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Housing: New Bubble or More Trouble?

by John Rubino on April 17, 2012 · 22 comments

The in-laws own a gas station in Miami that they’ve wanted to sell for years. But they dithered when the market was hot and ended up being stuck with it when interest evaporated in 2009.

Lately, though, the phone has begun to ring again. It’s not exactly a feeding frenzy but real offers are coming from legitimate buyers for the first time in three years.

That’s actually a pretty good description of real estate in general, where low interest rates have convinced a growing number of people that it’s time to buy. See this upbeat story on the home builders:

Pulte, Lennar jump as survey shows housing rebound
NEW YORK (MarketWatch) — Shares of U.S. homebuilders rallied on Wednesday after a Wells Fargo analyst’s research report said data from 20 select markets nationwide are showing strength across the board.

“For the third consecutive month, our survey points to an improvement in orders suggesting 2012 may be the long-awaited recovery year for housing,” the note said.

PulteGroup PHM -1.39% added more than 8%, Lennar Corp. LEN -1.47% gained 5%, D.R. Horton DHI -2.44% rose 4.2% and Toll Bros. TOL -0.86% gained 3.8%.

The bellwether industry ETF, the iShares Dow Jones U.S. Home Construction Index Fund ITB rose 3.4%.

Wells Fargo’s monthly Neighborhood Watch Survey, which tracks 150 sales managers at housing tracts in 20 markets, showed that March results were strong across all measured metrics. In particular, the survey noted that March’s numbers surpassed poll participants’ expectations by the widest margin since the survey started, in 2001.

Wells said that pricing in the 20 markets also improved, both month-to-month and over year-ago figures. Sales managers’ commentary on market activity indicated that buyer confidence seems to be improving as inventory shrinks.

“Sales managers suggested there is a sense of urgency in the marketplace as buyers anticipate higher home prices and/or mortgage rates,” the report said.

Bidding wars are even returning to some markets:

Market squeezing homebuyers
Home shopper Dian Schneider was four houses in on a whirlwind tour of local homes for sale Friday when her real estate agent issued her a warning.

“Now if you like this one you’ll need to move today because there are already two offers on it, and they’re both above list price,” said Anna Hernandez of McKinzie Nielsen Real Estate. “They’re not crazy high, but you’ll have to go in high, too, if you’re serious about it.”

Schneider nodded knowingly as she peeked inside closets, flushed toilets and opened cabinet doors.

The 50-year-old single mom had already missed out on two homes she’d made offers on. She was outbid on one, and pulled out of a second over concerns about its dated electrical system.

“In hindsight, I probably should have taken that one,” Schneider said.

Almost all the available inventory in her price range is badly in need of repairs, and upgrading the electrical on the home she passed up wouldn’t have cost as much as she’d assumed, she later learned. But back then, she didn’t fully appreciate how lucky she’d been to find something.

The Bakersfield area had only 583 single-family homes for sale in March, about a third fewer than in March of last year.

Bidding war return
The result has been fierce bidding wars and almost immediate turnover for anything of quality that’s priced reasonably, whether it’s a modest starter home or a mansion.

“Everybody’s pretty much in the same boat right now, regardless of price,” said Robert Morris, who sells for Watson Realty ERA. “The supply keeps dropping and dropping and there’s nothing replacing it.”

Broker Nancy Harper of Nancy Harper Realty recalled listing a home the day before Easter. By Easter Sunday, it had six offers on it, and when she called the losing agents to tell them their offers had been rejected, two of them burst into tears.

“They told me they’d written something like 14 offers for clients and just couldn’t get one accepted,” Harper said. “When you have agents bursting into tears, boy, that’s low inventory.”

So is the housing bubble back?

There’s an inflationary argument for this being the case. The Fed has lowered interest rates dramatically and handed banks a ton of newly created dollars, which in the past has produced asset inflation, as everyone decides that real things are a better bet than a rapidly-inflating currency and begins to act on this assumption with borrowed money.

Creating a new generation of overleveraged “homeowners” is of course a bad idea for society as a whole, but quite good in the short run for house prices, economic growth, and incumbent electoral prospects.

On the other hand, it might all be a mirage, since real estate has gotten some recent help from a couple of unsustainable sources. First, this past winter was warmer than usual, so presumably a lot of deals that would have been done in April and May have already happened. Second and much more ominous, the robo-signing mess that prevented banks from foreclosing on homes they otherwise might have (because they couldn’t be sure their paperwork would check out) is over, freeing banks to go after all the squatters who have been living rent-free for the past few years:

Flood of foreclosures to hit the housing market
NEW YORK (CNNMoney) — The golden age for foreclosure squatters may soon be coming to an end now that the $26 billion mortgage settlement has been approved.

The settlement, agreed to by the nation’s five largest mortgage lenders, is expected to speed up the foreclosure process by providing stricter guidelines for the banks to follow when repossessing homes.

The banks involved include Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citibank (C, Fortune 500), Wells Fargo (WFC, Fortune 500) and Ally Financial.

Many foreclosures have been in limbo since fall 2010 following the so-called robo-signing scandal, when banks allowed employees to sign off on thousands of foreclosure documents a month with little verification.

Lenders hit the pause button on foreclosures because they “were afraid that anything they did would be under a microscope,” said Eric Higgins, a professor of business at Kansas State University.

As a result, borrowers who were seriously delinquent on their loans have been able to stay in their homes for months or even years without making a single payment. Nationwide, the average time it takes to foreclose on a home — from the first missed payment to the final bank repossession — stretched to 370 days during the first quarter, almost twice as long as it took five years ago, according to Daren Blomquist, the marketing director at RealtyTrac.

Foreclosure free ride: 3 years, no mortgage payment
In some states, delinquent borrowers have been squatting in their homes much longer. In Florida, the average time was 861 days, and in New York it was 1,056 days — close to three years.

“Perhaps a million foreclosures could have been pursued last year but weren’t,” said Rick Sharga, executive vice president for real estate investment company, Carrington Holdings.

But that’s all about to change, he said. “We’re going to see an increase in the speed of foreclosures and a higher number of foreclosure starts.”

In fact, there are indications that the pace of foreclosures are already starting to pick up.

While overall foreclosure activity was down during the first quarter, filings were up 10% in the 26 states where foreclosures must undergo court scrutiny, according to RealtyTrac.

In the judicial state of Indiana, for example, foreclosure filings were up 45% year-over year. And in Florida, they were up by almost 26%, according to RealtyTrac.

So where does this leave housing? Perched, like the rest of the economy, between two very powerful forces — one inflationary, one deflationary. In housing’s case, mortgage rates are low, pent-up demand is massive and supply, at the moment, is minimal. But there’s also a tsunami of foreclosures about to hit the market, along with the usual eurozone and Middle East wild cards waiting to traumatize the financial markets.

So who knows? I just hope the gas station sells soon.

  • Agent P

    It’s all regional. And the regional dependence of course is on employment. Where it gets interesting – and much of the standard information available seems to fall short, is where precisely is the employment coming from that is fueling the 2006 housing demand redux? Here in the Bay Area, it’s easily explainable with the .com redux – this time, the ‘social media’ craze. What else though? What sectors? What is driving the demand for hiring? Is the hiring temporary? If not, is the employment horizon greater than 6 months? Is our overall economic outlook safe to prognosticate anything past 6 months? ISM manufacturing shows up positive – but where is the ‘manufacturing’ taking place – here, or ‘over there’…? The numbers don’t show whether U.S. based companies manufacture here or there, they just show the numbers…

    And what of any underlying issues since 2007/2008 – have any of those been addressed or solved? Have any of those underlying issues been added to, rather than subtracted from? Or, are we simply on a what amounts to a 6 month revolving cycle where one really can’t plan too far ahead – say like not much past 2 seasons? Gut check tells me – while the sales and temporary (?) uptick in demand is ‘real’, I’m not so sure that a foundational recovery is real. Perhaps I’m all wet…?

  • Tony D

    Could this be the first indicator of an increase in monetary velocity ? All that money sitting in the banks could start to move and then it would be inflation “game on” – at least until the house of cards collapses (to mix my metaphors !) Any increase in house prices based on easy credit rather than solid economic foundations (e.g. low unemployment) is doomed to fail. The whole situation in the States is a sham while the Federal Government runs trillion dollar deficits to keep the economy afloat. What happens with housing may well turn out to be decided by the macro/govt debt picture rather than forces within the housing market.

  • Bruce C.

    I may post another comment later that is more generally applicable, but until then I will say this: I have been trying to buy a house for about 1.5 years now and none of them have seemed worth it. Maybe it’s because I live in South Florida (see Note 1 below) but the houses still seem overpriced to me. I was going to say only those under $450 k, but after thinking about it they’re all still over priced. (I don’t care how much more they cost in 200x. They’re even older now.) In fact, I think they’re a proxy for the entire financial/economic system today. Things weren’t allowed to fully bottom out because of so much Fed/gov. intervention so everything is in a kind of levitated state. Things could remain levitated for a while longer until economic recovery picks up, but that may not (probably won’t) happen – at least sufficiently – so then another leg down will/must occur. Maybe I’m just a pessimist at heart, but it FEELS like “we” need a catharsis on many levels, so it’s difficult for me to believe that the Fed/gov. has saved the day (again) and the worst is over. Intellectually, I see no way that more debt can possibly solve over indebtedness problems. Hopefully, I’m too stupid, or just too impatient.

    Note 1: Evidently, South Florida/Miami is a mecca for South Americans (Venezuelans in particular) and they are unique customers. For one thing, they want to get their money out of X and into an asset (read real estate), and preferably in the US. Secondly, their (crappy) currency now holds a good size candle to the US dollar so they enjoy a 20-30% cost discount compared to US chumps. And, thirdly – and I’m not kidding about this – they (i.e., Latins in general) have an admirably but sadly outdated and naive belief about the US “system”. It’s a curious mix of having learned the ropes in their own corrupt countries and an idealistic belief that things function the same way “naturally” here. It’s a tangled tale to explain it all, but the bottom line is that they think that the price paid for real estate is the only cost there is. No taxes, no insurance, no maintenance, etc. And the real kicker is that they never admit it (their naivete) to their fellow X’s so the charade continues as I speak. And that is why South Americans over pay for US real estate, which “artificially” inflates locale prices.

    • paper is poverty

      I’m sure plenty of South and Central Americans are laughing at US ex-pats overpaying in their own countries, creating bubbles in Costa Rica and the like….

    • Cynical, Enraged, & Focused

      The thing about real estate is that it can’t be hidden and government knows who has it. As other sources of tax revenue that depend on robust economic activity continue to decline in the years ahead, where do you think the government is going to turn? That’s right, to the people with big, fat, illiquid, unconcealable assets that they don’t want to forfeit. Municipal and state “authorities” will be putting the squeeze on first, but I’m sure the feds are slavering over the prospect of using real estate equity as the basis for some sort of wealth tax in the not-too-distant future as well

  • Goldman

    Lets keep in mind the Federal Housing Authority is giving away loans like its 1999.
    FHA – low Money down loans include:
    1. HUD Good Neighbor Next Door Program (you can’t make this up)
    From HUD site – yes more goodies for Government employees:

    Question: Am I Eligible for the GNND Sales Program?

    Answer: Law enforcement officers, teachers and firefighters/emergency medical technicians and who meet all other requirements of the program are eligible to purchase an available home.

    Question: How Much of a Discount Can I Get on a HUD Home?

    Answer: You can get a 50 percent discount off the HUD appraised value. For example, if HUD lists a home at $100,000, you can buy it for $50,000 provided, you occupy the home as your personal residence for the required occupancy period. If you qualify for any FHA-insured mortgage program, your downpayment is only $100 and you may finance closing costs.

    2. 3% down Home Mortgages – check out your local state – I know Massachusetts Housing Authority is offering – haven’t we been here before?

    3. USDA is offering zero down Mortgages for Manufactured Homes.

    I have a bad case of deja vue!

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  • eugene12

    Wages aren’t climbing. Median wage is still way low for median priced house. The devils in the details. Something strange is going on.

    This is election yr and politicians will sell their mothers to get re-elected. So they will sure as hell sell the taxpayer. What’s another trillion or two of debt. I don’t talk to anyone who is the slightest bit concerned. In fact, I don’t talk to much of anyone who knows much of anything other than nice weather

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  • Bruce C.

    I just want to add a few more thoughts about the state of housing as I see it (here in S. Florida).

    First of all, most of the houses on the market are not in good condition which is one reason why I think they’re over priced. The only reason they do sell at prevailing prices is because so few are available. So, demand is high but supply is low so prices are high for that reason. However, there are three potential sources of more supply: more sales of existing homes, more foreclosures hitting the market, and more new homes being built. But foreclosures, which constitute approximately 30% of sales now, tend to depress prices so current owners (like JR’s in-law) may be less willing to sell if prevailing prices are deemed too low, and new homes certainly won’t be built if prices are too low to be profitable.

    According to some analysts, housing seems destined to recover slowly at best because of so many headwinds and it will ultimately stabilize at about half the level that it attained during the last decade. But even that will depend upon a number of dicey conditions – that interest rates stay low, that incomes steadily increase, that employment continues to grow, etc.

    Personally, I think many of the political elections this year will be very pivotal, especially the US Presidential. There are a number of candidates in Europe who don’t want to go along with the latest financial stabilization plans and that could trigger a tail spin in the financial markets and maybe even an avalanche. And if the US Pres. election is close (and it probably will be since Romney is such a pathetic alternative) then I think there will be major social disruptions over here. If Obama wins, and I think he will but probably more by crook than hook, then I think there will be an emotional pall over this country like we’ve never experienced, and then all bets are off. I suspect we’ll go over the cliff at that point as things become unhinged due to pent up anger and frustration, more taxes, unfettered regulations, and social unrest. My point is that regardless of the financial factors, people may not want to buy a house under those circumstances. Who would want to feel stuck, or sink so much money into some place that they may need/want to abandon?

    But even if none of these dire outlying events occur I can’t see how US deficit spending can go on much longer and when government spending starts to shrink then incomes and jobs will shrink too because deficit spending is largely what’s keeping everything together right now, which isn’t good for housing (or anything else).

  • Dave Ziffer

    Yes HUD, the good folks who brought you the Drug Dealer Next Door program (otherwise known as “Section 8”) and then the subprime mortgage, followed by the housing bubble and its subsequent collapse (along with the collapse of most of your assets) are now going to fix everything.

    Due to some unusual circumstances last year I had gotten the idea that the housing market might have bottomed out and was beginning to recover and due to this misconception I acquired a second property, which I have watched steadily depreciate over the past serveral months, along with my first property of course. I am now looking around at the market’s continuing downward slide and am getting the same sort of feeling that one gets before a tornado: too many disturbing signs that something very unpleasant is coming.

    The housing market’s persistent inability to stabilize even under the influence of so many grossly market-distorting federal initiatives is quite alarming. If we cannot find a housing price floor even while the government is undertaking the largest artificial wealth redistribution in the history of the planet in an effort to prop prices up, then what must the underlying fundamentals really be? I do know this – I will not be buying any more properties anywhere in the forseeable future.

  • Steve

    Good comments, folks, thanks for posting, helps one get other perspectives. Housing here in the Northeast on Cape Cod is down in price from the highs but selling.


  • Julio Jurado

    Very informative blog article.Thanks Again. Great.

  • Mark D.

    I have to ask myself what happens when the market establishes interest rates instead of the zirp policy that the fed pursues? The day will come when the market (a la Greece,Spain and other PIIGS) determines rates and not the intervening fed.. How marketable is a home when mortgage rates are double digits? Oh, and with over 100 trillion in debt and slightly over 2 trillion in revenue and FICO scores close to the single digit policies pursued by the feds, the 30yr fixed at 2% will not be an option for the USA.

  • Tony Wong

    Actually the cause of the rise of the house prices is justified because the 75% or more of the international reserves in all the other countries in the World is in US Dollar so when the Federal Reserve starts to print money it causes global inflation not just inflation in the US. Property prices in Asia and South East Asia has risen so high that property in New York US$ 5 milion looks cheap for that price you can buy only the space of a toilet in Hong Kong. Because of the high prices Asian buyers and the Chinese are now buying in the US large sum of properties, however this would probably not last since the US economy is broken and it just produces debt and inflation, nothing else. In Malaysia for example to get a new apartment in Bangsar you have to pay US$ 2.4 Million for a start and it goes up as high as US$ 5 Million taking note that apartments in that area a few years ago only cost US$ 200,000. Every time the Federal Reserve prints money it causes food prices and the price of properties in other countries to rise ! And this causes revolution in that country and strife and problems for the Government of that country! In other words the US is the one to blame for causing revolutions and the current instability in the World why, because 75% of international reserves are in US Dollar and no one dares to sell the US Dollar and cause it to collapse. But the first country to sell the their US dollar reserves and change it to other currency will benefit the most as they will be saved from the collapse of the US Dollar.

  • bob D

    the bubble will be in favor of the banks who hold zillions of ownership paper and will wake up and discover each can be sold, in an orderly way, by any
    halfwit, i.e. by any bank employee…………… the lazywits are reluctant
    to unwind their default holdings because they list as assets…. but dont
    worry, bankruptcy court will unwind and sell them at big discount enough
    to get rid of the dogs and cats and etc……………

  • bob D

    bidding wars are reborn by greedy RE brokers, the real world facts are
    that there is an over abundance of RE on market that is not being sold
    because the owners believe in santa clause and being reborn, such is
    not the case, real price is going down and down until at least y2020 and
    probably until y2030, so live in your car until 2020 then come up for air
    and see what the market is doing, if still in freefall wait til 2030 when
    the price market will hit bottom meaning wait until 2031 to see the
    freefall has turned into continual price hikes, then come in a bid for
    a home etc at price of y2029, the owners wont know the difference
    and that is where the profits are……

  • bob D

    as you know, lawyers have automatic right to act as RE Broker on any trades
    especially nice is when they broker their clients RE without telling client that
    they their lawyer is in for a juicy six to 10% commission and more if at auction
    because the commission is on hyped upward price, suckers game…..
    yes yes yes the lawyers do not have to share with another broker to validate the deals and do not have to take anytest, ethics or otherwise, and they the lawyers are free to scalp their clients in this additional goldmine way…..

    • http://www.facebook.com/profile.php?id=100003406027588 Mati

      Let’s buy Hannity a plane ticket to Tehran so litlte Sean can have his own litlte war. He could go suicide bomb their non-existent nuclear program. Or maybe gun down a playground full of Iranian children since they might turn into Nazis someday.Goodness, Sean. At least have the decency to floss out the Afghan flesh from between your teeth and to wipe the Iraqi blood off your fangs before you go back for an Iranian dessert.

  • Patricia

    This is interesting. Actually, I am curious about the development in the US and how it relates to whether it is good time to buy real estate in Canada or not. The resilience of the Canadian housing markey is obviously a great surprise as the prices continue to reach record levels. However, I feel it’s better to be more careful as there are already signs of housing bubble. It’s good to reflect on the situation in US, there is a lot to learn.

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