July 7, 2005

IF IT TAKES THREE DAYS TO SELL A HOUSE WE'RE LIVING IN HOOVERVILLE:

Home sales may have tapped the brakes (Edward Iwata, 7/06/05, USA TODAY)

Realtors across the country tell the NAR that houses are taking a bit longer to sell, according to Lereah. Nor are bidding wars for properties nearly as rabid as they've been in recent months.

In sizzling markets from California to Florida, some houses still sell in a day or two, with 15 bidders vying for desirable properties, he says.

But even some hot regions — Los Angeles, San Diego, Chicago, Las Vegas — are seeing houses stay on the market longer, with prices not rising as rapidly as before.

That should be good for the market, Lereah says, and suggests "a soft landing" is in store for buyers and sellers.


Sometimes the bubble is actually just a rising tide.

Posted by Orrin Judd at July 7, 2005 12:00 AM
Comments

Not in Las Vegas, Los Angeles, New Hampshire, NYC metro area, or especially San Diego, where only 15% of households can afford a home at the median selling price, using conventional lending rules.

Those are all locations with real-estate bubbles.

Posted by: Michael Herdegen at July 7, 2005 10:07 PM

Where's everyone going to live?

Posted by: oj at July 7, 2005 11:20 PM

Michael: I'm no economist, but what does affordability have to do with whether or not a market is a bubble? Seems to me the question is whether supply and/or demand could suddenly change and cause prices to crater. And in housing I just don't see it--demand is so high and supply so low in those places you mention. Even if supply increased by as much as 25% or more in LA, it still wouldn't come close to meeting demand.

Posted by: b at July 7, 2005 11:47 PM

oj:

Where they live now, except that their homes won't fetch the same prices that they do now.

The demand in these locations isn't coming from millions of new inhabitants.

b:

Unless there is continuous demand from buyers outside the community, which is a current feature of all of the markets that I mentioned, affordability determines demand, and thus prices.

For instance, the current boom is largely credited to extremely low interest rates, which have allowed many people who couldn't previously afford to buy a home, to buy one.
That additional demand, and the ability of current homeowners to service more debt due to lower interest rates, has pushed up prices.

Demand is high in the places I mentioned because 40% of new buyers are purchasing second or higher multiple homes as vacation homes, or are real estate speculators.
This type of demand can dry up literally overnight, since they don't NEED to buy these homes - they already have a place to live.
For instance, in Phoenix, which is one of the "hot new markets" that speculators are moving into, there are entire housing divisions being purchased by out-of-staters, with some people buying a dozen at a time, hoping to rent
them out while they appreciate.

That type of behavior drives up prices for all buyers, artificially increasing the perceived or nominal value of existing homes, and depresses rental rates, which in turn decreases the number of people interested in buying a house.

Further, speculators are, by their very nature, risk-takers, and most of them are probably already stretched to the limit of their ability to service debt. Most of them also have interest only loans, which begin to require principle payments after a few years, (31% of new mortgages in '04 were this type), or ARMs, where the payments fluctuate with interest rates.

In either case, if anything causes the real estate markets to stop appreciating, or interest rates rise high enough, then the speculators will either stop servicing the debt, and walk away, or put the properties on the market.
With a surge in supply, prices will drop even further.

Thus, you can see that both supply and demand CAN dramatically change in these bubble markets, because they depend on perfect circumstances continuing, keeping the fickle support of the speculators.

If LA increased its housing stock by 25%, prices would drop by at least 30%, if not 50%. Remember, most residential real estate is a commodity, priced at the margins. If 5% of sellers in a given market are willing to cut their asking price by 10%, then it lowers the value of ALL similar homes in the local area by 10%, except for those with some special feature.

Posted by: Michael Herdegen at July 8, 2005 5:48 AM

oj:

Where they live now, except that their homes won't fetch the same prices that they do now.

The demand in these locations isn't coming from millions of new inhabitants.

b:

Unless there is continuous demand from buyers outside the community, which is a current feature of all of the markets that I mentioned, affordability determines demand, and thus prices.

For instance, the current boom is largely credited to extremely low interest rates, which have allowed many people who couldn't previously afford to buy a home, to buy one.
That additional demand, and the ability of current homeowners to service more debt due to lower interest rates, has pushed up prices.

Demand is high in the places I mentioned because 40% of new buyers are purchasing second or higher multiple homes as vacation homes, or are real estate speculators.
This type of demand can dry up literally overnight, since they don't NEED to buy these homes - they already have a place to live.
For instance, in Phoenix, which is one of the "hot new markets" that speculators are moving into, there are entire housing divisions being purchased by out-of-staters, with some people buying a dozen at a time, hoping to rent
them out while they appreciate.

That type of behavior drives up prices for all buyers, artificially increasing the perceived or nominal value of existing homes, and depresses rental rates, which in turn decreases the number of people interested in buying a house.

Further, speculators are, by their very nature, risk-takers, and most of them are probably already stretched to the limit of their ability to service debt. Most of them also have interest only loans, which begin to require principle payments after a few years, (31% of new mortgages in '04 were this type), or ARMs, where the payments fluctuate with interest rates.

In either case, if anything causes the real estate markets to stop appreciating, or interest rates rise high enough, then the speculators will either stop servicing the debt, and walk away, or put the properties on the market.
With a surge in supply, prices will drop even further.

Thus, you can see that both supply and demand CAN dramatically change in these bubble markets, because they depend on perfect circumstances continuing, keeping the fickle support of the speculators.

If LA increased its housing stock by 25%, prices would drop by at least 30%, if not 50%. Remember, most residential real estate is a commodity, priced at the margins. If 5% of sellers in a given market are willing to cut their asking price by 10%, then it lowers the value of ALL similar homes in the local area by 10%, except for those with some special feature.

Posted by: Michael Herdegen at July 8, 2005 5:58 AM

"Las Vegas' population grew 73 percent between 1990 and 2000"

Posted by: oj at July 8, 2005 6:40 AM

Michael--I can state with 100% confidence that you are completely incorrect about the LA market. Most 'For Sale' signs I see become 'Sold' signs in less than 1 week. I don't think I've ever seen one up for more than twice that. Since there is so much demand, there are plenty of people who aren't willing to wait for a seller to come down on the price, since they know someone else will scoop them if they do.

Posted by: b at July 8, 2005 2:05 PM

For the sake of clarification, by increasing the LA supply by 25% what I meant was if the supply of houses FOR SALE went up by 25% there would be no effect. If the number of actual houses went up by 25% I concede prices would crash. But of course that won't/can't happen for all sorts of reasons. If it could, we wouldn't be in this situation...

Posted by: b at July 8, 2005 2:09 PM

Not in Las Vegas, Los Angeles, New Hampshire, NYC metro area, or especially San Diego, where only 15% of households can afford a home at the median selling price, using conventional lending rules.

This may not prove that those markets are in a bubble, but it says that the market isn't a very good thing for the majority of people who would want to buy a house there.

Where's everyone going to live?

Not in those markets.

What the slowdown, or "soft landing" means is that the speculative component of demand will wither. Which is a very large component of the recent demand in those markets. Those speculators who most recently jumped on the bandwagon, the "biggest idiots", will take a bath and be forced to liquidate. Then the next biggest idiots will be staring at paper losses, and since they leveraged themselves silly to get into the market they will be forced to liquidate also. Prices will drop until the speculative excesses have been worked off.

Typical bubble behavior, it is as old as capitalism. Human behavior doesn't change, there are no "new eras" where markets are concerned.

Posted by: Robert Duquette at July 9, 2005 1:57 PM

So it isn't a bubble at all. There are merely some markets that are momentarily inflated, but will sink back to a more proper valuation.

Posted by: oj at July 9, 2005 2:00 PM

OJ, that is what a bubble is.

Posted by: Robert Duquette at July 9, 2005 3:04 PM

It's what a market is. Some stuff is overpriced. Some under. Some just right. It all sorts itself out.

Posted by: oj at July 9, 2005 4:37 PM

Yes, bubbles are part of markets. They are inflated by irrational exuberance and are deflated by reality. Did you think that they were something else?

Posted by: Robert Duquette at July 9, 2005 8:26 PM

Yes, people generally mean by a bubble somthing whose price becomes so inflated that a catastrophic decline will follow because the underlying commodity has nothiong like the value the price indicates. That was the case with internet stocks, where the underlying product generally had no value. It's not the case with houses in NH, LA or Las Vegas, though their prices may have gone somewhat higher than the market will bear in the short term.

Posted by: oj at July 9, 2005 8:39 PM
« SAVE HIM FOR CHIEF?: | Main | FIRST KILL GOD... (via Judd Heartsill): »