Flutterby™! : Housing Bubble 2007-07-30 13:38:46.85113+00

Housing Bubble

2007-07-30 13:38:46.85113+00 by ebradway 8 comments

Forbes has an interesting piece on affordable housing - or the lack thereof - in certain cities. It includes a good way to standardize what housing costs (like down payments, tax and insurance, etc). By the stated figures, in 2001, over 42% of houses sold in Los Angeles were within the affordable range for earners making the median income for LA. In 2007, that figure has dropped to 3%.

There's also a nice piece on the Riskiest U.S. Housing Markets. Their statistic in this article is basically the percent of ARMs issued by banks.

Public awareness is just now rising. Housing has been in a tailspin for 18 months. No longer can houses be used as ATMs as values fall. There is a real divide among "realists" and investment bankers right now. Investment bankers feel the recent drop was a buying opportunity while the realists feel it is just the beginning. Since the so-called global economy is highly dependent on American consumers and since American consumers are highly dependent on the value of their homes, it seems the realists may be more on the money. With more Americans being unable to meet the ARMs increases so goes the CDO market which is used to finance the private equity deals. I would say we are looking for at least another 18 months before there is any light to be seen at the end of the tunnel. It would be wise to place short bets on market rises rather than taking the current advice at places like Goldman Sachs telling you to buy on the dips.

Prices in this area have dropped significantly in the last 6 months but they are still well above where prices were 3 years ago. People are just fooling themselves when they think they are going to get 2004 and later prices on their homes. Low interest rates are almost irrelevant if prices are too high. That is where we are now. Homes will not sell until prices come down a great deal, maybe by as much as 30 to 50%.

Sigh. We're seriously considering a move that could have us buying a house in an area that I believe is currently overvalued, and I'm trying to figure out if we do the gutsy thing and rent there, or just buy, because the mortgages are only running about 1.5x rents.

If you have to move, for God's Sake, don't buy. Rent for at least 18 months. Your patience will be rewarded.

#Comment Re: This may aid your decision making process made: 2007-07-31 13:08:30.527578+00 by: BC

#Comment Re: For those who want to get a better handle on what may unfold... made: 2007-08-01 02:36:41.539547+00 by: BC

Here is an excellent, all encompassing summary article on this issue and how it relates to the US and global economy.

Hmmmm... I've proposed that the only way to take care of the excess in the stock market is inflation, that probably applies to the housing market as well. Wonder what that means for the housing market, if there'd be some situation where housing prices would remain constant as interest rates ballooned, and folks with fixed mortgages would make out like bandits even as their house value in purchasing power falls?

Dunno, too much to do tonight to speculate further, but, yeah, still maintaining the original longer-term plan in real estate ownership.

Personally, I think too much emphasis is put on the US economy when it relates to the global economy. Think about this: what will happen if the US economy tanks and the dollar is significantly devalued (at 100X the rate it is now) with China sitting over there with a $Trillion in the bank (but not in US $$). All of a sudden, things are very cheap in America and China has lots of cash...

Also, you see stronger markets in Europe and even South America, independent of the US economy. The strengths of these markets will make the USA look like a flea market (not unlike the 80s when Japan starting buying up property - like most of Hawaii).

But I'm very optimistic about globalization. I think it leads to stronger, more resilient economies. What happens to the US economy if China starts pouring money in? Well, it starts plugging the holes in the dykes and the US economy rights itself.