I know that many of you are excited because you are starting to see more and more articles that suggest the 'ride is over' and that the bubble is 'deflating'. Just scan down the articles on Ben's excellent bubble blog, and you will see that things are changing. That is nice that the media is finally starting to get a clue, but my response is 'YAWN'. The media is a lagging indicator. This thing was WELL in the making a good 2-3 years before the media got a clue.
You are probably wondering about the title of this post 'YAWN...', but that pretty much sums up how I feel about things. Granted, I don't have an ARM adjusting...I'm renting for 1/2 to 1/3 the cost of 'owning' with a fixed rate mortgage. I have minimal debt, I'm no longer employed in a real estate related industry, and I can honestly say I have a positive net worth with a year+ of living expenses in the bank. I would pay off my debt, but I'm getting a higher rate of return in my savings account. Those things, combined with my knowledge of what I believe is coming, allows me to YAWN at what is currently happening.
Go back and read the almost 100 posts that I have made. It shouldn't come as any surprise to what is STARTING to happen. Lets take a look at a few things, and I will give you some advice.
Inventories are rising rapidly, sales are slowing 20-40% in many areas, foreclosures are up, and guess what, we still have a LONG way to go. Remember those 2+ trillion dollars of ARMs (adjustable rate mortgages) that are going to adjust in 2006 and 2007?!?!? Well, about 500 billion of that is supposed to adjust in 2006, and the remaining 1.5 trillion or so in 2007. Again, these are tough stats to gather and monitor, but lets just look at them as ballpark figures. Here is an old link from Nov '05 that had the numbers at 330 billion in 2006 and 1 trillion in 2007. I have seen it as high as 2.3 trillion for the same 24 month period, so lets just use my 'round' numbers and understand they are not exact and that some will refi/sell/etc and not be a part of the data set anymore.
If $500 billion are supposed to adjust in 2006, and we are halfway through, lets just assume that about $250 billions dollars worth of mortgages have adjusted for people so far. We have already seen skyrocketing inventories in places like San Diego, Las Vegas, and the Tuscon/Phoenix areas. We are already seeing articles about foreclosures increasing 40-70% in some areas. What do you think is going to happen over the next 18 months when we have the remaining 1.75 trillion dollars worth of mortgages adjust??? Do you think things are going to get better or worse? Do you think most Americans are fiscally responsible?? ...financially literate??
Some people act surprised that mortgage companies are going under or laying off lots of people. This should not come as any surprise either. Let's see, sales volume is down 20-40% depending on the area. If there is a 20-40% decline in the amount of home purchases, guess what?? There is also a 20-40% decline in purchase mortgages. With the Fed staying the course and continuing to raise interest rates, do you think that bodes well for a large amount of refinancing? Not really. From the people I am talking with, finding people that can afford to refi their ARM into a fixed rate mortgage is the latest marketing push. The problem comes when people cannot afford fixed payments and/or have large pre-payment penalties from their ARMs. Most pre-pay penalties amount to 6 months of interest.
Lets not forget the massive job growth in the mortgage/real estate industry the past 5 years. If purchase transactions and refi's are slowing down, do you think it might make sense for the industry to contract as well???
As I have shown mathematically many times before, buying a house in many areas does not make any financial sense. How long did you think that could go on??
Go grab some some old news articles from the .com era. I want you to re-read the articles, but substitute the words "preconstruction home" for IPO and "condo" where you see '.com'. Just as there was a mentality of "you can't lose" with an IPO, the same mentality applies this time to 'preconstruction' pricing. Let me ask you this: how many of those IPOs are now 'worth' less than their IPO price??? Think that track home that was bought at the peak of the bubble in Vegas/Phoenix/Inland Empire won't go down??
If you think a piece of property can't drop below the IPO or 'preconstruction' price, then keep on buying. If you think there might be a shred of logic to my argument, keep reading.
Condos have become like .com stocks. For the past few years, it didn't matter where the condo was, or how good the construction was...it went up. Just buy condos...they are great investments. The same thing used to be said for the .com stocks. It didn't matter what they did, or if they made money...they were .com's so they went up. ...until people realized that they were WAY over-valued. A stock trading at 100x future earnings is like a property that rents for 1/3 of the mortgage payment.
Are you seeing any similarities yet??
I'm not saying things are exactly the same...but there are certain fundamentals that is/are/were lacking in both of these bubbles.
My advice is this: if you don't own a place and you are in a 'bubble area', be patient. Just because that 400k condo is now 350k, doesn't mean it is a good deal. If you have an adjustable rate mortgage that isn't fixed for the next 7+ years, I suggest you try to refinance into a fixed rate mortgage. I see this problem looming for many people on the horizon: they bought a piece of property with little to no money down and now their mortgage is adjusting. They need to refinance, but property values have declined, and they are 'upside down' on their home. This isn't necessarily a problem if you have a fixed rate mortgage and plan on staying for a while. But it is a terrible place to be when you ARM has adjusted, you are struggling with the payment, the value of your house is down, and you cannot refinance. If you can afford a 30-year fixed, do it. Buy the rate down as much as you can. The break even point is about 3 years for rate buy-down points. Refi now before property values take a dive. It will make refinancing easier and you will get better rates the lower your loan-to-value (LTV).
I have some stories and other things touch upon...but I will get to those next week. It has been a long week already, so I'm going to get some sleep.
I look forward to the comments and feedback.