I’ve been waiting for the housing crash for awhile. I’m not an expert, but it has seemed to me that we have:
- a lot of empty existing units;
- a ridiculous excess of new units being built;
- absolutely insane financing deals being offered; and
- accelerating foreclosure numbers.
In other words, a perfect storm is brewing.
This has been especially true here in Denver, where despite dangerously high foreclosure rates and significant empty inventory levels, they seem to build a new suburb every week. To make matters worse, even a novice like me can smell disaster in the wind when I start hearing ads on the radio for 50-year mortgages and sub-interest only financing. We’d love to buy a house now that we’ve decided we’re going to be back in Colorado for good, but buying right now seems like suicide.
Well, the bubble may be finally be bursting. Bonddad, who knows this stuff a lot better than I do, sums it up:
Basically we have a glut of homes on the market and have had a glut of homes on the market for some time.Starting is say mid-2004 lenders started to get really aggressive in lending to people with bad credit. The basic issue here is lenders had pretty much exhausted the pool of solid credit risk, but lenders still wanted to make money. Hence, the easy liquidity.
Now lenders are returning to “prudent lending standards”, basically meaning they are returning to the traditional way to doing business. That means concepts like a track record of paying bills is now important again.
So let’s add all of these factors together.
— Inventory of new and existing homes is incredibly high
— Lenders are tightening Credit standards
— The pool of good mortgage risk is small
That means the housing market is going to be facing a terrible remainder of the year.
I guess my layman’s sense is that a correction has been due. But can we get a healthy correction without triggering a nasty recession?
Guess we’ll see. Meanwhile, we’re going to rent for another year or two, if that’s okay with everybody…
I truly respect your blog. Excellent content. As for the housing market…it is in trouble here in Denver. They are predicting at least 9000 foreclosures by the third quarter. Yikes. I am a broker. Today, American Home Mortgage will filed for bankruptcy and fire all, but something like 2% of their workforce.
Another story not publicized is the NAACP class action lawsuit against 15 of our most prominent ‘Lenders’.
Thanks, and let’s hope it’s not as nasty as I’m afraid it’s going to be. I can’t imagine what it’s like being a broker right now.
There are a lot of people who have been culpable in getting us to this stage, and I wish there was some way of making sure that they were the only ones paying for their sins. As it is, a lot of people who only wanted a home are about to get ruined….
Party like it’s 1929. 😉
Is it possible that there are actually two fat thin-walled bubbles – one in real estate and the other in stocks? With the current concentration of wealth (income producing assets rather than survival income), not to mention rampant distrust of the present regime after Katrina, a double-barrel bust could result in the political and economic realignment from hell for those at the top.
Nouriel Roubini has had some insights into this unfolding mess he’s been tracking the last few years. James Howard Kunstler too as Bonddad and The Big Picture.
A couple of questions I have are:
1. why not just dismantle the Federal Reserve. The Fed chairman has enabled this problem.
2. If this is so bad as with the other things the Bush Admin has done, where are the people marching in the street in protest?
My wife keeps track of the housing situation around our neighborhood and our old neighborhood so we don’t get surprised. Since we left our old house (and took a bath in leaving), the value of the house has dropped another $15,000 from when we left.
What’s really scary is this: the new neighborhood (by zip code) is ranked third in sales across the Denver metro area, and sales declined by 3.71from last year – only one zip code actually had sales increase from last year.
The housing market is like this across the country, though in some areas it is worse than others. Where I live we have business and rental saturation, with more units being built. Since the clientele is largely college students and 85% of the property is held by 5 businesses, the small-scale landlords will be hit worst.
I am not an economist or market analyst either, but I think if the biggest issue is the housing market the correction we see is like the recession of the early/mid-90s. There has been talk of bigger issues: rising unemployment because of shipping jobs overseas without influx of alternative businesses, huge debt (credit card and tuition) for people coming out of college and for people just trying to get by on the work they can find, trade deficits with other nations and regions across the globe. If all of that comes to a head at once, it’ll be far worse.
Colorado’s leading the pack.
State by state foreclosures since 2006
Here are some other charts.
I’ve been following this issue for years, and so far the worst of my predictions are being borne out. We’re in the middle of a massive overall credit crunch that will make it much harder for anyone to get loans for home buying, and the extensive overbuilding of the current market will ensure that those homes don’t get bought unless prices drop considerably–which will cause property values to drop all around.
That, in turn, will further slow consumer spending, as homeowners will be less inclined to use home equity for big-ticket purchases, and rising gas and food prices will push many wallets back into the pocketbook.
The slowdown in home construction will affect all the industries involved with that process, now with the added wrinkle of having tons of “undocumented” day laborers filling up unemployment offices and causing strains on public welfare systems.
It’s a terrible bit of business and it makes me glad I rent. Hopefully it will have flattened out in the next few years, but the economic pain is going to be disastrous and long-lasting for many.
I’m not too worried about this market correction. The people who are going to be affected are those trying to transition (buy, sell, refinance) and those who got an adjustable rate mortgage or have a HELOC. If you got a fixed rate mortgage and don’t plan on moving, the fluctuations won’t affect you too much unless your job is also tied to the housing market. Heck, it might give you a break for a few years on your property tax bill.
I admit I fall into the “it’s your own damn fault” camp. Financial people have been screaming for years at anyone who would listen not to get an adjustable rate mortgage or HELOC during these record low rates, duh, they are going to go back up. If people weren’t willing to listen, well they can dig themselves out of their own hole. I spend a lot of time on financial sites helping advise people with digging themselves out of $100k of credit card debt and other situations. The biggest thing is convincing people the difference between wants and needs and that no matter how deep the hole, getting out of it on your own is possible. I think sites like that will get a lot more traffic over the next few years.
I don’t think it will destroy the economy. Once people get to be debt free they have more available money, since less of it is going to interest payments. They will still continue to buy big ticket items, they will just save for them first. They will stop some money-wasting behaviors (paying for lunch out every day, premium tv channels they never watch) but spend the money another way, including investing. They will also have learned to watch their credit score and hopefully to fight back when someone offers them subprime terms (many people in subprime loans actually qualify for prime). These are my observations from watching people metamorphose on the site from “oh my god we’re never going to make it” to “we’re out of debt, have our 6 month emergency fund, we’re putting the max away for retirement, and hey, we have enough in the vacation fund to take the whole family to Disneyworld next year!”
Many of the victims are going to be people who wanted a home badly, and desperation + lack of knowledge is never a good thing. I can excuse them, but I can feel badly for them (speaking as a guy who still owns a home on the other side of the country that he shouldn’t have bought).
That said, I still have a good bit of malice for the lenders behind a lot of these too-good-to-be-true loans.
Gee, for me it’s more like, “maybe, if I can ever get out of debt, I’ll be able to go into more debt so I can have the surgery I need and have no health insurance for!”
But hey, save your lunch money and go to Disneyworld, by all means. You got yours.
Sinverly, you talk like you think there was some social contract or something where the United States promised to work to “promote the general welfare” or something. (That sounds a little “socialistic,” don’t you think?)
Oh yea, there WAS that thing called the Constitution of the United States, but that’s been religated by the current administration to being “quaint” and “just a piece of paper.”
From now on, it’s “every rich person for themselves and the rest can starve and die from simple diseases and illnesses, untreated, for lack of insurance.”
But hey, at least gays can’t get married.
Back when the banks, financial brokers, refinance organizations, etc. were hustling to get your name on their loan I was very very skeptical.
I remember once when arriving home after a tough day on the job the phone rang and I answered and found on the other end a loan
officer peddling his wares to refinance my home.
The salesman before I gave him a chance to sell me I told him to get another job. He asked why and I told him then that his company will
be taking peoples homes from them when they find their ability to pay has dwindled to nothing. This was especially after he told me that I could borrow 125% of my equity. What a bargain??
I was taught a 100% of anything is all of it.. anything extra is banking
on a bet.
THe time has come when these people who borrowed are paying
equity loans beyond the value of their homes and beside their incomes have staggered during the Bush administration.
Tell tale signs of disaster…
Worrying about this is making me crazy. I just moved to the Metro DC area. Homes that were on the market when I moved here in March are still sitting on the market because they at unrealistically priced, even for Old Town/Alexandria area. I love Old Town Alexandria and I would love to live here, but everything is so overpriced it’s obscene. I keep hoping the correction to prices will hit faster (i.e., beat further mortgage rate increases).
Additionally, I am pretty leery of buying right now because I’m afraid that the bubble will burst here even more than it already has. I don’t mind not making a lot of money on what we buy, and I know we will get a tax write off for the interest we’re paying, but I don’t want to find that what we buy this year will be worth 50k-100k less when we go to sell in 7-10 years.
One of the reasons there are so many foreclosures in my area is there was so much (over) speculation on real estate here. This resulted in folks over bidding above the list price, tons of bidding wars and people not minding because they assumed the prices would increase even if they were paying 20-50k more than the place was worth. In DC/VA there are lots of luxury condos that were built that are being converted to apartments because they can’t sell the units.
The foreclosures have also affected a lot of the condos because folks have simply stopped paying their condo fees. I’ve read in the post and other local papers that a lot of smaller condos are having to dip into their cash reserves to keep running.
So I’ve been looking at houses and neighborhoods and just trying to figure out where I’d get the best value for my money without having to commute one hour each way into the city. Right now it’s just research, the serious house hunting starts around Christmas time since my lease is up in March.
I also wonder if we shouldn’t simply bank the money I made selling my other home out west and just rent until everything settles down, but man that will hurt at tax time.
I know a guy who has worked for Wells Fargo doing mortgage paperwork for a few years. He has about three weeks left before he’s out in what seems like several waves of firings he’s told me about. Says you could say they are laying off “floors” of people.
My granddad and grandmother, former real estate investors, who still follow the markets seriously advised me a year ago that the real estate market would die in late 2007. Quess what? They were right.
Did they have any idea when it might be safe to wade back into those waters?
Elizabeth Warren wrote about foreclosures a year ago. She said that a Liberal was a former Conservative who had their home foreclosed.
The run-up in housing prices has created a group of cash-strapped but house-rich owners who are particularly vulnerable when hit by emergencies, such as the loss of a job or medical problems.