Trouble Ahead???

[Linda_D]

While we here in WNY enjoy some of the lowest home prices in the country, other parts of the nation have been enmeshed in a "housing bubble". Here's an interesting op-ed piece on the housing bubble by Paul Krugman of the NY Times who argues that the housing bubble has already ended, and that could be a problem for all of the US, not just for the areas that have been enmeshed in "housing bubbles".


That Hissing Sound
By PAUL KRUGMAN
Published: August 8, 2005

This is the way the bubble ends: not with a pop, but with a hiss.

Housing prices move much more slowly than stock prices. There are no Black Mondays, when prices fall 23 percent in a day. In fact, prices often keep rising for a while even after a housing boom goes bust.

So the news that the U.S. housing bubble is over won't come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.

Of course, some people still deny that there's a housing bubble. Let me explain how we know that they're wrong.

One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller "Dow 36,000" are now among the most vocal proponents of the view that there is no housing bubble.

Then there are the numbers. Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone.

In Flatland, which occupies the middle of the country, it's easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don't really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can't even get started.

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions - hence "zoned" - makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

In the nation as a whole, housing prices rose about 50 percent between the first quarter of 2000 and the first quarter of 2005. But that average blends results from Flatland metropolitan areas like Houston and Atlanta, where prices rose 26 and 29 percent respectively, with results from Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96 and 118 percent.

Nobody would pay San Diego prices without believing that prices will continue to rise. Rents rose much more slowly than prices: the Bureau of Labor Statistics index of "owners' equivalent rent" rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house - even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That's pretty much the definition of a bubble.

Bubbles end when people stop believing that big capital gains are a sure thing. That's what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990. Soon there was a glut of houses on the market, and prices began falling. By 1996, they had declined about 25 percent after adjusting for inflation.

And that's what's happening in San Diego right now, after a rise in house prices that dwarfs the boom of the 1980's. The number of single-family houses and condos on the market has doubled over the past year. "Homes that a year or two ago sold virtually overnight - in many cases triggering bidding wars - are on the market for weeks," reports The Los Angeles Times. The same thing is happening in other formerly hot markets.

Meanwhile, the U.S. economy has become deeply dependent on the housing bubble. The economic recovery since 2001 has been disappointing in many ways, but it wouldn't have happened at all without soaring spending on residential construction, plus a surge in consumer spending largely based on mortgage refinancing. Did I mention that the personal savings rate has fallen to zero?

Now we're starting to hear a hissing sound, as the air begins to leak out of the bubble. And everyone - not just those who own Zoned Zone real estate - should be worried.

[moonshine]

Linda,

I enjoy your posts, but Paul Krugman is no more of an economist than Martha Stewat is a lap dancer. I didn't even bother reading the article because his opinion is worthless to people who understand economics.

There are many more reputable opinions regarding the housing bubble.

[Linda_D]

I'm not saying he's right, but I've read and heard enough economists and economically-savvy people talk about the housing bubbles on the coasts to think that he makes some valid arguments. Interest rates have been going up, and every rise takes more buyers out of the market, even if they use interest-only mortgages. Eventually, where housing prices are rising abnormally fast, the supply of homes for sale outstrips the supply of people willing and able to buy them at or near the asking price, and the prices start coming down -- and that tends to happen gradually.

BTW, I've found that most economists are very good at telling us where we've been but not very good at telling us where we're going!

[WestCoastPerspective]

The steam is definitely out of the market in Sacramento, prices are still elevated but there are many more homes on the market, they are staying for sale longer, there aren't multiple bids, and are increasingly selling for under asking price. Compare this to a year ago where it was a frenzy: fewer homes for sale, multiple bids over asking price, and prices rising 20 percent/year. Investors and cash-rich Bay-area transplants provided most of the fuel for the fire. Most don't expect a crash here, but 'only' single-digit price increases this year. It can't happen soon enough- the median price in my county is over $400,000. New homes: $500k.

So its definitely happening....and it has happened out here in the early 90's.

[moonshine]

Here is an article that was released today that discusses some of the factors you mentioned:
http://www.lewrockwell.com/thornton/thornton27.html

The so-called "housing bubble" is such a complex situation it really can't be discussed in macro terms. Some markets have remained flat over the past 5 years (Dallas/Ft. Worth) while others have seen their prices skyrocket because of increased international demand (south florida, tampa/clearwater). Ask any RE Agent who is driving the south florida market and they will tell you: Asians and South Americans.

[Linda_D]

Originally posted by WestCoastPerspective
The steam is definitely out of the market in Sacramento, prices are still elevated but there are many more homes on the market, they are staying for sale longer, there aren't multiple bids, and are increasingly selling for under asking price. Compare this to a year ago where it was a frenzy: fewer homes for sale, multiple bids over asking price, and prices rising 20 percent/year. Investors and cash-rich Bay-area transplants provided most of the fuel for the fire. Most don't expect a crash here, but single-digit price increases this year. It can't happen soon enough- the median price in my county is over $400,000. New homes: $500k.

So its definitely happening....and it has happened out here in the early 90's.

What's scary about today's bubbles is that there are a lot more financing schemes out there. There are interest-only mortgages, which were seldom used in the early 1990s. There are also a lot more second-mortgages, too, and a lot of "financial advisors" advocating using second-mortgages as a means of getting money for investments. A lot of people could end up owing more than their homes are worth -- and that tends to force prices lower because people can't "move up".

[WestCoastPerspective]

San Diego real estate is a market not driven by fundamentals. Home prices have been driven to current levels by ubiquitous optimism, a complete lack of risk avoidance, a staggering amount of debt accrual, low lending standards, an enormous increase in market participation, widespread misconceptions about what drives home prices, and an utter dependency on continued price gains. San Diego real estate is in the grips of a classic speculative bubble.


A classic speculative bubble
If current real estate valuations are not driven by population, a housing supply crisis, income growth, or interest rates, what's happened in San Diego to have allowed home prices to get to such lofty heights? Consider the following statistics on San Diego housing activity in 2004:

-- 80 percent of mortgages were adjustable-rate, meaning that many borrowers were speculating that their salaries or home equity would increase faster than their mortgage interest payments.

-- 47 percent of mortgages were interest-only, meaning that many borrowers were speculating that their salaries or home equity would increase faster than their mortgage interest payments and the eventual addition of mortgage principal payments.

-- 27 percent of mortgages involved no down payment, meaning that many borrowers could (and did) use ultra-low rate interest only ARMs with no money down in order to afford far more house than their incomes would typically allow.

-- 37 percent of condo conversion buyers were investors, meaning that, given the comparatively low rents discussed above, the only possibility of these people not losing money is for condo prices to rise enough to cover the current negative cash flow.

And most importantly, as anyone who's read a newspaper or gone to a party knows, it has become a widely accepted fact both in the media and among the San Diego populace that real estate A) never goes down and B) is the place to be if you want to get rich. This entrenched expectation of huge, risk-free equity gains has become priced into the housing market.


http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=486837&ct=1107593

[Linda_D]

Originally posted by moonshine
Here is an article that was released today that discusses some of the factors you mentioned:
http://www.lewrockwell.com/thornton/thornton27.html

The so-called "housing bubble" is such a complex situation it really can't be discussed in macro terms. Some markets have remained flat over the past 5 years (Dallas/Ft. Worth) while others have seen their prices skyrocket because of increased international demand (south florida, tampa/clearwater). Ask any RE Agent who is driving the south florida market and they will tell you: Asians and South Americans.

Moonshine, I think you agree with Krugman more than you realize. Krugman said that in most of the country, real estate gains have been modest, but that on the coasts the prices in some markets have been crazy. Krugman thinks that the housing bubbles in some of these areas are already deflating ... he expects the rest to follow.

Thornton is looking at "why" the housing bubbles might deflate, and he sees rising interest rates as the culprit, and he also thinks that we may see the housing bubbles end (or maybe we already have and it's just not been reported yet!).

Krugman sees the deflation of the real estate bubbles as affecting the entire American economy because much of the current economic recovery has been based on real estate. Certainly the bubbles' deflation would affect regional and state economies.

[moonshine]

Linda,

There's no doubt that I agree with Krugman at times. Even a complete hack like Krugman can get some stuff right.

As a real estate investor, I'm not concerned about a "bubble". I'm positioned to take advantage of increasing and decreasing values, so it makes no difference to me in the end. Furthermore, my exposure to any "bubble" is limited since the WNY market hasn't seen any real appreciation in the low-median income housing markets recently.

[Linda_D]

I didn't mean that there was "trouble ahead" for the WNY real estate market, but probably for some "hot markets" and possibly for the national economy.

[atotaltotalfan2001]

Originally posted by Linda_D
I didn't mean that there was "trouble ahead" for the WNY real estate market, but probably for some "hot markets" and possibly for the national economy.


The WNY real estate market never heated up like it did elsewhere in the nation. But I think the recent revaluations in towns and cities showed housing prices increasing here -- which meant assessments increased.

What I want to know is if the market now losses whatever steam it had,will the assessors go back next year and lower our assessments?

Somehow, I doubt it.

[atotaltotalfan2001]

West Coast, I'm curious to hear what you think of Prop. 13 and the way it imposes limits on property taxes.

(As you know, we have NO limits here.)

I'm curious about whether Prop 13 and the system of assessing and taxing it imposed has had an impact on the California housing market.

Thanks

[moonshine]

totalfan,

Here's an article that ties together the Krugman and Prop 13 tangents. Fun read:

http://www.lewrockwell.com/anderson/anderson81.html


According to St. Paul the Martyr, the current troubles in California began in 1978 when Californians voted for the famous (or infamous, in the words of St. Paul) Proposition 13, which limited property tax rates. Krugman has stated on more than one occasion that because Prop 13 held down property taxes, no longer could Californians fund a good public school system, and from there, everything else went downhill. Of course, he does not dwell on the high income tax rates or the very high sales tax rates, and all of the other ways that the government of California strips money away from individuals. No, this "distinguished" economist declares that if only California had higher property taxes, then everything else would be right with the Golden State.

[WestCoastPerspective]

Here's what I see as Prop 13's biggest impact. Most people only have "x' to spend on housing (30 percent of income roughly). In WNY alot of 'x' is going towards taxes, in CA, taxes are set at 1.25 percent of selling price, so more of 'x' goes towards home price. Therefore, home prices here are outrageous where as in WNY home prices are held down due to high taxes. At least thats how I see it. I know there are other forces: supply/demand, incomes, etc. I never said I was an economist.

As far as government out here, taxes and services. The schools seem to be doing fine (except the big urban districts), they are struggling with keeping up with population growth however. Counties and cities have been forced to ween themselves off the property tax (with a booming real estate market- they're still raking in the dough, and will unless the market collapses and homes start selling for less than previous purchase prices- the homes are not reassessed until resold. If you bought high the assessment stays high). Now communities want to do two things: attract commercial development (SALES TAX!) and high-end homes (BIG SALES PRICE = MORE PROPERTY TAX). So we see goverment's cash needs dictating land use- not always a good thing.

[moonshine]

Holy Smokes!!!


So we see goverment's cash needs dictating land use- not always a good thing.

Round of applause for leftcoast. Maybe you aren't a lost cause after all :D

[Boost Buffalo]

Originally posted by Linda_D
There are also a lot more second-mortgages, too, and a lot of "financial advisors" advocating using second-mortgages as a means of getting money for investments



maybe you're confusing today with Clinton's dot.com bubble. The second mortgages were being written as fast as the stock certificates. When that phony economy crashed all people had to show for it was worthless pieces of paper, not real estate.

[moonshine]

When that phony economy crashed all people had to show for it was worthless pieces of paper, not real estate.

You're right. The worst case scenario I see is people with zero or negative equity in their homes will become prisoners of their homes. Of course this will reduce a family's mobility and cause greater employment risks, but I think we are dealing with a small portion of the population in this situation.

Plus, just because you owe more than your house is worth doesn't mean you can't sell it for less. It just takes some additional wheeling and dealing. Those who are in college right now might consider a career in the loss mitigation dept of a bank. There will be serious demand for that expertise IF the market flattens or declines.

[atotaltotalfan2001]

Originally posted by WestCoastPerspective
Here's what I see as Prop 13's biggest impact. Most people only have "x' to spend on housing (30 percent of income roughly). In WNY alot of 'x' is going towards taxes, in CA, taxes are set at 1.25 percent of selling price, so more of 'x' goes towards home price. Therefore, home prices here are outrageous where as in WNY home prices are held down due to high taxes. At least thats how I see it. I know there are other forces: supply/demand, incomes, etc. I never said I was an economist.

As far as government out here, taxes and services. The schools seem to be doing fine (except the big urban districts), they are struggling with keeping up with population growth however. Counties and cities have been forced to ween themselves off the property tax (with a booming real estate market- they're still raking in the dough, and will unless the market collapses and homes start selling for less than previous purchase prices- the homes are not reassessed until resold. If you bought high the assessment stays high). Now communities want to do two things: attract commercial development (SALES TAX!) and high-end homes (BIG SALES PRICE = MORE PROPERTY TAX). So we see goverment's cash needs dictating land use- not always a good thing.


It's interesting to me that homes aren't reassessed annually -- only when they are sold, which is illegal here.
Someone once told me not being reassessed until sale gives homeonwers incentive to fix up their places. They can put what they want to into a house without being quickly penalized by a higher assessment, as is the case here.


It also allows for some security. Owners don't have to worry about being taxed out of their homes.

Any thoughts on what a Prop 13 might do to this area?

[WNYresident]

Any thoughts on what a Prop 13 might do to this area?

It wouldn't hurt at all. IT would force local governments to realize they are spending too much money and paying themselves and the system far too much.

[WestCoastPerspective]

The also have a program called a 1031 exchange, seniors can buy a new house yet keep the same taxes as the home they were selling, presumably one they've had for decades- as long as both homes are in the same county or there is an agreement between the two.

[moonshine]

The also have a program called a 1031 exchange

1031's are a federal tax law, not state. They apply to anyone that meet the criteria. For example, I could parlay the profits of one of my rehab properties into a long-term purchase, tax deferred.

Maybe I misunderstood your reply. You say there is a state 1031? Is this a piggy-back on the existing fed 1031?

[Boost Buffalo]

westcoast, you're scaring me, where do you come uo with this stuff?

right on moonshine, 1031s are purely for the purpose of deferring capital gains taxes on income producing property or business property when you sell it and replace it with another. And it has nothing at all to do with property taxes or somebody's house.

[therising]

I don't think 1031's apply to owner-occupied properties.

Also, I'd rather spend my "X" building equity than throwing it out the window on taxes.

[WestCoastPerspective]

Oops sorry! Wrong program!

PROPOSITION 60: If you are selling your principal residence in a County, and buying a replacement residence of equal or lesser value in the same County or a County with an agreement with your current County, you may be eligible for transfer of your former assessed value to your new home under provisions of Proposition 60.

Forgive me- hope no one put their CA home up for sale!

http://www.placer.ca.gov/assessor/boe60ah.pdf

[atotaltotalfan2001]

Originally posted by WestCoastPerspective
Oops sorry! Wrong program!

PROPOSITION 60: If you are selling your principal residence in a County, and buying a replacement residence of equal or lesser value in the same County or a County with an agreement with your current County, you may be eligible for transfer of your former assessed value to your new home under provisions of Proposition 60.

Forgive me- hope no one put their CA home up for sale!

http://www.placer.ca.gov/assessor/boe60ah.pdf

So, does that mean the properties involved aren't reassessed upon transfer?

I think that's a wonderful break for senior citizens, although I wonder how California affords it.

[WestCoastPerspective]

The property you would buy wouldn't be assessed for a higher amount based on purchase price- you transfer your old assessment over. Someone under 55 buying your old home would then get a new full assessment.

In theory, you could have two identical homes next door to each other- one owned by someone since 1970 paying $100 month in taxes and the person next door who bought it this year paying $500/month due to Prop13.

[LaNdReW]

Originally posted by moonshine
1031's are a federal tax law, not state. They apply to anyone that meet the criteria. For example, I could parlay the profits of one of my rehab properties into a long-term purchase, tax deferred.

Maybe I misunderstood your reply. You say there is a state 1031? Is this a piggy-back on the existing fed 1031?

Is it possible to keep rolling the 1031's over and over?

[moonshine]

Is it possible to keep rolling the 1031's over and over?

Absolutely. It's one of the few federal laws that actually makes sense. At some point you will be expected to pay the feds the money they demand...unless you have a decent accountant :D

[biker]

Total:

Is that right? Reassessing or revaluing property while someone owns a home is illegal here?

In the City, all homes have been at FMV for the past five or six years.

I thought Rez had a new program when he said anyone 65 or older should never have their taxes go up.

[biker]

I'd rather have the monthly payment go to building equity also, rather than paying taxes.

A personal note:

Due to a thrifty (and, maybe, boring) lifestyle, I've been able to pay off my mortgage, have no car loans and the last kindern is just about through college with no student loans (them or me).

Looking back, the key was to plan on driving each car at least 10 years (which almost led to divorce!). Seems too simple a prescription for financial success, but that's a big part of what worked for me.

Here's the interesting thing.

Watch commercials on TV and radio (ok, listen). You'll be astounded at how many of them are for moving your debt load around or encouraging you to buy the car of your dreams.

If you're out of debt and don't need a car, most of those billions in ads are absolutely wasted on you.

[LaNdReW]

Originally posted by moonshine
Absolutely. It's one of the few federal laws that actually makes sense. At some point you will be expected to pay the feds the money they demand...unless you have a decent accountant :D

I question the demand part.

So, its kinda like the fact that many wealthy, invest with non-taxed dollars...then keep rolling it over and over....then, bitch about the estate tax by calling it a death tax, say it is double taxation......Get it repealed, then, the money is actually NEVER taxed.

Is that how it works?

[LaNdReW]

Originally posted by biker
I'd rather have the monthly payment go to building equity also, rather than paying taxes.

A personal note:

Due to a thrifty (and, maybe, boring) lifestyle, I've been able to pay off my mortgage, have no car loans and the last kindern is just about through college with no student loans (them or me).

Looking back, the key was to plan on driving each car at least 10 years (which almost led to divorce!). Seems too simple a prescription for financial success, but that's a big part of what worked for me.

Here's the interesting thing.

Watch commercials on TV and radio (ok, listen). You'll be astounded at how many of them are for moving your debt load around or encouraging you to buy the car of your dreams.

If you're out of debt and don't need a car, most of those billions in ads are absolutely wasted on you.

You only keep your cars ten years??

;)

[atotaltotalfan2001]

Originally posted by biker
Total:

Is that right? Reassessing or revaluing property while someone owns a home is illegal here?

In the City, all homes have been at FMV for the past five or six years.

I thought Rez had a new program when he said anyone 65 or older should never have their taxes go up.
Hi.


I believe the law prohibiting assessment when a home changes hands is called something like the "Welcome Stranger" law.

I'll look it up.

An increasing number of municipalities are moving to annual reassessments. The state is providing all sorts of financial incentives.

Bad idea, IMO. I know people in Amherst, which is also at full value, who have had their homes reassessed (upwards, of course) four times in six years! It's almost like harassment....

It's too much and frankly I don't see how you can get an accurate feeling for market worth on a yearly basis here. Not that much property changes hands in any given year, IMO, to give an accurate picture of real trends in various neighborhoods.

And I'm not saying that because I've seen my assessments increase. They haven't -- in years and years.

I don't know whether I should be worried or grateful!

[biker]

Originally posted by LaNdReW
You only keep your cars ten years??

;)

Read again. "...at least..."

Current favorite term is 13 years.

[Stevenco]

I emphatically deny any such bubble.