Bubble Humour

Some funny stuff:

"An early homebuilding method was "wattle and daub" construction. This mean the house was made of "wattles," which are those loose folds of skin hanging on old people's necks, and "daub," which is mud. So they were pretty disgusting to live in. People mostly stayed outside on the patio, grilling.

The next step was "half-timbered" houses, like they had in Shakespeare's time. They didn't last long, though. "Maybe we should use the whole timber next time," building contractors told each other.

Finally houses were built that people could live in long enough to pay 30-year mortgages on, so mortgages were invented. This led to the invention of cold-hearted bankers, played by Lionel Barrymore, who foreclosed on your house if you didn't pay the mortgage and threw you and poor old granny out in the cold. Then you were homeless, unless granny gave you her wattles to build a new one."

Right in the Thick of It

This blog posts from Brevard County, Florida, where we are in the thick of the price gains over the last year.

Should I be ready to pounce or should have I pounced (as a buyer) last year when my eyes were bulging out at the then current prices?

An Argument for Price Declines in Brevard County

An argument for price declines in beachside Brevard:

The following are people who will be selling in the near future:

1. Speculators. They are definitely more numerous as a percentage of the overall market in Brevard County and everywhere in Florida. What is the percentage? In South Florida, there are reports of some condos being 50% plus. In beachside Brevard, from my personal research, I might guess 20% in some select areas, probably closer to 10 to 12%.

2. Second home buyers. Many of them are really actually speculators who like the idea of a vacation home, or justify the large purchase based on the two purposes (vacation and speculation). Beachside Brevard is very saturated with these types. Between the condos and SFR's, I would guess its around 25% right now. I have no hard data, just hours of property sales research over the past couple of years.

3. Overextended homebuyers. These are the IO/ARM people. Their eyes are too big for their pocketbooks. Like Caswell says above, I do not think they hold a strong percentage of the market right now on beachside. It might be 3 to 5%.

Many from the above groups will need to sell in the near future, I do not doubt it one bit. When appreciation flattens, speculators will dump, they will be the first to go; they are in it for the price gains, and when they see those going away, they will run. The vacation home buyers will hang on a bit longer until the weight of tax and insurance increases wear their vacation attitude down. They will come to see that they can spend $20K on an excellent exotic vacation instead of dealing with tenants and using their beat up home two weeks a year. The overextended homebuyers will, of course, try to hang on the longest because its where they live, but rising interest rates will push them out.

The counter point is the growth argument. That more people are moving in than will be selling or moving away. However, consider how real estate markets are "made". If you own a home in a beachside location and your neighbor sells his inferior home for an obscene price, you immediately feel that your house is worth much more than what you paid. And so does every other resident in the neighborhood. It only takes a few sales for everyone to feel like they are in the California housing market. Lets say that in the last few years, the turnover in your beachside neighborhood was 10%. Solid sales, optimism goes up.

However, the market works the same exact way the other way. It only takes a couple of sales at falling prices for you to feel like your values are going down. The whole neighborhood does not need to sell out, only a couple. So when the speculators leave (10%), the vacation homebuyers (15%) and the overextended buyers fade out (3%), that will hit your local beachside market very, very hard. It may hit it so hard that the psychology starts to change, and after a year or two of languishing on the market, sellers decide to dump and run.

For the growth argument to work, beachside Brevard will need to see new residents who work here with an annual median income of $35K fill in the spots left by the speculators, vacationers, and overextended homebuyers at current prices. I just don't see that happening. The local economy barely supports a $150,000 home price, much less $300K and up like it is on beachside.

The caveat is that we are talking about group psychology and anything can happen in that context. So all of the above logic just might be irrelevant.

Corporate Malfeasance and the Real Estate Bubble

Remember during the tech boom when statistics were flying around about the growth of the internet? Everyone was going to connect to the internet, remember? Companies laid fiberoptic cables and created networks anticipating the crushing demand.

And while all the rabid attention was on tech, some old blue chips were quietly stirring their pot of cooked books. Enron, Worldcom, HealthSouth had to keep up with the "Joneses" somehow, if only by posting stellar revenues and profits and sweeping negative financial data under the rug.

I wonder if this pattern of corporate malfeasance will be the same in real estate markets. Books can't necessarily be cooked as well, but statistics sure can be. For every newsstory on a bubble with statistics is a corresponding newsstory refuting it with statistics.

For example, in 1983, the CPI began using "imputed rents" to represent housing costs as part of the consumer basket of goods. This worked fine as long as rents remained consistent with sales prices. But the actual cost of buying and maintaining a home today is much higher than the imputed rent calculated in the current CPI. Therefore, CPI as a measure of inflation may be flawed in that it does not take into account the tremendous increase in cost of homeownership. Inflation has certainly occurred in housing, but the Fed can say with their best straight face that inflation overall is under control.

So what sensational malfeasance will be uncovered when the bubble, if there is one, bursts? Will the finger be on the Fed? On news outlets? What about realtors and realtor.com which nationalizes the home search for consumers? Who will be the Bernie Ebbers or Kenneth Lay of real estate?

The National Bubble

Ok, I am back after a little hiatus from blogging.

Greenspan and housing bulls insist that bubbles, if there are any in the real estate market are local or perhaps regional. However, here are some recent observations which point to a national bubble:

1. Real estate financing is national, not local or regional. Easy money is easy everywhere from the small towns to the big towns. This puts upward pressure on homes in every market, not just those deemed frothy.

2. On several occasions, I have heard recently, "The house I bought in Florida was such a great deal compared to the house I just moved from in California/the Northeast." Since when are values determined using comparables from across the country? Yet the price pressures in small town Florida seem directly related to those in California because of this comparison all too often occurring in areas with population growth (like Florida). Furthermore, the more national character of the real estate information buyers get from the internet and other media outlets puts buyers into more of a "national" mindset when negotiating a purchase and considering their top dollar. I can almost hear the thoughts of recent buyers in Florida: "If the Bay area has a median home price of $600,000 then certainly $300,000 in Florida, puts me in a safe zone."

3. The flow of money from equities markets to real estate have created a voracious appetite for real estate that produces even the smallest return. This is leading to investors searching into the far reaches of small town America for deals that will produce positive cash flow. These investors will purchase properties they have never visited and that are located thousands of miles from their own home. It is a foregone conclusion these days that any purchase in a "hot" market will produce only a negative cash flow. So in other words, the bubblous regions are swallowing more and more territory every day potentially leading to one monolithic "market" covering most areas of population.

So real estate markets are always local? I am not convinced.

Hard Tax Data from Central FL

With an increase as low as 10% and as high as 18.8%, the coffers of local governments are swelling, as I expected. Now, lets look real carefully to see how they spend their newfound windfall. Raises anyone?

Forgive the unformatted cut and paste, it is a registration site:

County/City Additional property-tax revenue in 2005 Change from 2004
LAKE COUNTY $14,716,554 +18.5%
Astatula $21,998 +17.6%
Clermont $138,227 +25.9%
Eustis $563,518 +11.4%
Fruitland Park $59,559 +14.3%
Groveland $328,411 +29.5%
Howey-in-the-Hills $45,363 +11.8%
Lady Lake $247,359 +12.2%
Leesburg $660,564 +10.8%
Mascotte $110,060 +16.6%
Minneola $308,770 +26.9%
Montverde $42,381 +19.4%
Mount Dora $481,733 +11.5%
Tavares $388,784 +15.2%
Umatilla $48,873 +10.8%

ORANGE COUNTY $42,436,419 +12.2%
Apopka $1,137,547 +19.9%
Bay Lake ($954) -0.2%
Belle Isle $238,814 +15.1%
Eatonville $254,080 +23.3%
Edgewood $101,456 +10.3%
Lake Buena Vista $3,695 +0.2%
Maitland $613,120 +7.9%
Oakland $198,695 +31.8%
Ocoee $1,060,517 +16.7%
Orlando $12,663,186 +15.0%
Windermere $73,086 +6.9%
Winter Garden $1,193,317 +25.6%
Winter Park $1,625,963 +10.5%

OSCEOLA COUNTY $11,157,467 +10.0%
Kissimmee $1,986,705 +6.5%
St. Cloud $376,302 +10.0%

POLK COUNTY $21,698,889 +14.0%
Auburndale $1,485,265 +70.0%
Bartow $155,021 +6.9%
Davenport $71,725 +20.0%
Dundee $45,082 +7.1%
Eagle Lake $28,499 +9.2%
Fort Meade $3,180 +3.2%
Frostproof $29,624 +4.7%
Haines City $737,403 +29.6%
Highland Park $2,205 +3.3%
Lake Alfred $26,014 +3.4%
Lake Hamilton $36,384 +10.3%
Lake Wales $488,503 +11.4%
Lakeland $893,182 +6.5%
Mulberry $192,262 +5.5%
Polk City $14,440 +6.2%
Winter Haven $587,285 +7.2%

SEMINOLE COUNTY $10,981,000 +12.6%
Altamonte Springs $750,548 +8.6%
Casselberry $250,869 +8.5%
Lake Mary $434,188 +8.1%
Longwood $276,367 +9.7%
Oviedo $1,051,114 +15.0%
Sanford $1,617,190 +17.9%
Winter Springs $830,686 +12.0%

VOLUSIA COUNTY $21,229,291 +18.8%
Daytona Beach $3,945,102 +20.0%
Daytona Beach Shores $1,436,800 +39.0%
DeBary $224,148 +8.6%
DeLand $718,643 +18.1%
Deltona $1,196,299 +19.6%
Edgewater $657,685 +20.3%
Flagler Beach $5,310 +20.9%
Holly Hill $227,461 +13.4%
Lake Helen $71,663 +20.4%
New Smyrna Beach $2,822,200 +28.3%
Oak Hill $95,501 +28.7%
Orange City $299,460 +21.5%
Ormond Beach $887,780 +12.9%
Pierson $18,411 +14.6%
Ponce Inlet $648,186 +25.1%
Port Orange $900,649 +12.8%
South Daytona $329,362 +12.9%

Mental Bubble Gymnastics

I like the mental gymnastics in this piece.

From a seller analyzing his decision to sell, it is too much fun to bend your mind around the contrasting arguments:


"...he questioned whether prices could stick at a level that placed housing so far out of the reach of its principal market." and

"Then there's the contrarian factor: "The notion that this is a bubble is such conventional wisdom that I'm beginning to doubt that it is a bubble." and

"In my dreams, we get a crunch and I put the same money back into the market for 50% more house," he says. "The other side of the case is that it's true that they're not making any more land on the Westside. They're not building any more housing, either. Gas prices and freeways could really push up demand by forcing people to live closer to their work." He shrugs philosophically. "It will not surprise me if this house is worth 20% more in two years. I may end up with less housing than I could have afforded."

Froth is not just a good way to describe some markets, but it is the wishy washy thinking and psychology that goes through the mind of both buyers and sellers in our current market conditions. Its very tough decision making in real estate these days. Soon there must be an anchor to provide certainty, it is just human nature to need certainty. In what form the anchor will come is just fabulous to imagine.

Housing Bubble Chatter

Google news reports 1920 hits on "house bubble" and major news outlets are chattering. Will anybody listen? Or are the news sources just trying to generate ratings? Is it different this time?

Directly, across the street from my home, where the homes are oceanfront, owners are piling money into renovations, tear down/new construction. One just started the other day. I don't think they are thinking of a house bubble, maybe they're right.