Are New Home Builders Going to Cause the Housing Bubble?

Today, BusinessWeek wrote an good article regarding new home builders and the current supply of homes for sale. It indicates that the amount of existing homes for sale is up 20.6% nationally over this time last year... while "...the second half of 2005, the supply of new single-family houses available for sale has been growing at the fastest pace since the mid-1980s"

For those of you who remember Southern California during those times, think Chino Hills... and what happened back them... mid-late 1980's then in 1989 pop.

What is important is that those buying a home buy for the primary reason of owning a "home" not as an investment, as that's were people can get in trouble.

December Home Sales in Southern California Lowest in 4 Years

Today, Dataquick, released information regarding home sales in Southern California. Prices are easing back and the sales volume is the lowest in 4 years. Here are some area highlights:

These were all down:
Los Angles was down 13.6% from Dec. 04
Orange County was down 9.2% from Dec. 04
San Diego was down 11.3% from Dec. 04
Ventura was down 13.3% from Dec. 04

Bucking the trend was:
San Bernardino up 5.7%
Riverside up 16.5%

Overall Southern California was down 4.5%

New Real Estate Report Regarding Price Decreases

PMI recently released a new report regarding the risk of housing prices depreciation around the country. What's striking about the report is that 11 metropolitan area's are at risk to drop 50% or more. This is an excellent read if you are into charts.

Download the real estate PDF

California Real Estate Mortgage Underwriting To Tighten

According to Inman news today, California real estate lenders will be tightening their mortgage underwriting guidelines to compensate for higher default risks reported by homesmartreports.com. The article stated that there was a concern due to the market frenzy experienced from the coast that has now moved inland. I suspect part of the concern and where you will see tightening is on the interest-only and pay-option arm type loans.

California Housing Affordability Index Falls 5% From Same Time Last Year

Yesterday, the CAR released it's monthly housing affordability index. Last year in November 19% of Californians could afford to purchase the average price home, this year it's only 14%.

I have always had a problem with the figure because of the assumptions used to calculate it which are: "based on an average effective mortgage interest rate of 6.26 percent and assuming a 20 percent downpayment"

The kicker is how many of the people whom have the income of $133,390 to pay the average priced home of $548,000 actually have $109,600 for the down payment not including the closing costs. Think about your friends and family for a moment whom have purchased homes and how much they put down.... gotta love those interest only, stated income, piggy back loans!

So, fact leads to three observations.

A) Most people buying a home are those who already own a home. This is supported by NAR figures. So the argument used by many that immigration will cause a continued strength in the housing market seems a little weak.

B)The is significantly less than 14% of Californians whom can afford to actually purchase a home.

C) Due to the strength of the real estate market and sales volume over the last two years, you must believe that the relaxed underwriting standards of interest only loans has allowed many people who can't really afford a home to actually buy one. You be the judge of whether this is good or bad.

In looking at the chart there are some interesting figures that one may want to notice.

A) Almost across the entire state the affordability index has flat lined. In a few places it decreased 1-2% over October but generally it stated the same. This seems to support that prices have also remained stable maybe indicating that the peak has finally arrived.

B) The markets are slowing changing as the average prices in 19 regions reported 8 regions experienced small price declines.

California Real Estate Foreclosures Jump 29% in December

This news comes from a RealtyTrac press release regarding their data on national foreclosure rates. California had an increase of 29% in December but it is still lower than the national average. Worth taking a look at.

Will I/O Loans Lead to a D-Day in Real Estate?

On 1/08/06, on Inside Bay Area, was a great article on interest only loans which are extremely popular currently. In fact, interest only loans represent about 35% of all loans on the west coast presently. The main point of the the article was that what happens when these loans adjust and overwhelmingly the answer is "refinance"

The brings up some interesting issues as to what people perceive will happen. Many of those who believe there is a real estate bubble like, Ben Jones Housing Bubble blog, think that a time bomb that may set it off is the adjustments of this interest only loans. Next year approximately $400 billion worth of hybrid ARMS nationwide... by 2007 it could be $1 trillion.

What is scary about reading the comments from Ben's post is the number of people who seem fairly disappointed from the possible reality pointed out in the article. This may cause some problems because of how refinancing of a I/O works, which I will elaborate on tomorrow.

2006 California Real Estate Forecast

The newest issue of Fortune there is a real estate forecast for 100 of the largest metro real estate markets summarized on CNN Money. So area's are forecasted to continue the run-up in prices but these are typically in the Midwest with Texas appearing to be the next hot spot (investors read: San Antonio). Our focus is California real estate, so here is some of the figures from the report:

The first column is ranking, so you can see most of the California areas made up the bottom 10%, which may be in fact supported by recent decrease in the Pending Homes Sales index.

Whats important is to look at the last two numbers. These are the forecasted growth rates for 2006 & 2007.

94 Sacramento-Arden-Arcade-Roseville CA $372,900 -1.20% -5.10%
99 San Diego-Carlsbad-San Marcos CA $598,700 -3.40% -5.70%
92 Bakersfield CA $286,300 -0.80% -3.00%
97 Riverside-San Bernardino-Ontario CA $362,800 -2.60% -6.80%
87 Stockton CA $423,100 -0.30% -5.90%
83 San Francisco-San Mateo-Redwood City CA $766,000 0.10% -2.90%
90 Oakland-Fremont-Hayward CA $651,300 -0.70% -4.40%
98 Santa Ana-Anaheim-Irvine CA $682,300 -3.10% -6.10%
91 Fresno CA $340,800 -0.80% -2.80%
89 Oxnard-Thousand Oaks-Ventura CA $480,300 -0.70% -5.00%
95 Los Angeles-Long Beach-Glendale CA $412,900 -1.60% -6.30%
88 San Jose-Sunnyvale-Santa Clara CA $720,900 -0.40% -3.90%

So again, in all of this data it's hard to make sense of what is really happening but what I always tell my clients is simple: "Buy a home, not an investment" If you keep this in mind than the occasional dips in prices don't matter because you purchased a "home" not an "investment". It's proven that over time "real estate" is prudent investment but like any other investment the price can go down.

Real Estate Market to "Normalize" According to NAR 2006 Real Estate Forecast

Today, the NAR commented on the 2006 real estate market. The heading reads "Normalize" which may be a careful choice of words as further down in the forecast... "A lot of demand has been met over the last five years, and a modest rise in mortgage interest rates is causing some market cooling. Along with regulatory tightening on nontraditional mortgages, there will be fewer investors in the market this year,".

Here are some highlighted of sales figures from the report:

"After setting a fifth consecutive annual record, projected to 7.10 million units for 2005, * existing-home sales are forecast to ease by 4.4 percent to 6.79 million this year, which would be the second highest on record. New-home sales, which should be a record 1.29 million for 2005, are expected to decline 6.0 percent to 1.21 million in 2006 – that also would be the second best year in history. Total housing starts for 2005 are seen at 2.07 million units – the highest since setting a record 1972 – with a 6.6 percent slowing to 1.94 million this year."

In the report is also shows that national home prices increased 12.9% in 2005 and are forecasted to go up 5.1% this year.

We will continue to watch the California real estate market and report numbers for local regions as we find them.

Pending Homes Sales Index Down 5.1% in the West

Today the National Association of REALTORS released it's Pending Home Sales Index figures. The West was down 5.1% over last month and down 4.6% over last year. This new PHSI index is a leading indicator of the existing home sale figures that will come out next month, so we should be able to directly see the impact on those numbers (i.e. should be lower again). I suspect some of the impact is from the recent increase in mortgage rates.