Housing Bubble -- or bunk?

Business Week ^

[VegasCowboy]

Average national home prices haven't dropped since the Great Depression. But with the recent frenzy in the real estate market, investors are wondering whether the market can keep up this pace. Residential property investors have seen bubbles rise and pop on local geographic levels in past years, but the debate continues over whether a nationwide bubble has materialized.

See more at the link.

[montag813]

Unlike stocks, buying and selling a house doesn't cost 9.95 and take 5 seconds. It is a big deal, and full of fees and commissions.

[RFEngineer]

"The "Housing Bubble(tm)" Pops...
What does that mean to me?"

At first, nothing.....grumbling around the neighborhood barbecues.....

Then a neighbor has to move - no choice. He looks at the housing values, and realizes he doesn't have the cash to be able to sell his house.......he likes his neighbors, so he decides to put it out for rent......and eat the difference

The next neighbor decides he doesn't like the racket the new rental neighbors make, so he decides to move too, only he has an angle......Section 8 housing means guaranteed payment....

Then down a few houses, there is divorce, bankruptcy, they walk away...... house sits empty

Then the first neighbor, with the renters decides to not pay his mortgage but collect the rent.

Empty house becomes a crackhouse/meth lab on alternate weeks.

Then someone moves and converts to a group home

Then more section 8 houses and the drug dealing that comes with it, petty crime, violent crime, gunfire.....

Before long, you are the only one in your neighborhood with a job.....and oh, by the way, nobody else wants to live in your neighborhood...the value plummets even further.

Get the picture? (based on a true story!)

[spetznaz]

I paid attention and I went 90% cash on 03.15.00, and went 100% cash by the end of August.

Guess the Ides of March is a goodluck day for you ....and for me, after all it is my birthday. LOL. It's always good to have one's eyes open for good deals .....and for good exit points as well.

[backtothestreets]

I think with the number of people buying houses for investment purposes only, not for their own occupancy, there is a chance for some regional bubbles to burst. If a larger percentage of these purchases were for owner occupancy, I'd say there was no bubble. Last I heard these investors comprised slightly over 25% of the home buyers. Already economist are leery of the investors that cannot find buyers, and are being forced to rent the homes for less then the mortgages they are paying. I've no idea how widespread that practice is, but it sure sounds shaky.

[Labyrinthos]

Sound advice.

[montag813]

Funny thing is, with a 90-day settlement, by the time we closed on our new home, the amount of appreciation on the house in 3 months was greater than the realtor's commission.

In a hot market with multiple bidders, is it possible to demand cash and say a 2-week close?

[Deo et Patria]

OK, ready for a good laugh?

My wife and I are preparing to move closer to family on the east coast. An attorney by trade, I am prepared to carry a decent size mortgage, as I know that I will I need to in order to live in that area. So we look around for houses, and find a nice older cape cod-style in Westchester with a decent lot and great back yard (50 x 140). Buyer wants $520K, but he has to sell quickly. After much discussion, I get him to agree to $460K (gulp). I tell my uncle, who's been in the real estate business for over 30 years, and he actually says "what a deal!"

Has the whole world gone crazy? (I'm actually not that worried because we plan to be in this house for the long haul.)

[montag813]

If you have decent income, an interest only loan makes good sense. It is a 100% tax write-off, so essentially you are being paid to live in your home by the IRS, so long as the house price appreciates there is no problem. Even if prices drop 10-20% (very unlikely), within 7 years they are typically right back up there.

[Polybius]

I disagree with this line of thought entirely. You are castigating interest only loans without a clear understanding IMHO. The great debate about lending philosophies has always been fixed or variable? That's all this is and it's been the same the last 40 plus years. The interest only loans bring almost nothing new to this argument and hardly any new risk.

The added risk is that an entire generation of new buyers is being encouraged to assume a high debt level they cannot afford in the long run.

With the fixed rate period of an Adjustable Rate loan, a buyer at least had to start paying principal and interest from Day One. With the Interest Only loan, these buyers are now stretching their budgets to pay highly inflated prices that they can only afford during the interest only period.

It is like the future junkie being given the first ten hits of crack cocaine for free.

An Adjustable Rate loan may go up.

An Interest Only loan will go up by 50% in 10 years, at least.

Most of these buyers have no idea how they will afford that in 10 except to assume they will sell the house for more than they paid for it.

A Growing Tide of Risky Mortgages: Increasingly, consumers are using interest-only loans to stretch their budgets and buy new homes. But are the benefits worth the dangers?.............Interest-only mortgages were designed for wealthy families who used the loans as cash-flow management tools and could, if necessary, pay off the entire sum by liquidating some stocks and bonds. ..................Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public -- people who are struggling to get into a rising housing market and feel that they couldn't get the properties they want any other way.

[Bogeygolfer]

bingo

[Bogeygolfer]

Again I respectfully disagree. The adjustable doesn't just go up and all is fine and the interest only doesn't just go up 50% and all hell breaks loose. Both require refinancing in years 0 to 10. When an adjustable goes up the payment increases are often significant and usually equally as unaffordable in both scenarios. I'm not saying interest only aren't risky just that both adjustables and interest only carry similar risks and we've been doing adjustables for ages. Yes it's easier on wealthy families but it helps everybody to have more rather than less options. I don't subscribe to the everybody else is stupid crowd despite evidence to the contrary and I do subscribe to the old adage buy as much as you possibly can. That's worked well and I believe continues to be true. The young family should buy as much as they can and ten years is a long time, even in the old days. Refinance is not a new term.

[Bogeygolfer]

I think we'd both agree the risk is in the short term adjustables and the short term interest only loans. This is because of the term though and not the equity. It's both of these types of loans the add risk to a lenders portfolio and I believe more so than the loan to value ratios.

[VegasCowboy]

Exactly. I wish I would have bought a lot more house a few years ago. Now the high-end home prices are out of reach. If I would have done so, I'd have a large house in a nice neighborhood for $200K. Now I'm looking at $500K for the same thing.

Plus, with interest only you can pay down principal if you'd like. You just don't have to do so if money is tight from time to time. Most people make more money over time. In ten years, I sure as hell hope I can afford a 50% increase in my house payment, or my career isn't going very well.

[winodog]

I am missing something on the 100% tax writeoff. Say my interest payments are $10,000.00 for the entire year. I dont get to write off 100% of that. I was under the impression I only get to write off about 30% depending on the tax bracket I am in.

[RegulatorCountry]

"I dont get to write off 100% of that."

Actually, yes, you do. That $10,000.00 is deducted in its entirety; your taxable income is reduced by that amount, which constitutes a 100% write off.

[winodog]

Ok thats what I was missing. If my taxable income is 80 grand it becomes 70 grand. Thanks.

[montag813]

I am missing something on the 100% tax writeoff. Say my interest payments are $10,000.00 for the entire year. I dont get to write off 100% of that. I was under the impression I only get to write off about 30% depending on the tax bracket I am in.

Mortgage intertest payments are 100% deductible.

[Toskrin]

It's not hard to understand housing prices if you look at it from the standpoint of monthly payments rather than sales price - which is how most people make a decision on what price house they will buy.

Monthly payment is going to be based upon the household income and the interest rate. Most families end up with a mortgage somewhere near the maximum they can qualify for - about 28% of gross income. Nationwide, housing prices are tracking just where they should be based upon income and interest rates. The rise in housing prices mostly has to do with low interest rates, coupled with rising income coming out of the 2000-2001 recession.

The National Association of Realtors calculates something called an "Affordability Index" for the nation and metro areas. The Affordability Index uses the median family income and mortgage rate to calculate the maximum mortgage payment for the median family income. That is divided by the median home price. So an Affordability Index of 120% means that the a household with the median income can afford 120% of the mortgage of the median home. High numbers mean houses are easy to afford, low number mean they're expensive. If the number is below 100%, then not everyone can afford a home and folks will have to rent apartments.

Here's the national figures - year, mortgage rate, and Affordability Index:

1970 8.35% 147.3
1972 7.52% 154.8
1974 9.02% 130.3
1976 9.11% 125.8
1978 9.58% 111.4
1980 12.95% 79.9
1982 15.38% 69.5
1984 12.49% 89.1
1986 10.25% 108.9
1988 9.31% 113.5
1990 10.11% 113.7
1992 8.11% 128.9
1994 7.47% 135.1
1996 7.71% 133.3
1998 7.10% 141.1
2000 8.03% 129.2
2002 6.55% 133.9
2004 5.72% 132.6

There will be trouble if long term rates rise, but that has always been the case in real estate.

[Bogeygolfer]

interesting...thanks.

[RegulatorCountry]

It would be interesting to tie annual appreciation to this. Might have to resort to a color coded map, because it's always better/worse on a local or regional basis. Some areas of the country plowed right through 1978 - 1990, with something of a building boom. Others were depressed.