Real Estate Bubble Debate

How to protect yourself if the housing bubble bursts

MSN MoneyCentral:

Are there too many homeowners?
Risky home loans allow people with poor credit to buy a house or more house than they can afford. Learn how to protect yourself should the housing bubble burst.

PULL QUOTES:

I will concede Greenspan’s point that a nationwide decline in home prices is unlikely. In the United States, we haven’t experienced such a coast-to-coast phenomenon since the Great Depression.

But I see bubbly local markets all over the country, particularly on the coasts. And the loose lending practices that helped lead to real estate recessions in the past can’t hold a candle to the free-for-all we’re experiencing now.

Trends driving market risk: (2 of 4 worth reading all)

• Zero-down loans totaled more than $80 billion last year. They were virtually nonexistent a decade ago. Another relatively recent phenomenon is the 125% loan. It allows people to borrow more than their homes are worth.

• Interest-only loans were, until five years ago, almost exclusively a product for the wealthy, who had plenty of real estate exposure in their portfolio. Now they’re being pushed as a viable alternative for the average Joe -- who is probably underestimating the potential risk he’s taking on. (For more details, see “Can you handle an interest-only loan?”) Interest-only loans now make up 25% of all the loans that are securitized, or sold to investors, and are even being pushed in the subprime market.

Which cities are most vulnerable?
A spiking foreclosure rate can set off a vicious cycle in vulnerable markets. Lenders don’t want to hang on to foreclosed homes, so they slash the price for quick sales. That depresses the value of surrounding homes, which can wipe out the equity of other, overextended borrowers, who now become more likely to hand over their keys to the bank, which leads to another round of fire sales and depressed values.

Lenders -- and investors who buy mortgages -- get more cautious, as well, once they’ve been burned. The easy money starts to dry up and appraisals get more cautious, making it harder to get deals done. Potential homebuyers start to delay their purchases, waiting for prices to fall further, which helps fuel the decline.

This was the cycle that helped drive home prices down more than 20% in Southern California in the early- to mid-1990s and delivered similar blows to Boston, Dallas, Houston and Anchorage in the mid- to late-1980s. All these markets had experienced phenomenal price increases before the helium started to escape.

So what should you do if you suspect you’re living in a bubble? Here’s my advice: (1 of 4 tips)

Buy only if you can stay put. In normal markets, it can take three to five years for home prices to appreciate enough to offset the costs of buying and selling. If the market really tanks, it can take a decade or longer.

FULL TEXT:
http://moneycentral.msn.com/content/Banking/Homefinancing/P98896.asp

Davos says US Debt will drive interest rates up

Billionaire's summit at Davos cautioned that the world economy is vulnerable because of the massive federal deficit in the United States. Former Secretary of Labor Robert Reich warned that will translate into rising interest rates on everything in the US, including housing. Add this comment to the excel spreadsheet maintained since 2002 entitled, "Haunted by the Housing Market."

"House of Cards" report warns homeowners could be devasted

Trouble brewing in wake of home refinance boom
Report warns of disaster facing millions who cashed out home's equity
Wednesday, January 26, 2005
Inman News

The report, "A House of Cards: Refinancing The American Dream," found that between 1973 and 2004, homeowner's equity fell from 68.3 percent to 55 percent.

That's because millions of homeowners have refinanced their homes in the last three years to pay off credit card debt and cover basic living expenses, according to Javier Silva, author of the report. "If home values bust, many of these homeowners will be devastated," he said.

The full article is available online for 24 hours at the link below, but thereafter limited to Inman Subscribers. Printed copies are available from The Real Estate Cafe upon request.

http://www.inman.com/inmannews.aspx?ID=44542

You can download a PDF of the featured "House of Cards" report by visiting:

http://www.demos-usa.org/pubs/AHouseofCards.pdf

CAR warns today's marginal buyer tomorrow's foreclosure

NPR reported that real estate sales set a new record last year, for the four straight year. This story appeared one day after the chief economist from the California Association of Realtors made this haunting statement in her association's annual report entitled, "2004 – 2005 State of the Housing Market". Like Massachusetts, California is one of the "hottest" real estate markets in the country.

"The fate of the housing market will be tied mainly to the direction of the economy," Appleton-Young said. "The greatest concern surrounds the current increase in the use of low-down-payment and interest-only ARMs. If the economy should weaken and trigger job losses, there is potential for today's marginally qualified home buyers to be tomorrow's foreclosure."

The quote was included in an Inman.com news story entitled:

California real estate creates home-buying paradox
Proportion of first-time buyers falls to record low in 2004
Monday, January 24, 2005

The full article is available upon request in print form, and is available online to Inman Subscribers at:
http://www.inman.com/InmanNews.aspx?ID=44511

Negative Job growth concerns MA commercial market

Ready to roar (but maybe not here)
Commercial real estate to be hot in '05, report says, but it's wary about Hub

By James McCown, Globe Correspondent | January 12, 2005

Equity investments in US commercial real estate will outperform stocks, bonds, and other asset classes in 2005, a recent research report published by the Urban Land Institute and PricewaterhouseCoopers LLC says.

However, the report is tempered by concern about the fundamentals of US property markets, giving special notice to the Boston market and its negative job growth, corporate mergers, and high cost of doing business.

''Real estate is not sexy or romantic, but it has the attribute people want most today -- income, steady and predictable income," states the opening chapter of Emerging Trends in Real Estate 2005, which is based on interviews with and surveys from top real estate executives and institutional investors nationwide.

http://www.boston.com/realestate/articles/2005/01/12/ready_to_roar_but_maybe_not_here/

WSJ: 59 million more housing units needed by 2030

The Race Is On For Commercial [and Residential] Space
By SHEILA MUTO
Staff Reporter of The Wall Street Journal
Jan. 5, 2005

By 2030, the U.S. will need 44% more total built space than existed in 2000 to accommodate population and job-growth projections, according to a new study by the Brookings Institution.

The study estimates that only about half of the total 427 billion square feet that will be needed for residential and other uses by 2030 is currently standing.

Much of the space needed will be housing. About 109 billion square feet of new and replacement residential space, or nearly 59 million units, will be needed by 2030, the report says. In 2000, about 176.7 billion feet of resid ential space, or nearly 116 million units, existed.

Full text online at:
http://www.realestatejournal.com/propertyreport/newsandtrends/20050105-muto.html