The Bubble Has Burst

[SpringTX]

According to BusinessWeek, the housing bubble in the U.S. has finally burst, and will take as long as 15 years to recover in some places.

In the article, see how they single out "Houston and Dallas" as completely missing the bust (because we missed the boom). I'm not sure if the mini-boom inside the loop would see a bust, since Houston's economy is still booming and housing is in great demand.

http://www.msnbc.msn.com/id/16358239/

In a related article, BusinessWeek lists the cities where the housing market is expected to decline the most: Boston, Chicago, Denver, Las Vegas, Miami, New York, San Diego, San Francisco, and DC.

http://images.businessweek.com/ss/06/10/re...=msnbc_downturn

And in another related article, BusinessWeek lists the "top affordable suburbs". Their one for New York City is West Nyack. They say: "the neighborhood has a median home price of $605,700 (vs. New York City's $963,700)". Hahahaha. Their one for Boston is Sharon, Massachusetts with a median price of $493,900. Sugarland ($248,400) was their pick for Houston.

[TheNiche]

According to BusinessWeek, the housing bubble in the U.S. has finally burst, and will take as long as 15 years to recover in some places.

In the article, see how they single out "Houston and Dallas" as completely missing the bust (because we missed the boom). I'm not sure if the mini-boom inside the loop would see a bust, since Houston's economy is still booming and housing is in great demand.

The only thing that scares me is that we may have missed the price boom only because we have so few barriers to entry for new supply; there are barriers to exiting the market, however, and that's risky. Overbuilding is a very dirty word in my line of work, but it is a distinct possibility.

[Chamo]

According to BusinessWeek, the housing bubble in the U.S. has finally burst, and will take as long as 15 years to recover in some places.

However it is not as bad as many expected..... low interest rates keep helping the industry.

AP

Sales of New Homes Post Gain in November

Wednesday December 27, 10:14 am ET

By Martin Crutsinger, AP Economics Writer

Sales of New Homes Post Better-Than-Expected Gain in November

WASHINGTON (AP) -- Sales of new homes rose in November while the backlog of unsold homes fell for a fourth straight month, providing hope that the serious slump in housing could be ending.

Sales of new single-family homes rose by 3.4 percent last month to a seasonally adjusted annual rate of 1.047 million units, reflecting solid sales increases in every region of the country except the South.

...

The housing industry has undergone a severe slowdown this year following a prolonged boom that had been fueled by the lowest mortgage rates in more than four decades.

What some are calling a recession in housing has been a big factor in the economy's overall slowdown, cutting 1.2 percentage points from growth in the July-September quarter, a period when the economy expanded at a lackluster pace of just 2 percent.

Many analysts believe housing is continuing to act as a drag on growth in the current quarter and will continue to depress activity through the early part of 2007.

....

Sales last month increased in all parts of the country except the South, where they fell by 9.3 percent. Sales were up 22.5 percent in the Northeast, a rebound from a huge 35.5 percent drop in October. Sales rose by 22.4 percent in the Midwest and 19 percent in the West.

Edited December 27, 2006 by Subdude

[Subdude]

Please do not post entire articles of copyrighted material. Just quote and provide a link to the source.

Thanks.

[SpringTX]

The only thing that scares me is that we may have missed the price boom only because we have so few barriers to entry for new supply; there are barriers to exiting the market, however, and that's risky. Overbuilding is a very dirty word in my line of work, but it is a distinct possibility.

But only if the demand falls off. Would an overabundance of supply be much of a problem if we continue to have this relentless demand for housing in Houston?

[TheNiche]

But only if the demand falls off. Would an overabundance of supply be much of a problem if we continue to have this relentless demand for housing in Houston?

If demand is truely relentless, then there is no overabundance of supply and thus no problem.

But that's a big IF. Things do change from time to time, and we're highly-exposed to it.

[MidtownCoog]

This topic has to go down as one of 2006's most annoying.

Today from CNN/Money:

New homes sales: Back from the dead?New home sales rise more than expected and prices post gains despite continued rise in completed new homes on the market.

http://money.cnn.com/2006/12/27/news/econo...dex.htm?cnn=yes

[Trae]

So did it burst or did the bubble not burst?!

[MidtownCoog]

So did it burst or did the bubble not burst?!

Yes ;-)

[TheNiche]

So did it burst or did the bubble not burst?!

Not every perterbation of the economy can accurately be described as a "bubble".

[SpringTX]

So did it burst or did the bubble not burst?!

Well it's nowhere near that simple, because the bubble is a different size in different places, and it doesn't "burst" per se, because most people simply can't sell their homes for $100K less than what they paid for them, so it's sort of a slow "fizzle" in terms of real (inflation-adjusted) growth as it plays out over a number of years. But the short answer is "yes". The housing "bubble" of wild speculation and skyrocketing prices that swept Europe first and has now swept America has finally come to an end.

[bachanon]

i dunno, niche. i could describe alot of things as a bubble. a christian isolated within his/her community is in a "bubble". overly exuberant credit card spending that nears credit limits, while it's difficult to make minimum payments, could be a "bubble" of perceived wealth that is about to burst.

i think one could argue the point that excessive behavior or a pattern of behavior that is bound to end or "pop" is in a bubble. while i agree that not every wave of economic exuberance is bubble, it does indeed, ebb and flow. perhaps you could explain what your concept of a bubble is. i may not have the same idea of a bubble as you (in fact, i'm sure you know something i don't). please explain.

Edited December 27, 2006 by bachanon

[DJ V Lawrence]

What's everyone's opinion here on the re-po home market headed into next year? Is the buy/sale market in Houston stronger or weaker for those looking to make profit off appreciation? Since I've been back, new homes have shot up like crazy in Alief/Sugarland/Katy. SHould we expect a rise in new developments and a drop in purchases of older homes in 2007?

[Houston1stWordOnTheMoon]

Sales of New Homes Rise in November

Sales of New Homes Rise in November; Backlog of Unsold Homes Fall for Fourth Consecutive Month

WASHINGTON (AP) -- Sales of new homes rose in November while the backlog of unsold homes fell for a fourth straight month, providing hope that the serious slump in housing could be ending.

Sales of new single-family homes rose by 3.4 percent last month to a seasonally adjusted annual rate of 1.047 million units, reflecting solid sales increases in every region of the country except the South, the Commerce Department reported Wednesday.

The increase was better than..........

full story here http://biz.yahoo.com/ap/061227/economy.html?.v=7

What's everyone's opinion here on the re-po home market headed into next year? Is the buy/sale market in Houston stronger or weaker for those looking to make profit off appreciation? Since I've been back, new homes have shot up like crazy in Alief/Sugarland/Katy. SHould we expect a rise in new developments and a drop in purchases of older homes in 2007?

Expect change, constant change...............no one seems to know for sure. it changes by the quarter.

[TheNiche]

i dunno, niche. i could describe alot of things as a bubble. a christian isolated within his/her community is in a "bubble". overly exuberant credit card spending that nears credit limits, while it's difficult to make minimum payments, could be a "bubble" of perceived wealth that is about to burst.

i think one could argue the point that excessive behavior or a pattern of behavior that is bound to end or "pop" is in a bubble. while i agree that not every wave of economic exuberance is bubble, it does indeed, ebb and flow. perhaps you could explain what your concept of a bubble is. i may not have the same idea of a bubble as you (in fact, i'm sure you know something i don't). please explain.

In a liquid with relatively low viscocity, such as water, a bubble is something that floats to the top and bursts quickly, possibly leaving a relatively few smaller bubbles that pop one by one, but in short order. In a highly-viscous liquid, like Wolf brand chili, the bubble of gas may reach the surface, expand a little bit more under surface tension for a split second, and pop explosively. In uniformly-and-highly-viscous liquids, such as liquid detergents, bubbles can form from movement of gasses through the liquid and easily become airborne, often for seconds or minutes at a time.

People describe a lot of things as bubbles. I describe them as they are. To me, the only actual bubbles are bubbles and recessions are just recessions, etc. It's just such a cliche...and also a weak analogy.

[segovia]

I wonder how high the price ceiling will rise. Two years ago, Tricon was building high-end homes for 379-479K in the Heights. Comparable homes today are running in the low 600K.

[musicman]

the farther out you buy, the weaker the market. esp for resale.

Edited December 27, 2006 by musicman

[Guest danax]

In a liquid with relatively low viscocity, such as water, a bubble is something that floats to the top and bursts quickly, possibly leaving a relatively few smaller bubbles that pop one by one, but in short order. In a highly-viscous liquid, like Wolf brand chili, the bubble of gas may reach the surface, expand a little bit more under surface tension for a split second, and pop explosively. In uniformly-and-highly-viscous liquids, such as liquid detergents, bubbles can form from movement of gasses through the liquid and easily become airborne, often for seconds or minutes at a time.

People describe a lot of things as bubbles. I describe them as they are. To me, the only actual bubbles are bubbles and recessions are just recessions, etc. It's just such a cliche...and also a weak analogy.

Houston's real estate market was never bubbling, but rather has had a nice, steady foam on it, like the head on a fine beer. (burp).

[houstonmacbro]

I am not sure what to think. Am watching 'Squawk Box' right now and they say the housing market overall is improving. I guess you can have lots of people SAYING lots of things, but what is the Truth (that is with a capital 'T').

[musicman]

I am not sure what to think. Am watching 'Squawk Box' right now and they say the housing market overall is improving. I guess you can have lots of people SAYING lots of things, but what is the Truth (that is with a capital 'T').

the market varies a lot even within Houston .

[houstonmacbro]

Yeah, and I guess they were talking about nationally. It's just interesting that so many people can be (presumably) looking at the same data and arrive at completely different observations.

[The Great Hizzy!]

Houston's real estate market was never bubbling, but rather has had a nice, steady foam on it, like the head on a fine beer. (burp).

Funny, succinct and accurate.

[mpbro]

We're moving to the SF Bay area within the year, so this issue is prescient for us. We're interested in San Mateo County, which is south of SF, on the peninsula. Here's a graph of 9-year median price trends for four cities in the county.

Millbrae, San Carlos, and Belmont (MSB) are "normal" cities. They have similar demographics and good schools, and are (incredibly) "middle class". East Palo Alto has a more checkered history. A gang war during the early '90's recession made EPA the "murder capital of the USA" for a couple years. Since then, the city has gentrified somewhat, but still has bad schools and a lot of crime.

If you look at the graph, note that over a 9-year period, median prices in MSB doubled ($500K-$1M), implying an annualized return of 8%. Median prices in EPA more than tripled ($200K-$650K), implying a whopping 14% return over the 9-year period.

Let's say that the "bubble" will correct in 5 years. In other words, let's say that after 5 more years, the return over the 14-year period will return to a "historical" (please throw me a bone!) average of 5%. To achieve that in MSB, median prices only have to fall only to $990K. To achieve that in EPA, prices would have to fall a whopping 63%, to $395K!

The point of this story: even within relatively small counties, certain communities exhibit bubble-like behavior, while others do not.

Switching gears a little, however, recall that this housing "bubble" has occured against the backdrop of a worldwide commodity boom and double-digit percent devaluation of the USD versus some currencies. I'm not trying to justify the inflated values of Miami condos, but perhaps properties that are backed by actual land assets may be at "fair value"--it's just that our economy has suffered from pretty significant inflation that the Fed surely won't tell you about!

Edited December 29, 2006 by mpbro

[jm1fd]

We're moving to the SF Bay area within the year, so this issue is prescient for us. We're interested in San Mateo County, which is south of SF, on the peninsula. Here's a graph of 9-year median price trends for four cities in the county.

From a housing cost standpoint, Houston to SF is not a good direction to be going. If I was offered a job in SF, it would have to be an insanely huge pay increase (4x or 5x more) for me to even think about it.

[houstonmacbro]

Yeah, with housing costs in the $750k range it would have to be an insanely great salary.

[SpringTX]

You could always rent.

Or spend 40% of yours and your spouse's salary every month on a 50-year mortgage for a modest townhouse in an area bordering a ghetto and located nearly 2 hours drive away from work.

The average household income in The Woodlands is just over $100K. That qualifies you for absolutely nothing in northern California. You can't find a starter home on that salary.

It's funny that similar jobs in northern California don't seem to pay much more than jobs in Houston. There may be more of them in SV. But is $15K more in salary going to qualify you for a home that costs $400K more?

Unless you're one of the few who were lucky enough to buy in California before the boom, there's no way anyone but the very-rich could ever move there today. If your income is close to that of what the President of the United States makes (over $300K/year salary), then you can move there and look for a decent home in a middle-class neighborhood. If not, then you're locked out of the whole northern California area.

Edited December 28, 2006 by SpringTX

[houstonmacbro]

But EVERYONE is not making six figures or close to it. What do people earning $35k - $50k a year do?

[mpbro]

You could always rent.

The average household income in The Woodlands is just over $100K. That qualifies you for absolutely nothing in northern California. You can't find a starter home on that salary.

Unless you're one of the few who were lucky enough to buy in California before the boom, there's no way anyone but the very-rich could ever move there today. If your income is close to that of what the President of the United States makes (over $300K/year salary), then you can move there and look for a decent home in a middle-class neighborhood. If not, then you're locked out of the whole northern California area.

Hmm, $750K house, let's say with $250K down, leaving $500K financed. For a simple 30-year fixed P&I loan, that's $2800/month. Probably a bit much if you've only got $100K in income to work with, but I don't think you'd need $300K/year to be comfortable!

My gut feel on rents is that the equivalent home currently rents for around $2000/month.

I don't dispute the current rent versus own equation in SF. But having lived there during the tech boom (and then bust), I can assure you that rents can be far more volatile than home prices. I watched rents double between 1998 and 2000 for most Silicon Valley locales. And watched them plummet from 2000 to 2002. The area is still effectively in recession, though coming out nicely, and we see rents creeping up. While homes may be overvalued, I'd say rents are currently abnormally low.

The rent/own dynamic is a bit different out there. Ownership rates in San Mateo/Santa Clara counties run between 15 and25 percent. Around 10% in SF County. I don't have a good handle on residential vacancy rates, but I suspect there is slack in the system that depresses rents.

FWIW

[SpringTX]

But EVERYONE is not making six figures or close to it. What do people earning $35k - $50k a year do?

If you earn $35K to $50K, you're probably not the type that would be relocating to another state for an IT job in a corporation looking to hire people from out-of-state. Or, if you are in that category, then you're entry-level and fresh out of college, so you probably don't have any kids and don't mind renting for at least a few more years.

Hmm, $750K house, let's say with $250K down, leaving $500K financed. For a simple 30-year fixed P&I loan, that's $2800/month. Probably a bit much if you've only got $100K in income to work with, but I don't think you'd need $300K/year to be comfortable!

$250K down? That changes everything. I'm guessing that isn't from personal savings. I'm guessing that is from cashing out of a property that appreciated in another "bubble" market in inner Houston or elsewhere, in which case you're essentially just "hopping from bubble to bubble".

For those of us who don't have $250K in "bubble-generated" equity, we would qualify for about a $350K home if we had a $100K annual salary, according to the online mortgage calculators I just fiddled with.

With $250K down, you can probably get at least a starter home in northern California.

The rent/own dynamic is a bit different out there. Ownership rates in San Mateo/Santa Clara counties run between 15 and 25 percent. Around 10% in SF County.

This sounded awfully low to me (10% to 25% of the population in the area owning homes), so I looked around for some data. I found data from the US Census Bureau showing that the home ownership rate for the US as a whole was 69% in 2006 (http://www.census.gov/hhes/www/housing/hvs/qtr306/q306tab5.html). Then I looked up the home ownership rate for San Mateo County it was 61% in 2000 (http://quickfacts.census.gov/qfd/states/06/06081.html). For Santa Clara, it said 60% (http://quickfacts.census.gov/qfd/states/06/06085.html). And for San Francisco County, it said 35% (http://quickfacts.census.gov/qfd/states/06/06075.html). I presume we're looking at different measurements or different definitions or something.

[mpbro]

This sounded awfully low to me (10% to 25% of the population in the area owning homes), so I looked around for some data. I found data from the US Census Bureau showing that the home ownership rate for the US as a whole was 69% in 2006 (http://www.census.gov/hhes/www/housing/hvs/qtr306/q306tab5.html). Then I looked up the home ownership rate for San Mateo County it was 61% in 2000 (http://quickfacts.census.gov/qfd/states/06/06081.html). For Santa Clara, it said 60% (http://quickfacts.census.gov/qfd/states/06/06085.html). And for San Francisco County, it said 35% (http://quickfacts.census.gov/qfd/states/06/06075.html). I presume we're looking at different measurements or different definitions or something.

You are right, thanks for the correction. I forget where I got the numbers I did, but they were wrong.