Real Estate Bubble Debate

Bad moon rising: Should home buyers & sellers start "Freaking out?"

First the serious news:  The appearance of rogue economists Steven Levin and Stephen Dubner, coauthors of Freakonomics, on NBC's Today Show has sparked a controversy that has the National Association of Realtors firing back and offering their chief economist or association president to rebut allegations that Realtors work harder to get the highest price for their own properties, than they do for clients who they too often sell short.

Now the weird news, or should we say "Freaky?"  NASA's web site  says...

This week's full moon hangs lower in the sky than any full moon since June 1987, so the Moon Illusion is going to be extra strong."

Makes me wonder if there is a connection between the Moon Illusion and housing prices.  The last housing cycle peaked around 1987, marking a turning point which saw prices slide through the early 1990's in many housing markets across the US.

So if home buyers and sellers are looking for a sign that the housing market has peaked, and the Boston Globe's recent series of headlines on foreclosures haven't already freaked them out, what do you bet that history will recognize this year's summer solstice as a celestial tipping point in hindsight?

Many people have heard about money-making Ponzi Schemes, invented here in Boston in 1919, but who would guess that was six years AFTER something called the Ponzo Illusion -- the phenomena behind the Moon Illusion -- was discovered?  Both make things appear larger than they really are; in one case, the moon and in the other case, return on investments -- like real estate in today's market!  Who would guess that real estate cycles are tied to cosmic events like decade-long lunar cycles?  ;-)  Freaky!

From froth to foreclosures: You ain't seen nothing yet!

Less than a month after Fed Chairman Alan Greenspan first used the word "froth" to describe overheated housing markets, a new "f" word is stealing the headlines in Boston Globe:  Foreclosures!

During the last two days, the Boston Globe has run seven stories -- count em, SEVEN stories! -- on foreclosures in the main and regional versions of the paper.  The lead story on Saturday, June 18, 2005 -- Foreclosure filings jump in Mass. as home values soar -- was the fourth Boston Globe front page story on real estate in the past six weeks.

A second Associated Press story appeared on Saturday, State foreclosure filings jump 28 percent in early part of year, followed by regional versions in Sunday's paper (see list of links below).  According to the Globe:

Secretary of State William Galvin listed numerous factors in the sharp increase in foreclosures, including high housing prices, lenders' willingness to give loans without a major downpayment and people's desires to own something priced beyond their means.

"When you tie all these factors together ... you have a recipe for disaster," said Galvin, whose office oversees the registries of deeds in most of the state's 14 counties.

Headlines in regional editions of the Boston Sunday Globe on June 19, 2005 mirrored Galvin's comment:

In hot market, some feel chill of foreclosure
Loss of dream house is a nightmare for Peabody couple

The real estate boom's flip side: foreclosures
Filings skyrocket as overextended homeowners fall prey to personal debt, predatory lenders

Housing foreclosures expected to rise
Ease of borrowing money, uncertain economy leave some homeowners struggling to keep up

Economic woes hit home, as foreclosure rate soars

In hot housing market, the chill of foreclosure
Number of people losing their homes is on the rise

Many of the statistics used in the lead story and regional editions were from ForeclosuresMass.  The group will be hosting a number of educational events for foreclosure investors in coming weeks, including a FREE one-hour tele-seminar on July 13, followed by a one-day foreclosure seminar on July 23, and a two-day Foreclosure Summit in 2006.

During the last real estate down turn, The Real Estate Cafe's founder, Bill Wendel, helped eight government agencies auction foreclosed properties to low and moderate income households in 50 major cities across 25 states between 1990 and 1995.  Foreclosures during that period increased after the housing market changed.  In contrast, the Globes headlines repeatedly noted that the foreclosure rate is soaring now at the same time that the housing market is still overheated. 

When the market really cools, things will get worse, potentially much worse.  A recent New York Times article called the magnitude of interest-only and adjustable rate mortgages "The Trillion-Dollar Bet" because "$1 trillion of the nation's mortgage debt - or about 12 percent of it - [will] switch to adjustable payments in 2007."  Will foreclosures spike then?

An upcoming article in the July / August issue of The Atlantic Monthly, entitled "Countdown to a Meltdown, speculates that the situation could become so bad that "repossession riots" will occur in some areas.  Do you think that fictitious forecast is irresponsible fear mongering, or foreshadowing a falling market that will make current home buyers look foolish; or worse, candidates for foreclosure in the future?

Greenspan's Interest Rate Conundrum

While Fed Chairman Alan Greenspan once again told Congress he does not see a national housing bubble, he repeated his warning of May 20, the day Greenspan first used the "F" word:

"...at a minimum, [there are] signs of froth in some local markets where home prices seem to have risen to unsustainable levels."  Expressing his concern about interest-only loans, Greenspan added, "To the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace."

According to NPR's "All Things Considered," mortgage rates fell again today and stand at a 14 month low.  In the past, Greenspan has called that "a conundrum" because "falling interest rates have [historically] signaled looming problems."  Greenspan does not see that this time, according to NPR, because globalization is changing price structures, easing concerns of inflation. 

Interest rates at 14 month lows may sound good to some home buyers, but not everyone agrees.  According to Tom Ashbrook, host of NPR's nationally syndicated OnPointRadio, low interest rates may "portend real shocks down the road."  To learn more about "What is behind the low long-term rates and what does it mean not only for the interest rates on mortgages and retirement savings, but for the economy at large" listen to "The Interest Rate Conundrum" online or on 90.9FM tonight in Boston.

Lessons Learned From Riding Two Real Estate Cycles

Following the Massachusetts Association of Buyer Agents panel at Suffolk University Thursday morning, Sooz and I went to a nearby Starbucks to go over the conversations we recorded with some leading buyers agents in Boston.  As we were getting settled, a woman overheard our discussion and jumped in.  She described lessons learned over last two real estate cycles:  first losing money (at least on paper) on a starter condo purchased at the top of the bubble in Philadelphia in the mid-1980's; then purchasing another home at the bottom of the last cycle; and utimately hitting the real estate jackpot in Altantic City.  She and her husband are once again timing the market before making their next move.  When asked what advice to she would give to buyers thinking about buying now, she drew from her experience of loss in the mid-1980's.  It's a perspective some real estate bubble observers say is too seldom heard in the press today.  We invite you to listen in to our conversation at Starbucks.

Stay tuned for podcasts from the MABA panel on "Consumer Protection & Home Buying"

Listen: Real Estate Bubble Audio Time Capsule #2 (MP3, 7 minutes, 3.2M)
Date Recorded: 2 June 2005
Subject:  Lessons learned from riding two real estate cycles
Featuring: Bill Wendel (Real Estate Cafe) and guest Judy, a homeowner from Atlantic City, NJ
Location: Starbucks on School Street in downtown Boston

Capturing the Real Estate Bubble in an "audio time capsule"

This impromptu podcast was recorded last week, and includes some preliminary thoughts about how The Real Estate Cafe hopes to incorporate audio files or a podcast into this blog.  We're also excited about creating an "audio time capsule" to capture different perspectives -- from ordinary homebuyers and sellers -- on the Real Estate Bubble of 2005. 

Listen to the podcast (2.2 MB)

Wikipedia defines podcasting as "a way of publishing sound files to the Internet, allowing users to subscribe to a feed and receive new audio files automatically. Podcasting is distinct from other types of audio content delivery because it uses the RSS 2.0 protocol. This technique has enabled many producers to create self-published, syndicated radio shows." {more info]