Is the bubble really about to burst or is this just normal market adjustment? Link All Eyes on Home Market in San Diego By Annette Haddad Times Staff Writer Sun Aug 7, 7:55 AM ET SAN DIEGO — When the housing market here was red-hot 18 months ago, Alex Flores could buy a downtown condominium with as little as $5,000 down and sell it six months later for a tidy profit of $200,000. ADVERTISEMENT Now, Flores says, those easy-money days are over. Flores, a self-described real estate "flipper," is trying to sell two condos. But neither has drawn an offer after being on the market for more than a month, even though he's willing to break even on one and reduce the price on the other. "It's getting trickier now," said Flores, 30, who became a full-time property investor three years ago after a short career as a senior financial analyst for a movie studio. "Everyone thinks this has peaked." Once Southern California's hottest real estate market, San Diego is feeling a real estate slowdown. It's a trend also starting to be seen in other regions, such as Las Vegas, Denver, Boston and Washington, D.C. Dramatic rises in home prices, particularly on the West and East coasts, have sparked a nationwide debate about whether the housing market is engulfed in a bubble that is about to burst. San Diego has become a focal point of that discussion. Those who believe the market is about to implode say San Diego's cooling could be among the first signs of a pronounced downturn or even a possible crash in California. But housing industry leaders say the slowing in San Diego reflects the normal damping of a sizzling market that made millionaires out of many homeowners and investors. Because San Diego was the region's hottest market, it's not surprising that it's one of the first to simmer down and return to more normal conditions, they say. John Karevoll, chief analyst at DataQuick Information Services in La Jolla, which tracks home prices, called San Diego "our statistical canary in the mine shaft." "It is further along in the current cycle, and what happens there could predict what will happen elsewhere," he said. After more than doubling in the last five years, jumping almost 30% in one 12-month period, San Diego-area home prices are rising more modestly — 6.3% on a year-over-year basis as of June. Amid concern that prices may be peaking, more homeowners are selling, doubling the number of single-family houses and condos on the market from a year ago. Yet fewer are finding takers. Homes that a year or two ago sold virtually overnight — in many cases triggering bidding wars — are on the market for weeks. Homeowners such as John Kemper are finding additional windfalls harder to come by. Kemper figures his town home in Rancho Bernardo, a suburban community in the northern part of the city, surged about 50% in value since he bought it new two years ago. Seeking a bigger house for his five kids under age 8, Kemper put the unit on the market early last month at an asking price of $624,975. But it's competing against about a dozen others for sale in the neighborhood. With a dearth of offers, many sellers have set price ranges instead of a fixed listing price. Kemper cut his price to $615,000. "I have lowered the price and am the lowest in the neighborhood," he said, comparing his unit to others of the same style and size. Other once-torrid markets are also catching a slight chill. The pace of home price increases in Los Angeles, Orange and Ventura counties is becoming more sluggish, although not as much as in San Diego. Housing activity and price appreciation have moved from "hot" to "normal" in Boston, the tight Washington, D.C., market is starting to see home inventories rise, and Manhattan's condo market "was less frenzied" in the most recent quarter compared with the spring, according to a Federal Reserve report last week. These markets, like most of California, enjoyed huge price increases thanks to a strong economy, persistently low mortgage rates and the growing use of loans that let buyers squeeze into homes with far less than the traditional 20% down payment. Five and a half years ago, San Diego ignited California's housing boom — and to a large extent the nation's — when home prices started rising by at least 10% year over year. It didn't hurt that San Diego was enjoying a downtown renaissance, showcased by its new Petco Park baseball stadium, and a surge in jobs in its key industries of biotech, defense and healthcare. Downtown "has gone from an oceanfront of dilapidated warehouses and homeless people to a great place to live," said Thomas Noon, head of the California division of builder D.R. Horton Inc., which has built or is building several downtown condo complexes. "Five years ago, few people would have considered living there, but now they're fighting to get in." Demand elsewhere in San Diego County also helped drive sales to record levels. And the seemingly relentless escalation in prices gave homeowners a feeling of wealth. "Many people have made a fortune. All you have to do is be here and own a place," said San Diego-based financial advisor Christopher Van Slyke. Now, several factors could cause a more pronounced slowdown here, analysts say. One is the far-below-average level of affordability. By one measure, only 9% of households can afford the area's $493,000 median home price — the level at which half of all homes sold for more, half for less. By contrast, affordability statewide is 16%; nationwide, it is 50%. Another worry is the high level of risky loans. San Diego has been a standout in the use of unconventional lending. It ranks No. 1 in the use of so-called piggyback loans, which let borrowers with low down payments finance a home purchase without paying for mortgage insurance. And the majority of buyers in San Diego still use loans with an "interest only" option, a type of adjustable rate mortgage in which borrowers need only pay interest in the first few years before the monthly payment mushrooms. "In order to purchase a home, a lot of people have to resort to risky mortgages," said Celia Chen, an economist with the national research firm Economy .com in West Chester, Pa. Yet another risk stems from the higher than normal level of activity by investors. They accounted for 14% of all San Diego-area home buyers in June, versus the historical average of 11%, according to DataQuick. All of this unnerves many economists, who see a recipe for possible price declines in San Diego and elsewhere. They expect investors will start unloading properties when they see their returns diminish. Many holders of riskier mortgages, already stretching to meet their monthly payments, could default when their loans reset at higher rates in the next few years. Mortgage rates started rising recently. Mortgage insurance company PMI Group has pegged San Diego as the nation's third-riskiest market, with a 53% chance of home prices dropping in the next two years. Only Boston and New York's Long Island rank higher on the company's risk index. "Those of us with long enough memories know that real estate is cyclical," said Mark Milner, PMI's senior vice president and chief risk officer. "But we've never seen a cycle with so many of these kinds of loans, so nobody knows how the market will react if there's an economic shock." Such a shock could come from a wave of job losses. Although San Diego added 20,000 jobs between June 2004 and this June, the biggest gains were in jobs related to real estate, such as construction, according to Hanley Wood Market Intelligence, a research firm. Analysts say a deflating housing market could reverse that trend, much as a contraction in the aerospace industry touched off a Southern California housing market downturn in the early 1990s. San Diego home prices were virtually flat for six years. The signs of a possible repeat performance are increasing. "Houses that would have sold easily a year, a year and a half ago won't sell so easily now," said Parham Firouzi, a real estate agent in Rancho Bernardo. "There's a lot more negotiating going on, and buyers aren't going over the asking price." And, he said, it takes an average of about six weeks to close a deal on a single-family home, double what it took a year ago. There are other, more subtle signs of slowing. For instance, new-home developments in the coastal city of Carlsbad were selling houses at a rate of six or seven a month a year ago. Today, they are still selling out, but at a slower pace of about four or five a month. Noon, of D.R. Horton, said his company's sales pace had slowed, particularly among downtown condos, as price increases slowed dramatically since their peak in early 2004. Still, Horton's homes "are selling plenty fast," he said. "This is good news for the market," Noon said. "It shows that the market has reached more of a balance" between supply and demand. Alan Gin, an economics professor at UC San Diego, said a crash is unlikely, predicting that the region will continue to create jobs at a healthy pace, which will support demand for housing. Still, he said, many new jobs are in the lower-wage category. "What you've got here is a slowing situation and not much of a chance of a severe downturn," he said. "To have a downturn, you need a triggering event, such as massive job loss." Investor Flores, who says he made close to $1 million in the last three years buying and selling new condominiums in downtown San Diego, is branching out to markets he considers undervalued, such as Houston. He's still investing in San Diego, but with a longer-term view. He recently put a down payment on a new downtown condo that won't be ready until 2008. "I'm still betting on San Diego," Flores said, "but not as much as before."
I've seen more price reductions on MLS for houses in my area. It might mean sellers were overreaching with their asking prices or the glut of houses on the market in the Summer are driving their prices down.
The Housing market won't crumble like a stock market because it represents a real usable asset; you can't live in or eat a stock certificate, especially one that doesn't pay a dividend. That being said all markets have cycles of relative booms and busts and the higher the amplitude of the boom the lower the amplitude of the bust; so it will be worse in area's where the inflation was the highest. Houston is blessed/cursed with an unlimited supply of buildable land So the proliferation of new housing has kept prices relativley stable. Then again you can't sell your used tract home now.
I think houses in Houston are priced just right. Overall, Houston is a wonderful place to live when it comes to cost of living. I love this town
No way Houston beat where I live when it comes to housing. We have the 2nd lowest housing price increas in the whole US So I would not be able to sell for a profit but it is damn cheap to get a house here.
Actually I did and I gave my house in the Woodlands away to a guy who would just take over the note. But the house would have still provided shelter to me if it weren't 40 miles from my new job (1986) or could have been rented for some amount of money (if I had wanted the responsibility of renting). My Enron Preferred stock wasn't even usable for toilet paper. And if I had bought my CSCO ir JDS on margin like people buy houses on mortgages I would still be bankrupt and owing. Don't get me wrong, if (when) we have a recession in this country there will be a lot of folks way underwater on their house notes and there will be a lot houses auctioned off on the courthouse steps. It's just the the amplitude of the sine wave of the cycle that will be flatter. The pain will be just as real and the cycle to recovery will be longer because the federal government won't be able to artificially stimulate the economy with low interest housing. But the existing housing will provide some utility in that someone will live in them. And if they have utility , they have value. I guess someone still owns the Enron preferred I sold for $.94 a share too but I don't think they are getting any use out of it.
Unless interest rates head back up to 14% I can't see bubbles bursting anywhere but in hyperinflated markets (such as San Diego!). As long as it costs not much more to buy than it costs to rent, prices should remain stable, no? Affordability, in many areas, is still relatively low, I think. It's the speculators buying $800K+ homes in California that can only be rented for $2K per month that are exposed to the housing bubble.
First there is a huge housing bubble. The housing bubble has fueled the economy for the past 5 yrs. While low interest loans poured loan money into the economy most everyone got there hands on the pump either by buying a new home or home equity financing or re-financing. This surge in debt pushed home prices higher and higher. That is how a bubble works. You create huge debt pumped it into a sector (stocks or real estate) wha la- Bubble. As long as people can borrow cheap, make the payments and interest rates don't climb too rapidly the bubble can keep expanding at a slow rate. But sooner or later all the inflation takes its toll. Inflation is created with cheap credit by the central bank. The only way money is added to the economy is by debt. That is what a dollar bill is, a federal reserve note. In other words, a bank borrows money from the fed, then lends it to the borrowers (us the slaves) then money is pumped into the economy. As long as everyone can keep borrowing and keep making payments bubbles look like pots of gold. I mean who is gonna complain about buying a $275,000 home 5 yrs ago that now is selling new at $350,000? Its like getting rich just because you borrowed money. The problem is not everyone sells and takes the inflation profit. So those who fuel the bubble are actually sitting on top of it. So what will happen? Hopefully the bubble will slowly let out air. Worst case it will pop gradually. Disaster would mean it just blows. How does a bubble pop? Remember the stock market 5 yrs ago? What will happen with real estate is that now that inflation is starting to heat(remember the central bank causes inflation by cheap loans) prices are rising in most commodity sectors. Jobs are outsourcing, pay increases are running below annual inflation. So there is a lag effect. In the next 18-48 months we should see inflation from all the bubbles really start hitting harder. Where it takes 2 good wage earners in most homes to meet the debt load and the cost of living it will take 2.5 or more. Pressure will eventually hit enough employment sections that unemployment, restructuring, outsourcing et al will begin to have a much larger impact (jobs are going to keep sucking out of the US at record paces). At that point with rising interest rates (interest rates are always raised by a central bank after all the inflation they create because too much money will implode the economy- in other words they can't sell the debt because they can't risk totally destroying the dollar) With the rise in interest rates will come a constriction in the money supply- less debt to finance all the bubbles. That means that unless you get a big pay increase in your household -inflation will finally be on the rampage destroying your buying power and putting the strangle-hold on your debt load. This is how it always works. I would say that when the housing bubble starts to come home you should be sure you have a very good job that provide plenty of liquidity and cash surplus to cushion the inflation blow and be sure that you are not in a bind with your house payment. The last housing bubble was in 1970's then came the saving and loan collapse. We survived that period because of cheap imports, 2 wage earner households, and the dot.com bubble. Then the real estate bubble. The last 5 yrs of extreme debt bubble created by cheap mortgages has been the final economic life perserver. That is coming to an end and I would guess we have about 2-4 yrs to get ready. (depending on how fast interest rates go up and how much longer we are able to sell our federal debt in Asia) Hopefully interest rates will peak at about 4.5% prime. If it has to go higher we are in for a drop like a big roller coaster. Things don't look good, but you just can't borrow your way to prosperity (those are bubbles). It works for long periods of time but eventually people don't have enough cash stuffed in the mattress to pay off debts, unemployment starts to climb and then things get crazy. WHAT IS IN YOUR WALLET? Can you pay off all your debt today? Will your job give you pay increases to keep up with soon to be increasing inflation. Hope you have a great job with little risk of losing it. Watch for inflation to turn like the 70's sometime in the next 12-24 months. You libs don't fear the next Pres. will probably be a Democrat promising to get us out of double digit inflation. I always feel doom and gloom about 36 months after the govt increases the debt load about 300% in 5 yrs. with no end in sight.
LOL! rhester, why the gloom? Seriously though, I completely agree with everything you said, and I believe that what everyone keeps saying about "low unemployment" rates and other things misses the big point, and that is our economy is running high on borrowed time. You hit the nail on the head, all this "borrowing" by the American consumer is problematic, because the bottom line is most Americans don't own their cars or their houses, they are just borrowing more and more everytime the feds lower interest rates. Basically, enjoy the mirage while it lasts. Not Bush or even a Democratic president will get us out of this seemingly inevitable fate. Now, as you said, this is an economic 'forecast' more or less, so we will just have to wait and see if we are right or completely wrong; I would love to be wrong on this one. But yes, I am secure in my job and my financial situation, so no worries there.
I'm surprised you structured the thread as a question. Isn't it obvious the housing market is about to take a dive? We now have neg. am. loans! WTF! Living on credit is really bad. I hope the economy goes into a recession because, frankly, I rather have that than to have a depression.
I'm not sure if it is the loan where they give you a real small interest rate, and you pay interest only, leaving the loan principle sitting there?
Some friends of mine want to buy with something like this. They called it an interest-only loan. I think it's a BAD idea. They want to get a 5 year interest only loan to keep their payments down, and then refi either at the end of the 5 years, or if interest rates go up. They also plan on putting next to nothing down, less than 5 percent I'm sure. They think they'll have equity at the end of the five years due to appreciation, "because houses in Houston, in the neighborhoods we're looking, never depreciate".
Neg Am is short for Negative Amortization, which means the principal or the loan actually increases during the Neg Am period. (i.e. 300k loan becomes 330k loan) This usually is part of a Interest Only ARM loan, in which the interest rate resets every month but the payment doesn't change during the Neg Am period. Needless to say, this is a very very BAD idea for anyone buying a house.
negative amortization. Basically, you pay LESS than the full interest payment, so every month your principal gets bigger and bigger as the extra interest adds to it. So say your interest rate is 6%, you pay only 1%, the extra 5% adds to your principal. Whenever you see home loans that have interest rates < 3%, it's a neg am. loan. Also called an option ARM.
Assuming that the market DOES take a dive, how does this affect the market in Texas? Further, does this bubble mostly affect New Homes or resale? I am looking at buying an old house, pre-19 hundreads to 1930 or so--luckily, my new adopted city of Ft Worth has a glut of older, charming homes that are less than 10 minutes from downtown. How does the bubble affect markets like what I'm interested in? Is it time to buy or hold-out?
Intrest only loans are a risk. If the market drops, or you stay in your home for more than 5 years it will hurt plenty. But if interest only is the only way to get in the housing market and it is going to be something you will sell before the five year period, then it is slightly less risky. If you stay longer once you finance your loan and start including the principle there will be a huge jump in your mortgage rate. Further more if the housing market drops you haven't put hardly anything into your house and you bought it at a higher price than it is worth at that time, and have to pay that higher price. The type of home, and neighborhood would be crucial. Even if the overall market drops, it doesn't mean that homes in certain neighborhoods will drop. A relatively cheap home in a neighborhood that becomes revitalized and upscaled would still survive the bubble burst. Some homes in very expensive exclusive neighborhoods might survive the burst as well. I have done a lot of research on all this stuff as I am currently in the market for a new home, and have already put in 3 offers, that either I pulled out of, or was outbid by other offers. Buying a home in the LA area is one insane process.
