Volcker Interview

Paul Volcker was the Fed Chairman that you may recall kicked inflation's ass in the early 80s. He is a very smart man and dissects the current housing implosion and credit crisis quite well.

As an aside, you may notice that interviewer Charlie Rose has a nasty black eye. Of course, I had to Google this (hoping for a barfight story) and it turns out he got it while saving his MacBook Air from a fall.

Link

Mortgage Resets

Refinancing peaked exactly 5 years ago this month.

A major issue that has contributed to falling prices in real estate is the use of refinancing to "cash-out" equity from a house. Essentially, a second mortgage was taken out and could be a credit line or a lump sum payment. Consumers were encouraged by low interest rates and their home's skyrocketing price to go ahead and splurge: Buy a new SUV for your family. Take that needed vacation. Add on a fourth bedroom. After all, you deserve it Mr. and Mrs. American!

Taken October 17th, 2007 at Bank of America.

And consumers certainly did take out money from their home's ballooning values, many using variable rate loans that would increase at a later date (5 years being the most popular.) In a large number of cases, these loans were taken out with no proof of the borrower's ability to pay the reset rate. The house's increasing price would be the collateral. These new mortgages were then commoditized on the financial markets as various financial products, and sold to investors of all types.

Mortgage resets are peaking this month. (March 2008)

Now, borrowers are confronted with the price of this borrowed prosperity. Real wage growth has remained stagnant, and now the bills are going up (reset mortgage payments) and the property's market value (the collateral) is going down.

So when will the worst pain be felt through the housing markets? I estimate that the price deterioration will be steepest at about 6-8 months past the mid-2008 time period. This is after most of the resets will have taken place, and by early 2009, most of the homes that will be lost due to resets in this cycle will already have been evicted and sold, or at least on the market bringing prices down overall. We could see prices begin to curtail their fall, and perhaps even rise again, sometime in 2009.

Countrywide Foreclosures Tracker

Here's an interesting site for tracking a piece of data on houses going into foreclosure. It monitors the data on REO (real estate owned) posted on Countrywide's site.

Countrywide Financial is the largest mortgage company in the U.S. and issued between 17% to 20% of all mortgages created in 2006.

It looks like the steadily-growing listings on the Countrywide site shows some stability at around 15,000 listing nationally. Is this from increased sales of old REO, or a move down in new properties going up for sale? It's likely the former.

Florida, however, is a different case. The numbers keep rising in California #1 and Florida #2.

Florida

Link

1920s Boom and Bust

Miami Beach, Florida

Examining the past gives us clues to predict the future. Take this Wikipedia article on the Florida land boom of the 1920s.

The Florida land boom of the 1920s was Florida's first real estate bubble burst in 1925, leaving behind entire new cities and the remains of failed development projects such as Isola di Lolando in north Biscayne Bay. The preceding land boom shaped Florida's future for decades and created entire new cities out of virgin swamp land that remain today. The story includes many parallels to the modern real estate boom, including the forces of outside speculators, hurricanes, easy credit access for buyers, and rapidly-appreciating property values.

Link

The Subprime Primer

A sublime primer for the subprime grime (and perhaps crime.)

NSFSW due to stick figure profanity.

Short Sales

The internet has, quite recently, become an incredible tool for finding free data on housing. Sites like Zillow and Craigslist can give any soul with a thirst for facts a 64oz tub of Buzz Cola with unlimited free refills.

Now that basic housing data is out there for everyone, it's easier than ever to see a bubble's correction in real-time. Fringe, average or below quality suburban development in Orlando appears to be falling the fastest and the furthest thus far.

Led by a tip from a reader in reply to Quality Bring Sticky Prices (thanks, David!), I began researching the Victoria Pines subdivision built by now-bankrupt Engle Homes. These homes appear to have been built in 2005 and 2006, which means the ones that sold were priced at the top of the bubble. Not surprisingly, it looks like many of their original owners are now attempting short sales.

Google Maps Link (there's not much constructed, yet) The development is located off Young Pine Rd to the south of Curry Ford Rd, 1/2 a mile east of the 417.

The Craigslist research was quite striking. What are 2 fundamentally identical 2/2.5 townhouses are priced from $128,300 in an apparent short sale to this hilarious $164,900 "PRICED WELL BELOW RECENT APPRAISAL!!" Nice try, Realtor! Both of these properties are assumed to be around 1071sf.

This seller on Zillow wins the wishful pricing cup, asking a whopping $215,000 for his 2/2.5 1304sf ball and chain. I'm not sure whether it's amusing or sad that he's trying to sell it for more than he paid back in April, 2006 ($213,400).

The $215k townhouse under performing the ZIP, and falling since purchase.

Zillow's estimate today is $164,000, but with lower comps coming soon, it has another 20% to lose fast. Zillow seems to lag many months when prices are changing quickly.

According to David, there's a 2/2.5/1 (garage), 1200sf unit that's been for sale since July, 2006. It's now down to $135,000 with no takers, but I was unable to locate it through the internet. Perhaps I'll drive through the neighborhood if I'm out that way sometime and call a few of the numbers on the lawn.

Rental prices are coming down along with the prices, albeit slowly. This Craigslist search tonight shows 4 Victoria Pines townhouses for rent. The lowest is $925, and the highest is a sole $1200. With a HOA fee and taxes of perhaps $350/mo and a mortgage for $128,300, ($770/mo 30yr at 6%), prices look to be getting close to rent parity.

Let's assume as prices slip another 25%, rent will drop 10% to $850/month for these 2/2.5 condos. You would have to get one at a $500/mo mortgage to break even (can't forget those taxes and HOA fees est. at $350). That's an $83,400 condo, 24% below the $110k you might be able to buy today through a short sale. Then again, if you believe rent will go up to $1200 in a few years and you can afford short term negative cash flow...

We will certainly be watching trends in this development to estimate where the market is heading. Again, readers are welcome to suggest topics and particular neighborhoods/houses to analyze. I would love it if readers would question my assumptions and figures in order to get more accurate results. For example, taxes and HOA fees could be hundreds off.

Belief in the System

Don't stop believing.

While reading The Oil Drum this morning, I found this interesting short essay regarding the motivation of workers.

The topic of elites stimulated this train of thought: yes, there are elites in every human culture (and in the social apes as well). But unlike a troop of chimps ruled by an alpha male, today's elites cannot operate the vast complex structure of the the U.S. economy, government and society themselves. They need hundreds of thousands of well-educated, hard-working people to believe in the system of meritocracy, justice, opportunity, etc., people who will choose to invest their entire productive lives in sustaining the structure the elites influence/control.

Who needs a conspiracy when you have ambitious yuppies? This reminds me of the book Freakonomics where it is figured that the average crack cocaine dealer makes less than minimum wage. The dealers are willing to work the long hours and take huge risks in exchange for a small chance to get to the top of the pyramid.

Link

Income and Housing Ratios

2000
$35,732 = Median Household Income
$103,200 = Median House/Condo
=2.89 yrs of HHI per House/Condo

2005
$36,699 = Median HHI
$194,300 = Median House/Condo
=5.29 yrs of HHI per House/Condo.


Income increased only 2.7%, which is a loss when adjusted for inflation, while housing prices increased 88.3%!


What's more bizarre is that even after the past 20 months of price declines, the Zillow Orlando Price Index for today, March 16th, 2008, is $218,500- 12.5% more than these figures from 2005, which were taken before the 2006 price peak.

I don't think a doubling of housing prices in 7 years accompanied by a 10% increase in wages (a generous estimate) can be sustained. Either income has to surge, or housing prices have to fall.

Now you can see why the fed is "increasing liquidity" and commodities are soaring. Inflation is the most manageable of two evils today- and coincidentally, easier for politicians to swallow than a hard recession before the election.

Quality Brings Sticky Prices

I've noticed something interesting about real estate prices around UCF. While the SFH market has thus far fallen 10-30% in East Orlando, condos near UCF have held their values at or near all time dollar highs. Take these for example:

104 Reserve Cir APT 112, Oviedo, FL 32765. (Hunter's Reserve Neighborhood)
Sold 1/6/08; $165,000. $176/sf. $82,500/bedroom.
2/2, 975sf.


View Larger Map

Great location NW of the corner of McCulloch and Alafaya, bordered to the north by the Little Econ River and the south by a new Wal-Mart grocery store (fence and green space between). The 2/2 units are around 800-1100 sf and mostly occupied by students who go to UCF, which is less than a mile away. Community amenities, so add HOA fees.

5 Year Zillow %
Purple is this Condo. Light blue is 32765 (Oviedo, mostly SFH).

$165,000 is $989 a month at 6% for 30 years. If you're a parent or a prepared student, the $1000 condo (even though it'd be more like $1400 with HOA fees and taxes) in a nice location close to campus is still a pretty good deal. It looks like there's a pent-up demand for new UCF condos.

These are renting on Craigslist for $900-$1000, so they would have to go down to about $105,000 (-36%) to be at parity with rent. (assume a 6% mortgage, no money down; condo fees, taxes, repair reserve est. at $370/month, and a $1000/month renter).

My best guess is that they will decline 15% to $140,000 in the next 1-2 years, and then start climbing with prevalent inflation rates.

UPDATE: Here's a listing for a Hunter's Reserve condo, only $150,000. It also establishes the HOA fees at $195/mo. The going rate for these condos was $170-$180k at the peak, so they're definitely coming off the highs now.

New Features

In contrast to most bloggers, which are either always positive (mostly those in the business) or always negative (mostly those not in the business), I will be grouping useful web sites into several categories. My goal is to achieve a balance of opinions.

Research - Sites which provide general data and market information.

Central Florida Links- Local blogs and sites focused on the Orlando area.

RE Bulls and Investment Study - Evaluating rental potential and market gains.

RE Bears - Bubble analysis and critical viewpoints.

Personal Favorites - Unrelated sites that The Suburban Economist visits.

If you have a site you'd like to be included, please email me at suburbaneconomist (at) gmail (d0t) c0m.

How did we get here?

It's a fact: the housing bubble has begun deflating in Central Florida since sales peaked in August, 2005 and prices peaked in July, 2006.

10 year Zillow Orlando/USA average prices

The bubble occurred for the same reasons all bubbles do- the basic instincts of greed and fear humans unconsciously rely on when making decisions.

How it works.

1. In the formative stages, the bubble begins with the "smart money." These are the buyers who see the conditions are right for an asset price bubble- whether it be tulips or tech stocks- and get in on the ground floor. Negative real interest rates, lenient mortgage terms, and a desire to store wealth close at hand after 9/11 starts to push housing and land price appreciation rates above historical averages at the beginning of the decade.

2. Speculators see prices begin to rise above trend and want to get in on the action (greed). Their demand reinforce this cycle and prices rise with increasing demand. Speculative activity distorts the natural balance between supply and demand, and prices begin to detach from typical valuations based on the buyers' income. The 4-6% average annual price increases in housing from buyers' incomes and price inflation are gone.

3. The media and general public begin to pay attention to the great wealth, both paper and tangible, generated from real estate. New buyers who would not have been able to buy during a normal housing market are approved for loans based on this appreciation, and successful buyers may leverage assets to increase their gains. The self enforcing cycle begins to go into overdrive with annual increases of 20, 30, even 40%.

4. A new paradigm is reached. Housing prices are no longer tied to a buyers' income or assets. If buyers don't get in the market today, it will be more expensive tomorrow. Maximum leverage is used to get into the market. Despite historically high prices, loans are easy to get because the past enormous gains are assumed to continue. Standard practices of 10 to 20% down payments are no longer the norm.

5. The "smart money" sees the end game and some may begin to sell. The supply of buyers trying to get into the market becomes smaller than the number of sellers trying to get out. Even with ARMs, no down payments, and NINJA loans, the cycle cannot be sustained.

6. Eventually, housing prices begin to revert back to fundamental-backed prices. Loans are much more difficult to obtain as the market's psychology turns from "always up" to "always down." Patient buyers, even those whom are qualified, will wait on the sidelines for prices to stabilize. A new set of distortions may take the market price down below where it can be justified in relation to wages.

7. The market regains stability as prices bottom out and smart money returns. The cycle may begin again.

Uh oh.

So here we are in March, 2008, somewhere between #5 and #7. The questions potential speculators in the future bounce should be asking now are:

How will we know when the bottom is reached?

Will it be economically wise to speculate on prices climbing back up the greed/fear cycle when market psychology and prices hit #7?

What can a speculator do to minimize risk when calling the bottom?

The Suburban Economist Manifesto

Welcome to The Suburban Economist!

I've created The Suburban Economist (suburbaneconomist.blogger.com) as a tool to:

• Analyze the housing market in the Greater Orlando Area (GOA) and its potential rental property feasibility.
  
  
• Critically discuss the suburban model of development.
  
  
• Save, sort and share information regarding housing and development found through research.
  
  
• Receive input from others through comments and emails.
  
  
• Track the evolution of my opinions.

I have little experience blogging; however, I have read many and know what I enjoy. I hope The Suburban Economist will develop its own unique voice and improve with each post.

Comments are welcomed and encouraged!