Posted on 08/25/2006 8:57:15 AM PDT by Hydroshock
NEW YORK (Fortune) -- For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense.
Forget about a crash, they assured homeowners. Expect a "soft landing" where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a "normal," "sustainable" rate of 6 percent or so into the sunset.
Real estate slowdown New homes slump worsens
Pace of new home sales falls more than forecast as inventory builds, prices decline. (more) Freebies for home buyers Home sellers are trying to find creative ways to get buyers to sign on the dotted line. (more)
Americans wanted to believe, and they did. Now, the giant popping noise you're hearing is the sound of yesterday's myths exploding like balloons pumped up with too much hot air.
The newest sign that the myth-makers were spectacularly wrong is the data on existing home sales for July. Nationwide, median prices rose .9 percent.
But even that meager number masks the real story. Prices actually fell where housing is most vulnerable, in the bubble markets in the West and Northeast. In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.
Homeowners just saw their wealth shrink, by a lot. The numbers will only get worse. It's time to examine the clichés that the "experts" - chiefly analysts and economists from realtors and mortgage associations - used to convince Americans that what they're seeing now could never happen. Here are the four great housing myths - and why they never made much sense in the first place.
(Excerpt) Read more at money.cnn.com ...
I'm trying to find the link, but I saw a chart showing the "Housing Affordability Index" of all US Metropolitan areas. This is the percentage of households with sufficient income to afford a median-priced home in that market. It's another good indicator IMHO because it takes into account both the average income and the average price in the area.
For my city (this is off memory, I can't find the article) Akron, Ohio, it is 78. In other words, 78% of households can afford a median priced home. For San Francisco it was something like ONE PERCENT. That astounds me.
That would be very intersting, I hope you can find it ;)
You did something slightly dumb if you bought at that price with a conventional fixed rate loan.
If you bought with an interest-only ARM that barely allowed you to afford the monthly payments in order to borrow that much money, you did something REALLY dumb.
Home prices in my area drop 20% <-- I just got unlucky By itself, the housing bubble is not hurting me at all. So far.
So far, so good.
I now owe $500,000 on a $400,000 home. I will have a problem if: A) I get laid off <-- I just got unlucky B) The bank calls my loan <-- I just got unlucky
or
C) The years have passed and the interest-only grace period has expired as it most certainly will. You now have to pay the interest PLUS the principal at an accelerated rate PLUS you have to pay the interest at a higher interest rate.
Since you stretched your budget to simply pay the monthly payment during the interest-only period, you have now screwed your financial pooch.
The housing bubble will hurt people who have done several dumb things AND who have gotten unlucky in multiple ways.
Close to 50% of new home buyers in California were using interest-only ARM's as the means to afford these artificially inflated prices. The interest-only ARM giimick is what made those prices possible in the first place. If buyers were required to use responsible financing, they would be forced to say, "Sorry, I really love the house but I can't afford the monthly payments on the mortgage."
The future financial disaster for these people will not depend on being "lucky" or "unlucky".
The future financial disaster for these people is already guaranteed.
Here is a slightly different index, with the same concept: This is the Housing Opportunity Index:
Affordability refers to the percentage of homes sold in the first quarter that families making the median household income for that metro area could afford to buy.
http://money.cnn.com/pf/features/lists/nahb_housing_affordability/affordability.exclude.html
Best market: Lansing, MI, at 92.7%, worst, Los Angeles/Long Beach at 1.9%.
A well-reasoned response filled with facts that NEVER get mentioned in the RE horror stories oday.
One point I was making (by quoting loss) is that it's only a loss if you sell at a reduced price.
If you hang on to a property it will most likely recoup any lost value, given enough time. Of course, this assumes that you don't live near a toxic waste dump, or the state decides to build a freeway through your living room, etc.
Asking price indeed. The place beside me has been "asking" $985,000 since May, and the place on the other side has been "asking" $755,000 since June. There's two more real stories.
Who ever said a soft landing meant continued 6% gains? These articles keep starting out with the false pretense. A 0.9% increase is an extremely soft landing. I am surprised the landing has been this soft.
Have you seen "The Omega Man"?
A tool commonly used in bubble articles. Yesterday someone was asking $1.1 million and ended up taking $530K. Oh no, a 50% drop!!! Oh the horrors!!!!! What the article did not say was she bought the house for $50 30 years ago.
Fifty bucks for real, or are you exaggerating?
Well as one who grew up in NE Ohio, there's nothing like the combination of bad winter weather, a lousy economy, and high taxes to drive people (including myself) away.
Actually, prices ROSE 0.9%. This is the second article in two days which starts out that anything less than a 5-6% growth rate is a bubble bursting. Go figure.
$50K....
Fair enough, but Dallas and Houston both have good weather and good job markets but real estate is still CHEAP at least for now.
Massachusetts has lousy winters, a shrinking economy, and high taxes. Explain why Boston is so damn expensive!
I see how you fled to sunny Indiana!
;-)
We've owned the same house for over 30 years and watched that CA neighborhood carefully, even though we don't live there. Twice the value has gone down by over 25% after boom years..then takes 4-5 years to recover. The overall driver has been population boom and good location.
However, people will be surprised this time, because there are more investor owners and people who bought on low down payment schemes. Some of them will walk real quick with a negative cash flow. Also, now your taxes don't go down with values...the down side of 1% prop. 13. I have already talked to condo investors who are loosing 3-500 per month on a condo investment. They won't hang on forever with values going down.
True......If you bought under terms that allow you to carry the debt.
The problem is that the combination of highly irresponsible gimmick loans and the inflated prices they make possible are creating a situation where over 50% of all new buyers in California are sitting on ticking financial time bombs.
See Post 63.
Once their interest-only grace period expires, those people won't have the luxury of just sitting on the property as can the rest of us who bought our houses for a price we could afford with responsible financing.
Thanks for the funny article. Since I know Shawn Tully, I'd say that these myths need "popping" as well:
Myth #1: Fortune Magazine would rather "report the truth" than make make BIG profits pandering to the insecurities of America's "Chicken Littles."
Myth #2: A degree in English from Princeton qualifies anyone to write articles about anything, even complicated economic matters.
Myth #3: "Pop" economists need not present graphs, charts or any historical figures that might reveal that their "pop" articles have been over-simplified to the point of being misleading.
Myth# 4: A .9% RISE in prices is ACTUALLY "...a giant popping noise...exploding like balloons pumped up with too much hot air."
Too much hot air, indeed...
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