HOUSING BUBBLE & WILLIAM PITT REAL ESTATE AGENCY

[unlawflcombatnt]

THE HOUSING BUBBLE

Introduction:

In a post I made at another site, my comments on the "housing bubble" were challenged by a responder. Later, the same responder claimed my posting was "unacceptable." Upon reviewing the Email in his profile, I discovered he worked for the WILLIAM PITT real estate agency in Connecticut. It's clear his comments were motivated by his own self-interest in keeping the public unaware of the impending real estate crash. I urge readers not to do busines with WILLIAM PITT real estate, since they employ such devious techniques. Attempts to put a "spin" on public information should not be rewarded with our patronage. We shouldn't reward those who cruise the blogoshere, trying to counter any posts that do not further their own special interests.
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Housing prices have increased by an artificial increase in demand caused by reduction in interest rates. Less money spent on financing allows more money to be spent on the home value itself. Add to this the further increase in demand created by home speculation, as well as the decrease in supply created by such speculation. A San Diego real estate executive states that 3/4 of all homes sold in San Diego are to home speculators. Here is the link for that article:
http://news.yahoo.com/news?tmpl=story&u=/sddt/20050505/lo_sddt/majorityofcaliforniansmakelesstha nhalftheincomenee

All of this causes an artificial alteration of supply & demand forces. It's artificial in that speculators cannot continue to buy up homes, unless they find someone to sell them to. In other words, they can't continue contributing to this housing DEMAND increase, without reselling their homes to someone. (They can't continue to increase their "inventory" or "warehouse supply" of homes. Ultimately, goods in a warehouse must be sold. Surplus inventories don't create profits. Sales do.)

Ultimately homes must be sold to residential homebuyers, many of whom can't afford homes now. (In California, only 17% of families can afford a median-priced home.) Considering that inflation adjusted-wages declined 1% from April 2004 to April 2005, consumers' ability to buy homes is tenuous. Though mortgage rates have not increased since the Fed started increasing rates, eventually rates WILL increase. This will make homes even less affordable to residential buyers.

Foreign purchase of long-term treasuries is waning. This will result in a necessary increase in long-term interest rates, in order to attract purchase of our increasing national debt. When the long-term rate does increase, financial experts believe mortgage rates will also increase. This will cause a decline in money sellers receive for their homes, because financing charges will use up a larger amount of the buyer's money. This will reduce home equity assessment.

When speculators become aware of this impending decline in home equity growth, many will put their homes on the market. This will increase the SUPPLY of homes on the market, driving prices downward. Furthermore, speculators won't be able to buy as many homes, because interest rate increases make them more costly. In addition, the resultant decrease in home equity values will decrease the "equity" speculators can borrow off of, since many "investment" homes are purchased with home equity loans (from previously-owned homes of the speculators). In other words, speculation money will decrease. This, along with the previously-mentioned decrease in "residential" buyer demand, will further decrease prices.

Thus, market forces will eventually slow the rate of increase in real estate prices. Prices may even decline. The supply will increase, due to more homes being put up for sale.( New home construction may decrease, but probably not until market changes becomes obvious.) Demand will decrease due to decreased affordability & decreased speculation.

Again, all these factors will cause a decline in home price increases eventually. When this will happen, and how rapid the change will be, is uncertain. Maybe a better way to state this uncertainty is: Will the "bubble" slowly deflate, or suddenly burst? No one knows at present.

unlawflcombatnt

EconomicPopulistCommentary

http://www.unlawflcombatnt.blogspot.com/

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Investment does NOT create jobs. It only "allows" for their creation. Increased Demand for goods creates jobs, because it necessitates hiring of workers to produce more goods. Investment "permits" job growth. Demand necessitates it.

Building a factory does NOT create jobs. Demand for production DOES create jobs. Goods are not produced if there is no demand for them. Without demand for goods, there is no demand for workers to produce them. Without demand, no amount of investment creates jobs.

[GetTheRightVote]

1. Thank you for your posting.

:kick:

[Just Me]

2. Let's see what happens.

[snowbear]

3. What the heck was that first comment all about?

Wow.. :wow: What's up "Just Me"? :(

I don't know unlawflcombatnt outside of their post on here..

But geez.. his posts (usually regarding finances) .. which means they usually fly right over my head :dunce: .. are always extremely well-written and informative!!

I didn't read the post he's referring to.. but I for one am really glad that unlawflcombatnt is here! :hug:

[Just Me]

14. I was reacting,...

,...to the suggestion being posted. I am very sensitive to the affect of suggestion.

Don't mind me. I'm way over-educated and way over-informed and tend to be sensitive as a result.

No worries. Sorry. :hug:

[Career Prole]

4. "In a post I made at another site"

What site would that be?

[zoeb]

5. You have to expect that from those kind of agencies

I think your right-on with what many are saying about the exorbitant housing costs. This reeks of a bubble and I think we are at or near and end. As one economist said it's Bubblelicious! The only people disagreeing with this are those in the real estate biz like Pitt...and you know they're seeing their little bubble through rose colored glasses much like stock investors did in the 90's.
REITs are not something I would invest in at this time.

[Gregorian]

6. Demand IS the number of humans who need a place to live.

I just put my property up for sale. When I went to look at some of the housing prices in the San Jose Mercury classifieds, I found that with a starting price of a million, the search brought up about 1500 homes. So I started with two million. The entire first page was eight figure numbers. The houses I rode my bike past, as a kid, were going for $30 million. An empty lot in Los Gatos was $12 million. I don't know if people can afford to own these places, but I doubt it. I don't know if anyone knows what's going on. But here's my observation- Demand is one thing, and it has nothing to do with ability to buy. I suppose that's pretty academic. Everybody already knows that. Six billion people need a roof. But one thing that I don't think people realize is that the more people there are, the more people with large sums of money there will be. Of course there will be many more times that number of people who don't have the money. So the real question is, what will it take for those selling their property to be forced to lower their price. I think it's a multiplicity of facets. Even if interest rates go up, there are people who have cash. They aren't affected by rates. The majority of sales are financed, obviously, and they will be. So part of the market might come tumbling down, while another may continue upwards, depending upon supply. I think coastal properties will continue to be in demand. Acreage will, also. And then there is the pressure for people living in the city, to leave for places with less concrete. So even if city prices decline, country prices may continue upward. But one thing is certain, not many people have $30 million in cash. Or even a million. Something is crazy. My guess is that prices won't come down, but that this is one part of the inflation monster that is starting to wake up. In other words, prices won't come down, but the dollar just won't mean much. Do I know what I'm talking about (said in a Rumsfeltian way)? Not really. And I doubt anyone out there does.

One thought in retrospect- to me, supply is not just the number of houses on the market. It's the number of houses on the market, versus the number of people. And if that's true, then the supply is always scarce.

This stuff is way over my head. I need to sit down and rest after seeing how freakish the prices have become.

[Phoebe Loosinhouse]

8. Real Estate is a game of musical chairs, no more, no less

You have a certain number of homes (the chairs) You have a certain number of people who decide they would like one of the chairs (the buyers) If you have more players than chairs you have a market where things sell quickly at very high prices. If you get situations that cause players to sit on the sidelines rather than play (higher interest rates, job loss, loss of value perception {"$800,000 for that piece of !@##$%"},purchase price outpacing rental value, etc.) then at some point you will have more chairs than players. Then those players will stroll as opposed to sprint and they will kick the legs of the chairs and they will offer less money to occupy one of the chairs. Real estate is either basic shelter OR it is an investment. The chairs don't care what the motivation of the people sitting in them is. That really is as simple as I can possible make it.

[Gregorian]

11. That's the exact metaphor I use!

In fact, I used it this morning.
But the problem really is, the more people trying to get chairs, the more valuable the chairs are. And the population is growing. And the area on the planet isn't.
To be honest, I don't know. I've just been intimately involved with real estate since 1990. What really makes no sense to me is the rate of rise of prices just in the last year.
If it goes higher, it will be more insane than anything I've ever imagined. That much I do know.

[Phoebe Loosinhouse]

13. I'm glad - it's a good metaphor in a number of ways -

for one thing, it acknowledges that the game might be different in different locations- in certain areas like DC, NYC, and some coastal communites you might always have more players than chairs because of issues such as you mention - no more developable land, high desirability, price is no option , high rental rates,etc. But, as I always remind people who say the game has no top - talk to the Japanese who STILL have not regained the prices of the mid-eighties. Their banks and people made a conscious decision to suck-up the negative equity. As you say, this is unlike anything I've experienced, although I've come close. Inthe go-go late eighties there was a bubble like this and in fact it did pop. Do the words "appraisal" "Resolution Trust" or "S&L scandel" mean anything to anybody? They were primarily drivem by a hyper-inflated real estate market.

[unlawflcombatnt]

17. Rise in Real Estate Prices in Last Year

I think I know some of the reasons. The more creative financing schemes have enabled more people to purchase homes, and more speculators can buy more than one home. Also, despite all the Bush administration propaganda, the economy is not doing well, and good stock market investments are few. So it's pushing investment money into real estate. Also, there has been the feeling among many buyers that prices are going to continue to rise, and they'd better buy now while they can.

In addition, despite Greenspan's raising the prime rate, mortgage interest rates have actually declined. So buyers can afford more home with the same amount of money. Since a higher percentage of the buyer's money can go toward the actual home price, it increases what the seller can charge. The seller gets proportionately more money, while the buyer pays the same amount. That increases the assessment of the homes value, because that value is determined by sellers can receive for home sales. Higher interest rates subtract from that amount, lower interest rates add to that amount.

[Joebert]

12. Land in Colorado is just silly

In southern (why yes, this IS a desert) Colorado, land is somewhat cheaper, but water is rare.

Acreage is nice and all, but if you only own the topsoil, and the local oil/gas company owns your mineral rights, they can put a rig on your land, and pay a pittance to do so.

I'm trying to find a place to buy some land with elbow room. If it weren't for the border-fun, I'd look seriously at Canada.

But I'm also not wealthy beyond measure. Affordable land, with mineral and water rights is getting hard to find.

[unlawflcombatnt]

16. Housing Supply vs. Demand

I think you have the right idea about the number of houses on the market vs. the number of people. But the number of people is a tricky issue. At least 30% of homes purchased nationally are 2nd homes purchased for investment purposes only. In some housing markets, like San Diego, this number may be as high as 75%. So the demand may be higher than the number of people buying houses. And the supply gets reduced accordingly.

But many people are not potential buyers. Many of us know that home prices are grossly overvalued, and that eventually they will drop. The more people that think that way, the less potential buyers there'll be. And the more people that think the housing bubble is about to burst, the more people will try to sell their homes. At the present time, no one knows when it will burst. But American wage income is declining, and that will reduce the number of homes that can be resold by the housing speculator-investors. So far, low interest rates and creative financing schemes have countered the drop in wages. Eventually, however, wage decline will effect the ability of speculator-investors to sell their homes. When the speculators see this coming, they're going to flood the market with homes by putting theirs up for sale. Prices are going to take a sharp drop when this happens. So will home equity values. So will money borrowed off those home equities. And so will the consumer spending financed by home equity loans. Consumer demand for goods will also decline. The bursting of the housing bubble may well be the spark that sends us into a recession. Or a depression.

unlawflcombatnt

EconomicPopulistCommentary
http://www.unlawflcombatnt.blogspot.com/
_________________________
As Corporate America reduces labor costs, it reduces America's ability to purchase its own production.

[funkybutt]

7. What do you think about the New Orleans market?

I've heard some chatter about it. Prices here have been going up at astounding rates. I don't remember the specifics.

[yebrent]

9. I'm a renter in Oakland.

And since I moved to the Bay Area in 1999, home prices have doubled, while the cost of renting has actually gone down in many places. If that isn't a bubble, I don't know what is. It is a renters market right now.

[suziedemocrat]

10. I'm assuming that is not DU's famous William Pitt!! eom

[unlawflcombatnt]

15. Not DU's famous William Pitt & Broken Link

No, this is not DU's William Pitt. I think this agency is simply named after the historical person, William Pitt

Also, my apologies to those of you that tried the housing link I posted. It has apparently died since I initially saved it. It was from a Yahoo News Story from a San Diego real estate agent. The main point in the article was that 3/4 of current homes being sold in the San Diego area were to "investment" buyers. In other words, they were being sold to people who ALREADY owned a home, and had no intention of living in the home they just bought. They were simply buying the home to re-sell it.

unlawflcombatnt
EconomicPopulistCommentary
http://www.unlawflcombatnt.blogspot.com/

_____________________________________
The economy needs balance between the "means of production" & "means of consumption."

[PsycheCC]

18. Talking up the Housing Market Really Hurts Average Folks

This thread makes a number of excellent points about the effects of pumping up home prices. But as one Californian who can't afford a home, I can tell you that MY biggest problem with real estate agents talking up the market is that it pushes home prices out of reach. I make a pretty good living, drive an almost 20 year old car (unheard of in California), do not live lavishly, and yet, I can't afford a home. Maybe I could make the payments, but when I look at that huge bottom line, I just get scared away.

Frankly, I hope the speculators get bitten when the bubble bursts. Buying up two or more homes just to profit from them seems somehow wrong when others can't afford one. I know in some ways it's like the stock market. People are just looking to make money, but here I am still renting. Yes, I could move, but I can't convince my born and raised Californian husband to come with me! I know, poor me...
:nopity:

[unlawflcombatnt]

19. "I feel your pain"

I also live in California. I can't afford to buy a home either. Only 17% of Californians can afford a median-priced home. Speculators are creating a large part of this problem. There are at least 3 homes within a quarter of mile of me that no one is living in. They are simply owned by speculators who will dump the homes when the price is right. Most Californians do NOT own homes. According to the real estate sources I've checked, a median-priced California home requires an income of approximately 200% of that of the average Californian.

Some ownership society. Did Bush mean we'd all be "owners," or that we'd all be "owned"?

unlawflcombatnt

______________________
Capitalism cannot function without consumer income. The benefits of capital investment are limited by consumers' ability to buy the products of capital investment. There must be balance between the "means of consumption" and the "means of production."

[EvolveOrConvolve]

20. My property tax valuation actually decreased this year

I originally bought my house for about $90,000 5 years ago. Last year the valuation done by the county was about $124,000. This year it fell to $118,000. The market value is at least $160,000, and I've seen comparable homes in my neighborhood sell for close to $200,000. I've been smart and paid my principal way down so I have a HUGE amount of equity. It's been a very nice investment, and I hope the bubble lasts a bit longer so I can cash in.

unlawflcombatnt, you seem like a pretty sharp guy. Why is there such a disparity between the taxable value and the market value? Is it because of the bubble that the market value has risen so much? I'm pretty ignorant when it comes to these things.

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[TreasonousBastard]

33. Locking

A reasonable discussion has, once again, degenerated into a feud.