May 21, 2005

The Fed starts backing down health of Real Estate Market

From the Wall Street Journal: The Fed Starts to Show Concern Over Bubble.
For a long time, Federal Reserve Chairman Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that housing, unlike stocks, is a local market, so it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out.
But there has been a little more concern creeping into his commentary in the past few months. "We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told a House committee in February. Mr. Greenspan speaks to the Economic Club of New York at lunchtime tomorrow. If housing comes up in his remarks or if he is questioned on the subject by one of the prominent economists there, look for the Fed chairman to mention -- as Fed Governor Donald Kohn did recently -- the upturn in people buying vacation homes, second homes or other homes on the risky bet that housing prices will continue to rise as they have lately.

Mr. Greenspan hasn't yet hit the "irrational exuberance" gong, the phrase he used to warn about the stock market in December 1996. The Fed and other bank regulators, however, this week warned banks to take more care with home-equity loans, noting that such loans are "subject to increased risk if interest rates rise and home values decline." (Did you say decline? Gulp.) Even a slowing of the pace of increase in housing prices probably would dent consumer spending, which, for the past couple of years, has been helped by Americans tapping their home equity.
Other Fed officials have begun to express some anxiety. In a speech last month, Mr. Kohn said, "A couple of years ago I was fairly confident that the rise in real-estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics." Mr. Kohn was a longtime adviser to Mr. Greenspan before his appointment to the Fed board.
No longer. "Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who...may be expecting the recent trend of price increases to continue," Mr. Kohn said.
Interestingly, the one place I saw these speeched headlined, the headline was "Greenspan say no real estate buble". I guess the story is the improbable rise of real estate, not the risk of the real estate market. The thing is that Greenspan only ever speaks about the national market in the aggregate because that's his job. Its not his job to manage regional economies (in fact, that might interfere with his management of the national economy). When he finally recognizes a real estate bubble, it will only be because it has reached national proportions.
Posted by dapkus at 12:38 PM

anybody need an agent?

The LA Times ran A Glut in the Market for Homes last week, an article about how much interest in being a real estate agent has surged.
More than 22,000 applicants took the state's real estate exam in April, nearly three times as many as in April 2003, according to the Department of Real Estate. To handle the surge, the department has rented six test centers around the state to supplement the five it already has.
The last time so many people wanted to sell real estate in California was in 1990. In what might be an ominous sign for the current boom, that year marked a peak in the housing market.
There are 437,000 agents in California, enough to form the state's eighth-largest city. With only 680,000 home sales a year, competition for listings can be savage.
I guess all those day traders had to find something to do. So, each agent gets an average of less that 1.5 sales a year. If the average house price was $500,000, and they kept all of their 3% (which they don't), that's $20k a year. Wow. You'd think the numbers alone would be enough to discourage them. Guess all we need to do sell more houses for more money :) .
Posted by dapkus at 09:29 AM

May 16, 2005


hm. I'm thinking about dusting off my blog and firing it back up. It's become completely infested with comment / trackback spam. Guess I'll have to rebuild it (better, stronger, faster).
Posted by dapkus at 11:20 AM

September 27, 2004

WSJ: Coastal Homeowners Are Now Cashing Out has an article about coastal homeowners cashing out and using their profits to buy less expensive houses outright in less expensive markets.
Is it time to take profits on the real-estate boom? The huge rise in prices in thriving cities on or near the coasts has created an arbitrage opportunity for people who have the flexibility to move: Sell Manhattan, buy Montana. Over the past five years, raging real-estate markets in some coastal areas have more than doubled housing prices, while farther inland prices have risen more moderately. That has stretched the price gap between the middle of the country and the coasts far beyond the norm. The typical home price for the 10 American metropolitan areas with the highest housing prices has jumped to 230% of the national median from 155% five years ago, according to an analysis by for The Wall Street Journal.
The main justification for the current house prices that is given is the shortage of supply in hot housing markets. While I think that argument doesn't have much merrit on its face, it's worth pointing out that this is one way a supply shortage could reverse itself.
Posted by dapkus at 10:07 PM

September 01, 2004

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".
Posted by dapkus at 01:56 PM | TrackBack

March 30, 2004

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.
Posted by dapkus at 10:43 AM | TrackBack

March 04, 2004

Housing Affordability Worsens in California

According to a monthly survey of house prices by the Realtor's monthly housing affordability indexhousing in California has gotten less affordable.
In the San Francisco Bay Area as a whole, just 21 percent of households could afford to median-priced home in January, down from 25 percent a year earlier.
Posted by dapkus at 09:19 PM | TrackBack

March 03, 2004 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.
Posted by dapkus at 08:44 AM | TrackBack

February 25, 2004

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.
Posted by dapkus at 01:05 AM | TrackBack

February 24, 2004

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.
Posted by dapkus at 07:40 AM | TrackBack

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.
Posted by dapkus at 07:31 AM | TrackBack

February 12, 2004 some rental housing markets gasping for air has a story about how some rental markets are down significantly from last year, despite rising house prices.
In areas where the rental market has really taken a beating, such as Atlanta, Denver and San Francisco, landlords are desperate. Not only are they making concessions on rent, they're offering freebies -- DVD players, televisions, vacation packages, even the chance to win a year's free rent. In 2003, rents in the San Francisco Bay area fell 6 percent, according to M/PF Research and Torto Wheaton Research. In Atlanta, rents declined 4.5 percent, and in Denver they've come down 4.3 percent.
Posted by dapkus at 01:56 PM | TrackBack

February 04, 2004

EB Business Times: PMI Index shows rising risk to home prices

Private Mortgage Insurance is insurance that you have to buy when you cannot put down a minimum percentage of the house price as downpayment. Obviously, people who offer PMI are going to be keenly sensitive to house price futures as that determines their worst case should the buyer default on the loan. The East Bay Business Journal has an article about the Q4 rise in the PMI Risk Index. A rise indicates increasing likelihood that house prices will fall. Overall, the rise looks fairly mild. Here's the reasoning:
But PMI analysts reported that despite continued home price appreciation, a lack of significant job growth or a premature tightening of monetary policy by the Federal Reserve could hinder future economic growth. Despite strong economic growth, businesses have not started to strongly engage in the hiring process. Employment growth has disappointed the expectations forecasted by economists. With a rising government budget and trade deficit, an expanding U.S. economy, a devaluating dollar, and increasing commodity prices, many economists are suggesting that the Federal Reserve will tighten monetary policy in the future.
Posted by dapkus at 04:03 PM | TrackBack

February 02, 2004

san mateo times: cost vs. commute

An article in the San Mateo County Times discusses the main trade off many Bay Area house buyers make -- commute vs. cost. It seems like crime and schools are the other two big factors, at least in the Oakland/Berkeley area.
Posted by dapkus at 11:32 PM | TrackBack

January 28, 2004 Fed softens commitment to holding interest rates low

The Fed held rates steady but stocks tumbled when the fed softened its commitment to holding them low.
Economists had widely expected the Fed to keep interest rates unchanged at 1% but pundits had not anticipated a change in the policy statement. "We think this is simply a rewording, rather than a change in Fed's accommodation policy as it conveyed that it 'can be patient in removing its policy accommodation,'" said Ashraf Laidi, chief currency analyst at MG Financial Group.
Presumably low rates increase the risk of inflation since low interest rates increase the money supply. Apparently the risk of deflation is still present in the Fed models and the risk of run away inflation looks relatively small. As long as this is the case, the Fed can leave interest rates low to encourage investment over savings.
Posted by dapkus at 04:03 PM | TrackBack

San Mateo County Times: California is costly to live in

This morning, the San Mateo County Times ran this article on the decreasing affordability of living in California.
The California Budget Project, a Sacramento-based public policy think tank, said in a report to be released today that an increasing number of moderate- and low-income Californians are "locked out" of the housing market. "This is affecting so many middle class people now," said report author Erin Riches. "It's no longer just a low-income problem." The report also said that young people in California are finding it increasingly difficult to buy their own homes here. According to the California Association of Realtors, 19 percent of Bay Area households could afford to buy a median-priced home in November, down from 22 percent last year. Among California's low-income renters, inflation-adjusted household income fell more than 10 percent from 1989 to 2002, from $16,250 to $14,580, making it more difficult to afford housing, the report said. As a result, many people are living farther away from their jobs, resulting in long commute times.
The article also pointed out the downward trends in rents and incomes:
Though average rents in the Bay Area have been declining since the first quarter of 2001, incomes have also been on a downward trend, said Matt Schwartz, executive director of California Housing Partnership, a San Francisco-based nonprofit.
Posted by dapkus at 10:24 AM | TrackBack

January 27, 2004

WSJ: Housing Prices Continue to Rise

The Wall Street Journal had an article on the housing market today (subscription required). The synopsis is that generally the national media house price goes continuously up, roughly in line with incomes; but the picture is sometimes different for local markets:
In a paper to be published soon in the Brookings Papers on Economic Activity, house-price gurus Karl E. Case of Wellesley College and Robert J. Shiller of Yale University find that the national measures of market trends can be very misleading. In most of the country, house prices tend to rise gradually, in line with personal income, they find. But California, New Jersey, New York, New England and Hawaii -- all of them short on land for building new homes -- are prone to lurch from booms to busts or periods of stagnation. The upshot: Buying a house in a popular, land-starved place doesn't necessarily mean you will gain more in percentage terms over the long term. In the 21 years ended in the first quarter of last year, Messrs. Case and Shiller found, prices in Milwaukee more than tripled, about the same as in Los Angeles. The difference was that prices in Milwaukee rose steadily, while Los Angeles rode a roller coaster.
The consensus of the folks in the article was that nationally house prices would continue to rise this year, though some local markets may be see flat or declining prices. Some see signs of bubble mentality in some of th e hotter markets. Here's an opinion from some San Diego realtors:
Messrs. Case and Shiller, however, see signs that a bubble mentality has developed in some of the hotter markets. Last year they surveyed 700 people who had recently bought homes. The survey found that many of these people had very high -- and probably unrealistic -- expectations of how much home prices would keep rising. On average, respondents in the San Francisco area thought prices would rise nearly 16% a year over the coming decade. Another sign of self-delusion: Some people surveyed thought prices in places like San Francisco and Boston should continue to rise faster than those elsewhere because they are such attractive places to live and there is little space for new housing. Those factors do explain why home prices in those cities are relatively high, the authors note, but they don't mean that prices should keep on rising at a faster rate. Alas, write Messrs. Case and Shiller, "the single-family home market is a market of amateurs, generally with no economic training."
[via Asymmetrical Information]
Posted by dapkus at 08:52 PM | TrackBack

January 22, 2004

SJ Business Journal: Bay Area Home sales surged at year's end.

According to the SJ Business Journal, houses are still selling like hotcakes.
Home sales in the Bay Area experienced their strongest December in more than 16 years as prices moved to new highs, says DataQuick Information Systems, a La jolla-based real estate information service. Santa Clara County led the sales pace among the nine counties included in the report.
I thought this was interesting:
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,045 in December. A year ago it was $1,913. The peak was in May 2000 at $2,124.
That's the first time I remember seeing that statistic quoted. I'd love to see a graph of that.
Posted by dapkus at 02:33 PM | TrackBack more on declining Bay Area rents has another another article on the decline in Bay Area rents, with a more detailed data on the decline. It also talked more about relationship to house prices.
... Other economists think the discrepancy between falling rents and rising house prices can be explained. Expensive house prices boosted demand for rentals among new arrivals during the Bay Area's late-1990s economic boom, said Steve Cochrane, an analyst for, a West Chester, Pa., firm. When the economy tanked, tenants moved out and homeowners hung on, so the rental market took the brunt of the slowdown, he said. And cheap loans tilted the playing field further toward home purchases, said Christopher Cagan, an analyst for First American Real Estate, a title insurance firm: "Low interest rates have made a lot of renters into buyers." Michael Sklarz, an analyst for Fidelity National Information Systems, another title insurance firm, dismissed Baker's bubble argument as "naive" and saw limited risks to homeowners. "You'd have to see substantially higher (mortgage interest) rates for the so-called bubble" to deflate, he said. But Cagan saw another danger: home buyers relying on adjustable rate loans or introductory rates to leverage their buying power could be vulnerable to a downturn. A bubble, he said, is "a market driven by psychology" rather than economic fundamentals. Gimmicky lending has some worrisome similarities to a bubble psychology, he said.
Posted by dapkus at 01:37 PM | TrackBack Affordability and Unemployment Will Spur California Foreclosures sees a rise in foreclosures in 2004
"Only one in four California households make enough money to afford a median priced home in this state," said Alexis McGee, president of "In many California communities, the situation is worse." Ms. McGee cited a January California Association of Realtors report that put affordability at 19% or less in several Bay area counties in the north and as low as 15% in Santa Barbara. "California markets have stayed hot longer than anyone thought they would, partly because the state has gained more than 500,000 in population each year for the last four years," said Ms. McGee, "but incomes are just not catching up." She went on to say that the disparity between incomes and prices combined with rising interest rates would put downward pressure on home prices this year, and that, she said, would bring an increase in the number of foreclosures. "We're already seeing a rise in foreclosure activity," said Ms. McGee. "Almost 16,000 California homes went into default in the third quarter of last year, a little over 3% more than in the second quarter." She added that persistent and protracted unemployment was a contributing influence.
Posted by dapkus at 12:54 PM | TrackBack Bay Area Rents Slump has an article about the slump in rents last quarter -- down 4% Bay Area wide. Selected quotes:
Bay Area tenants saw further rent decreases in the fourth quarter of 2003 despite earlier evidence that prices -- which have tumbled dramatically during the last three years -- were poised to rise. ... Those concessions seemed on the verge of subsiding in the second and third quarters of 2003, according to Latham. That's when occupancy rates in some locales edged toward the 95 percent level -- usually a turning point when landlords take the opportunity to boost prices. Although occupancy rates in San Jose remain closer to 93 percent, in San Francisco and Oakland they hover near 95 percent. However, prices dropped further in the fourth quarter, due in part to anemic job and income growth. "There's a strong parallel between (rent) growth and apartment demand curve," said Latham. "And when you realize that in October there weren't any new jobs, and that we actually lost jobs in the Bay Area, that put a damper on the market." One landlord has an alternate theory: Low interest rates are enticing renters to buy homes. ... Simply put, many housing experts say rents and home prices should generally move in the same direction, in part because the same economic drivers -- unemployment and shrinking income -- affect both. In addition, the price of any asset -- whether it is a stock or a condo -- should reflect its future income stream. As such, the price of a home should reflect the income if the property were rented. Therefore, the divergence between rent and home prices doesn't make any sense, the experts say, and could mean that home prices are too high and due for a correction. "When you buy a house, you're placing a bet on future economic growth," said Ed Leamer, director of the UCLA Anderson forecast. "But when rents are declining, as they are in the Bay Area, then placing a bet on economic growth isn't a good idea."
The rental expert quoted in the article expects rents to go up modestly this year, though they don't provide a concrete explanation for why. Because rentals are hovering near 95% in some areas? I guess, though it appears the Bay Area is still losing jobs and people.
Posted by dapkus at 11:59 AM | TrackBack

January 20, 2004

a perspective on the Florida housing market

BusinessPundit offers a perspective on the Florida housing market, as someone who just sold a house there:
We put our house here in Melbourne, FL up for sale on Saturday. Sunday it was in the MLS. Monday we received our first offer. Today we received our second offer, full asking price. I think there is a real estate bubble here. I thought we were asking about 3-4% too much for our house already. We had planned to simply rent the house, and hope that someday we could use it as a winter home and split time between here and Kentucky. But I recently read this in the Economist. _In 1929 John D. Rockefeller decided it was time to sell shares when even a shoe-shine boy offered him a share tip._ Everyone I know has been telling me you can't go wrong with real estate, it never goes down in price, and that my house will double in value over the next 4 years - especially people who know nothing about real estate except that they bought a house and it has gone up a lot. Real estate is a good investment, but it isn't that good. So we decided to sell. I think we are doing so near the top of a bubble, or maybe more like a plateau that is leveling off. I just don't think homes will sell in 3 days when interest rates go significantly higher.
The comments also raised some interesting points.
Posted by dapkus at 09:51 PM | TrackBack

January 16, 2004

SD Union Tribune: house prices impact recruiting in SD

The San Diego Union Tribune ran a story today about how house prices are affecting companies abilities to attract new employees to the area.

"Pricing is now almost on par with the Bay Area," said Brad Little, an executive recruiter for San Diego's R.J. Watkins & Co. "San Diego is at a distinct disadvantage."

The county's median home price has more than doubled in the past five years, ending 2003 above $400,000 for the first time. Just 16 percent of San Diego County households can afford a median-priced home, according to the California Association of Realtors.

"Some people we just can't attract," said Phil Williams, director of corporate staffing for Science Applications International Corp. "They tell us, 'As great as it is, I just can't afford the housing.' "

One of the engines that drives house prices is demand -- sounds demand is dampening as salaries fail to keep pace and / or justify house prices.

Posted by dapkus at 01:34 PM | TrackBack

January 14, 2004

Contra Costa Times: Bay Area Slips in Productivity

McKinsey and Co. did a study of productivity in the bay area, and found that local economic factors are costing us our edge.

Rising home prices, soaring premiums for workers' compensation, stubbornly high electricity costs and lengthening commutes have all eroded the Bay Area's ability to compete in the national and global marketplace, the McKinsey & Co. study suggests.

For decades, this region has had a high cost of living. But the problem is particularly acute now since home prices remain high, even amid the loss of more than 300,000 Bay Area jobs in recent years.

"The Bay Area is losing its competitive edge," said Lenny Mendonca, a McKinsey director.

The consequences could be dire if policy makers fail to remedy the workers' comp, housing, electricity and other woes that afflict the Bay Area.

"If nothing is done, the Bay Area would have a New Economy version of Detroit," Mendonca said. "You'd have people moving out, fewer jobs, falling home prices. You'd have deteriorating schools. It would remain a great tourist town, but I'm not sure that's where we would want to live."

Posted by dapkus at 08:44 AM | TrackBack

January 12, 2004

house prices and california's budget

Bay Area Housing prices were identified as a risk to Govenor Schwarzenegger's budget. The relevant text below:
Ken Rosen, a professor at UC Berkeley's Haas School of Business, fears that the super-heated housing market in the Bay Area and, to a lesser extent, the rest of California could finally start to cool off this year and next. Rosen pointed out that statewide housing prices have soared about 37 percent in the past two years. "Whether it's a home-price bubble or excess appreciation, there is certainly some risk that prices can reverse," Rosen said. Suppose price increases do slow or flatten? Some economists warn that means homeowners might have less cash to extract from the equity in their houses, effectively slashing their spending power. And if interest rates rise, that could be a further threat to California's crucial housing market. "There would be a weaker economy as a result," Rosen said. "There would be less home building and fewer real estate commissions. People would have less wealth." But an industry executive counters that the California housing market still looks pretty strong. "Demand for housing continues to exist, even with the tough economy," said Guy Bjerke, an executive with the San Ramon-based Home Builders Association of Northern California. "In the Bay Area, we are tremendously under-supplied for housing. The only thing that could rain on the parade for housing is if interest rates dramatically spike."
I buy the the under-supplied argument in the long run. It's important to remember, though, that prices are determined by supply *and* demand. So, although the supply-side definitely points up for housing prices, demand side is more ambiguous. The demand side is constrained by the ability of home-buyers to carry the mortgage given their current salary and the available interest rates.
Posted by dapkus at 11:06 AM | TrackBack

January 05, 2004

SJ Mercury News: More home buyers choosing ARMs

The SJ Mercury news had an article over the holiday about the increasing use of adjustable rate mortgages (ARMs) in California.
In response to rising home prices and mortgage rates, an increasing portion of California home buyers are opting to finance their purchases with adjustable-rate mortgages, a real estate information company said Friday. Santa Clara County had the highest percentage of buyers who financed their homes with adjustable-rate mortgages, or ARMs, of any area in the survey: 68 percent. The survey by DataQuick Information Systems looked at home sales that were completed in November.
I take this as evidence of two things: (1) people are looking at mortgage payments, not house price when determining what to pay for a house; (2) the market has pushed buyers to the limit of what they can afford -- now that interest rates have levelled off, buyers are taking on increasing levels of risk to match still-rising house prices. It seems clear that the interest rates on these ARMs has nowhere to go but up; seems unlikely that buyers will be able to re-fi their way out of this later. I have a hard time seeing this as anything other than an act of desperation on the part of buyers.
Posted by dapkus at 11:22 AM | TrackBack

December 15, 2003

new home prices fall in the bay area

I ran across this article today in the SV Business Jounral: Bay Area new home prices fall
A sharp fall in new home prices in several Bay Area counties may be the long-awaited signal that the price appreciation boom in California homes may come to an end next year... The steepest drop was in Alameda County where median new home prices fell 25.9 percent to $453,250 in October 2003 compared to the same period a year ago, says Alexis McGee, president of Prices of new homes fell 15.5 percent in San Mateo County, 14.1 percent in San Francisco, and 11.2 percent in Santa Clara County year over year.
Posted by dapkus at 01:37 PM | TrackBack

December 09, 2003

fortune: your house may soon be worth less

Fortune has an article this month on The New Home Economics. You can't read the whole thing unless you're a subscriber (I'm not), but I thought this quote was pertinent:

"In housing, Americans typically are buying a monthly payment," says Mark Zandi, a housing specialist with "So if rates fall, bingo! They're willing to pay $500,000 for a house that two years ago sold for $400,000 because the carrying costs stayed the same."

So, reversing that, you'd expect rate hikes to lower housing prices. Given the recent talk from the Fed, it seems unlikely that rate hike is a danger to housing prices in the next few months; and even after rates start to rise, it's likely they'll do so gradually with the hopes of avoiding a nationwide bust. Seems like the greatest dangers to housing in the short term is that talk of a housing bubble refuses to die and metro area rents are on the decline.

This behavior of letting the payment set the price seems dangerous since, with low rates, it leads you to increase your debt without regard to your equity.

[via Business Pundit]

Posted by dapkus at 11:08 PM | TrackBack

metro rental markets at historic vacancy rates

Tom Brown's has an article about the decline in metropolitan area rents:

SINCE EISENHOWER WAS PRESIDENT: Here's the most compelling sign yet that the housing boom will cool any minute: the vacancy rate for rental units hit 9.9% nationally this past summer.That's the highest rate since the government started keeping records in 1956. Nearly half a century! Rents are now falling in 80% of the metropolitan areas in the country

Not surprising since our population isn't swelling -- all these new home buyers are folks exiting the rental market. This spells trouble for housing P/Es.

[via Jay Solo's Verbosity]

Posted by dapkus at 10:44 PM | TrackBack

December 08, 2003

are bay area housing prices sustainable

I've been doing a little poking around on the topic of bay area housing prices. I've had several people tell me that buying a house in the bay area is like buying a license to print money. Sounds suspicious to me, especially given the arguments they use when pressed for an explanation: most point to the past performance as the indicator -- not the best predictor.

So I was curious what you'd find if you looked at the underlying forces that drive housing prices. According to the Fed, housing prices and rents for equivalent properties are linked -- they roughly follow each other.

Nationwide, the low interest rates have been driving renters into the houseing market and this has generated a modest imbalance. The imbalance is small enough that a year or two of stagnant house prices and average rent increases will return the prices to equilibrium. This is why the Fed has been saying they don't anticipate a housing bubble.

This is not true for the bay area however: rents here have been declining sharply, as salaries decline, the area loses population, and people exit the rental market for the housing market. Economist Ed Leamer, head of UCLA's Anderson Forecast, looked at the home P/E ratio, the ratio of a house's price to the earnings potential of the house via rent. Using that measure, the Bay Area is 7% over it's record P/E from 1989. The same is not true for all areas. For example, LA has seen housing prices matched with rent increases and is currently 17% below its P/E ratio for '89.

I personally don't question that, long term, demand will outstrip housing supply in the area -- its the best place I've ever lived. But, it looks to me, in the short term, the Bay Area is due for a correction. The only question, in my opinion, is timing.

Posted by dapkus at 11:29 AM | TrackBack