on rent though

If you can afford it now, then do it. Most real estate doesn't go down, it just stops from going up. If you can't afford it now, you won't be able to afford it when the interest rates are higher.

It's a crappy situation.

ON A TANGENT: I was thinking today about how people who are single (like me) are screwed when it comes to real estate. I'm lucky to have found a place, but in DC, there's a ton of "dual income, no kids" out there who have driven prices sky high. Republicans got rid of the 'marriage penalty' because they felt it discouraged marriage, but in reality, people who get married have all sorts of benefits, like being able to split a mortgage between two people.

[woosh]

23. How do they afford it?

Adjustable Rate Mortgages. I don't see this bubble deflating, but see a period of leveling off of prices when these 5 and 7 year ARM's start to expire. Of course, you would need interest rates to rise to a level where these ARM borrowers are priced out of their own homes.

[CoffeeCat]

40. How in the world could anyone get an ARM now?

I don't get how anyone would get an ARM right now.

The only way interest rates are going--is up.

Maybe that's how people afford these expensive homes.

They start out with a $1,000 monthly payment on a 400,000 loan--without any regard for what happens to those payments when (not if) interest rates rise a few points.

I really don't get how people can do this, unless they plan to pay off the house in a few years.

[midnight armadillo]

36. Housing prices

You can't make the payments unless you're extremely well paid, willing to be very house poor (or both), or you can cash in pre-existing equity. A friend of mine just bought into the market, and while he had some luck in the dotcom era and his wife's famiy has money that they probably contributed, I wonder if the $500k price will result in their being eyeball deep in mortgages and taxes.

Here in eastern MA there's a charming pattern of building higher density housing as 2-bed condos only, in order to discourage families with kids (like, say, mine) from moving in an putting any 'burden' on the school system.

My wife & I are paying off credit card debt (largely medical-related) and will be saving for a down payment in less than two years. With luck by then prices will at least have stabilized.

[Roland99]

4. New Home Sales dropped 9.2% in Jan., though.

And with upcoming interest rate hikes, this is a dangerous game.

[edhopper]

7. Outside of real estate brokers

who have a vested interest in telling people there is no bubble, I have not seen any one convincingly argue against it.

[Warren Stupidity]

9. We are all set for a repeat of the '86-87 re crash.

That was a precursor to the 90-91 recession. Builders were the ones who popped the bubble first as they were all over-leveraged to the hilt with one development-in-progress in hock to finance another dev-in-progress which was in hock etc....

The difference this time around is that I don't see anything much at all outside of the defense industry besides housing that is actually legitimate economic activity. When the housing bubble burst last time high tech was fueling job growth and capital spending and we all jsut rode it out. This time?

[spinbaby]

13. I remember that being localized

The housing crash of the late 80s was pretty localized as I recall. In Pennsylvania things were just fine, but I remember visiting a friend in the Research Triangle area of North Carolina and being amazed to find the newspapers full of "no down payment" houses for sale--you could get a house just by assuming the payments. There were even offers that would pay you for assuming a mortgage. I suspect that the coming housing bubble will affect the high-priced coasts far more than the moderately-priced midwest.

[Warren Stupidity]

16. it was localized to the regions that 'bubbled' up.

That would be every major metro region this time 'round.

[comsymp]

38. Yeah, a lotta developers went belly-up here in NC in 86-87

I only wish that when we bought in '03, the market was in the same pricing range as back then...

You're probably right about it affecting the higher-end markets more- but how many ordinary folks have sunk everything they have into their homes and will be completely screwed when they suddenly have -50K in equity? Hell, for a lot of people, personal RE = retirement income.

Not a pleasant thought.

[reprobate]

12. According to my brothe in law, the RE broker: It can't go on forever.

He won't commit to the bubble but sees the increasing prices as unsustainable.

[On the Road]

10. Here are Some Warnings from the Article

the percentage of homes bought for investment might be as high as one-quarter of the 7.7 million sold last year.

A lot of investors are not showing good judgment. I have three extremely cheap houses in Baltimore, but even boarded-up rowhouses in slums are being bid up this year.

Dru Finley and her husband, Hsiao-Li Pan, who live in Brewster, N.Y., bought a one-bedroom condominium in Battery Park City in Lower Manhattan last summer for $499,000. They rent it out for $2,225 a month, about $1,000 less than their mortgage and maintenance costs. The couple hope to make up the shortfall when they sell the condo in a few years. "It seems that real estate always goes up," in the long term, Ms. Finley said.

"Prices always go up." Sounds like the stock market a few years ago. $1,000 a month is a heavy price to be paying for speculating on that level. If you can't even break even, it's probably not a good investment. And whenever the market takes a breather, investors like these will have negative equity and be unable to sell.

Some real estate watchers in Miami wonder whether that drop will come soon. With more than 60,000 units in some phase of development in the Miami area, "the supply may be greater than the ultimate demand," said Michael Y. Cannon, managing director of Integra Realty Resources-South Florida, a market analyst. A similar situation in 1986 sent the market spiraling, and it took seven years to recover

New starts are up and demand is down. Interest rates will rise for the forseeable future. And all those ARM payments will start to become unaffordable for people who live on the financial edge.

[Yavin4]

11. When The Housing Bubble Bursts...

we're going to have a long, long period of economic decline that won't go away any time soon. As someone else mentioned in this thread, there's no tech industry to come to everyone's rescue like it did in the 90s.

[AnneD]

21. I'm in agreement......

I've gone through the S&L fiasco, the oil bust (I worked in the industry) and the tech bubble. The RE bubble has been a long time developing. Many things trouble me about the economy now...the increased interest rates, the deficit, the lack of fiscal common sense (tax cuts in a war, cronism involving business and tax payers money), un/under employment, credit card debt, trade deficit etc, etc. I want to buy a home but they are overpriced in our market so I am paying off cards and saving money. When I hear that 'POP', I will be prepared to take advantage. But until then, all this is RE speculation on the bubble and I will not get as burned as I did with the tech bubble (didn't get out sooner). I don't look for the market to do too well when the boomers retire either. Maybe I ought to look for RE in Costa Rica..... Gee, I am just a barrell of sunshine today, sorry. Love the thread, try to read every day.

[Yavin4]

27. You Bring Up An Interesting Point, AnneD

I want to buy a home but they are overpriced in our market so I am paying off cards and saving money. When I hear that 'POP', I will be prepared to take advantage.

The housing market could bust simply because buyers are going to wait out the sellers. You can only take prices so high. There comes a point when buyers will just withhold until the prices start to drop, and that could also be a factor in this.

[djack23]

37. Good point

I am one of those who will be waiting till buy until prices come down or if I get married. (Washington, DC area)

[woosh]

22. I've been following this "bubble" since the dotcom crash

And here we are on year 5 of speculation of the bust and we're still waiting for the other shoe to drop.

[tom_paine]

25. What is different is the Imperial-sponsored Orwellian False Reality

that has been set up.

Not much different in ultimate function (though, naturally Kinder and Gentler, more subtle and less obtrusive in form) from the last time this sort of plan was tried with the latest advancement in Public Relations, advertising, and the other Psychomaniuplative Sciences.

So much of economics boils down to uncontrollable herd mentality.

What we are seeing now, in ways Brezhnev and the Soviets could only have dreamed, is the Orwellian mechnaism of Unreality, reinforced from the top down and with the complicity of the grotesquely cowardly and lazy Corporate TV Pravda.

Of course, anyone knows the long you ignore a problem and let it fester, the worse the correction is when reality finally slaps you in the face.

It's the same for an alcoholic as it is for an Empire like Amerika. And the Imperial Family has a Propaganda Infrastructure and Lie Laundry that could literally, sell half the populace on the idea that 1 + 1 = 3 and the discredited idea of 1 + 1 = 2 was the artificial construct of the "Liberal Media".

I used to think this was an exaggeration, but if it is, it is only a slight one.

Having said all that, you have the other idea that people would rather kill tahn wake to the fact that they've been played for fools.

The worsde and the longer they have been played, the stronger the denial.

Add to THAT the fact that the Character of the Imperial Subjects of Amerika, collectively comes closer every day to mimicking the mentality of the Good Germans and the Nazis, and the recipe is there for disaster.

For rather than accept responsibility for what they (we) allowed to happen, they will (under the gentle direction of their Imperial Masters and Corporate TV Pravda), they will come looking for scapegoats to blame.

Gay, Liberals, Jews, or Blacks...it doesn't matter. The only thing certain is tht the New Oppression WON'T look like Nazi Germany.

That methodology has already been discredited, which is why the Bushevik couldn't use DIRECT racism as the basis of their Gobbelsian Propaganda.

[denverbill]

14. We might be saved from a bursting bubble.

The dollar has dropped about 50% from it's highs, meaning that US assets are incredibly cheap to foreign buyers. When Idiot-Boy #1 (Reagan) was in office, his enormous budget deficits also caused a big drop in the dollar, and Japanese investors were climbing all over themselves buying US property because it was so cheap (to them, not to us).

Only a few parts of the country experienced a real bust, and those busts were more related to local economics (the end of the oil boom in Texas, e.g.).

I wouldn't be surprised if housing was spared once again by inflation.

[woosh]

24. Good point

It's hard to say where those areas would be though. The most obvious places are the bay area and boston, given their extended run in prices increases, but when you have places in MI seeing 80%increases in a year, you have wonder where are the populations most at risk for defaulting on their mortgages?

[Yavin4]

28. Remember, There Was No Euro Around During Reagan

Now that there's another strong currency out there, I don't see many foreign investors swarming all over the U.S.

[denverbill]

32. You misunderstood my point.

It's BECAUSE the dollar is weak that real estate becomes an attractive investment to foreigners.

E.g., in 2000, a $100,000 home in the US might have cost a Canadian $150,000, but with the drop in the value of the US dollar, the same house with the same $100,000 (US) price tag might only cost $125,000 Canadian. To a Canadian, it seems like a MUCH better deal, even though to the American, the price is the same.

In the 80's, it was Japan that gobbled up US real estate. Nowadays, it might be Chinese, Europeans, or anyone else who has had a strong currency relative to the dollar, because compared to prices 5 years ago, US real estate is cheap to them, even though it has seemingly increased in value to Americans.

[brentspeak]

15. As someone who doesn't own a home

Can someone explain what a "housing bubble" is, what a "housing boom" is, why this is a good time/bad time to buy/sell, selling before they're mortgage is paid, etc?

Brentspeak (who's still renting an apartment).

[Yavin4]

30. A Bubble Is Caused by Rampant Speculation

Buying an asset that doesn't even yet exist and then selling it right away for a profit, again even though it doesn't exist, is the pure definition of rampant speculation.

What people are doing is refeinancing their homes, then putting that money down on another home. Then, turning around selling that second home for a profit. IOW, people are buying and selling homes that they have no intention of living in, and they're "flipping it" (buying and quickly selling) for a quick profit.

All of this is due to Alan Greenspan's interest rate policies for the past five years under Bush. In 1999 and early 2000, Greenspan did his level best to destroy the Clinton economy by raising interest rates like crazy. He was successful, but his timing was off. The economy crashed under Bush II, so to guarantee Bush's election, Greenspan cut rates to the bone. He set them at a 40-year low of 1%, which is beneath the rate of inflation. IOW, he was literally giving money away.

Greenspan's interest rate policies have brought us this housing bubble and rampant speculation. Now, he's forced to raise rates, and as they get higher, it will crush the housing bubble. Unfortunately, a lot of other Americans who nothing to do with this speculation will also be hurt.

[bleedingheart]

18. Loads of people are counting on their homes being their retirement

many people who bought into these mammoth 300K to 400K houses in my area are hoping that they will double in value by the time they are ready for retirement. I think it is a very risky gamble.

I think homes have been overvalued in my area and in fact there are people who are selling at a loss or breaking even because they are trying to sell a home while builders are building at rates that make building your own more favorable than moving into someone's 2 year old home....There are a number of 300k homes in our area that are just sitting for months on the market while the builders are constructing tons of new housing...

[Boomer]

19. More wealth without substance

Unlike a contractor, who actually builds a product and then sells it, these speculators are generating income on the backs of the people who actually do want to live in a house and are now paying inflated prices for a trading commodity.

I'm no economist, so I can't expound on any rationale for why this practice will or won't hurt the country as a whole, but my gut feeling tells me you can't keep generating "wealth" at such a remove from the product being traded around.

From what I've seen of rapid development projects, the construction quality of these $300,000-$500,000 homes is not very good. So at some point before a 30-year mortgage has been paid off, these McMansions are going to be leaking and sagging and falling to pieces.

I'm still dumbfounded that anyone would pay those exorbitant prices for a pile of particleboard held together with staples. Meanwhile, the house I bought -- which is over a 100 years old and sturdy as a rock -- was selling for a fraction of the cost of a McMansion. Go figure.

[Phoebe Loosinhouse]

45. Infomercial mania

The National Association of Realtors lately said that 25% of home purchases are attributable to "investors". Until recently, home ownership was for the traditional purpose of shelter with possibly a second or vacation home thrown into the mix. We have deviated from that model because of all the people who have been disappointed in the stock market or who have seen their 401Ks tank. These folks are entering the real estate market in droves, adding to the upward pressure on prices. So you might have 3 people looking at at house for residence bidding against 1 person who's into it for investment.

A lot of these new investors are recent and fairly clueless.They are a product of infomercials, radio shows and seminars. They are counting on quick appreciation and flips. They are not knowlegeable about things like capital gains, vacancy rates, maintenance etc. There is the kernal of the bust within the article posted - the couple who is taking a LOSS on their investment property and counting on the appreciation to pull them out. At some point rents will outdistance the market and these properties will be vacant or rent for a loss and depreciate. It is a game of musical chairs just like the tech boom and timing will be everything.

[boredofeducation]

46. Lookming at investment property myself

I am currently looking at investment property myself. I currently own my own home and have extra cash for another. Think I can find any good bargains? Heck no, everything that was a bargain gets bidded up by these investors to a point where it is no longer a bargain. I recently looked at a REO (bank owned), in South Jersey, that the bank was looking to get 42K for. It needed work, but wasn't that bad of shape. Small house, small lot, public utilities, low taxes, not the best part of town, abandoned home next door, every person on the block has a dog or four. I put a bid in slightly below asking, I figured it would give me something to do over the spring, and I figured I could get 70-80K for it when I was done working on it. But I was out bidded by 23K, the other bidder had it up to 63K. I couldn't believe some idiot would give a BANK 21K more than what they were looking for! It just doesn't make any sense!

[robertpaulsen]

26. Here's another point of view

snip

Another reason the value of your house is about to plunge is that the L.A. Times, the New York Times and the Washington Post all say that it isn't. A recent L.A. Times article reported that the median price of a local house had gone up only 17% in the last year. Headline: "L.A. County Home Prices Cool Slightly." Subhead: "Slowdown may not last." To describe a 17% annual increase as a "slowdown" assumes that gains of 20% or more are the norm. And the evidence for "may not last" comes from realtors whistling in the dark.

You've got a bubble when today's prices assume large future increases. If you think prices will be 20% higher in a year, you'll be willing to pay 19% more today. But if others share that assumption, today's price will already be 19% higher. Betting on future appreciation makes sense only if you are even more optimistic than other buyers. Right now, that is hard to be.

In Washington, where house prices have doubled over five years, the Post says, "Experts Predict Steady Gains in 2005, but More Moderate Than in Past Years." But whatever "experts" say, it is not the nature of price explosions to segue gracefully into more moderate growth. When today's run-ups are based on beliefs about tomorrow's run-ups, the self-feeding frenzy goes into reverse when those assumptions are dashed.

The New York Times also must be talking to experts. "In Housing Sales, Frenzy Is Giving Way to Balance," it says. And it reports from suburban Westchester County that "Housing Market Is Still Going Strong." In 2004, the median sales price rose from $564,000 to $645,000. "More and more families are seeing the residential real estate market as the best and safest place for their money," a realtor says. And the article adds chirpily, "Even the ongoing problem of a lack of houses for sale in Westchester eased somewhat last year." Like a roller coaster, a financial bubble has a moment of eerie stillness at the top. Buyers have adjusted, sellers haven't. So sales dry up. When the New York Times spins a surplus of unsold houses as a sign that "the ongoing problem of a lack of houses for sale" has been solved, it means that you had better not count on the New York Times to tell you when it's time to bail.

more...

http://www.fromthewilderness.com/free/ww3/022805_top_market.shtml

[Andy_Stephenson]

29. We bought our house 6 years ago for

$155,000 Today you cannot touch a house in this neighborhood for under $350,000.

We have upgraded everything in the house from the wiring to the plumbing . Did all the work ourselves and saved a heap of money. Recently it appraised for $335,000. I keep sayingwe should sell and realize the gain. But then where would we live :shrug: and with the cost of housing going through the the roof...I fear we could never afford to live in this area again.

[AlCzervik]

34. same here, we bought in 2000 for $209.000

and it's going on the market for $475,000.

[nolabels]

31. When the correction comes it probably will come like a domino effect

The value of our property has tripled in the last seven years. But prior to that it for the previous eleven it stayed stagnant. There might be a correction in the future but I doubt it will be more than thirty percent. Even if there is don't care, I am not moving, I am building on.

Speculators will have to wait till I die before they get mine :P

[ProfessorGAC]

33. Who's Gonna Buy It?

Without economic sustainability and continued growth, which is predicated on strong employment, good wages and disposable income, who is going to buy all this property FROM the speculators?

Doesn't seem like a well considered strategy from a long term view.
The Professor

[Boomer]

47. Just a paycheck away from disaster

I'm not surprised by reports that Americans are up to their eyebrows in debt. There's no way sooo many people can afford to pay $400,000 (for a modest house in the Washington metro area) if it weren't for two-family incomes, seductively low downpayments for mortgages, and credit cards to cover emergencies or even not-so-urgent expenses.

Which means a lot of families are just barely managing to keep their finances afloat. Another economic downturn will tip the scales into bankrupty. Oh wait, I forgot! It's not going to be so easy to declare bankruptcy any more.

I've spent the last few years doing everything I can to prepare myself for the inevitable: bought a house that cost well below what I could afford, then paid off my mortgage, paid off my credit card debts, and started a small free-lance business on the side. My goal is a financial buffer that would carry me through one to two years without steady employment income. From what I hear, it can take that long to get a new job in the Bush economy.

Meanwhile, I watch so many other people pushing themselves to the very limits of their finances and wonder what is going to happen to them if the US economy keeps trundling toward disaster.

[edhopper]

35. I've mentioned this before...

But I do not know anyone who has owned their home for over 5 years who could afford to buy that same home now. Not anyone I've talked to anywhere in the country. Think about that. At todays price most people could not their current home!

[BillZBubb]

39. In the Houston area, I could afford to buy my house again.

I bought in 1999 and it has appreciated some--but not to the wild extent I read about in other areas. It must be the roaches down here!

[amazona]

42. yes in New Orleans area I too could afford to buy again

I would pay more but not THAT much more. Roaches? As good an explanation as any, I suppose. :-)

The conservation movement is a breeding ground of communists
and other subversives. We intend to clean them out,
even if it means rounding up every birdwatcher in the country.
--John Mitchell, US Attorney General 1969-72

[Kimber Scott]

41. It's scary. Here in Phoenix your average Joe can't afford to buy anymore.

The houses are being bought up before they're even built. Pre-existing homes don't last a day on the market. My husband and I had our eye on a new house in a new "town", but we weren't in any rush. We went back six months later and the price had gone up 100k and we were told they didn't have any houses left. They're not even 1/4 built out and they're sold out - a good portion to investors. It's a shame. We're going back to fuedal times, I guess.

[info being]

43. Unless the dollar collapses, then the price of real-estate with surge

[edhopper]

44. if the dollar collapses...

real estate will crumble. The response to a collapsing dollar will be rapid and high interest rate increases. This will crush the housing market and impact all those with ARMs. The dollars fall is one of the main things that could burst the housing bubble.

[eridani]

48. I'd suggest that we all learn to focus on reality-based economics

In the simplest terms, that is, if you can't eat it, drink it, wear it, build a house with it or burn it to keep warm, then to hell with it.

[Blue_Tires]

49. not that i'm anywhere near being able to afford a house anyways