Housing Bubble... In the News Again.

There is a very interesting article coming out in Fortune magazine that many of you will want to read. The title is: "Is the Housing Boom Over?"

The article makes an argument for way there may be a housing bubble coming around the corner. Here are some of the highlights that reference the California real estate market:

• Overvalued Markets. To calculate whether a market is overvalued or undervalued, Ingo Winzer of The Local Market Monitor compares home prices to incomes.
  - Los Angeles / Long Beach Real Estate = 27% Overvalued
  - Orange County Real Estate = 36% Overvalued
  - Sacramento Real Estate = 35% Overvalued
  - San Diego Real Estate = 40% Overvalued
  - Modesto = 43% Overvalued
  
• "The most alarming development, though, is the change in psychology. "The market isn't acting rationally," says Christopher Thornberg, an economist at UCLA. "It's now an emotion-driven market where people are buying on the expectation of future appreciation." Increasingly Americans view houses not primarily as places to live but as foolproof, can't-lose investments. The passionate faith that money poured into real estate will magically multiply is creating a self-fulfilling speculative frenzy that's bound to end badly. "
  
• "Another sign of fever: the unprecedented volume of deals. Home sales keep shattering records at a rate that's totally out of proportion with demographics, incomes, and every other metric. Last year Americans bought 7.2 million new and existing homes, almost 10% more than in 2002, and sales are running at a rate of 7.9 million this year. That pace of 660,000 homes turning over a month is probably unsustainable."
  
• "In the early '90s slump, for example, prices in Los Angeles county dropped 21%. And this time around there's a real danger that a downturn in prices, or even a stall, could slam the economy, especially all-important consumer spending. Americans have used their homes like ATMs, taking out $662 billion in home-equity loans and refinancings since 2001—a cash infusion that helped support the economy at a time when the job market was tough and the stock market made investors feel ever poorer. And rising home prices conveyed a sense of well-being that encouraged more spending even by homeowners who didn't refinance. According to Mark Zandi of Economy.com, home-price gains and refinancing added seven-tenths of a percentage point to GDP growth in each of the past three years. "
  
• "The average nationwide rise of 47% in median home prices since 1995 (after adjusting for inflation) is like nothing America has ever seen. In the boom from 1982 to 1989, median prices jumped by 14%"
  
• "A recent survey by economics professors Robert Shiller and Karl Case found that 28% of homebuyers in Boston, Los Angeles, and San Francisco expect home prices to rise 20% a year for the next ten years. "
  
• "California, for example, 3.1% of buyers are reselling houses within six months, up from about 2% a year ago."
  
• "The California speculators who drove up prices in Las Vegas 45% from November to May have moved on...with rents that weren't high enough to cover taxes and interest, many investors bailed. Since May, the number of homes for sale in Las Vegas has soared from 4,000 to 14,000."
  
• "Prices are also way out of line when stacked against another important yardstick: personal income. From 1975 to 2000, home prices always stayed in the range of 2.7 to 2.9 times median annual income; in fact, 2.9 was once considered a huge number. It's where the ratio stood before housing prices sank in the early 1990s. But starting in 2000, this crucial figure entered uncharted territory. Today the ratio stands at 3.4, 17% higher than just five years ago. And get this: The ratio is now 6.4 in California and five in Massachusetts. Just to return to the once-lofty level of 2.9 would require roughly five years of flat prices—about the same kind of market correction that would be necessary to bring prices back in line with rents. "
  
• "California, the median home price is $464,000, vs. $382,000 a year ago. To qualify for a mortgage to purchase that nearly half-a-million-dollar property, a husband and wife would have to earn a combined $112,000 a year; 12 months ago the income threshold was $85,000. Today fewer than one in five California households can afford to buy the median-priced house. "
  
• "homebuyers are coping with higher rates by taking out adjustable-rate loans. Early last year, about 16% of all new mortgages were ARMs. By this summer that figure had jumped to 36%, and in California—with its glaring affordability problem—60% of new buyers are armed with ARMs. The catch is that in the future those ARMs convert to what are almost certain to be far higher rates after periods that range from six months to five or seven years."

If you are in the California real estate market... you should read this article as there is much more information to read than the snippets here.

Thanks for Reading.
Jessie J. Beaudoin