Wednesday, March 02, 2005

Bubble? What Bubble?

According to the National Association of Realtors, who should know, second homes accounted for 36% of U.S. home purchases last year, up from more than 16% in 2003. That 36% breaks down thusly: 25% of homes were bought for investment; 13% bought as vacation homes.

Think about that for a second. More than a third of all homes bought last year were bought for either speculative purposes or as vacation homes.

This doesn't square at all with the mantra of the home building companies and their fans, which is that the U.S. has a perennial housing shortage caused by job creation, immigration and the deep-seated hunger for home ownership.

It has nothing to do, they assure investors, with the recent 4% 10 year treasury yield. It has nothing to do with adjustable rate mortgages or "IO" loans--interest only loans--in which the only thing the homeowner pays is the interest, leaving the principle for later (which to the buyer means "when I flip the thing for a big profit").

And it has absolutely nothing to do with speculative buying, according to home builders including--and I've heard them all say it--Toll Brothers, Pulte, Lennar, KB and Hovnanian.

But now we know the facts: home purchases were inflated a full 20% (the jump from 16% in 2003 to 36% in 2004) by boomers snapping up spec housing and vacation homes around the country. That's a bubble.

And not for nothing, it seems the average single-family home financed by Fannie Mae or Freddie Mac shot up almost 12% last year, the highest rate since 1979. For those who remember that far back, 1979 ushered in a couple of pretty ugly years in the housing market.

Jeff Matthews
I'm Not Making This Up

22 comments:

Its_strange said...

PMI shares the same concerns as Matthews and this blog could use someone who knows about the PMI / NFI dispute

tiddman said...

Are investing and speculating the same thing? You equate the increase in investment property purchases with speculation.

Remember that vast stretches of the US do not have housing markets that have been increasing in value by 15-25% per year for 5 years.

AA said...

If you read the classic bubble books of the past, one thing stands out in trying to separate a bubble from pure overvaluation:

1) Buying something it is going higher
2) A surfeit of money or credit in the market

It feels as though 2) has been in place for some time. Now, for the first time, 1) is showing up.

So, by the above definition, a bubble is in place. It doesn't have to be national, or global. Even a local bubble is a bubble.

Your thoughts, Mr. Greenspan?

Jeff Bagley said...

Bubble or not, when I started in the investment business in the early 1990's, I cut my teeth on the New England banks.

They were in terrible shape back then, and one of the largest -- Shawmut National -- was literally one payment away from being bankrupt.

Problems abound in the banking industry back then, and Citicorp itself was teetering. But a common thread among the New England banks was that they wrote a whole lot of bad loans on residential real estate. Vacation property was a huge source of losses, if I recall correctly. (I'll never forget, actually.)

I'm not saying the end is near or anything like that, but I'll end with one anecdote: In the late 1990's I purchased a condo at Mount Snow, VT for approximately 50% less than it originally sold for. Enough said.

Its_strange said...

Jeff Bagley . Do i recall correctly that Pulte had to lower prices recently in its Las Vegas development ?

Its_strange said...
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Its_strange said...
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Its_strange said...
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Its_strange said...

Didn't Pulte lower prices in Las Vegas recently ?

The Unknown Broker said...
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The Unknown Broker said...

As regards the housing/real estate situation, some random observations:

1. Along the lines of Jeff's excellent observations and discussion discussion about CEOs who obsess over short sellers: The CEO of Toll Brothers (TOL) was recently on a financial channel and said The shorts are going to get crushed. You ain’t seen nothin’ yet.” Strangely enough (for one who was anticipating "crushing" the shorts with, I assume, a continuing runaway ascent in the stock) he sold 2 million of his 13 million shares in December.

2. I have a client who is good friends with a professional athlete who lives in Florida. The fellow in Florida hooked up with a "real estate expert" who tapped him for some money to buy a fixer-upper home for a quick flip. And to his (the "expert's") credit it worked. He bought a house for $400,000 and flipped it for a net $75,000 profit in a rather short period of time. They split profits.

The investor liquidated a good chunk of his securities portfolio, handed the guru $6 million and gave him "carte blanche."

Oh, the guru/expert? A 23 year old kid.

3. I'm writing this on the fly so I don't have the figures/details in front of me. Perhaps someone else does and will shares. But I remember hearing recently about the rising percentage of mortgages that are being structured as interest-only. The number has been rising and the implications are obvious.

4. My business partner was recently on a trip and struck up conversation with a fellow. This guy was in the furniture business. My partner commented that business must be good with all of the building going on. The fellow responded that it really had not been that strong -- since so many people were so stretched out on their mortgage -- buying the biggest house possible - that they couldn't afford to furnish them.

He said that one guy who was cleaning up in business though was renting complete home furnishings -- furniture, pictures, vases, plants, etc. -- for a weekend at a time. This was for when people were having a party or company and didn't want to admit being so house-poor and stretched. They will pay several thousand dollars for a weekend.

I've got a few more anecdotes, but this is Jeff's blog, not mine. So I've taken enough space.

Its_strange said...

interest only / adjustable rate mortgages and divorce rates . Is there a relationship ?

jay-b says said...

I work for a large regional mortgage lender selling residential mortgages. In the past several years I have seen a degredation in the quality of loan applicants. Buyers now EXPECT to get into a house with nothing or very little out of pocket. Zero downpayment AND they roll closing costs into the loan by inflating the sale price and getting the seller to pay them.

Many buyers can't save up enough money to pay for closing costs or a small downpayment so what will they do when the furnace or roof goes bad? I'll tell you what they'll do....they will call me to get a loan.

Are we in a bubble? Yeah, probably... but at least I am the one making good money off this bubble.

Oh, about shorting the homebuilders...not a bad idea...but I've maybe got a better play for you. Short CFC, most of their originations are refinances which will nearly all go away as the rates go up and all they'll be left with is their purchase originations which make up less than 1/3 of their originations. Look at the numbers closely and you'll see the trend.

Its_strange said...

Can people still protect thier $ from creditors by buying a home in Fl ?

Jeff Matthews said...

Three questions for "Jay-B": how much of your business is ARM and has that changed in the last year? Also, how much is interest-only? Finally, it sounds like you don't do as much with spec buyers--is this right, and if so, why not?

Good stuff.

Jeff Matthews
I'm Not Making This Up

Dean said...

I read an interesting article over on safehaven yesterday concerning the BLS' questionable methods of calculating the CPI. In the article it makes mention of homeownership reaching the 69% level. This spawns a question in my mind; is BLS just looking at the total number of houses sold and ascribing each to an individual/family (i.e. one house per family exclusvely)? The truth is many folks (myself included) own more than one. I always thought the 69% number seemed unreasonably high and we all know the fact of the matter is not everyone can own a home. In the end, I'd be willing to bet this will all be attributed to The Hedonic Adjustment Model. Sigh.

Its_strange said...

Jay B , You seeing the same faces , the same customers ?

Its_strange said...

In Dec of 2004 Novastar opened a job counseling / placement service to help customers who have lost thier job . Have other lender done the same ? Has anyone heard if the program has helped anyone ? How many ? Why didn't they just refer them to other placement services ?..This seems odd to me when you look at the growth and low interest rates we have here in the USA...

Tom M said...

Here's an interesting ARM's article from one of the hottest markets in the US:

http://www.ocregister.com/ocr/2005/02/22/sections/business/business_columns/article_416640.php

jay-b says said...

Jeff, I would estimate that roughly half of our new originations are ARMs. While I did notice significantly more buyers gravitating towards ARMs around the last half of 2003 the trend has continued to build steam ever since. (I've got more thoughts about this trend that I'd like to post under your Brookings/Hovnanian piece from today).

I would also estimate that about 20% of my originations are of the interest only variety. And more buyers and refinancers are calling and asking about them. This is definitely a huge trend that isn't slowing down. You'll see more major lenders rolling out even more I/O products this year and I expect that it will be a feature that can be added to nearly any type of loan in the future.

As for spec buyers we just don't see as many of those in my market (Minneapolis that is). As you can imagine we are not a big vacation destination! But, I am financing a new 250 unit condo project in our downtown area and we have sold around 100 of the units in just over 90 days and I would estimate that over 1/3 of the buyers so far have been investors (ie. the speculative type).

its_strange, you are right. I do see some of the same faces over and over. No matter how much financial coaching I give...some people just can't seem to get their finances under control. Others though are just restless and need to buy a different house every few years.

Depsite all this let's not lose sight that we live in a great country and high rates of homeownership are a tremendous asset for the communities that we live in. Just my opinion of course!

Thanks for the good diablog!

Its_strange said...

Are they buying more house ? Bigger homes ? Wait until the taxes and heat and repairs on those bigger homes start

razor said...

Support for the Unknown Brokers earlier comments.

Furniture Brands International (FBN: news, chart, profile) said first-quarter earnings per share will be at the low end of its previous forecast, of 45 cents to 49 cents, with revenue down by a mid-single digit percentage figure. Analysts polled by Thomson First Call see an EPS of 47 cents.