there won't be a crash in Rockford
from an NPR show
Coastal Housing Bubble May Be Set to Burst
http://www.npr.org/templates/story/story.php?storyId=4572672
and from the left coast
San Francisco Bay Area Housing Crash Continues
Charlie Munger of Berkshire Hathaway: "There are some very extreme housing price bubbles going on."
Foreclosure listings nationwide went up 50% from February to March 2005.
PMI mortgage insurance now refuses to insure more than $350,000 of risk in speculative markets like San Jose/San Francisco.
A large majority of Bay Area houses are now bought with interest-only adjustible rate mortgages, exposing owners to bankruptcy.
New house sales plummet 9.2% nationally in January nationwide, while median prices fall 13%.
Speculators now account for 25% of all purchases nationally, and an additional 13% are vacation houses, making a market free-fall possible when they all sell.
Sydney, London, and Las Vegas are already well into their crashes. Now it's our turn.
Why?
# Interest rates going back up. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate.
82% of Bay Area loans are now adjustable, not fixed. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse as more adjustable rate mortgages (ARMs) get adjusted upward.
From CBS.MarketWatch.com on 13 Jan 2005: "There is a double whammy inherent in these ARMs," said Frank Nothaft, chief economist for Freddie Mac. "At the end of fixed-rate period you face a hike in interest rates and you have to start paying principal. There is more default risk in these interest-only ARMs than in a fully amortizing product."
# Massive job loss. More than 300,000 jobs are gone from Bay Area since the dot-com bubble popped. This is the worst percentage job loss in the last 60 years. It's worse than Detroit car problems or Houston's oil bust. People without jobs do not buy houses and owners without jobs may lose the house they are in. Even the threat of losing a job inhibits house purchases. Santa Clara County posted its third straight year of job losses in 2004, so it's not over yet.
# Salary declines. From
http://www.mccallstaffing.com/need/needsal.html we hear that "salaries have in fact returned to 1997 and 1998 levels." Local incomes are nowhere near what they need to be to sustain current house prices.
# Mortgage fraud. Incidents of mortgage fraud tripled in 2004 compared to 2003, according to the FBI. A typical scenario is where the seller, buyer, both agents, and the appraiser all collude to inflate the price of a house to get a huge loan. They split the excess amount of the loan between them. The buyer then hides his share of the excess and defaults on the loan.
# Stock option expensing. The Financial Accounting Standards Board issued final guidelines that will force companies to deduct billions of dollars of employee stock options from profits starting in mid-2005. This will reduce the amount of money that local technology employees will get, and that in turn will depress housing prices even more.
# Population loss. San Francisco continues to lose population at the fastest rate of any city in the US and most of those are professional jobs. The problem is not only the dot-com crash, but also the outsourcing technical jobs to India, which continues at a frantic pace as corporations realize they can pay an Indian only 20% of what they must pay a similarly qualified employee in the Bay Area. Fewer people in the Bay Area means less demand for housing.
# Stock market crash. The NASDAQ at about 2000 is still only 40% of the 5000 it was at the peak of the recent stock market bubble. The crash in the NASDAQ probably hit the Bay Area harder than anywhere else because of all the stock held by employees of tech companies. That money would have been spent on housing, but is now gone.
# Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact.
# Inflation warp. The rest of the economy shows little inflation, but housing inflation has been very high. This disconnect makes houses more expensive in terms of real work. There is no increasing salary to pay off the ever higher interest, so the only way to do it is more work. Many recent buyers will have to postpone retirement because they overpaid for their house.
# Surge in foreclosures. We are already reaping the consequences of bad lending. Foreclosures are at the highest rate they've been in 40 years, about 1,500 per quarter in Santa Clara county. There are only about 4,500 sales in the quarter, so on average, about one third of house sales are ending in foreclosure.
# Shortage of first-time buyers. According to the California Association of Realtors, the percentage of Bay Area buyers who could afford a median-price house in the region plunged from 20 percent in July 2003 to 14 percent in July 2004.
# Lightbulbs going on in many brains in the Bay Area: "Hey, I can just go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably retire on the rest of the price difference. My neighbors just did it, so I'll have friends there too."
# Surplus of speculators. Nationally, 25% of houses bought in 2004 were pure speculation, not houses to live in. It is now possible to buy a house with 103% financing. The extra 3% is to cover closing costs, and the buyer needs no money down. All this is on the unwise assumption that housing will rise ever higher, covering interest payments through appreciation. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
# Trouble at Fannie Mae and Freddie Mac. They are now being forced to tighten up sloppy lending. This means they are not going to keep buying very low-quality loans from banks, and the total money available for buying houses is falling. Fannie Mae recently announced a $9 billion loss and its mortgage portfolio shrank at an annualized 16.8 percent rate in January 2005, on top of a 10.1 percent decline in December 2004.
# The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor."