We're Doooomed!
Posted on 06/14/2006 6:34:14 AM PDT by Hydroshock
Contrary to popular belief, the housing market hasn't cooled off that much. In fact, residential real estate prices continue to soar in a number of key metropolitan areas, according to a new study released this week.
That's a good thing, right? Actually, no–because the froth building in housing prices raises the distinct possibility of significant corrections to come in many of those regions.
In the first quarter, home prices nationwide rose an additional 7.3 percent, according to a joint study by the financial services firm National City Corp. and the research firm Global Insight. As a result, there are now 71 metropolitan areas–representing nearly 40 percent of all single-family homes–that can be classified as "extremely overvalued," according to the study. By comparison, only 64 metro regions were considered frothy at the end of last year and only 1 percent were classified as such in the first quarter of 2004.
The report further stated that Californians and Floridians ought to be the most concerned, as their states are home to 17 of the 20 most overvalued markets. The frothiest region in the country, according to the study, is Naples, Fla., where home prices are said to be 103 percent overvalued. Rounding out the top five markets are Salinas, Calif.; Port St. Lucie/Fort Pierce, Fla.; Merced, Calif.; and Bend, Ore., which are all more than 75 percent overvalued, according to the report. (Global Insight and National City based their judgments on valuations on several factors, including historical market premiums and discounts, household income levels in those regions, interest rates, and population density.)
"The fact that this number of metro areas – representing such a large percent of the total single family market–is extremely overvalued should be a cause for concern," said Richard DeKaser, chief economist for National City.
Another worrisome sign is that the 50 most overvalued markets at the end of last year were again the biggest winners at the start of 2006. Indeed, the 50 hottest markets saw a 10.1 percent increase in home prices, on average, in the first quarter.
This study's findings would seem to contradict other housing market reports that have shown a steady decline in home prices recently. For example, the Commerce Department has indicated that the median sales price on new single-family homes purchased has fallen around 3 percent since the start of the year.
But DeKaser notes that new homes are sold by developers, not families. And developers generally don't have the luxury that regular families do of living in their homes for several more years to wait out attractive offers. Moreover, DeKaser said new homes represent only a small percentage of the total housing market. For their part, National City and Global Insight relied on national housing data collected by the Office of Federal Housing Enterprise Oversight.
Under normal circumstances, the fact that housing prices are continuing to rise would be something to cheer. But the housing boom has been going for most of this decade. And housing markets can't be overvalued for too long, as imbalances in residential real estate prices will eventually lead workers to relocate to more affordable cities.
The bottom line: Real estate prices eventually correct themselves. And unfortunately for homeowners, it often takes years before home prices start to rise again, especially after a big run up.
National City recently studied 66 major metro regions over the past 21 years that suffered through a 10 percent or greater decline in prices for at least a two-year period of time. It found that home prices, once they begin to correct, tend to decline 17 percent on average before markets heal themselves.
"And the average duration of these adjustments is 3.5 years," says DeKaser.
So what about families who recently bought into one of these "extremely overvalued" markets in hopes of turning a fast buck? "I extend them my deepest sympathies," says DeKaser.
ping
This report came out 6 hours after I wired a $25k deposit on a home purchase...IN FLORIDA.
I do believe I'm sound as I got the seller down 22% from the asking price.
And I'm no where near Naples!
Hey, George, don't worry about it. Enjoy your new home in good health.
I have tons of friends in Winter Park and family homes in Clearwater Beach. You near those spots?
-Rex
We're Doooomed!
We're Doooomed!
As prices stagnate, the real estate weeklies are FULL of "price reduced" ads (in the tens of thousands of dollars) for homes that have been on the market for a couple of months. (The article has this market at 30% overvalued.)
If your purpose is (3), you're almost certainly fine, since you will be getting use out of it and (hopefully) building equity. If (2), it depends on how much you think a vacation place is "worth" to you, since it's tying up capital (foregoing income to the extent you use assets you'd otherwise invest) and you're "renting" money (to the extent you borrow) instead of paying "rent" on a hotel room or condo with the income from the assets you use. I'm sure that you can run the numbers to see how much the value would have to increase to offset the foregone income, costs of ownership (taxes, maintenance) etc., rent on money and make you better off than if you'd rented a hotel/condo for the 2-3 weeks a year you use it. On the other hand, I suspect if you're speculating - even with a fairly long-term 'investment' view - you paid too much. Every seller has room in his asking price to come down, how much depends on how much the seller needs to sell (as opposed to wants to sell). Unless the seller HAD to sell, you probably paid what he and his real estate broker expected to get, all other things being equal. This stuff is not rocket science. Go check out zillow.com for values where you bought - hopefully you've already done that.
50% correction in some areas coming soon.
The families that bought their houses at reasonable prices they could afford without resorting to very risky gimmick loans have the luxury of waiting several years.
However, all those families that bought houses they could only temporarily afford by resorting to interest-only, ARM loans as long as the interest-only grace period was in effect will have only a limited amount of time to either find a greater fool to buy the property or default on their mortgage.
Then the overpriced property will become the bank's millstone as happened during the 1980's Japanese Bubble.
The root problem is not the price of housing. The root problem is that these very risky gimmick loans are allowing such crazy pricing to be possible in the first place. It is analogous to loaning everybody in town $400,000 in cash they can never repay and then wondering why, all of a sudden, a gallon of milk costs $15 at the local store.
I agree 100%, but would like to add something. It also is not helping that insurance and property taxes are going up so fast. In Harris County TX (Houston Area) State farm is trying to raise there rates by over 50% on average this years.
Doubling in 15 years is 5% appreciation a year. That's really not that unreasonable.
bump for later.......
Yet another real estate is DOOMED!!!! post from Hydro shock? Who knew!
Yet another real estate is DOOMED!!!! post from Hydro shock? Who knew!
I am but posting an article from a respected new organization.
Well said. Even with the gimmick loans, high priced homes usually have high property taxes along with high utility bills. The squeeze is coming for many of these new homeowners.
Friends of mine and my aunt and uncle bought at market peak in Mass. in 1987. After the bottom fell out then, it was only a few years ago they broke even with equity in their home.
You just never know.
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