When will this housing market burst?

[BIG_DADDY]

I was reading on the Bloomberg that last year 2/3 home loans in the bay area were interest only loans. Even in areas that are not know for expensive Real Estate the interest only loans make up 1/3 loans this last year. This thing is definately going to burst, it's only a matter of time. I hae friends in the business and they say people are doing these interest only loans and are still in way over their head for their current income. Greenspan is even starting to talk about it.


Greenspan Is Concerned About 'Froth' in Housing

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By EDMUND L. ANDREWS
Published: May 21, 2005
WASHINGTON, May 20 - Alan Greenspan, chairman of the Federal Reserve, suggested on Friday that the red-hot housing market is becoming a little too exuberant for its own good.

Greenspan's Remarks "Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Mr. Greenspan told the Economic Club of New York at the Hilton New York hotel in Midtown.

Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country.

The comments of the Fed chairman were the closest he has come to acknowledging the possibility that housing prices may be poised for a fall in some parts of the country.

The issue is sensitive for the Federal Reserve, because its policy of keeping interest rates low has helped propel housing prices upward even when the rest of the economy was dragging.

But the housing issue highlights an unusual quandary for the central bank: even though it has raised short-term interest rates eight times since last June, long-term interest rates and mortgage rates are actually lower than they were one year ago.

The unexpected persistence of low mortgage rates has kept alive the housing boom - in new-home construction as well as in prices of existing homes - much longer than most analysts had expected.

Mr. Greenspan has tried to avoid second-guessing the markets. In 1996, he suggested that the stock prices had been pumped up by "irrational exuberance."

But after a brief spasm of anxiety, investors drove prices higher for three more years. Mr. Greenspan has been criticized by some for failing to pre-emptively puncture the stock market bubble, which burst in March 2000, and some analysts criticize the Federal Reserve now for creating a housing bubble.

Fed officials contend that their primary job is not to influence the price of assets, whether stocks or real estate, but rather to focus on inflation and growth. Trying to puncture a bubble, they say, would cause more problems than it would prevent.

Mr. Greenspan repeated many of his past reassurances about the housing market: that any bubbles were local, not national; and that people do not speculate as much on houses as they do on stocks, because they generally live in the houses they buy.

Residential real estate prices have jumped at double-digit rates for the last several years in many cities, especially along the East and West Coasts.

Prices for existing homes on the West Coast jumped 18.9 percent for the 12 months through March and 14.7 percent on the East Coast, according to the National Association of Realtors.

Nationwide, prices of existing homes have risen by 20 percent over the last two years and 29 percent for the last three years, according to Gus Faucher, a senior economist at Economy.com, a research group.

"We do not see a nationwide housing bubble," Mr. Faucher said, "but there are certainly instances where prices are way ahead of fundamentals."

Many analysts have argued for months that evidence of speculative activity has increased over the last year. Much of the evidence is anecdotal, including people buying and reselling houses at developments before construction is even completed.

But there has been solid data as well pointing to rapid price increases in second-home markets, reports of many more individuals buying houses and condominiums as investments rather than as places to live, and to the heavy use of interest-only loans and adjustable-rate mortgages that allow purchasers to buy considerably more expensive properties than would otherwise be possible.

Mr. Greenspan acknowledged on Friday that many people were "reaching" to finance their purchases.

But he predicted that housing prices were unlikely to decline much, if at all.

"Even if there are declines in prices," he said, "the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased before prices actually literally go down, are going to have problems."

[Rausch]

I don't see areas like Arizona or Nevada falling off anytime soon...

[penguinz]

The only reason Greenspan is concerned is that WallStreet is suffering because of the housing market. People are investing in real estate instead of the Stock Market.

[BIG_DADDY]

The only reason Greenspan is concerned is that WallStreet is suffering because of the housing market. People are investing in real estate instead of the Stock Market.

These interest only loans are a disastor waiting to happen.

[BIG_DADDY]

These interest only loans are a disastor waiting to happen.

And I want it to happen in about 2 years so I can finally buy a nice house out here. You can't buy anything worth living in now for under a mill.

[Goapics1]

And I want it to happen in about 2 years so I can finally buy a nice house out here. You can't buy anything worth living in now for under a mill.

I heard on the radio that MOBILE HOMES are selling for $1M in Malibu. MOBILE HOMES.

[Soupnazi]

The parallels between the internet stock bubble and the current housing market are undeniable. I'm going to laugh my ass off when it happens.

[Goapics1]

Why not just buy your mobile home for $30K elsewhere and drive it to Malibu.

The land/real estate would bite you in the ass.

[BigRedChief]

Calfornia, yeah that baby is ready to burst. Way over priced. Here in the KC suburbs nahhhhh supply greater than demand.

[Goapics1]

Calfornia, yeah that baby is ready to burst. Way over priced. Here in the KC suburbs nahhhhh supply greater than demand.
Is that really Rainman's wife in your sig? I am a noob so I do not know the history. Can you educate me?

[beavis]

These interest only loans are a disastor waiting to happen.
Yep. Not only that, but the vast increase in real estate speculation. I've heard as much as 10% of homes are owned by people as an investment.

I was actually thinking of buying later this year, but with the way things are, I'm actually considering putting it off a while.

[Amnorix]

Is that really Rainman's wife in your sig? I am a noob so I do not know the history. Can you educate me?

Yes. Here's a shot of them together from a few years back. He's lost some hair since then though...


http://goodjoke.com/jokes/how_to_spot_a_rich_guy.jpg

[Goapics1]

Yes. Here's a shot of them together from a few years back. He's lost some hair since then though...


http://goodjoke.com/jokes/how_to_spot_a_rich_guy.jpg

Ah, nice lookin' couple, but I think he could do better. Thanks Amnorix.

[Edubs]

Very risky....but you are also banking on the property shooting up in value/price. I have considered interest only in downtown KC properties.

[BigRedChief]

Yes. Here's a shot of them together from a few years back. He's lost some hair since then though...


http://goodjoke.com/jokes/how_to_spot_a_rich_guy.jpg

That guy must be super rich and have John Holmes "equipment" to get something like that.

[BigRedChief]

Is that really Rainman's wife in your sig? I am a noob so I do not know the history. Can you educate me?

No, He just liked the pic so I decided to have a little fun with it since I believe he's gay.STFU OHHH crap did I say that outloud. :p

[Skip Towne]

Oh, she's not so much. I drilled her brains out for a couple of years then threw her out. Now it's Rainman's turn.

[Calcountry]

The parallels between the internet stock bubble and the current housing market are undeniable. I'm going to laugh my ass off when it happens.Why?

[BIG_DADDY]

Why?

Why what?

[Calcountry]

<HR SIZE=1>
Originally Posted by Soupnazi
The parallels between the internet stock bubble and the current housing market are undeniable. I'm going to laugh my ass off when it happens.

Why?

[bogie]

This thread is timely for me. I have a second home in Big Bear that I'm putting on the market. It's the second homes that plunge first when the market drops off. I'm not going to be greedy. I'm selling and going to grab the money and run.

[Calcountry]

This thread is timely for me. I have a second home in Big Bear that I'm putting on the market. It's the second homes that plunge first when the market drops off. I'm not going to be greedy. I'm selling and going to grab the money and run.I was advising people to sell last year.

Its almost too late to get out now. Good luck.

[bogie]

I was advising people to sell last year.

Its almost too late to get out now. Good luck.

Wow you made my heart jump. Why do you feel it's too late? Everything I read about Big Bear market is positive.

[Calcountry]

Why what?If we have a sever drop in Real Estate prices, it is going to cause ripples throughout the economy. The people who will be hurt the worst are those that are the least diversified as always. Some poor bastard who used his home as an ATM to go out and buy a big SUV and a boat is going to wake up upside down on his home and a 50 % depreciated SUV and boat. I pitty that person, but the bad thing is, they will come in here and bounce a check to buy dog food when they are in that situation. It all trickles down and I am not looking forward to a bubble bust under no circumstances.

The US economy has no other cards to play. The real estate card pulled us out of the dot com collapse, what will pull us out this time.

What we need is a gradual cooling off of the RE market with prices stabilizing at a sustainable level. That is what is good for the economy as a whole.

[BIG_DADDY]

<HR SIZE=1>
Originally Posted by Soupnazi
The parallels between the internet stock bubble and the current housing market are undeniable. I'm going to laugh my ass off when it happens.

Why?

Well there was always the why does he think it parallels the stock market bubble. I wasn't sure which you were refering to.

[Calcountry]

Wow you made my heart jump. Why do you feel it's too late? Everything I read about Big Bear market is positive.I don't have any clue about your local market, just a gut feeling. A year ago, everyone was "making money" in the RE market. Everyone I talked to that had dealings was all excited and it seemed like deja vu all over again(.com days)

I read a book on investing once and it said, you had to know when to part company with the crowd. IOW, just before market collapses, all the "smart money" and all the slackies are all saying BUY BUY BUY, that is when you should sell. When everyone is buying that is when you should sell. The converse is also true. No one can time it perfect, I just had a gut feeling. What have we had, 6 consecutive interest rate hikes? That has to be bearish for the RE eventually.

Had to know that we were in an inflationary invironment due to 50 dollar barrel oil, that has not abated for almost 12 months. Also, cost of war in Iraq is mounting which is also inflationary.

Inflation leads to high interest rates which drives up the cost of borrowing which leads to a smaller pool of people qualifying for loans which lessens the supply of qualified buyers, which will lead to a softer RE market.

[Calcountry]

Well there was always the why does he think it parallels the stock market bubble. I wasn't sure which you were refering to.My why was that it will be no laughing matter for anyone if the RE market collapses, including the guy who posted it. Everyone will be hurt in some direct or indirect way.

Thats all, its no laughing matter.

[bogie]

I don't have any clue about your local market, just a gut feeling. A year ago, everyone was "making money" in the RE market. Everyone I talked to that had dealings was all excited and it seemed like deja vu all over again(.com days)

I read a book on investing once and it said, you had to know when to part company with the crowd. IOW, just before market collapses, all the "smart money" and all the slackies are all saying BUY BUY BUY, that is when you should sell. When everyone is buying that is when you should sell. The converse is also true. No one can time it perfect, I just had a gut feeling. What have we had, 6 consecutive interest rate hikes? That has to be bearish for the RE eventually.

Had to know that we were in an inflationary invironment due to 50 dollar barrel oil, that has not abated for almost 12 months. Also, cost of war in Iraq is mounting which is also inflationary.

Inflation leads to high interest rates which drives up the cost of borrowing which leads to a smaller pool of people qualifying for loans which lessens the supply of qualified buyers, which will lead to a softer RE market.

I appreciate your input and agree in part. That being said the fact that I held on to the cabin an additional year has added about $40k to the asking price. But yes, I'm nervous now and feel it's a good time to get sell.

[Calcountry]

I appreciate your input and agree in part. That being said the fact that I held on to the cabin an additional year has added about $40k to the asking price. But yes, I'm nervous now and feel it's a good time to get sell.I wish you well.

A year ago, I told a guy that had like 3 homes, to sell one, just to be safe. That way, if it kept going up, he is still cool, but to have some cash if if goes down, will help offset the losses in the 2 he kept.

Whether he took a pet store owners advice or not, who knows. What the fug do I know anyway? :p

[bogie]

I wish you well.

A year ago, I told a guy that had like 3 homes, to sell one, just to be safe. That way, if it kept going up, he is still cool, but to have some cash if if goes down, will help offset the losses in the 2 he kept.

Whether he took a pet store owners advice or not, who knows. What the fug do I know anyway? :p

Very important to diversify. Congratualtions on being a business owner. While I'm sure it's a 24/7 job, it must be nice. I've always wanted to open a hardware store, maybe someday.

[Calcountry]

Very important to diversify. Congratualtions on being a business owner. While I'm sure it's a 24/7 job, it must be nice. I've always wanted to open a hardware store, maybe someday.Like anything it has its ups and downs. Such is life.

[Fat Elvis]

The housing bubble is more of a local phenomenon than national. You folks out there on the coast just have wacky home prices. Around here, it isn't too hard to get a nice new home for ~$100-125/square foot.

[Herzig]

I think in your bigger markets(CA, NY, Chicago) that are seeing double digit yearly appreciation, there will have to be a slow down.

High gas prices have led to higher building costs. In my area, building costs are right around $100-125 a square foot. In the summer of 2001, I bought my first home for $58 a square foot brand new(I got an outstanding deal). Most properties were going for about $70 a sq.foot. at the time.

I'm renting out that first home at the moment...if I sold it now, it would go for about $95 a sq ft...The thing is...they have really slowed down building 3-4 bdroom 1500-2000 sq ft homes around here. Most new homes are 3000+ sq feet, so there's shortage of "starter" homes here.

[Herzig]

The housing bubble is more of a local phenomenon than national. You folks out there on the coast just have wacky home prices. Around here, it isn't too hard to get a nice new home for ~$100-125/square foot.

Where's "here"?

[BIG_DADDY]

My why was that it will be no laughing matter for anyone if the RE market collapses, including the guy who posted it. Everyone will be hurt in some direct or indirect way.

Thats all, its no laughing matter.

Not the guy sitting on the sidelines all liquid ready to take advantage of it. The banks will get run over the coals and undoubtedly ask the govermnment (us) for a bazzillions of dollars because we can't let the poor banks crumble. Naturally there will only be a select few (big banks old money) that will actually get the money allowing for a money grab to take place of monstrous proportions. In the meantime Bush is passing laws that will make it hard to claim bankrupcy to hold us citizens accountable for our actions while big banks will inherit the paper and be on a gravy train like we have never seen before. OF course it won't look that way at first. The aftermath will be a huge bunch of legislation being passed that will appear to protect the poor stupid average Joe but will actually help big banks to protect themselves from fair competition.

In all fairness I haven't done any real good due diligence on this but the ball appears to be teeing up nicely. That is a mirror of what happened in the stock market. Do you realize how few ma pop operations in the investment industry survived? We are about the only one's that I personally know got through it. We still won't have recovered from it though for probably another 2 years. I will say this about the RE market. The big institutional holders of property began selling 2 years ago. The percentage of interest only loans out there is staggering and certainly looks like a big problem waiting to happen. With interest rates rising the mortgage industry is about to dry up like a MO, that's why the big push to get everyone to buy now. That much I know.

[BIG_DADDY]

The housing bubble is more of a local phenomenon than national. You folks out there on the coast just have wacky home prices. Around here, it isn't too hard to get a nice new home for ~$100-125/square foot.

The interest only loans are 1/3 of everything being written even in markets where there is not good demand. People are being put on paper that have no business being there. How much has the house\ing market went up there in say the last 5 years? How proportionate is that to the rise in rentals over the same period of time. That's how you tell if there is an issue where your at too. Want to hear something scary, our rentals in the bay area are down over the last 5 years while our RE values have shot the moon.

[Herzig]

The interest only loans are 1/3 of everything being written even in markets where there is not good demand. People are being put on paper that have no business being there. How much has the house\ing market went up there in say the last 5 years? How proportionate is that to the rise in rentals over the same period of time. That's how you tell if there is an issue where your at too. Want to hear something scary, our rentals in the bay area are down over the last 5 years while our RE values have shot the moon.

Both of my notes are 30 yr fixed conventional.

[Fat Elvis]

Where's "here"?

Lawrence.

[Fat Elvis]

I think in your bigger markets(CA, NY, Chicago) that are seeing double digit yearly appreciation, there will have to be a slow down.

High gas prices have led to higher building costs. In my area, building costs are right around $100-125 a square foot. In the summer of 2001, I bought my first home for $58 a square foot brand new(I got an outstanding deal). Most properties were going for about $70 a sq.foot. at the time.

I'm renting out that first home at the moment...if I sold it now, it would go for about $95 a sq ft...The thing is...they have really slowed down building 3-4 bdroom 1500-2000 sq ft homes around here. Most new homes are 3000+ sq feet, so there's shortage of "starter" homes here.


It is the first time buyers trying to get that "starter home" that are getting pinched in this market. That is where the real price appreciation is hitting folks. The demand is there, but the supply is real limited. Here is Lawrence, homes in the $150K-225K range appreciated by about 10-15% in the past year, but home in the $350K+ only appreciated by 1-3% on average year over year.

[BIG_DADDY]

Both of my notes are 30 yr fixed conventional.

2/3 of all mortgages in the bay area were interest only loans last year, talk about scary. Big Banks are gonna make out on this one way or the other. You either have someone paying you interest forever on an inflated piece of property or you have the other scenario I posted.

[HemiEd]

If we have a sever drop in Real Estate prices, it is going to cause ripples throughout the economy. The people who will be hurt the worst are those that are the least diversified as always. Some poor bastard who used his home as an ATM to go out and buy a big SUV and a boat is going to wake up upside down on his home and a 50 % depreciated SUV and boat. I pitty that person, but the bad thing is, they will come in here and bounce a check to buy dog food when they are in that situation. It all trickles down and I am not looking forward to a bubble bust under no circumstances.

The US economy has no other cards to play. The real estate card pulled us out of the dot com collapse, what will pull us out this time.

What we need is a gradual cooling off of the RE market with prices stabilizing at a sustainable level. That is what is good for the economy as a whole.


Great Post, Rep! :clap:

[Dave Lane]

These interest only loans are a disastor waiting to happen.

They are only interest only for a few years then they convert to a standard 30 year loan. Most are 5 years interest free. Some as many as ten. They make no sense of course but its not the end of the world.

Dave

[BIG_DADDY]

They are only interest only for a few years then they convert to a standard 30 year loan. Most are 5 years interest free. Some as many as ten. They make no sense of course but its not the end of the world.

Dave

Never claimed it was the end of the world, just a bubble.

[Fat Elvis]

They are only interest only for a few years then they convert to a standard 30 year loan. Most are 5 years interest free. Some as many as ten. They make no sense of course but its not the end of the world.

Dave

Actually, they make a lot of sense when you consider that, on average, the typical homeowner only stays in thier home for seven years. During the course of those seven years on a traditional 30 year loan you will only make a scratch in the amount of principle you owe. They make absolute sense if you make two assumptions as a home owner: 1) You will be moving to a different house in a few years, and 2) You believe that property values will continue to rise, even moderately.

Hypothetically, even if you plan on staying in the home for a while longer, they could make sense if you have the fiscal discipline to make extra payments on the principle during the interest only period. Typically, you can pay off more principle that way than with a traditional 30 year note. Most folks, however, do not have that discipline.

They are a killer if property values decline.

[BIG_DADDY]

Actually, they make a lot of sense when you consider that, on average, the typical homeowner only stays in thier home for seven years. During the course of those seven years on a traditional 30 year loan you will only make a scratch in the amount of principle you owe. They make absolute sense if you make two assumptions as a home owner: 1) You will be moving to a different house in a few years, and 2) You believe that property values will continue to rise, even moderately.

Hypothetically, even if you plan on staying in the home for a while longer, they could make sense if you have the fiscal discipline to make extra payments on the principle during the interest only period. Typically, you can pay off more principle that way than with a traditional 30 year note. Most folks, however, do not have that discipline.

They are a killer if property values decline.

Big money is selling, not good odds.

[Dave Lane]

Actually, they make a lot of sense when you consider that, on average, the typical homeowner only stays in thier home for seven years. During the course of those seven years on a traditional 30 year loan you will only make a scratch in the amount of principle you owe. They make absolute sense if you make two assumptions as a home owner: 1) You will be moving to a different house in a few years, and 2) You believe that property values will continue to rise, even moderately.

Hypothetically, even if you plan on staying in the home for a while longer, they could make sense if you have the fiscal discipline to make extra payments on the principle during the interest only period. Typically, you can pay off more principle that way than with a traditional 30 year note. Most folks, however, do not have that discipline.

They are a killer if property values decline.

Yes tough to be upside down in a house for $50k or so. They make no sense at all to me since ALL the increase in the payment is applied to the principal of the loan. If you can then add a extra payment here and there you can really save some bucks. The extra money you pay you are earning 6-7% on which is hard to get. I had a 15 year loan I paid off in 10 by making 5-6 extra payments early on. Haven't had a loan since 1991 on anything so I maybe a bit extreme I guess.

Dave

[KingPriest2]

They are only interest only for a few years then they convert to a standard 30 year loan. Most are 5 years interest free. Some as many as ten. They make no sense of course but its not the end of the world.

Dave


not really. Some last for ten years and most of the rates are adjustable.

Bank United and World Savings are big players in this.

Since I am a mortgage broker I am seeing more and more lender come out with Interest Only

World Savings offers a rate at 1.98 actual rate is 5 percent

The payment goes up 7 percent each year.for the frist 6 years and then it is a variable rate The payments are set up on biweekly payments. The loans are set to be paid off in 22 years. What people do when they take out these type of loans is invest the difference.

[Mojo Rising]

I am not so sure that home loans are going to rise in the near future.

Bill Gross, the guru of the bond market recently stated; "If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe"

The 10 year is what mortgage rates are based on and the secular period he mentions has 3-5 years left.

I do think there are other signs of Irrational Exuberance in the market though.

[SBK]

I make my living investing in real estate, and this is what I think.

When you can watch the evening news and they are talking about what to invest in it's too late. (remember the late 90's?) I wouldn't normally compare because people don't live in their pets.com stock, but....not a good time to buy when the bulls are all buying too. That being said. I am buying everything I can get my hands on right now, (although I actually know what Im doing), but I am buying for less than 50% of what this stuff is worth. Im not holding it either, Im re-selling it because when this market hits the skids I'll be buying the property from banks, that the amateurs lots for pennies of what it's actually worth. That's the property I'll hold until the market returns to today's form. Banks should get killed, but BD is right, the gov't will bail out their stupidity.

My final take, invest your money in education, you'll get a much better return. A good rule of thumb is there are 2 people in a transaction. The one with money, and the one with experience. Almost always the one with the experience ends up with the money, and the one with the money ends up with the experience.

[Nightfyre]

I make my studenthood in business, and this is my take (very much agree with shortbuskid. Also of note I haven't read the thread.)

The real estate market will burst exactly when the interest rates go up again. Why? Because there is a direct relationship.

[Goapics1]

No, He just liked the pic so I decided to have a little fun with it since I believe he's gay.STFU OHHH crap did I say that outloud. :p

Thanks. She is one hot little thang.

[Goapics1]

Oh, she's not so much. I drilled her brains out for a couple of years then threw her out. Now it's Rainman's turn.

ROFL