BizWeek on the new Housing Bubble

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Submitted by patb on February 24, 2013 - 12:16pm

http://www.businessweek.com/articles/201...

"The 28-acre subdivision is one of 309 developments in the metropolitan Phoenix area with new homes for sale. It opened in December 2012, with 96 lots, and Pulte has been releasing them in batches: 16 are already under contract, and the company is raising prices. One buyer, Marc Victor, a lawyer, lost out on a home the first time. Potential buyers can bid on premium lots, and he was outbid. In the second round he offered $156,500 for a lot listed at $120,000. He’s hoping workers start pouring the foundation soon."

seems like time to clean up the house and get it for sale.

Hundreds of bids on property for offer, Things going over asking,
Interest rates in the sewer?

Seems like it's time to start renting again.

Submitted by spdrun on February 24, 2013 - 12:32pm.

Renting? How about buying in markets that are still depressed and either flipping or renting to others? There are still a lot of people who can't qualify to buy...

Submitted by bearishgurl on February 24, 2013 - 1:04pm.

I'm starting to "downsize" and clean up/repair/renovate, etc.

Unfortunately, I can't move for another 16+ months but I see the writing on the wall.

I don't really like being a "landlord" but if I relocate, I'll just hire a PM Co if I decide to rent out my home instead of sell it.

What I am a bit concerned about is, "What will I have to pay for a (~1600 sf) replacement home?" I'm considering mountain towns with 1K to 55K people.

Hopefully, the exodus of "boomers" from cities won't drive up the prices in these areas, as well. In some mtn resort areas, the residential RE prices have already doubled in the past ~15 years.

Submitted by bearishgurl on February 24, 2013 - 1:25pm.

I glanced over the article and wonder if these fast-selling (outlying) new communities in the PHX area will lift ALL boats (new and old) in PHX.

Are buyers just flocking to the *new* because it is there? Many major cities aren't allowing any building right now, ran out of land for subdivisions long ago or it doesn't make sense, financially, for builders to enter a particular urban market.

I DO feel buyers flock to the *new,* no matter WHERE it's located. ESPECIALLY younger buyers.

It will be interesting to see how this latest "building boom" affects home values in the entire residential RE market in PHX.

Submitted by SK in CV on February 24, 2013 - 1:52pm.

Phx has the same inventory problem that SD has. They're down everywhere and prices are up. What is different here is the much higher number of homeowners still underwater and the number of all cash investor buyers. What I'm guessing will happen is that prices will continue going up through the early summer. At that point, some of those cash buyers are going to take their quick profits as well as some of those underwater homeonwers bailing as their equity rises somewhere close to zero. It won't drive prices back down, but it will increase inventories and quell the increases.

In addition, the harsh winters in the east as well as the still depressed prices (in comparison to 5 or 6 years ago) will keep old people coming here from colder climates. (As long as they don't hear about the snow storm we got here this week.) The growth has slowed, but it hasn't stopped.

Submitted by CA renter on February 24, 2013 - 11:32pm.

patb wrote:

seems like time to clean up the house and get it for sale.

Hundreds of bids on property for offer, Things going over asking,
Interest rates in the sewer?

Seems like it's time to start renting again.

Bingo, patb! Even Jim the Realtor just sent out e-mails this past week telling everyone that, "it's a great time to sell your house!" I could not agree more.

Submitted by UCGal on February 25, 2013 - 10:14am.

CA renter wrote:
patb wrote:

seems like time to clean up the house and get it for sale.

Hundreds of bids on property for offer, Things going over asking,
Interest rates in the sewer?

Seems like it's time to start renting again.

Bingo, patb! Even Jim the Realtor just sent out e-mails this past week telling everyone that, "it's a great time to sell your house!" I could not agree more.

Looking at my hood - stuff is going pending in a week - at close to peak bubble prices. These aren't new houses... but it's a decent/desired neighborhood.

I was just commenting to my hubby that the bubble is back in full force.

Submitted by SD Realtor on February 25, 2013 - 10:42am.

This is all pretty much to be expected isn't it?

We did not let the market correct properly. Instead of letting the foreclosure process run a natural course, our government said no. Sacks of money were given to banks. A large number of homes did not hit the market that should have. No inventory glut occurred. Interest rates have been pushed WAY LOWER then the bubble interest rates ever were. Many people who should have lost their home did not. Loans were modified, and in some cases reduced.

Presto we have created conditions that were even WORSE then the original conditions that led to the bubble. It perpetuates itself. Those who were underwater soon will not be as the market marches higher.

Showed a home in Scripps yesterday. After 2 days on the market it has over 20 offers.

If you are a buyer looking for a deal in the I15 corridor or Carlsbad, my advice is to either come in very strong or go rent for awhile. Conditions like this may cool down some at the end of summer, but if people are predicting a reversal of the trend, well they are flat wrong. The trend will not reverse until rates rise substantially.

Submitted by spdrun on February 25, 2013 - 10:50am.

That's what was said about NJ where the foreclosures were basically stalled by the courts in 2010-11. Now the dam is breaking. (hugs Chris "kick the bums out" Christie)

Submitted by barnaby33 on February 25, 2013 - 10:58am.

So is there a part of San Diego where conditions are favorable to buying?
Josh

Submitted by spdrun on February 25, 2013 - 11:21am.

Depends WHAT you want to buy. Deals on things that cater to middle class people, read 1-2 bdr condos in average areas are still good. Not as good as last year, but they're there.

Submitted by SD Realtor on February 25, 2013 - 11:23am.

You have to be more specific Josh. The short answer is no. Conditions are not favorable throughout the county compared to the past few years. Not for investment grade, not for owner occupancy grade. It also goes without saying I am talking about low or middle price tiers, not the 7 figure tiers.

Second, the low rates form a double whammy because investors have nowhere to put money. Do they choose an overbought stock market or an overbought real estate market? So now you have lots of investors buying, some seasoned, many not seasoned with regard to San Diego county and that is a bad recipe to create "favorable" conditions. I saw another home purchased at trustee sale for the same sales price as it was sold on the retail market back in 05. Prices will reach an equilibrium in the short term, maybe by the end of summer maybe the end of next summer, and then return to a much more subdued appreciation rate. Right now it is legging up fast and not a good place for buyers.

Submitted by earlyretirement on February 25, 2013 - 11:32am.

SD Realtor wrote:
You have to be more specific Josh. The short answer is no. Conditions are not favorable throughout the county compared to the past few years. Not for investment grade, not for owner occupancy grade. It also goes without saying I am talking about low or middle price tiers, not the 7 figure tiers.

Second, the low rates form a double whammy because investors have nowhere to put money. Do they choose an overbought stock market or an overbought real estate market? So now you have lots of investors buying, some seasoned, many not seasoned with regard to San Diego county and that is a bad recipe to create "favorable" conditions. I saw another home purchased at trustee sale for the same sales price as it was sold on the retail market back in 05. Prices will reach an equilibrium in the short term, maybe by the end of summer maybe the end of next summer, and then return to a much more subdued appreciation rate. Right now it is legging up fast and not a good place for buyers.

I totally agree SD Realtor. On both the overbought levels of several investment opportunities out there.

I don't think anyone should be rushing to buy anything. I think it's different if you are buying something that plan to live in for the foreseeable future that you can comfortably afford and another to be jumping in on investment properties. Lots seem to be the latter picking up investment properties.

The horrible thing is for savers and retired that are getting pummeled and punished and earning anemic interest rates. I for one can't wait for interest rates to go back up.

Submitted by spdrun on February 25, 2013 - 11:47am.

If you see an investment property that can yield 7.5% or so after expenses, then why not go for it? They're out there. One is still languishing in the ss process for me. But I made another offer on an occupied property last week that can actually yield more than 7.5%. We'll see.

Submitted by bearishgurl on February 25, 2013 - 11:53am.

spdrun wrote:
If you see an investment property that can yield 7.5% or so after expenses, then why not go for it? They're out there. One is still languishing in the ss process for me. But I made another offer on an occupied property last week that can actually yield more than 7.5%. We'll see.

You GO, spdrun . . . I for one am rooting for you :)

Submitted by sdduuuude on February 25, 2013 - 12:31pm.

It isn't clear to me that "there is a bubble coming" is consistent with "it is time to rent again."

The time to rent is not when the bubble is developing, but when the bubble starts to burst. There is no way you can say that the mediocre rise of the last 12 months has brought us to the top of a bubble about to burst.

Bubbles grow for many years before bursting and what I saw with the last bubble is that even smart people who identified the bubble correctly called for the top much earlier than the top actually arrived. Even the good Professor Piggington was a couple years early. Bubbly behavior begets bubbly behavior and the market can remain irrational for a long time. So, if you really think we are in a new bubble, expect it to get even bubblier.

Now, with that said, I'm not so sure I would classify current conditions as a bubble or even the start of something that can become a bubble. Prices have come up, but we are still within a range that goes back to 2008. The telling factor for me would be a revival of the home price vs. rent charts Rich used early in the days of Piggington to ID the bubble. Rich ? Might be nice to see, that in a rodeo some time, eh ?

We are definitely a period of rising prices, though, and it is the inventory levels driving it. Last year I didn't think this selling season would have the momentum to bring prices above last season, but it looks like it will.

Many folks - including me - expected to see higher prices drive owners to sell. In fact, owners are seeing prices come up and deciding they could get more later and that is delaying listings. Perhaps it will take a stall in prices, after a run-up to get inventory on the market.

The path forward that I see is this - prices rise until the upside down people (UDPs) see a way to get out. Folks may cry "bubble" as prices comes up, but the conditions just aren't there to allow the bubble to continue because the UDPs will eventually decide to list their house, cutting the bubble growth short.

Plus, long-term macro-economic conditions will push downward on prices for several years (I didn't say, "push prices downward" - I said "push downward on prices"). The stimulus that drove the last bubble won't come, or won't have the same effect.

And - as I wrote in an earlier post - I'd be wary of a rally in low-inventory or low-volume conditions.

I'd be OK buying now, expect to see a year or two of appreciation, then another couple years of moderate pain or flatness as the country (and the world) start to deal with debt and spending issues.

Submitted by bearishgurl on February 25, 2013 - 12:22pm.

SD Realtor wrote:
. . . Conditions are not favorable throughout the county compared to the past few years. Not for investment grade, not for owner occupancy grade. . . .

Right now it is legging up fast and not a good place for buyers.

I disagree that the long-term owner occupier buyer can't find a decent house in the $320-$400K range. Some of them may need a little work, but they're out there.

Yes, this is also the "flipper" price range, but if the asking and bid prices are too close to what the property would sell for flipped, the flipper won't want it.

earlyretirement wrote:
I think it's different if you are buying something that plan to live in for the foreseeable future that you can comfortably afford and another to be jumping in on investment properties...

It's different for the long-term owner-occupier buyer because they don't have to fix everything at once to get it back out on the market ASAP. They can move in (or partially move in) and fix as time/money permits.

I'm seeing rental PODS parked on some properties in this price range which recently closed escrow. In any case, there are "pre-fab" tool/garden sheds existing in many backyards of listed properties which can be cleaned out and used for storage, along with the garage. These sheds don't even cost as much to buy at HD/Lowes as renting a POD costs, even if you build a (leak-proof) wood foundation before putting them up. Your "extra" household goods could be stored at low cost in them indefinitely until you are ready to move them in.

There are more than nine ways to skin a cat. I would urge prospective owner-occupiers who don't currently own a home to get out there on the street and make offers until they are successful if they want a home of their own in the coming years.

I bought several of the calibur of properties (which are listed at $320K to $400K today) in a 9-12% mortgage interest-rate environment and ended up coming out just fine after selling :)

It isn't going to get any easier to buy a roof over your head in SD County.

Submitted by sdduuuude on February 25, 2013 - 12:32pm.

bearishgurl wrote:
I disagree that the long-term owner occupier buyer can't find a decent house in the $320-$400K range. Some of them may need a little work, but they're out there.

Ya "out there" as in "way the hell out there" as in Santee, Lakeside and Ramona.

Submitted by SD Realtor on February 25, 2013 - 12:36pm.

So funny...

Here is what I wrote

Conditions are not favorable throughout the county compared to the past few years. Not for investment grade, not for owner occupancy grade. . . .

Here is what was commented on.

I disagree that the long-term owner occupier buyer can't find a decent house

****

I think it is awesome to make up things to disagree with. Kind of like playing chess against yourself!

Submitted by bearishgurl on February 25, 2013 - 12:47pm.

sdduuuude wrote:
bearishgurl wrote:
I disagree that the long-term owner occupier buyer can't find a decent house in the $320-$400K range. Some of them may need a little work, but they're out there.

Ya "out there" as in "way the hell out there" as in Santee, Lakeside and Ramona.

No, there are quite a few other areas in SD County which have this calibur of SFR's .... yes, even 4 bdrm SFR's!

A buyer in this price range is in the "FTB range," whether they are actually shopping for their "first home" .... or not.

Beggars can't be choosers.

Notice that all three of the areas you mentioned, sdduuuude, are already FULL of residents, a large percentage with a much HIGHER net worth than many Piggs!

And "Ramona" not longer qualifies to have this "calibur" of home readily available. It is mostly out of this price range.

Submitted by Rich Toscano on February 25, 2013 - 12:48pm.

Great post sdduuuude.

Things selling fast, or prices going up fast, don't necessarily make for a bubble. To me, a necessary condition of a bubble is that valuations are extremely high on a historical basis. We just aren't there on housing -- not even close.

I have been meaning to update the long term valuation charts and will soon when I get some time. But, just extrapolating from last year's chart, we are probably pretty close to "fair value" (which I define as the median historical price to income or price to rent ratio).

More charts soon-ish!

Submitted by bearishgurl on February 25, 2013 - 12:50pm.

SD Realtor wrote:
So funny...

Here is what I wrote

Conditions are not favorable throughout the county compared to the past few years. Not for investment grade, not for owner occupancy grade. . . .

Here is what was commented on.

I disagree that the long-term owner occupier buyer can't find a decent house

****

I think it is awesome to make up things to disagree with. Kind of like playing chess against yourself!

What exactly did you mean by "owner occupancy grade," then?

And do you think owner-occupants should buy and flip or buy and hold??

I was actually "agreeing" with ER's statement. But I can see by this statement that you're too much in the "argumentative mode" to understand that.

Submitted by bearishgurl on February 25, 2013 - 12:59pm.

Rich Toscano wrote:
. . . just extrapolating from last year's chart, we are probably pretty close to "fair value" (which I define as the median historical price to income or price to rent ratio). . . .

I agree with this. That "fair value" was in sales occurring sometime between 1999 and 2003 (depending on micro-area).

edit: as I've stated here before, the residential RE values in many areas of SD County became decimated beyond fundamentals, due primarly to SS closings (many of which were "fraudulent" and/or "non-arms-length" transactions). These (numerous) closed SS's skewed the sold comps much lower than they should have been.

Submitted by SD Realtor on February 25, 2013 - 1:02pm.

Nobody else seems to read ambiguity into my response, even the person who I was responding to. Guess you will have to figure it out.

Submitted by bearishgurl on February 25, 2013 - 1:13pm.

sdduuuude wrote:
....In fact, owners are seeing prices come up and deciding they could get more later and that is delaying listings.....

I agree with this statement. I've seen articles and videos online over the weekend that "boomers" have decided to mostly stay put .... for now.

The "boomers" recently interviewed all over the country are apparently "happy" with where they live and don't particularly want to "downsize."

Part of this has to do with not being able to re-purchase today the quality of home/location they are currently living in, even if they sell. And a large portion of them can't qualify for purchase-money mortgages, and, in any case, don't want one at this late date. I myself can identify with this mindset.

Since there are presumably 77M of us and the vast majority own their own homes, that is a LOT of current listings across the country that don't seem to be materializing.

Of course, in a few years, this could change, depending . . .

Submitted by bearishgurl on February 25, 2013 - 1:15pm.

SD Realtor wrote:
Nobody else seems to read ambiguity into my response, even the person who I was responding to. Guess you will have to figure it out.

That's because "nobody else" is responding to you ;)

Submitted by SK in CV on February 25, 2013 - 1:20pm.

Great comments by both Rich and sdduuude (though I disagree about the last few words in sdduuude's comment).

One of the essential parts in building a bubble is speculators driving price increases, based on the expectation that the market can only go one direction. I don't think we've had that. We have had investors buying up large quantities of properties in some markets, and while by most appearances there is no difference between speculators and investors, intent is a huge difference. Investors buy for yield. And I think that's what we've seen. Even flippers aren't always speculators. When they buy, remodel and sell, that added value makes their intent very different from buyers that buy and turn around and try to sell for based solely on rising prices.

It's way too early to call this a bubble. Rich's pending graphs will shed some light. It may become one, but there are too many other unusual market conditions (limited new construction, extraordinarily low interest rates, very low yield on alternative investments among them, and possibly the most significant, low inventories) to label this very short term rise in prices a bubble. Twelve to eighteen months out, maybe sooner, we'll know more.

Submitted by The-Shoveler on February 25, 2013 - 4:32pm.

In SD I think you have more of a wireless/SmartPhone Bubble than anything else.

Me I think we will continue to have bubble/burst .. bubble/burst until we go back to using assets as part of the CPI (like pre-1981 --- the introduction of OER and the beginning of the destruction of the middle class).

I saw something by Nouriel Roubini where he thinks we are on the verge of the biggest mother of all credit bubble yet!!
Much bigger than the last one.

I don’t know, I think watching Japan will tell us what is likely to occur here (they are launching a new experiment in economics, State controlled markets!!).

Hey, you got a market that is not increasing, no problem, just force it!!

Submitted by no_such_reality on February 25, 2013 - 5:22pm.

bearishgurl wrote:

Yes, this is also the "flipper" price range, but if the asking and bid prices are too close to what the property would sell for flipped, the flipper won't want it.
...
It's different for the long-term owner-occupier buyer because they don't have to fix everything at once to get it back out on the market ASAP. They can move in (or partially move in) and fix as time/money permits.

You're correct if the price was too close to post fix, but they're not. The market hasn't heated to the point that those cosmetic fixes aren't major price hitters.

There-in is problem in our current marketplace. The pool of people willing to pay premium price for fully gloss coated greatly outweighs the price of those willing to deal with good enough.

And hence, people that want to live there while they fix it are being out bid by people that want to flip it, because the people that want it fixed right now are outbidding all of them.

Submitted by spdrun on February 25, 2013 - 5:29pm.

That's a West Coast thing to some extent. I remember seeing some condos in Chula-Vista that weren't horrible, just ugly, but the other people at the open house complained to no end about minor things. Whereas on the East Coast, people are used to old houses and don't expect perfection when buying. Having to repaint and replace some cabinets, zOMG, the horror!

(And speaking for myself, I'd rather have original 1920s details if possible than live in a crappy renovation, though my current apartment was pretty much the latter.)

Submitted by bearishgurl on February 25, 2013 - 6:13pm.

no_such_reality wrote:
...There-in is problem in our current marketplace. The pool of people willing to pay premium price for fully gloss coated greatly outweighs the price of those willing to deal with good enough.

And hence, people that want to live there while they fix it are being out bid by people that want to flip it, because the people that want it fixed right now are outbidding all of them.

I don't think flippers will offer more than costs of acquisition + cost-of-flip + cost of sale + "reasonable profit" (15%+??). Because most of them are looking for a very quick turnaround (to minimize their carrying costs), they have to go by the current sold comps in the area when making offers, even though prices (in general) may be rising.

In any case, prices are rising at different rates depending upon micro-area.

This leaves a window for joe6p buyer to bid a little more than a flipper would and get the property ... IF they have 20% down and can close in a timely manner.

nsr, your (emphasized stmt, above) is what I've been trying to tell lower-tier buyers here (ESP FTB's) since before the holidays. I've been telling them to cease being "part of the problem." In essence, I've been saying:

"Be pro-active, realistic, and make offers contingent upon a VERY TIMELY physical inspection. When your inspector in escrow doesn't turn up any structural damage AND the repairs they turn up total under 1.5% of the sales price, just suck it up, remove the contingency and deal with it. If you throw the listing back to the market, YOU are back to square one, which could get more expensive by the month. The property you just threw back will sell to someone else, in very short order.

Even if the repairs are 1.5% to 3% of the purchase price, don't ask for the WHOLE amount in concession from the seller in your counter-offer. If you really want the property, get an expert estimate (ex:. new furnace), present it to the seller and start out by asking them to reduce their accepted price by 70% of the cost of it.

All major cities are getting older and older and many of them have run out of land around their perimeters for new subdivisions.

And you really don't want to shop 50+ miles away from work (to make offers on *newer* construction in your price range), as getting one of these properties will eventually make your life miserable.

As a lower-tier buyer (incl FTB's), you can't have everything. Get as much as you can for the price you can pay and move forward.

If you, as a lower-tier buyer, are stuck in a "dream" of "delusions of grandeur" for your modest price range (new appls, new floor coverings, granite, etc), you are looking at a "flipped house" which will likely get multiple offers and thus, it's asking price will be run up, very likely beyond your price range."

********

Flippers and owner-occupant joe6p serial rehabbers didn't get where they are today by "sweating the small stuff" at the offer/counter-offer and acceptance/escrow stages. SFR buyers in the $320K-$400K price range can no longer afford to either . . . that is, IF they actually want to own their own home in SD County ASAP.

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