ok, now you know there’s trouble

Thanks to a Web Alert over at Google, I’ve been reading just about every article printed on housing prices in the Bay Area. After you’ve read a dozen or so, you begin to see a pattern — an economist will say the values in the market have departed from fundmentals; a realtor or someone from a realtor association will sat “no they haven’t – there are more buyers than houses for sale”. In other words, scarcity is all that matters.

Well, now even the realtors ar forced to concede there is more than one force at work in setting house prices; and that a new one is about to start exerting itself:

“In San Francisco, the median home price is $648,000. That tells the story right there,” said David Lereah, chief economist at the National Association of Realtors. “You need a very high median income to qualify for that mortgage. At some point, the cup has runneth over, and something has to give, and that may be prices.”

The tide seems to be turning in the coverage of housing — from “oh my gosh, those crazy house prices just keep on climbing” to “ok, we all know this isn’t real”.

zero down mortgages.

You have to know, right now, at many banks, they are going to great lengths to get your mortgage business — the low interest rates present a great opportunity to grab up customers from other banks through re-financing and bring in new customers through new mortgages.

Now, they’re starting to encourage people to take zero-down mortgages — higher interest rates, but lower barrier to entry for first time buyers.

Mortgage brokers say those who believe they cannot afford a house because they don’t have money for a down payment are wrong. As housing prices have climbed – leaving more and more potential home buyers behind – the mortgage industry has responded with loan programs that allow even those with a short credit history to use, for example, cell phone bills to prove their credit worthiness.

So, this increases the risks for banks, since they initially have no buffer to protect them against default — in a state like California, it really is no protection as the bank is only entitled to the collateral (the house) if the buyer defaults. There’s no going after the buyers other assets.

This is essentially a bet that house prices will continue to rise. Is it rational? Or is this a short sighted maneuver to grab more mortgage businesses? I’d be willing to bet there are more than a few bank employees who’s future bonuses are determined by the volume of their mortgage business.

This might also explain why mortgage rates continue to go down despite a steady rate from the Fed.

Even Greenspan is worried about this one.

thought provoking discussion of group size in social settings

Chris Allen, over at Life with Alacrity has posted a thought provoking discussion of group size. The post takes the Dunbar Number (i.e. the upper bounds on human groups is about 150) as it’s starting point and considers the affect of the purpose of the group (ie survival vs other activities) on the optimal size. Along the way, he provides some interesting references to empirical data from the on-line multi-user gaming. Check it out.

SFGate.com: Bay Area home prices not rising as quickly as other areas

So the Fed has released a study of housing prices nationwide that shows Bay Area home prices not rising as quickly as other areas . Fresno and Riverside, on the other hand, top the list, appreciating at about 20% in the last quarter.

Homes prices in Santa Clara County grew at one of the slowest rates in the nation during the fourth quarter of 2003, while seven other metropolitan areas in California ranked among the top 10 with the highest year- over-year gains, according to a new federal report.

House prices in other Bay Area towns also slowed, tho not as much. Alameda and Contra Costa counties slowed the least.

Seven California metropolitan areas ranked among the top 10 in year-over-year home price appreciation in the fourth quarter of 2003. The Bay Area’s three biggest cities were far down the national survey of 220 cities, with San Jose finishing third from the bottom.

One thing that the article that I wasn’t aware of was the two ways that housing prices are measured: DataQuick uses median house prices from recent sales. The Fed uses data from Freddie Mac and Fannie Mae. The Fed data seems a bit more restricted (no jumbo loans) and tends to move more slowly. Right now, they disagree about how the Bay Area housing market is performing

Still, some homeowners’ experiences suggest that prices may be stagnating, in line with the federal agency’s results. Financial adviser Dan Goldie purchased his Palo Alto home for about $1.1 million in April 2002. Since then, he and his wife, Karole, have refinanced three or four times.

Greenspan: Fannie and Freddie are carrying too much debt

It seems like it should have been obvious that these kinds of trouble were going to appear: Greenspan says that Fannie Mae and Freddie Mac have expanded the portfolio of loans their financing too far ($4 trillion) — so far that the risks could not be adequately hedged in the event of a financial crisis. They’ve been able to do this because, as government sponsored entities, they’ve been give better terms because many believe the government would bail them out in the case of trouble. However, this has never been stated and may not be true.

It seems like this might start mortgage rates heading north — that money that seemed so easy to make on mortgage refinancing may not turn out to be so easily made.

Tom Peters: 16 hard truths about off-shoring

Tom Peters has a list of 16 hard truths about off shoring. I found the list thought-provoking. These two were my favorites:

9. Big Companies are off-shoring/automating almost exclusively in pursuit of efficiency and shareholder value enhancement. (This is not new or news.)

10. Big companies do not create jobs, and historically have not created jobs. Big companies are not “built to last;” they almost inexorably are “built to decline

There are also some quotes at the end that are worth a read.

Greenspan says US Household balances in good shape

Greenspan has taken a look at the health of the average household balance sheet — He likes what he sees.

Decades of low interest rates and extra cash from refinancing have given people flexibility to better manage their debt, the Fed chief said in a speech to a credit union conference.

While elevated bankruptcy rates in the past several years are troubling because they highlight the difficulties some households experience during economic slowdowns, Greenspan said that “bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions and they can be significantly influenced over time by changes in laws and lender practices.”

Most importantly, I guess, the share of income devoted to paying interest+principal on household debt has remained relatively stable over the past couple years, despite increasing debt loads.

Home mortgage refinancings and a solid rise in home values helped to bolster consumer spending during economic hard times as well as during the recovery, Greenspan said.

“Over the past two years, significant increases in the value of real-estate assets have, for some households, mitigated stock market losses and supported consumption,” Greenspan said.

SJ Mercury News: California housing prices hit new records in January

Last months housing numbers are out; looks like housing prices are still rising.

In the San Francisco Bay area, the median price paid for a home in January was $443,000, up 9.7 percent from last year and down 3.3 percent from December.

Year over year price increases have been running around 10 percent since October, DataQuick reported.

So prices were down from the prior month, but that likely reflects a seasonal affect. The rate of increase has been down to 10% from the 15% of previous years for the last three months. I’d be curious to know how much of that 10% accrued in the early months of the preceeding year.

The article also points out that mortgage interest rates have actually decreased in the last couple months. So, that is still providing fuel to the housing increases.