Brad DeLong's Semi-Daily Journal (2004)

Perhaps some of this bubble is being driven by restrictive planning,zoning, land use regulations ? If so, unless they are changed dramatically there is a limit to how much the bubble can deflate because you still have a local artificial scarcity of land upon which to build new housing. If people still wish to move to this area housing prices will remain exceptionally high, relatively speaking.

Something else to consider is how the people that buy at the top of the market will feel:

"Dear Mortgage Lender: I bought my house two years ago. Since then, it's lost 30% of it's value. I'm trying to sell now so I can move to Kansas to be near family and my new job. If I can even sell the house, I will still owe you $60,000. Why don't you sell the house instead and keep all the money. Here're the keys. I'm sorry. Good luck."

Already, the foreclosure and bankruptcy rates are something near record levels, and the market hasn't even topped. Add homebuilders to the list of who to short.

Here's the thing. It may not cover much of the nation, but it probably covers the most dynamic and innovative parts of the nation (remember the magic "knowledge economies")? Remember we're talking Boston, San Francisco, New York, and so on here.

So the economic damage might be far out-of-proportion to the percentage of the housing stock affected...

that is assuming that there are people left who can afford to buy the property. So even though people may desire to move their for certain reasons they just can't financially afford to do so.

I believe there was a post the other day that referenced an analysis that noted that indeed the inflated house prices relative to rent inflation are only in 20 metro markets. However, these 20 metro markets constitute 50% of the total U.S. housing market wealth. Just brushing it off by saying it's only California (which has the population of Canada alone) might be insouciant behaviour.

It certainly is a bubble here in San Diego.

One key element: virtually nobody believes that home prices can/will fall. Yes, "it's different" in San Diego.

So, people happily gamble and go for the adjustable loans that allow them to qualify for higher mortgages. That's a recipe for negative equity and an unaffordable mortgage payment if interest rates rise and housing prices fall.

As it is, only 16% of SD families can afford the median price home.

The local paper painted a more dramatic picture a few weeks back in a piece on biotech hotspots in the U.S.

Going by memory, the Research Triangle area of North Carolina had an average biotech salary just slightly above that of SD--say $67,000 versus $65,000.

Average home price in NC was something like $180,000 versus $450,000 in SD.

I think that Prop 13 is probably responsible for some serious distortion of the Calif housing market--the bubble prices aren't all easy mortgage money and "it's different" thinking.

I've got to agree with Phil on this one. The potential danger is to bank's balance sheets if a lot of property owners default. Wasn't Japan's current malaise originally caused by the effect of a collapsing real estate market on the solvency of banks?

“The problem will come not if housing prices decline, but if the decline in housing prices makes rich homeowning consumers feel poor and scared, and causes them to stop spending so much.”

Rich homeowning consumers?

1)If your home is less valuable, you are by definition “less rich.” At some point, you are indeed “no longer rich.”

2)To consider a consumer as being in the state of “homeowning” when he or she is in the first year of a spanking new 30-year refinanced mortgage seems to confuse a legal assertion with an economic force.

3)If you save nothing every month and are consciously or unconsciously relying on assumed growth in the equity in your home as the surrogate for your savings, it does not matter what your present income may be, you are not rich—just spectacularly optimistic.

As a "homeowner" in Tokyo (house purchased in August 2000), I can state only the obvious—buy only if you intend to live in the same place for 15 years or more. If you guess you will be on the move in less than 15 year’s time, keep your possesions few, rent or lease, and diversify your investment holdings.

The article cited in a prior post to which Monte Carlo refers is:

http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

In that article, author Benjamin Wallace-Wells insisted that there are no economists who doubt the existence of a housing bubble. I am thus fascinated to read that there are analysts in the article Drum cites who argue against a bubble. BW-W also took one, that's 1, comment from Greenspan during testimony suggesting financial advantage to ARMs - if households are willing to manage interest rate risk themselves - as a hamhanded attempt to put household finances at risk in order to serve the interests of banks. Oh, and brokers are devils. Mr W-W forgot to point out that monthly payments for the average house are well within the means of the average household income, which might help explain why one would make such purchases even if one were not a speculator. If BW-W's arguments represent the substance of the housing bubble argument, then we probably all need to go buy a house on spec. Sadly, there is reason for worry. There is simply no reason to conclude, before the fact, that the housing market is doomed.

The "bubble" term continues to get an awful lot of casual use. The suggestion that land-use rules contribute to the "bubble" misses the point that a bubble - as I understand the term - is speculative in nature. Limits on supply is a fundamental factor.

Yes, we are carrying lots of debt. Yes, home prices have advanced very fast. Yes, some of that advance is because mortgage rates have allowed low monthly payments relative to the price of the home. Most of those mortgages are still fixed rate debt, though ARM use is certainly up.

In all this discussion, it is rare that anyone mentions the fate of the poor lender, other than to note that banks may have risked too much on mortgages. Pity for banks seems misplaced, since most mortgages get bundled and sold. The ultimate lender is often households (via pension funds, 401k, and the like), pension funds, cash rich corporations and foreign investors. If inflation picks up to, say, 2.5% (core CPI rose at a 2.9% annualized pace in Q1), then mortgages at 4.8% (the average on 15-year paper so far this year) will yield a real 2.3%. That's pretty disappointing. TIPs might do better.

The median home price data are very volatile and not very representative of actual changes of home prices. When high-end home sales pick up relative to low-end home sales, the median sales price will rise even if all house prices are UNCH.

The more-reliable OFHEO data show that LA was up just under 17% last year. This is hardly a minor advance, but it is probably more representative of what is actually happening than the 29% figure cited in the article.

Also I think people use the term "bubble" far too casually. A bubble is not when the price does not look right to you. The word for that is "market". A bubble occurs when expectations of future price diverge from perceived underlying value. It is a bubble when we are all relying on the greater fool.

Shiller has recently argued that we are in fact relying on the greater fool these days, but I don't find his evidence convincing. His recent survey shows that people who just bought a house REPORT an expectation that the price is likely to rise. Shock-ER. But these same data show that sentiment is less inflated now than it was during the late 1980s (after which there was no nation-wide price collapse).

It may well be that the bubble is actually in the bond market and that homes are fairly priced given the current (or recent) level of bond yields. Affordability measures would suggest as much. One might assume that home prices derived from a bubble in bonds would themselves be bubbly. But I don't think that would be right. The fellow borrowing 30-year money to buy a house may be just as short the bond market as he is long housing. Indeed, he may be more so if his need for shelter implies a natural underlying short in housing that would be closed by buying a home.

If the housing market is efficient, then home prices will begin to fall when interest rates rise. I would say that the "duration" of the housing stock is quite high just now because the real discount factor (after-tax real mortgage yield)on the perpetuity that is housing services is quite low. The implication is that home prices should fall a lot when bond yields rise, particularly if (as is likely) that rise reflects a change in monetary policy rather than a change in expected lifecycle income growth.

So I think it could get ugly for the reaons that Professor Delong alludes to. The mortgage credit boom associated with rising home values, rapid turnover of the housing stock and cashout refinance has kept the aggregate personal saving rate well below what most people would assume is normal.

For me this is yet another reason for the Fed to be "patient" before tightening. Before the Fed risks an abrupt renormalization of savings, it will want to make sure than capex and labor income growth really are ripping and that any lingering risks of disinflation are behind us.

But that is separate from the question of whether home prices are now being set rationally, GIVEN the level of mortgage yields. At least I think so.

Forget nationwide data. San Diego is in a bubble.

Another data point: increasing conversions of apartment complexes into condos. That is a clear sign that the relationship between rental rates and home values is out of whack.

A bubble occurs when expectations of future price diverge from perceived underlying value. It is a bubble when we are all relying on the greater fool.

I'd say that the San Diego area meets this condition. Why else would somebody purchase a home with a 5 yr fixed/adjustable mortgage at a time when interest rates are very likely to rise? At the end of that 5 yr period, the borrower is screwed unless the home has held its value (or incomes have risen dramatically--given that most buyers here really have to stretch to get in).

Those in the real estate business almost universally argue that this isn't a bubble ready to burst, because construction hasn't been excessive--in other words, the homebuilders haven't been doing speculative building.

True--they can't keep up with demand. I'd say that the speculation exists, but on the lending side (and therefore also on the borrowing side). One indicator of this is that the low-end homes (where lending matters the most) have been increasing in price much faster than have high-end homes.

Unless San Diego incomes suddenly make a big jump or interest rates hold near this level, the greatest fools are already in the market, IMO

Moved to Silcon Valley, pre silicon, in 1958. Bought a house in 60. Over the next couple of years the prices did not seem to be out of line. Moved to So Cal in 69 and returned in 71 and still prices seemed ok for someone like me. Then the lid came off. Prices have stalled for a spell but have resumed their upward movements after each stall.
I believe the statement that "what can't continue; won't", is true, but, the time frame in real estate can exceed a persons lifetime.

Michael Cucek: "...buy only if you intend to live in the same place for 15 years or more."

That may be true in Tokyo, but probably not in the U.S. I've found it's easier and cheaper in most places to buy. You have more choices and you're not locked into a lease.

In many places houses sell in days or weeks, so buying actually gives you more freedom. If you own five years and have 10% closing costs, the house only has to appreciate 2% a year for you to break even.

Where else it is so easy to buy and sell a house as in the U.S.? Once you've jumped through the finance hoops you get the hang of it and it's often easier than renting an apartment.

When rates rise, prices will have to go down. I think we've worked every possible angle from 40-yr mortgages to interest only 5/1 ARMs to low or no money down financing schemes so that when rates rise, there won't be any kind of financing trick left unturned to keep prices from falling.

For most people, they'll just ride it out, but some people won't have that option because of something bad that happens to them: Lost job and need to relocate, divorce, illness or injury to family member, etc. If enough of these unfortunate folks happen to be in a negative equity situation because they were one of the people who recently bought with one of the creative financing schemes listed above, then it could have serious ramifications throughout the economy. Some would have to tap into savings/sell off their investment portfolio, possibly their retirement money to pay off their lender. Some would go bankrupt. None of this would be good for the economy.

It's a doomsday scenario to be sure, but I'd be interested to see some analysis for a given market that looks at:
a.) number of homeowners with < 20% equity, along with their other assets
b.) number of homeowners with < 10% equity, along with their other assets
c.) percentage of households in a given year who experience a divorce, a job relocation, major illness or injury
d.) For a scenario where we see a 20% decline in house prices, multiply b and c to get a rough estimate of what kind of risk we are looking at.
e.) Repeat for a scenario where we see a 30% decline with a & c.

Ottnott

I lived in San Diego in the 1980's, now live in NYC. I don't understand how Prop 13 would impact housing prices. Its basically a "welcome neighbor" tax where you have capped increases while you live in the home but the buyer's new taxes are at whatever the new assessment is. if anything this would keep housing costs down because the taxes soar when a sale occurs. Part of the issue is that "attractive" places to live are increasing in value. By attractive I don't mean pretty, what I mean is places where people want to live or where supply is contrained. In the case of San Diego its because its near the ocean and the mountains. In the case of Manhattan its because its Manhattan and the supply is very very, did I mention very, constrained. In addition if the rest of the country is like Manhattan we are currently suffering from a big drop in supply in the number of coops and condos currently on the market and available for purchase.

What could also be driving the increased values is that people, buyer's, know that rate are going to increase and they want to get their slice of the pie before they do. Buyer's have also been watching prices going up up up and figure that if they don't buy that they will get priced out of the market. With lender's willing to finance 90% of the properties appraised value, and remember that appraised value is based on recent sales so they are a self fullfilling prophecy, people are able to get more house they could ordinarily afford.

Whether this is a bubble or not, who knows, one only gets hurt when values drop if one has to sell for some reason, other wise just hold on and eventually the values come back to where they need to be for you to sell. Just look at the early 1990's the people who made money on real estate were the ones who bought, the stuff that people were forced to sell for some reason.

Speaking of class, I just posted a summary of CBO's distribution tables (1979--2001) for the federal tax burden:
http://www.truthandpolitics.org/fed-tax-burden-cbo.php

Dam*, wrong thread.

I agree that it's a bubble.

BTW, someone told me today that over 40% of home mortgages are ARMs. True or not?

Where can I get information?

BTW, how does Prop 13 effect income?

Take parents whose children have all graduated college.

They purchased a house for $80K in 1979, it's now worth $400K, and paid off.

They are taxed on a value of $130K (2%/year max valuation increase).

If they want to downsize their home, they can get one for $250K.

Of course, this raises their property taxes by about $1200/year, so they decide, "Why Bother".

Maybe they'll transfer it to their children at a later date (which does not cause a revaluation).

House stays off the market.

Less supply, higher prices.

BTW, forgot to note: in the early 1990s, banks were getting unsolicited hundreds sets of keys in the mail a week.

Karl said:
"I lived in San Diego in the 1980's, now live in NYC. I don't understand how Prop 13 would impact housing prices."

Matthew pointed out one of the mechanisms--people hang onto houses instead of selling them. Instead of selling the old house, they convert it into a rental. The unit remains available for housing, but not for buying.

There are several other important Prop 13 effects:
1) local governments have encouraged commercial construction and discouraged residential construction. The tax revenue from residences doesn't cover the cost of services from the beginning and the 2% Prop 13 inflator makes the problem worse with time.
2)Prop 13 has slowly been strangling school funding, and people pay huge premiums to crowd into the few district that are still decent.

One more issue to think about in light of Brad's AMT post--mortgage interest is added back to income for the purpose of AMT calculations.

The cust in tax rates and the increases in the standard deduction have already been reducing the benefit of the mortgage interest deduction. Just wait till taxpayers with big mortgages start getting hit with unexpected AMT liabilities.

Weren't we in this situation in, say, 1986? As I experienced it in NY (don't know how economic historians looked at it), the 1987 burst in a small stock market bubble triggered, a year or two later, a similar burst in a real estate bubble. Locally, at least, this produced a really lousy real estate situation for five years or more until the Clinton boom took over. Associated with the bad real estate market (caused by it or also caused by some third factor?) was a equally bad economic climate and the first Bush recession.

Not sure if national trends were the same, but wondered if there were any thoughts on the economic effects of the decline in the real estate market in late 80's and early 90's?

RE: California is headed for a massive real estate crash in the next 12 months and it's inevitable.

California is at the end of its 10-12 year recurring cycle of running up real estate values, and is now due for a correction. However this time, there are factors in play that will act like an accelerant on the decline in California real estate values like nobody's ever seen before.

In a nutshell, here's Why:

Real estate values have been artificially "pumped" up by the presence of interest rates that are at 50+ year lows.

Despite these very low interest rates, records are being set for the number of bankruptcies filed for almost every year of the last three years. See related article at http://www.abiworld.org/Template.cfm?Section=Press_Releases1&CONTENTID=5175&TEMPLATE=/ContentManagement/ContentDisplay.cfm

Increasing foreclosures and REO's are appearing in the same states (Texas, Arizona, Colorado, etc.) that immediately preceded our crash the last time. Foreclosures are up 400% (over 2000) in Dallas Texas per the article here... http://www.zwire.com/site/news.cfm?newsid=10717727&BRD=1426&PAG=461&dept_id=528197&rfi=6

California has a disproportionately high number of 1031 tax deferred exchanges. Consequently, and in order to avoid paying taxes, tens of thousands of real estate investors have allowed themselves to be suckered into buying (i.e., increasingly leveraging into) larger properties that are significantly overvalued.

California still has an ENORMOUS and UNRESOLVED budget crisis

California still has an ENORMOUS and UNRESOLVED energy crisis

If you think records were set for fixed rate mortgage refinancing, you're right. But what you may not know is that the number of homeowners who've taken out Home Equity Lines of Credit (HELOC's) on their homes (ever notice how many people "more" people are driving expensive cars these days despite the cost of gasoline) is far more than the number of people who have locked in low fixed rate mortgages. Keep in mind, ALL HELOC's (and credit card debt) are adjustable! When interest rates rise, these homeowners will get blown out of their homes, and when that happens, their low fixed rate mortgage will disappear (remember, fixed rate loans are not assumable!) and lenders will be happy to lend it out again at a much higher rate. Maybe now you can see why lenders are so happy to give you a HELOC that far easier to qualify for than a regular home loan. And I'll bet you didn't know that in 2001 alone the Prime rate dropped ELEVEN times that year. Imagine what will happen if the Prime Rate increases ELEVEN times in any one year!

The disparity between what it costs to own versus rent the same property has become nonsensical economically. I've heard from too many Californians about the so-called "sunshine tax", the excess amount people are willing to pay to live in California, and how it will always be that way. Well guess what, they're wrong. The only people coming into California are those coming from the south looking for a hand out. Anybody with enough money to rent a truck and leave California is doing exactly it and here's the PROOF!

If you go to Uhaul.com (as of mid-April 2004) and get a one-way quote from Las Vegas, Nevada to San Diego, California for their largest truck, it costs $200, but if you get a quote "leaving" San Diego for Las Vegas, the amount is well over $1,500!, a more than 700% increase! That's because so many of their trucks are leaving the state compared to coming in, that they have to price them for what they have to pay people to retrieve them and bring them back. I checked other cities that I've heard Californians are moving to and the rates all reflect the obvious, that the net migration pattern for San Diego (and likely other parts of California) is that tons of people are leaving! With more people (with assets) leaving the state, and more illegals arriving, in an increasing interest rate environment, economically, it's going to get very ugly for California!

Want to verify what I'm saying, get a quote from Uhaul.com at the link below:
http://reservations.uhaul.com/(5roksl45lnxsxdu31gpfqa55)/moveinfo.aspx?move=oneway

Other interesting articles related to this topic are at:

It's about the World real estate bubble, but it applies here.
http://www.economist.com/displayStory.cfm?Story_id=1794899

Britain's housing boom threatened by record bankruptcies
http://uk.news.yahoo.com/040408/325/eqm4b.html

How healthy is the US banking system?
http://www.brookesnews.com/040504usams.html

Housing Bubble
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

Housing Bubble
http://www.virginiabusiness.com/magazine/yr2004/feb04/ideas.shtml

Housing Bubble
http://www.baconsrebellion.com/Issues03/11-17/Housing_bubble.htm

Problems with Fannie Mae and Freddie Mac
http://www.larouchepub.com/other/2002/2924fannie_mae.html

Housing Bubble
http://www.msnbc.msn.com/id/4724213/

Housing Bubble
http://www.greekshares.com/real_estate.asp

Watch for news reports of slowing real estate sales that should begin in the 3rd quarter 2004 through the 1st quarter of 2005 immediately following any increase in rates by the Federal Reserve. Two increases by consecutive meetings of the Federal Reserve will officially launch the begining of a real estate crash in California and more so in San Diego, if not for the actual impact of the increase then for the psychology of back to back increases.

Remember to ask yourself this question about those who say there's no real estate bubble: What's their bias? The only people who are denying the obvious are those who stand to profit from it, real estate agents, lenders, title companies, and anybody who's so leveraged that any small decline in property value will destroy them.

Lots of good information in the comments I read. I currently live in mobile, ala, certainly not the capitol of the world but a fairly good size city. They are building homes by the hundreds around here and I just cant understand who is buying all this new property. I have read alot of information concerning the so called "housing bubble" and have to admit (something unusual is going on here). I personally believe that what goes up MUST eventually come down. I just hope it doesnt wipe away our (questionable) gains in the economy. Another issue is inflaaaaaaaaaaaaaaation is on the rise and who knows where that will lead us, no where good I suspect. Of course that includes the price of fuel, specificly gasoline. Anyone who does any amount of research concerning issues driving the economy has to be somewhat apprehensive at this point. Oh well, take one day at a time and today looks pretty good.

I live in New Jersey.Back in 1994 there was a Bubble that sent real estate prices crashing down...I bought my apartment (co-op) for $9,000 in a bancruptcy deal from the co-op management......The bubble is about to burst,and when it does i will be ready with my large cash supply to snap up more bargains....Right now in New Jersey you can buy a Shack in Hackensack for $400,000 or a $750,000 home in Fort Lee ...Back in 1994 these same homes sold for about 180,000 to $200,000.....In my opinion there are a few factors that cause a bubble....(1) Low interest rates cause people to run out and purchase homes--(2) Low interest rates cause home prices to rise----Then the bubble gets popped>>>>(3) Interest rates Go up>>.(4) There is a large amount of homes for sale,and not enough buyers willing to buy at higher rates>>>People then start sellng these homes cheaper>>>(5) The people who bought an over-priced home begin to panick-----(6) then people are Out of work and cant afford the huge motgage payments and end up going bancrupt-----I predict in a few months the Bubble will get popped!!---------Little by little it happens>>>>Houses start to get cheaper and cheaper>>>>and cheaper and cheaper>>>>>>Real Estate is just like the stock market>>>>.Buy Low and Sell High>>>>.Now is the time to Sell if your thinking about it!.......I woudnt buy anything now>>>>Im waiting to snap up some cheap real estate and it will happen>>>>>The bubble is about to explode and i will be waiting with my cash in hand!!!!!

I currently live in California and I have seen a one hundred and twenty percent increase in home prices. I can't believe the intelligent, educated individuals who recently purchased these "hyper" inflated homes. It amazes me when they tell me what a "great" deal they received and how much their home will continue to increase in value.

It is a matter of simple economics. If the overall economy, especially "real" wages, don't justify a certain market price for any commodity (especially real estate), that particular commodity will eventually correct itself to reflect its true value. This simple premise WILL soon present itself, leading to the demise of millions of American families.

I admit that I am not an economist but I have always been praised for my common sensical attitude. I firmly believe we will see the highest level of foreclosures in United States history and if you really want a beautiful home and a Mercedes Benz, be patient, because they will soon be almost giving them away!

I live in las Vegas and have witnessed prices skyrocketing like you can't believe. I looked at a model home in a new community, went back one month later and the price had went up 80,000 dollars. People are buying houses like they are giving them away! Houses are selling in less than one day, people are authorizing their agents to make and offer on a property if it comes up, before they even see it! The whole state of California is cashing out and buying here. I was approved for 250,000 and I can't buy a condo for that now. I did some research online and have now decided to wait to see what happens before I get into the market. Something just isn't right.

Another thing...
There is supposed to be this huge housing shortage in Las Vegas, but when you look in the rental section of the Sunday paper there are page after page of home rentals, most of them say. . . Brand new, never lived in. I honestly think most of the houses, especially new ones are being bought up by investors. The houses here aren't that great either you get no yard no driveway, the houses are so close together. I had no idea stucco was so valuable.

You all might find this entertaining. This is information about the San Diego housing market
-60% of the loans in Feb were ARMs (are these people crazy?, half of these people will foreclose if prices don't continue to increase)
-20 new high-rise condo residential towers are permitted or being built.(no supply??)
-The number of condos in downtown doubled in the last 4 years (no supply??)
-projections have #s condos doubling AGAIN in the next 4 years (no supply??)
-The very bad income to mortgage payment ratio in San Diego (2nd worst in the country)
-historically low interest rates, not seen for 50 years or more, are up from 5.15% to 6.2% on a fixed 30-year mortgage
-Gateway left San Diego, various other companies are refusing to hire employees because of housing costs and workmen's compensation rates.
-60% of new Riverside residents come from San Diego County (people are leaving...)
-Speculators, Speculators, Speculators, this category includes anyone expecting to sell and make a quick buck OR "buy up" in the next 10 years.
-Freddie Mac scandal (think savings and loan scandal)
-Appraisal scandals (this scandal is just around the corner, hints of this scandal have already started to be reported)
-housing starts in San Diego are up 50% this year over last year (no supply??)
-National home resales hit an all time high in March 2004.
-In 2 years I have never seen a For Sale sign in PB or a for rent sign. They are popping up like wildflowers right now. There is a reason...

This was a letter to local real estate journalist:

Alan,
I am sure I am under qualified as a 24-year old Engineer/MBA student to debate the housing situation in San Diego, but I would give you a good run for you money! I don't want to offend you but your article "Ten More Years Of Good News" overlooks so many things! Here is a list of my top seven reasons why the San Diego housing market will crash:
1. Every single market in economic history that has become very unbalanced has put itself back into check. Often the markets that became the most unbalanced, crashed the worst. I call it the "McMillin slinky affect". Similar to Newton's first law, think of the housing prices as a slinky, if the slinky gets too far stretched in one direction, it will lose momentum, and correct itself to a lower level then is natural.
2. Momentum carries markets. This market is as obscene as the NASDAQ in 2001. No sane economist would compare a house to a stock, but you watch, the markets have MANY parallels. Interest rates steer markets.
3. Currently, billions of dollars are flowing into the stock market weekly, where do you think the money is coming from? The housing market, or future house sales and the bond market. Why would I buy an obscenely overvalued home when the NASDAQ doubled last year with NO end in sight (for 2-3 years at least)? I could care less about a 10 percent gain if I have to live on bread and water for the next 30 years to pay my mortgage. Why not double my money in the stock market and wait for the San Diego housing market to collapse and invest when interest rates are high, I can refinance in 3 years when the rates drop anyway!
4. Your increase in housing prices stemmed from the fall of the stock markets, plain and simple. Where do you think the money came to support these outrageous prices?
5. Buying in Temecula and the outskirts of San Diego is ludicrous. Seriously, why would I buy a house in Temecula, commute over 1 hour each way, pay California state taxes, and not have Southern California weather. I would rather move to Denver where the weather is better, there is no commute, and the taxes are lower. There is no advantage to living in California if you can't enjoy the weather, or the time you barely have is spent working overtime to pay your mortgage and commuting for 2 hours a day.
6. Most important reason, and why the market will turn in 2004: Everyone is already stretched to the limit. Less than 15% of San Diego families can afford to buy a home. Where is your demand coming from? Certainly not the people who can not afford to buy! With everyone stretched to the limit, and interest rates rising, where does the money come support the current housing prices, let alone price increases! Everyone has already jumped on to the bandwagon in 2001-2004, remember that NASDAQ bandwagon? Keep jumping in like fools and see what happens.
7. This is the early 90s all over again. We have a Bush in the White House. We just finished a war in Iraq. Interest rates are at extremely low levels. Housing production is ramped up. The stock market has just swung upward. The last piece of the puzzle is a big business leaving the area, and that market would have crashed anyway, the defense industry leaving merely helped the slinky in the right direction. Infact this market is much worse than early 1990s market. New lending "tricks" will lead to new lending blunders as the market corrects itself. Those loan rules were in place for a reason.

Until recently I believed that there was one exception to the
logic behind the bubble theory: people with little or no debt trading
up. We live in a house that's paid off, and we're looking for a
larger place. We can sell our house for 3x what we paid in the mid '90s,
and trading up (here in coastal San Diego) would cost us maybe $250k.
That is manageable if the investment is long term, but the killer
is now the property tax, 1.5% to be paid forever. On a $1M property
that's $15k, or at least $10k after tax. That's a whopping $800
per month. Forever.

Online Casino Directory

My husband and I are so confused over this buy vs. rent situation that it is almost ends every dinner conversation with an unpleasant fight. We are renting currently and are afraid to jump in now. However, all these reasonably bright folks keep telling us to jump, jump, jump. I am not from California so it looks pretty damn frightening to me. My husband has done analysis after analysis. Who knows...I guess no one has a crystal ball. Everyone from California that I talk to says, Cal real estate never goes down long...but I am not so sure!!

I feel that it is challenging to decide whether or not to purchase now. I rent in the Bay Area and every time I turn around to check the housing prices they shoot by almost 10-20%. Now the houses which were about 400K in early 2000 are at 600K. I see that a section is predicting a gloomy future for the realestate.

I am not an expert in these matters. If I were to stay away from the real estate and the housing prices keep going up I will be worth nothing after a few years. I am really really confused whether I should purchase now and take the risk or wait for the downfall.

Christy,
Look at the facts, and the facts only when evaluating the housing market. Read my posting above. What FACTS do the people have that market can continue to rise? I think every single arguement they bring to the table, I have countered in my posting. It is all about the FACTS. Byt the way, the Cal real estate market crashed in 1991. It can happen. Our prices are much more subject volitility when look at history. That means the up AND the down direction.

Weasley,
Hold firm my friend. Ever notice how every home is now appraising for the value sold? Even if it has appreciated 40% in 2 years? Watch out, the people buying these mortgages are the bond market on Wall Street. If they feel like they are getting burned, they will pull out and the rates will rise sharply. Just wait until the market levels off and foreclosures start coming. That is going to be the begining of the end.

In San Diego the real estate market is totally out of control. Last month a median price house appreciated $900/day! I have a feeling that the bubble is going to pop any day now.

I think it would be realistic to say that the market will correct itself at least back to the level where it was two years ago (altough you can argue that the market was bubbling already then). But even a correction back to July 2002 level means that the market would go down 36%. I guess you can call that a crash.

I lived in upstate New york, Binghamton area, 3 hours drive from New York City. Here the median price of housing is around $75,000, which is far below the national average, unbelievable, but this area has been in recession and losing population for a decade. Starting from this year, some developers from New York City have stated interested in this area, one of them bought half of the downtown street (eight buildings) here. It's a big news, people seems begin to see the hope for this town. But I am wondering if there's a bubble in New York City, what's going to happen in this small town? Is the housing price going to be like the last decade? or it's going to follow its own cycle? Hope I could get some input from here.

It's all about number crunching. If the numbers don’t add up, then that's all that needs to be said.

If rates are at a 50-year low, and prices are as high as they have ever been, what do you think will happen if rates go up? Does anyone really think that thousands of people are willing to pay more for homes that they currently are at higher interest rates? No way! The concept or fantasy that prices will continue to raise over the next five years is ignorant. The things rising are unemployment, bankruptcies, stress levels, etc.

Anyone buying a house at these prices is a fool.

I LIVE IN NEW JERSEY AND WE HAVE THE SAME PROBLEM AS THE REST OF THE COUNTRY.PEOPLE ARE PAYING OVER THE ASKING PRICE FOR HOMES. EVEN IF THEY ARE NOT WORTH THE PRICE AND ARE SHACKS.

I AM LOOKING FOR MORE INVESTMENT PROPERTY..BUT I WILL NOT BUY IF THE NUMBERS DONT MAKE SENSE. THEY HAVE 4 FAMILY BUILDING LISTED FOR 500k AND ONLY BRING IN 40k A YEAR IN RENT. BUT THEY ARE SELLING.THE PROBLEM MOST PEOPLE DON'T UNDERSTAND IS THAT THEY NEED TO FACTOR IN: INSURANCE,REPAIRS/RESERVES..NOT ONLY P&I AND TAXES. I HAVE NOT FOUND I PROPERTY THAT GENERATES A +CASH FLOW. ALL THE INVESTMENT PROPERTY ARE LOSING MONEY WITH TODAYS PRICES IF THE NUMBERS ARE DONE CORRECTLY.

PLEASE E-MAIL ME YOUR COMMENTS OR WRITE BACK.

STEVE VOLTURO

rates are at a 50-year low, and prices are as high as they have ever been, what do you think will happen if rates go up? Does anyone really think that thousands of people are willing to pay more for homes that they currently are at higher interest rates? No way! The concept or fantasy that prices will continue to raise over the next five years is ignorant. The things rising are unemployment, bankruptcies, stress levels, etc.

I am planning on a move with my family to the Big Island of Hawaii. Real estate is crazy over there as well. A lot of the people moving over there who are buying land and homes are baby boomers. They are cashing out in areas throughout the U.S on their overpriced homes and retiring over there. I am not at all at the age to retire but want to move over there and spend the rest of my life there. Unfortunatly I am getting priced out. My million dollar question is ...Will the Big Island correct itself like other places? A lot of people who have retired over there are so sure they are untouchable and there homes will never go down. Are they right to have that cocky attitude? For my sake and my family's I hope it comes down so us little people can afford a little bit of paradise. I know each Island maybe different but I would truly appreciate anybody's opinion so I could sllep a little better at night.
Thanks
John

Did anyone check the UHAL prices lately? My sister in low said that one way from Temecula Ca to Arizona is $7 000! She started crying, it's insane! Also the house we are shoving in Vista CA has been on the market for a mounth, I didn't hear for any ofers yet. People are so scared of bying a house now. The mounthly payment for this house would be around $3 200 per mounth but when people ask me how much they can rent the place for I have to say that the rent is only $1500 per mounth. Also renting places are loosing their renters lately to. My friend is renting 6 houses and 4 of them are empty and have been in the papers for rent for a while. Ok, who can say that bublle is not about to pop!

Did anyone check the UHAL prices lately? My sister in low said that one way from Temecula Ca to Arizona is $7 000! She started crying, it's insane! Also the house we are shoving in Vista CA has been on the market for a mounth, I didn't hear for any ofers yet. People are so scared of bying a house now. The mounthly payment for this house would be around $3 200 per mounth but when people ask me how much they can rent the place for I have to say that the rent is only $1500 per mounth. Also renting places are loosing their renters lately to. My friend is renting 6 houses and 4 of them are empty and have been in the papers for rent for a while. Ok, who can say that bublle is not about to pop!

Did anyone check the UHAL prices lately? My sister in low said that one way from Temecula Ca to Arizona is $7 000! She started crying, it's insane! Also the house we are shoving in Vista CA has been on the market for a mounth, I didn't hear for any ofers yet. People are so scared of bying a house now. The mounthly payment for this house would be around $3 200 per mounth but when people ask me how much they can rent the place for I have to say that the rent is only $1500 per mounth. Also renting places are loosing their renters lately to. My friend is renting 6 houses and 4 of them are empty and have been in the papers for rent for a while. Ok, who can say that bublle is not about to pop!

Did anyone check the UHAL prices lately? My sister in low said that one way from Temecula Ca to Arizona is $7 000! She started crying, it's insane! Also the house we are shoving in Vista CA has been on the market for a mounth, I didn't hear for any ofers yet. People are so scared of bying a house now. The mounthly payment for this house would be around $3 200 per mounth but when people ask me how much they can rent the place for I have to say that the rent is only $1500 per mounth. Also renting places are loosing their renters lately to. My friend is renting 6 houses and 4 of them are empty and have been in the papers for rent for a while. Ok, who can say that bublle is not about to pop!

Did anyone check the UHAL prices lately? My sister in low said that one way from Temecula Ca to Arizona is $7 000! She started crying, it's insane! Also the house we are shoving in Vista CA has been on the market for a mounth, I didn't hear for any ofers yet. People are so scared of bying a house now. The mounthly payment for this house would be around $3 200 per mounth but when people ask me how much they can rent the place for I have to say that the rent is only $1500 per mounth. Also renting places are loosing their renters lately to. My friend is renting 6 houses and 4 of them are empty and have been in the papers for rent for a while. Ok, who can say that bublle is not about to pop!

I have been renting a luxury townhome in Tucson AZ for 3 years now at about $10,000 a year. I told my landlord i was tired of renting and he offered to sell it to for the appraised 2003 vaule of $150,000. Is this too much, it was sale in 2001 for $120,000 but nobody bought it. I was approved for a 5/1 ARM loan at 5.87% for the 1st 5 years. Its 1300 sf ft and with $30,000 down that leaves a $120,000 balance with PITI payments of $860 the same as the $865 rent, but I feel by waiting i am $60,000 in the hole. Any comments? My landlord seems anxious to sell, its a four-plex and he lives in one unit and is renting out the other two just now after they have been vacan for the summer months. The market here is very slow in the summer. My friend in San Diego say $150K seems like a steal but that $30,000 down payment is my life saving and I dont want to lose that, should I continue to rent or take the plunge and buy? PLEASE HELP!
midivantranz@yahoo.com

I have been renting a luxury townhome in Tucson AZ for 3 years now at about $10,000 a year. I told my landlord i was tired of renting and he offered to sell it to for the appraised 2003 vaule of $150,000. Is this too much, it was sale in 2001 for $120,000 but nobody bought it. I was approved for a 5/1 ARM loan at 5.87% for the 1st 5 years. Its 1300 sf ft and with $30,000 down that leaves a $120,000 balance with PITI payments of $860 the same as the $865 rent, but I feel by waiting i am $60,000 in the hole. Any comments? My landlord seems anxious to sell, its a four-plex and he lives in one unit and is renting out the other two just now after they have been vacan for the summer months. The market here is very slow in the summer. My friend in San Diego say $150K seems like a steal but that $30,000 down payment is my life saving and I dont want to lose that, should I continue to rent or take the plunge and buy? PLEASE HELP!
Everyone here is caught up in the bubble and tells me to buy, but i have always rented and feel like Ive been missing out on tax savings and rising values. Most people say that the demand will outstrip the supply here because the City is ringed by Mountains and can only grow so much.BTW, i still got approved by Bank of America even though I am currently on layoff from Gateway and my unemployment benefits expire Aug 28th. This whole thing is making me sick to my stomach and I cant sleep at all lately.
midivantranz@yahoo.com

am planning on a move with my family to the Big Island of Hawaii. Real estate is crazy over there as well. A lot of the people moving over there who are buying land and homes are baby boomers. They are cashing out in areas throughout the U.S on their overpriced homes and retiring over there. I am not at all at the age to retire but want to move over there and spend the rest of my life there. Unfortunatly I am getting priced out. My million dollar question is ...Will the Big Island correct itself like other places? A lot of people who have retired over there are so sure they are untouchable and there homes will never go down. Are they right to have that cocky attitude? For my sake and my family's I hope it comes down so us little people can afford a little bit of paradise. I know each Island maybe different but I would truly appreciate anybody's opinion so I could sllep a little better at night.
Thanks
John

There's no an easy answer about this real estate bubble. For example, is the interest rate the sole important factor that influenses the housing price? What about future economic situation, massive immigration? The immigrants are no longer just refugees, we have actually seen middle class from Asia first made investment(some in real estate)before becomming the residents here. And the real estate bubble is by no means same as stock mkt bubble, if we compare the charts, we could see the angles are totally different. The bubble is possible,like what happened in some of ghost towns. The prices could also possibly retreat a little and then stay around there for a couple of decades. People who have lots of money at stake in real estate shoule really do some extensive research before make any decision.

Hi,
we recently (May 2004) bought a 2 bedroom 1034 sq.ft. condominium in san diego, for 388,000 with 5% down payment. we are currently in a 5/1 interest only ARM, but planning on paying principle and bringing down the loan amount to 300,000 by the end of 5 years. i am kind of worried with the talk of bubble going on. the 3 bedrooms in my complex are selling very fast (within 3 days of hitting the martket) right now, but a 2 bedroom has been sitting for about a month without any offers. should i just sell my place right now suffering a little loss or wait and stay put in this place for another 5 or 10 years, watch the real estate and sell later??

Indu, your concern reminds me of a recent LA Times article on the subject of "Flipping" Real Estate, July 18, 2004 (attached below). In the article, it discusses how realtor/investors are causing an artificial demand for homes by buying and selling quickly during "heated" markets.

I think the ethics of realtors, real estate agents, brokers is an important subject. And it appears that there is little controlling thier "inside trading" practices. It appears to me that those that are at the lead for declaring that it is a great time to buy are the same people that benefit financially from you doing so. Generally, I think the southern California area will see a price valuation correction of a reduction of home prices of about 20 to 50 percent approximately. I think the properties that will be hit worst are the least expensive condo markets. Million dollar plus homes have already been taking hits. The single family residence may be hit with the lower end of that range I have mentioned above.

Los Angeles Times (CA)
July 18, 2004
Not Everyone Is Doing Cartwheels Over 'Flipping'
The tactic of buying and quickly selling homes has experts on watch for a
market downturn. But few foresee a '90s repeat.
Author: Debora Vrana; Times Staff Writer
Article Text:
In the last 12 weeks, Nick Manfredi has bought eight homes in the Riverside area. Not to
live in but to sell as quickly as possible, for as much as possible.
He picked up one Corona four-bedroom for $201,000 on July 5 and, he boasted, was in
escrow for $267,000 two days later. A speculator who specializes in what's known as
flipping, he's a sign of the times: Real estate isn't much of a gamble in a market as hot as
Southern California's has been for the last 12 months.
"Most people are so euphoric, they are in big denial that 1991 can come again," Manfredi
said, recalling when the last L.A.-area housing market bubble burst.
Not everyone is in denial. Real estate experts noticed that in May the number of homes
sold that had been owned by the sellers for six or fewer months was 47% higher than it
was a year earlier. And these constituted 3.1% of all homes sold in the month -- nearing
the flipping record of 3.5% set in early 1989, according to DataQuick, a La Jolla real
estate information firm.
"I don't think we are in a big speculative bubble right now, but the fact that these numbers
are on the rise is something we are closely watching," said John Karevoll, an analyst with
DataQuick.
A marked increase in flipping -- the buying of a house for the sole purpose of selling it
swiftly at a profit -- is viewed in the industry as a sign of an overheated market. In fact,
two years after the 3.5% flipping record was set, the Los Angeles housing market began
to sputter, with prices deflating 22.2% from early 1991 through 1995.
Many real estate experts believe that 2004 and beyond will be different.
The low-supply, high-demand fundamentals behind the doubling and tripling of prices in
the metropolitan area in recent years will prop up values for some time to come, they say,
even if double-digit percentage gains come to an end.
The caveat is that if the flippers who are helping to fuel the price increases decide that the
end is near, they could help create something of a downturn.
"You expect to make 30% returns in just a few months if you are flipping," said G.U.
Krueger, a housing analyst in Irvine. "The danger is that speculators might suddenly
decide to sell at prices far less that what other people would sell for."
But, Krueger said, "there doesn't look like there are
super-dangerous levels of speculation occurring."
And what do the flippers themselves think?
"This market is flooded with investors right now," said Jim Sheils, co-owner of real estate
investment company Titus Financial, who has bought and sold 120 homes in Bakersfield
in the last three years with a group of backers he described as family and friends.
"A lot of people coming here from Los Angeles, outside investors, are overpaying," he
said. "It can be dangerous."
Sheils isn't giving up, though, and Manfredi is also still in the game. But Smitha
Chandrabose is taking a breather.
Chandrabose said she had made some serious money turning properties around -- last
year, for example, she sold a house in Santa Monica for $623,000 that she had bought
five months earlier for $445,000 -- and didn't want to risk losing any now. Prices, she
said, are just too rich for speculation.
That will change, she predicted, in just a few years, when people buying now with
adjustable-rate or hybrid mortgages -- which typically convert from an initial fixed to an
adjustable rate after five years -- find themselves unable to pay as rising interest costs
boost their monthly payments. Then she'll go back to flipping, buying up foreclosures.
"Some of these young people don't remember double-digit interest rates," she said. "I'm
expecting to get back in when these fixed rates switch to adjustable rates and people just
can't make their payments."
Andrew Goldsmith, an investor with a real estate license, is also sitting it out for now. In
fact, his most profitable flip was in 2001, when he bought a home in the Sunset Plaza
area of the Hollywood Hills for $825,000, put in $100,000 of improvements and sold it
six months later for $1.1 million.
"Lately, with money still being so cheap [to borrow], I'm not seeing the opportunities," he
said. "Someone buying a home to live in will pay a lot more than I will to fix it and flip
it."
Speculation is especially troublesome in Orange County and other areas where new
homes are being built. Houses in a first phase of a development can go up in value by
$50,000 or more in a matter of months, often in anticipation that the second and third
phases will sell for much more, making them ripe targets for flippers. Builders are
concerned that absentee owners don't contribute to the companies' desire to create
communities and that in some cases these owners compete with them for clients.
"We've talked to the new home builders and they are all concerned about speculators,"
said Rick Fromm, senior director of financial planning at Irvine Co., Orange County's
largest landowner. "They artificially drive prices up by taking homes off the market,
which means there is even less supply out there."
Irvine and many other home builders include anti-speculation clauses in sales contracts
that mandate penalties if buyers sell in less than a year. Many such clauses stipulate that
if a house is sold for a reason other than a divorce or job transfer, the difference between
the purchase and sales prices would go directly to the home builder.
At California Pacific Homes, which built more than 300 houses in Irvine last year, most
priced from $500,000 to $1 million, anti-speculative contracts have been the norm for
several years, said Jon Robertson, a senior vice president at the company and former head
of the Orange County Building Industry Assn., a trade group.
The same is true at Los Angeles-based KB Home, one of the nation's largest builders,
which constructed more than 5,500 houses in California last year. Flipping "always
happens in an overheated market," said Jay Moss, KB's regional general manager for
Southern California. He says the company also works with brokers to weed out possible
speculators.
"We don't want our development to be Wall Street or a piggy bank for someone else,"
Moss said.
In Orange County, real estate lawyer Camellia Schuk said she was busy preparing antispeculation
contracts. Some speculators, she said, are using multiple names to try to tie
down several new homes at once.
"This really reminds me of the late 1980s," she said, adding, "but I don't think it's quite
the frenzy we saw then."

Indu, your concern reminds me of a recent LA Times article on the subject of "Flipping" Real Estate, July 18, 2004 (attached below). In the article, it discusses how realtor/investors are causing an artificial demand for homes by buying and selling quickly during "heated" markets.

I think the ethics of realtors, real estate agents, brokers is an important subject. And it appears that there is little controlling thier "inside trading" practices. It appears to me that those that are at the lead for declaring that it is a great time to buy are the same people that benefit financially from you doing so. Generally, I think the southern California area will see a price valuation correction of a reduction of home prices of about 20 to 50 percent approximately. I think the properties that will be hit worst are the least expensive condo markets. Million dollar plus homes have already been taking hits. The single family residence may be hit with the lower end of that range I have mentioned above.

Los Angeles Times (CA)
July 18, 2004
Not Everyone Is Doing Cartwheels Over 'Flipping'
The tactic of buying and quickly selling homes has experts on watch for a
market downturn. But few foresee a '90s repeat.
Author: Debora Vrana; Times Staff Writer
Article Text:
In the last 12 weeks, Nick Manfredi has bought eight homes in the Riverside area. Not to
live in but to sell as quickly as possible, for as much as possible.
He picked up one Corona four-bedroom for $201,000 on July 5 and, he boasted, was in
escrow for $267,000 two days later. A speculator who specializes in what's known as
flipping, he's a sign of the times: Real estate isn't much of a gamble in a market as hot as
Southern California's has been for the last 12 months.
"Most people are so euphoric, they are in big denial that 1991 can come again," Manfredi
said, recalling when the last L.A.-area housing market bubble burst.
Not everyone is in denial. Real estate experts noticed that in May the number of homes
sold that had been owned by the sellers for six or fewer months was 47% higher than it
was a year earlier. And these constituted 3.1% of all homes sold in the month -- nearing
the flipping record of 3.5% set in early 1989, according to DataQuick, a La Jolla real
estate information firm.
"I don't think we are in a big speculative bubble right now, but the fact that these numbers
are on the rise is something we are closely watching," said John Karevoll, an analyst with
DataQuick.
A marked increase in flipping -- the buying of a house for the sole purpose of selling it
swiftly at a profit -- is viewed in the industry as a sign of an overheated market. In fact,
two years after the 3.5% flipping record was set, the Los Angeles housing market began
to sputter, with prices deflating 22.2% from early 1991 through 1995.
Many real estate experts believe that 2004 and beyond will be different.
The low-supply, high-demand fundamentals behind the doubling and tripling of prices in
the metropolitan area in recent years will prop up values for some time to come, they say,
even if double-digit percentage gains come to an end.
The caveat is that if the flippers who are helping to fuel the price increases decide that the
end is near, they could help create something of a downturn.
"You expect to make 30% returns in just a few months if you are flipping," said G.U.
Krueger, a housing analyst in Irvine. "The danger is that speculators might suddenly
decide to sell at prices far less that what other people would sell for."
But, Krueger said, "there doesn't look like there are
super-dangerous levels of speculation occurring."
And what do the flippers themselves think?
"This market is flooded with investors right now," said Jim Sheils, co-owner of real estate
investment company Titus Financial, who has bought and sold 120 homes in Bakersfield
in the last three years with a group of backers he described as family and friends.
"A lot of people coming here from Los Angeles, outside investors, are overpaying," he
said. "It can be dangerous."
Sheils isn't giving up, though, and Manfredi is also still in the game. But Smitha
Chandrabose is taking a breather.
Chandrabose said she had made some serious money turning properties around -- last
year, for example, she sold a house in Santa Monica for $623,000 that she had bought
five months earlier for $445,000 -- and didn't want to risk losing any now. Prices, she
said, are just too rich for speculation.
That will change, she predicted, in just a few years, when people buying now with
adjustable-rate or hybrid mortgages -- which typically convert from an initial fixed to an
adjustable rate after five years -- find themselves unable to pay as rising interest costs
boost their monthly payments. Then she'll go back to flipping, buying up foreclosures.
"Some of these young people don't remember double-digit interest rates," she said. "I'm
expecting to get back in when these fixed rates switch to adjustable rates and people just
can't make their payments."
Andrew Goldsmith, an investor with a real estate license, is also sitting it out for now. In
fact, his most profitable flip was in 2001, when he bought a home in the Sunset Plaza
area of the Hollywood Hills for $825,000, put in $100,000 of improvements and sold it
six months later for $1.1 million.
"Lately, with money still being so cheap [to borrow], I'm not seeing the opportunities," he
said. "Someone buying a home to live in will pay a lot more than I will to fix it and flip
it."
Speculation is especially troublesome in Orange County and other areas where new
homes are being built. Houses in a first phase of a development can go up in value by
$50,000 or more in a matter of months, often in anticipation that the second and third
phases will sell for much more, making them ripe targets for flippers. Builders are
concerned that absentee owners don't contribute to the companies' desire to create
communities and that in some cases these owners compete with them for clients.
"We've talked to the new home builders and they are all concerned about speculators,"
said Rick Fromm, senior director of financial planning at Irvine Co., Orange County's
largest landowner. "They artificially drive prices up by taking homes off the market,
which means there is even less supply out there."
Irvine and many other home builders include anti-speculation clauses in sales contracts
that mandate penalties if buyers sell in less than a year. Many such clauses stipulate that
if a house is sold for a reason other than a divorce or job transfer, the difference between
the purchase and sales prices would go directly to the home builder.
At California Pacific Homes, which built more than 300 houses in Irvine last year, most
priced from $500,000 to $1 million, anti-speculative contracts have been the norm for
several years, said Jon Robertson, a senior vice president at the company and former head
of the Orange County Building Industry Assn., a trade group.
The same is true at Los Angeles-based KB Home, one of the nation's largest builders,
which constructed more than 5,500 houses in California last year. Flipping "always
happens in an overheated market," said Jay Moss, KB's regional general manager for
Southern California. He says the company also works with brokers to weed out possible
speculators.
"We don't want our development to be Wall Street or a piggy bank for someone else,"
Moss said.
In Orange County, real estate lawyer Camellia Schuk said she was busy preparing antispeculation
contracts. Some speculators, she said, are using multiple names to try to tie
down several new homes at once.
"This really reminds me of the late 1980s," she said, adding, "but I don't think it's quite
the frenzy we saw then."

Indu, your concern reminds me of a recent LA Times article on the subject of "Flipping" Real Estate, July 18, 2004 (attached below). In the article, it discusses how realtor/investors are causing an artificial demand for homes by buying and selling quickly during "heated" markets.

I think the ethics of realtors, real estate agents, brokers is an important subject. And it appears that there is little controlling thier "inside trading" practices. It appears to me that those that are at the lead for declaring that it is a great time to buy are the same people that benefit financially from you doing so. Generally, I think the southern California area will see a price valuation correction of a reduction of home prices of about 20 to 50 percent approximately. I think the properties that will be hit worst are the least expensive condo markets. Million dollar plus homes have already been taking hits. The single family residence may be hit with the lower end of that range I have mentioned above.

Los Angeles Times (CA)
July 18, 2004
Not Everyone Is Doing Cartwheels Over 'Flipping'
The tactic of buying and quickly selling homes has experts on watch for a
market downturn. But few foresee a '90s repeat.
Author: Debora Vrana; Times Staff Writer
Article Text:
In the last 12 weeks, Nick Manfredi has bought eight homes in the Riverside area. Not to
live in but to sell as quickly as possible, for as much as possible.
He picked up one Corona four-bedroom for $201,000 on July 5 and, he boasted, was in
escrow for $267,000 two days later. A speculator who specializes in what's known as
flipping, he's a sign of the times: Real estate isn't much of a gamble in a market as hot as
Southern California's has been for the last 12 months.
"Most people are so euphoric, they are in big denial that 1991 can come again," Manfredi
said, recalling when the last L.A.-area housing market bubble burst.
Not everyone is in denial. Real estate experts noticed that in May the number of homes
sold that had been owned by the sellers for six or fewer months was 47% higher than it
was a year earlier. And these constituted 3.1% of all homes sold in the month -- nearing
the flipping record of 3.5% set in early 1989, according to DataQuick, a La Jolla real
estate information firm.
"I don't think we are in a big speculative bubble right now, but the fact that these numbers
are on the rise is something we are closely watching," said John Karevoll, an analyst with
DataQuick.
A marked increase in flipping -- the buying of a house for the sole purpose of selling it
swiftly at a profit -- is viewed in the industry as a sign of an overheated market. In fact,
two years after the 3.5% flipping record was set, the Los Angeles housing market began
to sputter, with prices deflating 22.2% from early 1991 through 1995.
Many real estate experts believe that 2004 and beyond will be different.
The low-supply, high-demand fundamentals behind the doubling and tripling of prices in
the metropolitan area in recent years will prop up values for some time to come, they say,
even if double-digit percentage gains come to an end.
The caveat is that if the flippers who are helping to fuel the price increases decide that the
end is near, they could help create something of a downturn.
"You expect to make 30% returns in just a few months if you are flipping," said G.U.
Krueger, a housing analyst in Irvine. "The danger is that speculators might suddenly
decide to sell at prices far less that what other people would sell for."
But, Krueger said, "there doesn't look like there are
super-dangerous levels of speculation occurring."
And what do the flippers themselves think?
"This market is flooded with investors right now," said Jim Sheils, co-owner of real estate
investment company Titus Financial, who has bought and sold 120 homes in Bakersfield
in the last three years with a group of backers he described as family and friends.
"A lot of people coming here from Los Angeles, outside investors, are overpaying," he
said. "It can be dangerous."
Sheils isn't giving up, though, and Manfredi is also still in the game. But Smitha
Chandrabose is taking a breather.
Chandrabose said she had made some serious money turning properties around -- last
year, for example, she sold a house in Santa Monica for $623,000 that she had bought
five months earlier for $445,000 -- and didn't want to risk losing any now. Prices, she
said, are just too rich for speculation.
That will change, she predicted, in just a few years, when people buying now with
adjustable-rate or hybrid mortgages -- which typically convert from an initial fixed to an
adjustable rate after five years -- find themselves unable to pay as rising interest costs
boost their monthly payments. Then she'll go back to flipping, buying up foreclosures.
"Some of these young people don't remember double-digit interest rates," she said. "I'm
expecting to get back in when these fixed rates switch to adjustable rates and people just
can't make their payments."
Andrew Goldsmith, an investor with a real estate license, is also sitting it out for now. In
fact, his most profitable flip was in 2001, when he bought a home in the Sunset Plaza
area of the Hollywood Hills for $825,000, put in $100,000 of improvements and sold it
six months later for $1.1 million.
"Lately, with money still being so cheap [to borrow], I'm not seeing the opportunities," he
said. "Someone buying a home to live in will pay a lot more than I will to fix it and flip
it."
Speculation is especially troublesome in Orange County and other areas where new
homes are being built. Houses in a first phase of a development can go up in value by
$50,000 or more in a matter of months, often in anticipation that the second and third
phases will sell for much more, making them ripe targets for flippers. Builders are
concerned that absentee owners don't contribute to the companies' desire to create
communities and that in some cases these owners compete with them for clients.
"We've talked to the new home builders and they are all concerned about speculators,"
said Rick Fromm, senior director of financial planning at Irvine Co., Orange County's
largest landowner. "They artificially drive prices up by taking homes off the market,
which means there is even less supply out there."
Irvine and many other home builders include anti-speculation clauses in sales contracts
that mandate penalties if buyers sell in less than a year. Many such clauses stipulate that
if a house is sold for a reason other than a divorce or job transfer, the difference between
the purchase and sales prices would go directly to the home builder.
At California Pacific Homes, which built more than 300 houses in Irvine last year, most
priced from $500,000 to $1 million, anti-speculative contracts have been the norm for
several years, said Jon Robertson, a senior vice president at the company and former head
of the Orange County Building Industry Assn., a trade group.
The same is true at Los Angeles-based KB Home, one of the nation's largest builders,
which constructed more than 5,500 houses in California last year. Flipping "always
happens in an overheated market," said Jay Moss, KB's regional general manager for
Southern California. He says the company also works with brokers to weed out possible
speculators.
"We don't want our development to be Wall Street or a piggy bank for someone else,"
Moss said.
In Orange County, real estate lawyer Camellia Schuk said she was busy preparing antispeculation
contracts. Some speculators, she said, are using multiple names to try to tie
down several new homes at once.
"This really reminds me of the late 1980s," she said, adding, "but I don't think it's quite
the frenzy we saw then."

Indu, your concern reminds me of a recent LA Times article on the subject of "Flipping" Real Estate, July 18, 2004 (attached below). In the article, it discusses how realtor/investors are causing an artificial demand for homes by buying and selling quickly during "heated" markets.

I think the ethics of realtors, real estate agents, brokers is an important subject. And it appears that there is little controlling thier "inside trading" practices. It appears to me that those that are at the lead for declaring that it is a great time to buy are the same people that benefit financially from you doing so. Generally, I think the southern California area will see a price valuation correction of a reduction of home prices of about 20 to 50 percent approximately. I think the properties that will be hit worst are the least expensive condo markets. Million dollar plus homes have already been taking hits. The single family residence may be hit with the lower end of that range I have mentioned above.

Los Angeles Times (CA)
July 18, 2004
Not Everyone Is Doing Cartwheels Over 'Flipping'
The tactic of buying and quickly selling homes has experts on watch for a
market downturn. But few foresee a '90s repeat.
Author: Debora Vrana; Times Staff Writer
Article Text:
In the last 12 weeks, Nick Manfredi has bought eight homes in the Riverside area. Not to
live in but to sell as quickly as possible, for as much as possible.
He picked up one Corona four-bedroom for $201,000 on July 5 and, he boasted, was in
escrow for $267,000 two days later. A speculator who specializes in what's known as
flipping, he's a sign of the times: Real estate isn't much of a gamble in a market as hot as
Southern California's has been for the last 12 months.
"Most people are so euphoric, they are in big denial that 1991 can come again," Manfredi
said, recalling when the last L.A.-area housing market bubble burst.
Not everyone is in denial. Real estate experts noticed that in May the number of homes
sold that had been owned by the sellers for six or fewer months was 47% higher than it
was a year earlier. And these constituted 3.1% of all homes sold in the month -- nearing
the flipping record of 3.5% set in early 1989, according to DataQuick, a La Jolla real
estate information firm.
"I don't think we are in a big speculative bubble right now, but the fact that these numbers
are on the rise is something we are closely watching," said John Karevoll, an analyst with
DataQuick.
A marked increase in flipping -- the buying of a house for the sole purpose of selling it
swiftly at a profit -- is viewed in the industry as a sign of an overheated market. In fact,
two years after the 3.5% flipping record was set, the Los Angeles housing market began
to sputter, with prices deflating 22.2% from early 1991 through 1995.
Many real estate experts believe that 2004 and beyond will be different.
The low-supply, high-demand fundamentals behind the doubling and tripling of prices in
the metropolitan area in recent years will prop up values for some time to come, they say,
even if double-digit percentage gains come to an end.
The caveat is that if the flippers who are helping to fuel the price increases decide that the
end is near, they could help create something of a downturn.
"You expect to make 30% returns in just a few months if you are flipping," said G.U.
Krueger, a housing analyst in Irvine. "The danger is that speculators might suddenly
decide to sell at prices far less that what other people would sell for."
But, Krueger said, "there doesn't look like there are
super-dangerous levels of speculation occurring."
And what do the flippers themselves think?
"This market is flooded with investors right now," said Jim Sheils, co-owner of real estate
investment company Titus Financial, who has bought and sold 120 homes in Bakersfield
in the last three years with a group of backers he described as family and friends.
"A lot of people coming here from Los Angeles, outside investors, are overpaying," he
said. "It can be dangerous."
Sheils isn't giving up, though, and Manfredi is also still in the game. But Smitha
Chandrabose is taking a breather.
Chandrabose said she had made some serious money turning properties around -- last
year, for example, she sold a house in Santa Monica for $623,000 that she had bought
five months earlier for $445,000 -- and didn't want to risk losing any now. Prices, she
said, are just too rich for speculation.
That will change, she predicted, in just a few years, when people buying now with
adjustable-rate or hybrid mortgages -- which typically convert from an initial fixed to an
adjustable rate after five years -- find themselves unable to pay as rising interest costs
boost their monthly payments. Then she'll go back to flipping, buying up foreclosures.
"Some of these young people don't remember double-digit interest rates," she said. "I'm
expecting to get back in when these fixed rates switch to adjustable rates and people just
can't make their payments."
Andrew Goldsmith, an investor with a real estate license, is also sitting it out for now. In
fact, his most profitable flip was in 2001, when he bought a home in the Sunset Plaza
area of the Hollywood Hills for $825,000, put in $100,000 of improvements and sold it
six months later for $1.1 million.
"Lately, with money still being so cheap [to borrow], I'm not seeing the opportunities," he
said. "Someone buying a home to live in will pay a lot more than I will to fix it and flip
it."
Speculation is especially troublesome in Orange County and other areas where new
homes are being built. Houses in a first phase of a development can go up in value by
$50,000 or more in a matter of months, often in anticipation that the second and third
phases will sell for much more, making them ripe targets for flippers. Builders are
concerned that absentee owners don't contribute to the companies' desire to create
communities and that in some cases these owners compete with them for clients.
"We've talked to the new home builders and they are all concerned about speculators,"
said Rick Fromm, senior director of financial planning at Irvine Co., Orange County's
largest landowner. "They artificially drive prices up by taking homes off the market,
which means there is even less supply out there."
Irvine and many other home builders include anti-speculation clauses in sales contracts
that mandate penalties if buyers sell in less than a year. Many such clauses stipulate that
if a house is sold for a reason other than a divorce or job transfer, the difference between
the purchase and sales prices would go directly to the home builder.
At California Pacific Homes, which built more than 300 houses in Irvine last year, most
priced from $500,000 to $1 million, anti-speculative contracts have been the norm for
several years, said Jon Robertson, a senior vice president at the company and former head
of the Orange County Building Industry Assn., a trade group.
The same is true at Los Angeles-based KB Home, one of the nation's largest builders,
which constructed more than 5,500 houses in California last year. Flipping "always
happens in an overheated market," said Jay Moss, KB's regional general manager for
Southern California. He says the company also works with brokers to weed out possible
speculators.
"We don't want our development to be Wall Street or a piggy bank for someone else,"
Moss said.
In Orange County, real estate lawyer Camellia Schuk said she was busy preparing antispeculation
contracts. Some speculators, she said, are using multiple names to try to tie
down several new homes at once.
"This really reminds me of the late 1980s," she said, adding, "but I don't think it's quite
the frenzy we saw then."

The median sale price of a home in the 92660 area code of Newport Beach increased 50% from May 2003 to May 2004. Less than 2 years ago, the townhouse I'm presently renting in that area was on the market for $369,000 and didn't sell. (I'm kicking myself repeatedly for not finding out that I could have qualified to buy it; silly ol' wet-behind-the-ears me, I figured with my newly-acquired law school debt and (relatively) modest income, I couldn't have.) An identical home just sold for approximately $650,000 (albeit after sitting on the market for several months). Homes in my parents' old 1960s-ranch neighborhood in Costa Mesa are listed for just under $1 million.

The interesting thing is that my rent is less than 2/3 what an interest-only mortgage payment would be. Granted that ownership commands a premium, this price/income ratio seems seriously out of balance. The only thing propping home values at their current level is the expectation that they will continue to increase. I think all it will take to set off a collapse back to prices in line with the return on investment will be clear evidence that the days of obscene increases are over. A couple of quarters of flat price growth will probably do the trick.

Maybe I'm just engaging in wishful thinking, but it seems to me that a chain reaction could then ensue: Investors will drastically reduce their willingness to buy mortgages; the "flippers" (and the speculators who hold houses for longer than 6 months and therefore escape measurement) will disappear from the buying market; ARMs will lose their appeal (reckless gambling is one thing; buying into an almost-certain financial catastrophe is another), with the result that virtually no one will be able to qualify for the remaining financial arrangements at current prices.

In turn, the more marginal present holders of ARMs and adjustable home equity lines of credit will be squeezed; some will be unable to sell fast enough, resulting in foreclosures, resulting in more feedback to the system and driving prices down still further. Once the expectation takes hold that prices are on the decline, buyers will dry up even more, as people wait for the correction to bottom out. If, in turn, this causes a negative wealth effect and drags on the local economy (Orange County still has an unemployment rate below 4%), things get even messier. A lot messier.

I think there's a potential for an even greater crash than occurred in the early 1990s, if only because the runup in prices that preceded it wasn't so steep and dependent on exotic financing products.

I think the San Diego County and Riverside County Realestate is getting ready to bust. My realtor has 7 properties listed and no showings on sunday. I have had my property on MLS and it is newly upgraded and the cheapest in Temecula. It has been on the market 10 days with 2 showings. Ouch!! I'm not an expert,but I'm afraid we missed the boat!

I'm writing from Miami, where the current market simply offends me; there's just no other way to put it. In June of 2000 (the year before people started going insane), I bought a 1300 sq. foot 2/2 condo with a garage for $115,000. It was in the most desirable condominium complex in one of Miami's most desirable bedroom communities. I figured I'd sell it in a few years for $120K-$125K, if I was lucky. Well, last June, I sold it for $165K. Not too bad, huh? But now, things are just absurd. Wanna know how absurd they are here? I have a friend with no job (he's in law school) who was able to get an interest-only, no income verification loan on a $150,000 2/2 condo. And this condo is not even in a desirable, sought-after community. Back in 2000, this unit probably would have sold for about $85K-$90K. I particularly see a condo glut/crash coming here in Miami. There are so many new high-rises under construction that I think they're running out of "hip" names to give them. I mean, when buildings are being named things like "Sky," "Ice," and "Blue," you KNOW the developers have run out of names for their communities. I simply refuse to buy into this ludicrous situation.