Saturday, December 24, 2005

Some Not-unexpected News...

Housing Affordability Hits 14-Year Low

(Dec. 22) - [All emph. add.] Soaring house prices and higher mortgage rates [caused] housing affordability in October [to sink] to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae. [...]
Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up. [...]
Mortgage applications fell to an 11-month low last week, the Mortgage Bankers Association reported yesterday, as applications to purchase homes declined. [...]

Housing affordability fell nearly 9% in the third-quarter from the same period a year earlier, according to an analysis prepared for The Wall Street Journal by Moody's, a unit of Moody's Corp., which adjusted the NAR Affordability Index for seasonal variations. Affordability dropped by more than 20% in nearly two-dozen markets, including Phoenix and Tucson, Ariz., Spokane, Wash., and Orlando and Lakeland, Fla., according to the study. "You have to go back 25 years to find a decline that is as significant on a percentage basis," says Mark Zandi, chief economist of Moody's

In Tucson, where affordability has fallen 23% over the past year, buyers in all price ranges are feeling the pinch, says Kevin Freadhoff, an agent with Long Realty Co. Mr. Freadhoff says he's currently working with eight couples who would like to buy their first home but have been priced out of the market and a dozen others who already own a home, but are having trouble trading up.

In Seattle, declining affordability is forcing many home buyers to accept longer commutes, says Jane Powers, a broker with Ewing & Clark Inc. [...] And in Bergen County, N.J., where most starter homes are priced above $400,000, "prices have gone up to a point where it's pushing the first-time home buyer out of the market," says Margaret Foudy, manager of the Weichert Realtors office in Tenafly. That creates a "domino effect" as people who already own a home find it tougher to move up, says Ms. Foudy.

In 57 of 379 metro areas nationwide, homes were so expensive in the third quarter that a family earning the median income couldn't afford the median-priced home based on traditional lending standards, according to Moody's Sixteen markets have joined the ranks of unaffordable areas over the past year, according to the analysis.

To be sure, affordability isn't a problem in many parts of the country. [...] The National Association of Realtors' Affordability Index [...] indicates [that nationally], the median-income family has [slightly more than] the exact amount needed to buy the median-priced home, assuming a 20% down payment and a traditional mortgage. [Mortgage rates, though edging higher, are still relatively low by historical standards.] [...]

Another major analysis of affordability, by the National Association of Home Builders and Wells Fargo, shows that just above 43% of all new and existing homes sold in the third-quarter were affordable to families earning the median income. That's the lowest level since the index was first released in 1992 and compares with 50.4% a year ago.

Some factors have helped offset the decline in affordability. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1% and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26% by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage, according to Moody's [But rising short-term interest rates are eroding the effectiveness of many such mortgages].

In Tucson, roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market, up from 30% two years ago, says Renee Booker, president of Long Mortgage, the mortgage arm of Long Realty.

In Spokane, where affordability fell more than 28% over the past year, many first-time home buyers are using piggyback loans and 40-year mortgages [!!!], which have smaller monthly payments than traditional 30-year mortgages, to get into the market, says Laraine Hunter, a managing broker with John L. Scott Real Estate. [...]

[R]enting remains a bargain in many parts of the country. Stephan Vrudny, an engineer who lives in San Diego, sold his three-bedroom condo to an investor in June for $405,000, then rented it back for $1,500 a month. Mr. Vrudny figures the arrangement is saving him $430 a month, even after taking into account the lost mortgage-interest deduction. "We'll be homeowners again when it makes sense again as an investment," says Mr. Vrudny, who had purchased the unit for $345,000 last year. [That's an 18% gain in market value, in only one year !]

- By RUTH SIMON, Staff Reporter, The Wall Street Journal

New Home Sales Plunge by Largest Amount in a Decade

WASHINGTON (Dec. 23) -- [All emph. add.] Sales of new homes plunged in November by the largest amount in nearly 12 years, the most dramatic evidence yet that the booming housing market is starting to cool off.
[New home sales make up 15 percent of all housing sales, according to the New York Times.]

The Commerce Department reported Friday that sales of new single-family homes fell by 11.3 percent last month to a seasonally adjusted annual rate of 1.245 million units.
Analysts had been expecting a drop of around 8.7 percent given that sales in October had jumped unexpectedly to an all-time high. [...]
In addition to the big plunge in sales, the median price of a new home dropped by 4.1 percent from the October level to $225,200. That was up only 0.3 percent from November 2004, representing a marked slowdown from what been double-digit price gains.

Analysts said they still expect sales of both new and existing homes to set records for a fifth consecutive year in 2005, but they are forecasting sales declines of around 6 percent in 2006 as demand falters under the impact of rising mortgage rates. [...]
"There are plenty of bubbles around the country that are losing air rapidly and more are likely to follow. But so far there is no generalized collapse in the market," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa. [...]

Home sales were down in all parts of the country except the Northeast, where they staged a 13.4 percent surge, the biggest percentage increase in this region since January 1994.
Sales were down 22.1 percent in the West, the biggest decline since February 1994, while sales fell 18.3 percent in the Midwest and 5.5 percent in the South.

The stockpile of unsold homes rose to a record of 503,000 homes in November. [...]

While rates on 30-year mortgages dipped slightly to 6.26 percent this week, they are still a full percentage point above the four-decade low of 5.21 percent set in mid-2003.
Builders are apparently rushing to complete homes and sell them before mortgage rates rise further. The government reported earlier this week that construction was started on 5.3 percent more homes and apartments in November than in October.


Developers always overbuild during booms. ALWAYS. Look for new home prices to drop further, which of course will help solve that "housing affordability" problem - for new buyers.
Sellers will be much less happy.

I also take issue with claiming that interest-only loans, mortgages with teaser rates of as low as 1%, "piggyback" loans, and 40 year mortgages "offset the decline in affordability".
They're all wagers that either home prices will continue to climb, or that the buyers will increase their incomes substantially. As long as either of those conditions are met, then there may be some merit to buying the largest home that one possibly can, and sooner rather than later.
However, if NEITHER of those conditions are met, then the buyers will be worse off than if they'd purchased a smaller home, or not bought at all.
"Piggyback" loans are personal loans made in lieu of a downpayment, and have interest rates that range up into credit card territory.
Interest-only loans or mortgages with teaser rates are initially VERY affordable, but within five years one must start paying the principal as well, and on an accelerated schedule, and teaser rates give way to serious rates. While both are great for those who know exactly what they're doing, or those who manage to flip their properties within a few years, there are many people who are not going to be prepared to meet the increased payments, especially if their homes decline in value.
40 year mortgages are wonderful for those who are thrilled to be allowed to pay almost exclusively interest for the first 15 years of their mortgage.

When there are markets where 60% or more of families earning the median income can't afford to buy the median-priced home, where prices are increasing by double digits every year, where 60% of first-time home buyers make no down payment, and instead get 100% financing, where over 30% of buyers have adjustable-rate mortgages...

For how long can such continue ?
From where will future demand come ?

And once prices start sliding, the speculators will start to unload, further depressing prices, and those folks with interest-only loans will find themselves with payments increasing by 20% once the initial period ends, and homes that are worth 20% less than they paid for them - some of them will be upside-down to the tune of tens of thousands of dollars.

There are some small markets, in areas that are desirable for vacation homes, where outside demand can keep the boom humming along, but in larger markets that depend much more heavily on organic demand, and especially where developers are throwing up new homes by the square mile, it seems as though the roller coaster might be cresting the drop.

As previously discussed, a deflating housing market in those 60 hot spots will cut a good chunk off of GNP growth, but in-and-of-itself, ought not cause a recession. Plus, the Fed will stop raising interest rates if housing hits a wall, which will benefit all of us who don't live in one of the real estate hot spots.


[All emph. add.] [T]here are several major differences between Japan in the 1980's and the United States today. One is the fact that property prices rose much faster and more steeply in Japan, partly because speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
Another difference is that the biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating. [...]

Japan suffered one of the biggest property market collapses in modern history. At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.
Then came the crashes in both stocks and property. [...]
Now the land in Japan is worth less than half its 1991 peak, while property in the United States has [roughly] tripled in value, to about $17 trillion. [...] **
In Japan's six largest cities, residential prices dropped 64 percent from 1991 to last year. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives. [...]

Yukio Noguchi, [is] a finance professor at Waseda University in Tokyo who is perhaps the leading authority on the Japanese bubble. [...]
In the 1980's, Professor Noguchi said, the frenzy in Japan reached such extremes that companies tried to outbid one another even for land of little or no use. At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.
Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor. [...]

Professor Noguchi said he also saw parallels between Japan then and America now. Last year, as a visiting professor at Stanford, he said he read real estate articles in local newspapers that sounded eerily familiar. Houses were routinely selling for $10 million or more, he said, with buyers saying they felt that they had no choice but to buy now, before prices rose even further.

"It was déjà vu," Professor Noguchi said. "People were in a rush to buy, and at extraordinary prices. I saw this same haste psychology in Japan" in the 1980's. "The classic definition of a bubble," he added, "is people buying on false expectations about future prices, and buying with the hope of selling in the future."

Economists and real estate experts see other parallels as well. In the 1980's, the expectation of rising real estate prices made many Japanese homebuyers feel comfortable about taking on huge debt. And they did so by using exotic loans that required little money upfront and that promised low monthly payments, at least for a short time.

A similar pattern is found today in the United States, where the methods include interest-only mortgages, which allow homebuyers to repay no principal for a few years. Japan had its own versions of these loans, including the so-called three-generation loan, a 90- or even 100-year mortgage that permitted buyers to spread payments out over their lifetimes and those of their children and grandchildren.

- By MARTIN FACKLER, The New York Times

The full article was careful to say several times that nobody expects home prices anywhere in the U.S. to fall by two-thirds.

It's interesting to note that even after a catastrophic real estate crash and an eleven year long recession, all of Japan's land is STILL worth half of what all of America's land is worth, even though America is fifteen times larger.
Population density is obviously a big part of the premium valuation, but can't be the only factor, of the U.S. is any guide; Houston, for example, has cheaper real estate prices than just about any city of its population size and density, for reasons unknown to me.
Maybe it's the extreme heat and humidity, which is very Vietnam-like.


Blogger Duck said...

I can speak to the rise in prices in Phoenix. In March my wife and I bought a home (for her, we are separating) in Surprise, Az, which is one of the westernmost new suburbs of Phoenix, for $210,000. We bought it from an investor who had paid $160,000 6 months earlier, and had never occupied it. The tax assessment just received pegs its value at $305,000. The investor we bought it from is a famous TV actor whose initials are PD, and who starred in "The Man form Atlantis" and "Dallas".

I'll be selling my home here in Minnesota this year, if I can get it fixed up enough. I should net at minimum $200,000 over what we paid in 1990. I will definitely be downsizing, just haven't decided yet whether to stay in MN or move elsewhere, maybe back to New England to be near my folks. It would be cheaper to stay in Minnesota, there are many places in the Twin Cities to get new and used townhomes for under $200k.

December 24, 2005 10:23 AM  
Blogger Duck said...

By this year, I mean 2006.

December 24, 2005 10:24 AM  
Blogger Oroborous said...

Phoenix is DEFINITELY going to suffer from stagnant home prices, if not a substantial drop.

It's one of the cities with a very high number of homes owned, for the moment, by speculators.

December 24, 2005 7:46 PM  
Blogger Hey Skipper said...

I sure wish where I live could find its way onto the Unaffordability Hall of Fame.

December 26, 2005 4:22 AM  
Blogger Oroborous said...

Ha !

Don't we all - assuming that we're willing to sell for a small fortune and move elsewhere.
Which I am.

December 26, 2005 5:41 AM  
Blogger Duck said...


Just be happy that you don't have to buy your wife a separate house.

December 29, 2005 1:37 PM  
Blogger Hey Skipper said...


That got a laugh, of the rueful kind.

December 30, 2005 1:47 PM  
Blogger Duck said...


Actually it's not so bad. We're still on good terms, or should I say that we are on better terms now that we're separated. And I have a warm weather vacation home where I can stay in the winter (for a short visit, not to exceed the shelf life of a fresh fish by more than a week).

Affording both is the current problem. But downsizing here in MN should solve that problem. Actually my location in MN is up for grabs now too. My daughter got back from visiting her mother in AZ yesterday, and it looks like she wants to go to college down there. I mught just pull up stakes and move back to New England to be near my folks.

December 31, 2005 7:54 AM  
Blogger Hey Skipper said...

We might be picking up stakes, as well.

My wife finishes should graduate nursing school in May, which means she will be instantly employable everywhere.

On top of that, we are no longer factoring Northwest into our plans, which means the only reason we got here in the first place is gone.

On the other hand, we have put a bloody lot of work into this house, and don't particularly relish the thought of spending all that time making it wonderful for someone else to live in. As well, the area is very pretty, and we have great neighbors.

What to do ... what to do.

December 31, 2005 5:15 PM  
Blogger Oroborous said...

Are you still near Detroit, Skipper ?

I dunno how far out your plans extend, but that's very unlikely to be a high-growth area over the next few decades.

Might be better to take a small hit now, and position yourself for rapid future growth...

December 31, 2005 6:44 PM  
Blogger Duck said...


Where would you move to if you did move?

Yes, it is aggravating to think of all the effort and expense that we put into houses, only to sell them. Hopefully you get part of tat back in appreciation. I've replaced every window on my house and refurbished several of the rooms, including the master bath.

It will be no-maintenance living for me from now on. Do they make all-vinyl houses?

January 01, 2006 12:58 PM  
Blogger Hey Skipper said...


Yes, about 25 miles due north of Detroit.

... but that's very unlikely to be a high-growth area over the next few decades.

What might come as a surprise to you is that Oakland county is something like fourth richest in the US.

Which makes it ironic that you are almost certainly right.

Unfortunately, there is one fundamental factor of the real estate even more important than location: any market I buy into will tank.


No earthly idea. I have friends in DC who, given my defense background, could quickly get me a job, but I'd have a hard time even repurchasing the house I sold there in 2000 (which had scarcely appreciated over the six years I owned it, and skyrocketed since; see "tanked" above).

Raleigh Durham is another option that is high on the hit parade. I'd love to live out west, but my wife has roots on this side of the country.

No extra points for guessing how that will affect the decision.

January 01, 2006 1:38 PM  
Blogger Oroborous said...

I really enjoyed North Carolina, specifically the climate, terrain, and flora, but I lived in the eastern part, Fayetteville, to be exact.

January 01, 2006 7:02 PM  
Blogger Duck said...

My brother lives in the DC area, Maryland to be exact. The home prices are outrageous, I wouldn't be surprised to see some backpedaling in prices. The last thing you want to do is buy your old house at it's inflated price and watch it retreat to the price you originally sold it for. That would be irony of the worst kind.

Virginia is a beautiful part of the country, though.

January 02, 2006 9:38 AM  
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