When will the Housing Bubble go "popppppp"?

Question

Business Week had a very informative cover article in the current edition titled "How Toxic is Your Mortgage?"

It talked about so-called deceptive loans, phantom profits and the coming wave of defaults. I'm still trying to figure out why I should feel sorry for people who got themselves into risky ARM's, interest only loans, etc. but I digress.

At some point, reality will set in. And it's gonna be ugly. And the ugliness will be directly proportional to the irrational price rise and the levels of denials in homeowners that anything is wrong with the market.

It's like 1999-2000 all over again, except this time the pain is on Maple Street, not Wall Street.

Answer 1

It is in progess as we speak.

http://money.cnn.com/2006/09/08/real_estate/caught_in_the_bubble/index.htm?postversion=2006090814
http://money.cnn.com/2006/09/05/real_estate/Ofheo_home_prices/index.htm?postversion=2006090514

The estimate is a 20 to 30% correction.

How to value a property during market downturn?

Housing market continues to slump. Now we can calculate true value of a property easily. As price decline, we don't need to guess and factor in the potential price appreciation while calculating home value. Without the guesswork, figures are more accurate.

Let's use following example:

Today, a typical 15 years old, two bedrooms condo/townhouse is priced around $500,000 and $550,000 in Sunnyvale, California. Rent for similar condo/townhouse is $2000/month.

If you are a home owner, $2,000/month in rent means $20,000 a year in profit ($24,000 per year in rent, minus $4,000 maintenance costs). A $20,000 income is equilevant of owning $400,000 bonds or CDs, because current yield of 30 Years U.S. treasuries are 5% (5% of $400,000 is $20,000). Bank CDs have similiar yields.

In our example, the two bedrooms condo/townhouse is 20% to 25% overpriced. They should be priced at $400,000.

It is interesting to note that if we redo the calculation from buyer's perspective instead of seller's perspective, the figures are even more shocking.

Mortgage payment consists of two parts: mortgage interests and mortgage principal. The interests portion is similar to rent. If you pay interest, it disappears and doesn't add equity to the property. To fully simulate characteristics of renting, we assume buyer will apply for a zero down, interest-only loan.

It turns out that rent of $2000/month is equivelant to mortgage payment of a $340,000 loan at 7.0% APR. And comparing $340,000 loan to $500,000 or $550,000 price tag, from buyer's view, the two bedrooms condo/townhouse is 30% to 35% overpriced.

One may ask, why is there a discrepancy between two perspectives of the buyer and owner?

The discrepancy is a result of 2% differences in interest rate that buyer borrow comparing to yields of bonds and CDs that owners would get. We understand that buyer would always pay more. That is the premium of buying to own. However, looking from home owner's perspective, current housing market is probably 20% to 25% overpriced. We recommand investors to wait for a better entry point.

Answer 2

As a RE/Mtg. pro, that does business all over the country. It's blowing up and it's bad!!!! I have many clients that are in bad situations right now. In most areas, especially FL, AZ, CA, CT, MA. The area that isn't too bad is the Midwest, most people there have common sense, and wouldn't buy a 2 Bdrm condo, with office grade carpet, cheap tile, fake granite, closet like construction for 300k, like they did in some areas. I'm in LA so I see the worst of it here personally. Too many house flipping shows made the public go nuts and the agenst too. Been in the biz for a long time and saw a similar up and down, not for the same reasons though. This one will be worst because of many, factors such as, ridiculous loans, oversupply, mortgage fraud, investment clubs, media hype. I won't get into technicals, just common sense. People try to compare the last down turn to this one, but you can't even quantify. This one will be the worst. The causes for this downturn didn't exist 80's-90's. Option Arms, Int-only loans, 100% financing, no income verification, 100% investment prop loans, etc... Now on top, the buzz has created an oversupply. What happens to any product when too much is available, the price must come down. As a person in the biz and an investor, I could care less though, I can make money on the downturn. Short-sold and optioned against the home builder lender stocks in the spring, stocks dropped 30%, I made 30%. I already had rental property for the last 10 years. Home values went down, but rent in my area went up. Folks renting, don't just sit around and wait, you missed it this time and you'll miss it again if you're not proactive. Rent under a 2 yr lease option if possible. If market stabalizes and you want to own a home exercise the option and a portion of the rent you've paid goes toward buying the property. If after a year or two the market keeps dropping with no signe of rising, just keep renting. Lease option is a hedge to use if the market stabalizes and you want to find the bottom without risking missing the bottom, or getting in too early. If you really think the market is going to tank even more and you have some money, call your investment broker, tell him you wan to play the downside of the real estate bubble, and if he has any common sense, he should no what to do, if not open an online account somewhere, do your own research, find out how to short and option stocks, do it yourself, and save the commssion. Real Estate is an investment, "real estate is only going to keep going up". So has the stock market historically, since the great depression it has risen steadily. Well, tell that to the people that got caught in dotcom stocks, Worldcom, Enron, etc.. I'm getting so tired of these new real estate people who only know the last 2-3 years leading people down the wrong path.

Answer 3

Guess which poster are in the Real Estate business. Still believing their own lies. Phase one: DENIAL.

First they tell people buy their not making any more land.
Prices are only going to go up.
Then, well things are going to stablize.
The market is going through a correction then it will go back up soon.
Then prices may drop a little bit. But now its a buyers market.
Can't wait for the next pitch, should be good.


A great con has been played on the most vulnerable aspirants to the American Dream--those striving mightliy to join the middle class. Just buy a house, the doctrinaire pitch has it, and soon, thanks to rising housing prices, you'll have equity and thus some measure of wealth. After all, house values never drop, they only rise.

Only there was one little problem: millions of households didn't have the traditional 20% down payment--a standard which became ever more unattainable as housing prices exploded.

American homeowners are no longer sitting on paid-in-full homes; they're sitting on heavily leveraged mortgages they've taken out.

The cheerleaders are missing one key point. The collapse of the housing bubble won't just take out an isolated 10% of households; it will take them out first and then move down the economic chain in domino-like fashion

You do see where this is going, don't you? A political revolution is brewing. Not a violent revolution, of course, but one fueled by the catastrophic loss not just of whatever small capital those 150 million people (half of our nation's population of 300 million) might have acquired, but more importantly, perhaps, the loss of their belief in the American Dream--of home ownership and a life of luxury paid for by painless extraction of ever-rising equity.

Fox news headlines
•Mortgage Applications Rise on Lower Loan Rates•Home Price Increases Slowest in Three Decades, Gov't Says•Mortgage Applications Decline for First Time in Four Weeks•New Home Sales Drop By 4.3 Percent in July•Existing Home Sales Drop to Lowest Level in 2 1/2 Years•Housing Bellwether Toll Brothers Reports 19 Percent Fall in Profit•30-Year Mortgage Rates Drop for Fourth Straight Week•Home Starts Fall for Fifth Time in Six Months•Mortgage Applications Rise Again on Refinancing Demand•Survey: Homebuilder Optimism Sinks to 15 Year Low•Majority of States Report Declines in Home Sales, Including Former Boom Areas•Mortgage Demand Drops for Third Straight Week•Construction Spending Rises on Nonresidential, Public Building

http://housing-watch.com/home.aspx?d=90

Answer 4

It already HAS!

By the time I got myself into financial shape to buy a house.. housing prices were through the roof here in Phoenix Arizona. So I just sat tight in my fancy apartment that was 1/2 the price of any mortgage, even on a DUMP down in the ghetto. (And guess who gets to do the repairs when something breaks???)

Meanwhile I've watched co-workers take out $300,000+ mortgages on incomes of $35-$40k with those interest only arms. They were "convinced" by the lenders that there was nowhere for their property to go.. but up.
Never mind, the income of the average Arizona(Phoenix) resident is about $12/hr ..not enough to support these high-end mortgages

Then we had another batch of peoples "late to the party" ... the greedy SOB apartment complexes that took their dumpy 650 sq foot apartments and did condo conversions at a cost of $130-$165k (this was in a "cheap" neighborhood). OH YEAH.. let me just BUY a crappy apartment for twice the monthly cost of rent. That makes sense (NOT).
Guess what? That little project has gone belly up.. these units are sitting empty.

Add to that, all the "amateur" home investors... these idiots that in debt up to their eyeball with a dozen properties they can't even RENT because the rent is twice as much as anything you can get in a nice gated community apartment complex.

I figure I'll be buying a place in 2-3 years from the foreclosure listings.............. :-)

Of course you can easily see the types of responses are in propotion to what these people do for a living... the mortgage brokers & real estate agents living in the Land of Denial. The only way that these people are affording the houses is because their 5 year arms aren't up yet.......... let's just see how many of them can afford payments that are 35-50% higher than what they are paying now................. (interest rates are going UP!)

GRIN.....

Answer 5

I disagree that the market is the same as 99/00. We are in a completely different economic climate. And that alone will prevent a collapse. In my opinion, we are in for a soft landing. I agree that there are some weak loans. Mostly the interest only type. There is always risk associated with any loan of this type, but for people who could not qualify any other way, the reward far outweighs the risk. To answer your question, I think we will have seen the worst of the "pop" by the end of this year. Many economists say the rates may start dropping again in early 07.

Answer 6

the bubble is not just the loan side, there is a bigger cause and that is lack of a open market. yes the market is a closed market and controlled by the Realtors and they shorted it causing prices to go throw the roof. check out this web site it tells how.
http://www.breakingbubble.com/index.htm

Answer 7

This question should have been asked two years ago. In large areas of the country, the answer is currently "It already has"

Answer 8

It already has gone popppp.... it's just taking a time for the air to let out... that's what is causing that giant sucking sound.

Answer 9

I'm not worried. The media seems to be sensationalizing this quite a bit.