Wednesday, December 14, 2005


Evidence the Housing Bubble has popped

Investors Retreat From Housing Market

In markets such as Las Vegas, Miami, Phoenix, San Diego and Washington, D.C., where investor activity had been heated, fewer people are competing to buy properties as an investment, real-estate brokers and housing analysts say. Some investor-owned properties are returning to the market for sale. With the pace of price appreciation slowing, some investors who were betting on quick profits are instead being squeezed.

The apparent pullback by investors is recent and is just beginning to show up in national data. Evidence of the development can also be seen in a number of markets that had until recently been a hotbed of investor activity. As speculators withdraw from the market in San Diego, for instance, the number of investors buying property has fallen by nearly half, estimates Russ Valone, president of MarketPointe Realty Advisors, which tracks the San Diego housing market.

Expect to hear more stories like this:

Some investors are already getting pinched. Barry Fiske, an account manager, teamed up with a friend to buy a bungalow in the oceanside town of Hingham, Mass. The pair tore down the house and put up a three-story Victorian home that went on the market in October, priced at $889,000. After three price cuts, the asking price is now $799,000 and the opportunities to profit are "marginal," Mr. Fiske says. "We probably spent more than we originally intended to," he adds.

Robert Cayouette, a computer programmer, has put down deposits on 10 homes under construction in Florida, figuring he'd quickly flip them and make a profit of about $30,000 apiece. The first of those purchases, a three-bedroom home in Port St. Lucie, is expected to close this month. But Mr. Cayouette has learned he'll be lucky if the house fetches $285,000, or $10,000 less than his original purchase price. "I wouldn't be able to flip it if I wanted to," says Mr. Cayouette.

With home prices growing faster than rental rates, investors who decide to rent out their properties rather than sell them often can't make enough to cover mortgage payments, taxes and other costs. Arash Yazdi, an information technology consultant, decided to rent out his $465,000 townhouse in Merrifield, Va., this fall after a deal to sell the home fell through. He figures he's losing about $1,000 a month.

Just like the internet stock bubble except that it is much harder to sell a house than a stock. I cannot say that I am shocked. However, after watching the stock bubble get more and more ridiculous, the deflation of that bubble is far from over, I was prepared to watch this bubble scale even greater heights of investor/speculator stupidity. Of course, I am glad it won't. My plan is to buy a home in Chicago in the next three years and I will be able to afford a lot more home if the market cools down; falling off a cliff would be nice, too. If this is the end of the housing bubble it will drag the economy into recession in the next eighteen months. All we need is an inverted yield curve. Hey Mr. Bernanke!

Oh yeah, now might not be a bad time to check your financial institutions exposure to the real estate market. Short term rates which affect variable rate mortgages have risen sharply in the past two years. Also, holding onto municipal bonds of states that have enjoyed substantial revenue for increased property taxes might not be a good idea.

Regulatory guidance on mortgage lending, now in the works by the Office of the Comptroller of the Currency and other bank supervisors, will give a focus to negative-amortization mortgages and payment-option adjustable rate mortgages, or ARMs, considering the "payment shock" these loans can carry for unwitting borrowers, Mr. Dugan said.

"In the last two years ... we have seen a spike in the volume of payment-option ARMs, which are no longer confined to well-heeled borrowers who can clearly afford them," Mr. Dugan said in remarks prepared for delivery to the Consumer Federation of America.


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