The Housing Bubble is Bursting

[opebo]

According to this the Housing Bubble is bursting more quickly than anticipated.  Will this sink the economy and/or effect the Nov. elections this year?

New Home Sales, Median Prices Fall in Feb.
Friday March 24, 7:15 pm ET
By Martin Crutsinger, AP Economics Writer 
New Home Sales Fall by 10.5 Percent in February; Home Prices Drop for Fourth Consecutive Month

[dazzleman]

I always scratched my head a little bit at the idea that booming housing prices were an undiluted good thing for the economy.

Soaring housing prices are a wealth transfer, to those who own property from those who do not yet.

Many people with lower to moderate incomes are forced to spend an inordinate share of their income on housing.

While a decline in housing prices might be bad for many homeowners, the effect is more psychological than real for those who are not severely overmortgaged.

At the same time, a decline in prices would greatly benefit younger people and those with more moderate incomes.  And the additional disposable income that those people will have, if their housing costs are not as high as they otherwise would have been, may be better for the economy in the long run than severely inflating housing prices.

Let's not forget that the best boom years of the 1990s did NOT include large increases in housing prices.  In my area, housing prices in 1999 were below their levels in 1989.  It was after 1999, when the boom started to go off the rails, that housing prices increased so severely.

I hope for a modest decline and then a period of price stability in housing, to allow people's incomes to catch up with the horrendous rise in prices.

[MODU]

The sky is falling, the sky is falling!!!  *dies laughin*

[Moooooo]

My grandfather is a general contractor and realtor, and he's taking a pretty big hit right now.  He currently has 8 or so houses on the market, but no one is buying.

My girlfriends cousin is one of the largest residential general contractors in Baltimore City, and he's also having a hell of time selling houses.  Even in Canton where the housing market is/was red hot.

Im not sure if its just a bad time of the year or are prices too high...?

[dazzleman]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

[Sam Spade]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

^^^^^^^

Besides, it's the old adage. 

People were being told that the housing bubble is going to burst again and again.  So, when things started to slow down slightly, people assumed, "This is the housing bubble bursting," and figured it would be smart to wait until prices got lower.  Sellers still wanted higher prices, so then inventory started to grow, but the buyers kept waiting.  And they'll keep on waiting as long as they have the idea things are going lower.

Sometimes believing something is going to happen causes it to happen.

[Moooooo]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

[Sam Spade]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

I wouldn't bet on that.  But a correction of 15-20% would not be unreasonable, especially after the gains of the past five years in the DC-Baltimore area.

The gains haven't really been that strong in Philly, so Flyers probably isn't going to see the same downturn (Philly prices are always lower than everywhere else in the NE for some reason or another).

[dazzleman]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

^^^^^^^

Besides, it's the old adage. 

People were being told that the housing bubble is going to burst again and again.  So, when things started to slow down slightly, people assumed, "This is the housing bubble bursting," and figured it would be smart to wait until prices got lower.  Sellers still wanted higher prices, so then inventory started to grow, but the buyers kept waiting.  And they'll keep on waiting as long as they have the idea things are going lower.

Sometimes believing something is going to happen causes it to happen.

Generally, when the market starts to turn around, there is initially a 'standoff' between buyers and sellers.

Buyers decide they're not going to accept 30% annual increases and reduce what they're willing to pay.

Sellers still expect a big premium over what the neighbor's house went for 6-12 months ago, and won't let the house go for a lower price.

Eventually, one of them has to crack.  If demand picks up again, then the buyers have to crack.  If it doesn't, the sellers have to crack.

Many builders paid prices for the land that was predicated on the assumption of higher prices by the time the house was finished.  If prices are stable or decline, some of these builders will lose all their profit, at a minimum.

I considered getting into speculative development of real estate in my area on a small scale about a year ago.  My plan was to try to buy smaller, run-down houses in neighborhoods that were coming up, and either renovate them or tear them down, put up a new, larger house, and sell it for a profit.

I pulled back because the prices were so high that my profit would have been dependent on market appreciation during the construction period.  That didn't seem to be a good bet with the market peaking at that time.

[MODU]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

Working on buying one now.    The only problem is that price corrections are regional, and not nation wide.  So while DC prices might be dropping, Fredericksburg prices are not (or very little). 

[dazzleman]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

Working on buying one now.    The only problem is that price corrections are regional, and not nation wide.  So while DC prices might be dropping, Fredericksburg prices are not (or very little). 

Definitely -- it's a highly localized series of markets.

[Sam Spade]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

^^^^^^^

Besides, it's the old adage. 

People were being told that the housing bubble is going to burst again and again.  So, when things started to slow down slightly, people assumed, "This is the housing bubble bursting," and figured it would be smart to wait until prices got lower.  Sellers still wanted higher prices, so then inventory started to grow, but the buyers kept waiting.  And they'll keep on waiting as long as they have the idea things are going lower.

Sometimes believing something is going to happen causes it to happen.

Generally, when the market starts to turn around, there is initially a 'standoff' between buyers and sellers.

Buyers decide they're not going to accept 30% annual increases and reduce what they're willing to pay.

Sellers still expect a big premium over what the neighbor's house went for 6-12 months ago, and won't let the house go for a lower price.

Eventually, one of them has to crack.  If demand picks up again, then the buyers have to crack.  If it doesn't, the sellers have to crack.

Many builders paid prices for the land that was predicated on the assumption of higher prices by the time the house was finished.  If prices are stable or decline, some of these builders will lose all their profit, at a minimum.

I considered getting into speculative development of real estate in my area on a small scale about a year ago.  My plan was to try to buy smaller, run-down houses in neighborhoods that were coming up, and either renovate them or tear them down, put up a new, larger house, and sell it for a profit.

I pulled back because the prices were so high that my profit would have been dependent on market appreciation during the construction period.  That didn't seem to be a good bet with the market peaking at that time.

Makes total sense to me.  If your profit is dependant on future appreciation in the housing market, I simply don't consider that a good deal.

[TeePee4Prez]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

I wouldn't bet on that.  But a correction of 15-20% would not be unreasonable, especially after the gains of the past five years in the DC-Baltimore area.

The gains haven't really been that strong in Philly, so Flyers probably isn't going to see the same downturn (Philly prices are always lower than everywhere else in the NE for some reason or another).

Compared to NYC or the Balt-Wash corridor, you're right, but we still have a housing CPI along with increase between 2000-2005 far greater than the national average.  I could definitely see a 10-15% downturn which would suit me just fine to allow my income to catch up!

[opebo]

The sky is falling, the sky is falling!!!  *dies laughin*

Idiot, no one said the sky is falling.  Merely that house prices are falling.  Why would you interpret that as claim of a catastrophic effect?

Of course, there is a minority of people that will consider it a catastrophe - builders, speculators, real estate sales agents/'brokers', and all those poor saps that bought interest only, etc. 

[Sam Spade]

I plan on purchasing a home within the next 3-5 years, so I hope it comes down.... A LOT!

I wouldn't bet on that.  But a correction of 15-20% would not be unreasonable, especially after the gains of the past five years in the DC-Baltimore area.

The gains haven't really been that strong in Philly, so Flyers probably isn't going to see the same downturn (Philly prices are always lower than everywhere else in the NE for some reason or another).

Compared to NYC or the Balt-Wash corridor, you're right, but we still have a housing CPI along with increase between 2000-2005 far greater than the national average.  I could definitely see a 10-15% downturn which would suit me just fine to allow my income to catch up!

Corrections of more than 20% rarely occur in the housing market unless there are severe economic problems with the area (Houston, Texas in the mid-1980s is a good example).

A 10-15% decline is not unreasonable for Philly (I think 20% is highly unlikely), but these types of things are usually pretty hard to predict, so I wouldn't exactly count on it happening (same goes with Nick).  A hold (lack of movement) in housing prices for 3-5 years is actually just as likely as a decline.

[opebo]

My grandfather is a general contractor and realtor, and he's taking a pretty big hit right now.  He currently has 8 or so houses on the market, but no one is buying.

My girlfriends cousin is one of the largest residential general contractors in Baltimore City, and he's also having a hell of time selling houses.  Even in Canton where the housing market is/was red hot.

Im not sure if its just a bad time of the year or are prices too high...?

People do just stop buying when interest rates rise, nickshepDEM.  This equates to a moderate loss of value for most homeowners - the 10-15% mentioned by many posters in this tread - but a disasterous situation for those in the highly speculative real estate business.  My family are in this business, but have always stayed fairly small, so that they could ride out any downturns. 

[MODU]

The sky is falling, the sky is falling!!!  *dies laughin*

Idiot, no one said the sky is falling.  Merely that house prices are falling.  Why would you interpret that as claim of a catastrophic effect?

I'm sorry, I'm not the one who titled the thread as "bursting."  It isn't "bursting," but rather correcting based on regional demand. 

[nlm]

This shouldn't be anything more than a bit of economic Darwinism for builders. Home buyers should end up seeing modest price relief in certain areas (and notable in a few), but will end up with higher mortgage rates (but we have no idea how much higher). If a buyer ends up coming out ahead of the game or not will depend on where they live and the exact moment at which they buy. For builders it's a different story. For the last 20 years or so, just about anybody could make good money putting up house if they had half a clue. The thing is, a lot of the builders today only have half a clue as a result of that and they may well end up out of luck and the folks they employee will as well. I think the business is going to get leaner and meaner again - such is the nature of any business segment in the economy. I do think a lot of subcontractors are going to be scuffling to stay a float in the near future in some areas, a lot of "shot from the hip" type builders are going to be looking for a new line of work, a lot of very small builders will be as well - even if they are not clueless, and larger builders with poor or over priced existing land holding will take a notable hit - a lot of the big national builders have been buying up smaller local builders across the country based on things other than land holdings, and that is something they are likely to regret in the near future. I see a pull back by some of the national builders coming soon. I could go on for hours about the stupid course some of the publicly held national building companies have set for themselves based on the desire to create perceived success for Wall Street as opposed to long term stability - but I will resist the urge other than to recommend that you not buy their stock. The bottom line is that a lot of good jobs could go bye bye in some areas.

But there will be no bursting - just some air let of a ballon that had too much in it for quite a few reasons.

edit - the folks that took out no money down, interest only adjustable rate mortgages are going to take in the short as well if mortgage rates spike - but it's too early to tell if that's going to happen. I feel for those poor saps, regardless. And don't do that sh*t if you are a youngster looking to buy your first house soon - wait until you can get a down stroke together.

[dazzleman]

But there will be no bursting - just some air let of a ballon that had too much in it for quite a few reasons.

edit - the folks that took out no money down, interest only adjustable rate mortgages are going to take in the short as well if mortgage rates spike - but it's too early to tell if that's going to happen. I feel for those poor saps, regardless. And don't do that sh*t if you are a youngster looking to buy your first house soon - wait until you can get a down stroke together.

I agree.  I'm sure you also know that those people who took those interest only adjustable rate mortages received 'teaser' rates for their initial period, meaning that their interest rates will shoot up at the end of the initial period even if general interest rates are stable from the time they bought the house.  This type of person is also likely to make little to no down payment.

This is not a big problem if they can refinance when the initial period is up.  They can do this if (a) interest rates remain relatively low (b) they have a good payment history on their original loan and (c) the value of their home doesn't fall below the principal amount on their mortgage(s).

For many of these people, at least one of these conditions will not be applicable, and they will definitely take it in the shorts.  I know several people who are in this situation because they wasted money, had poor credit, or went for more house than they could afford.

I remember when I bought my first house, I was pretty insistent on having a 20% downpayment.  I took a 30-year mortgage, and refinanced it to a 15-year mortgage a few years later, when interest rates dropped.  During that period, the value of the home went up significantly, but I didn't refinance for a much larger amount than the original mortgage, so I had significantly more equity in the house than I had when I bought it.

In my current house, my mortgage is about 40% of the home's value, which I'm pretty happy with.  I don't want to be mortgaged to the hilt.  I have a 15-year fixed rate mortgage, which will be paid off in 2018.

It's so important when you set up your finances to try to fix it so you're rolling a snowball down a hill rather than up.  So many people don't take the necessary steps to do this, and end up rolling a snowball uphill their whole lives.

[Nation]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

[dazzleman]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

Let them sit with it then.  If they really need to sell it, they'll have to lower the price.  If not, they can take it off the market eventually.

Not everybody who lists their house for sale actually intends to sell it.  Some of them are just testing the waters to see what it is worth, or they may sell it if they get a crazy price for it, like the one you mentioned.

At this point, it's not only that they want to sell for what their neighbor sold for, but they want a 30% premium over what their neighbor sold for.  It's crazy.

Even though I am a homeowner, and should applaud these crazy prices, I really don't because I think they're at the point where they're getting to be bad for the economy, and bad socially, since so many people are getting squeezed out of housing by these prices.

[David S]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

What kind of a house are you talking about for that kind of price? In our neck of the woods $500,000 would buy you a brand new luxury home.

[dazzleman]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

What kind of a house are you talking about for that kind of price? In our neck of the woods $500,000 would buy you a brand new luxury home.

Dude, you're lucky you live in Michigan.  Here, $500K gets you an average house.  Nothing special.  For that money, it won't be a premier neighborhood, won't have great property, and won't be that big.  But it will be decent at least, and in a good town.

The prices around here are crazy.  They are also crazy down in the DC area where Nation is from, though I think the prices down there are a little lower than here.

[Nation]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

What kind of a house are you talking about for that kind of price? In our neck of the woods $500,000 would buy you a brand new luxury home.

Dude, you're lucky you live in Michigan.  Here, $500K gets you an average house.  Nothing special.  For that money, it won't be a premier neighborhood, won't have great property, and won't be that big.  But it will be decent at least, and in a good town.

The prices around here are crazy.  They are also crazy down in the DC area where Nation is from, though I think the prices down there are a little lower than here.

Dazzleman pretty much got it. I know the house that I mentioned that was 650 is SLIGHTLY nicer than some of the other adjacent homes, but not enough to warrant even a $25,000 increase, let alone a $150,000 one.

Home prices in the northern VA/DC Metropolitan area are astronomical -- and I honestly couldn't imagine moving into some of these homes. Over developmented areas with nothing but fast food restaurants and no grass.

[David S]

Im not sure if its just a bad time of the year or are prices too high...?

The prices are too high.

People are refusing to accept that they have to bring their prices down --- in my parent's area, where the median price for home is probably around $500,000 -- maybe a little more, since a lot of new military jobs are coming into the general area soon  ---- one couple is trying to sell for $650,000.

That just ain't gonna cut it.

What kind of a house are you talking about for that kind of price? In our neck of the woods $500,000 would buy you a brand new luxury home.

Dude, you're lucky you live in Michigan. 

If you say so.
The problem here would be finding a job. Also this part of Michigan is not exactly the fun capitol of the world.
Clipped this ad from Pulte homes for a model in Canton Mi.


Hastings

From: $410,990
2800 Square Feet
3 Bedrooms
2 Bathrooms
1 Half Bathroom(s)
2 Car Garage Attached