Lawrence
Roberts, the Housing Bubble Cassandra, Proposes National Association of
Realtors Regulation and Outlines Future Housing Bubble Prevention in New Book
Authored by real
estate insider, Lawrence Roberts, who is considered a housing bubble Cassandra due
to his prediction of the housing price crash, the book, The Great Housing
Bubble, calls for National Association of Realtors regulation through the
Securities and Exchange Commission. The book also outlines proposals for future
housing bubble prevention, and it is among first to examine the causes of the collapse
of U.S. home values.
Irvine, Calif., Dec.
3, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
believes the members of National Association of Realtors (NAR) should be
subject to oversight by the Securities and Exchange Commission (SEC) due to the
false statements they routinely make concerning the investment potential of
residential real estate. Financial services professionals are strictly
regulated as to the representations they can make regarding the financial
performance of certain investments by the SEC. Roberts believes their
activities should be similarly regulated since the false investment
representations of the NAR contributed to the housing bubble.
Roberts proposes a
series of changes to our current system of appraisal, lending and sales of
residential real estate. He contends our system of property appraisal needs to
be overhauled to rely on valuations based on a properties potential rental
income rather than merely verifying and perpetuating irrational exuberance by
using the comparative sales approach.
Roberts believes lending
standards need to be tighter to ensure those who are loaned money to purchase
real estate can comfortably afford the payments necessary to sustain ownership.
The documentation standards of residential loans needs to be improved with both
parties having more stringent civil and criminal penalties for lending outside
of reasonable standards or committing fraud or misrepresentation on a loan
application.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
Liar I have drunk the wine (or kool aid) Liar time after time
Not long ago, we had a realtor trolling the forums. He tried all the standard hooks, but he found those fish were not biting. One of the more ridiculous ideas he put out there was the notion, "You can't predict which way the market will go, so you should buy." WTF? Anyone with half a brain or any amount of investment experience would know the old truism, "When in doubt, stay out." Beyond that the remark is stupid for another reason: it is pretty obvious that the market is going to go down. The decline has momentum, we are entering a recession, and prices are still greatly inflated.
Realtors thrive by creating fear in buyers. They will use lines like:
It is a good time to buy!
Hurry. This one won't last.
Don't throw away your money on rent.
If you are serious, you had better buy now or you might be priced out of the market.
They are not making land anymore.
If you see a property you love, you really need to make an offer.
The more earnest money you put down, the more seriously your offer is taken.
Things have been a bit slower than last year, but the last two weeks we have seen a lot more traffic.
Rates are at all time lows and buyers have more choice than ever!
Rates are creeping up, so you better get in now.
If you wait until the bottom, you will miss out on getting a property that you really like.
This property is priced at below market value.
Incentives this good won't be available after...
Don't worry about the asking price - just offer what you're willing to pay.
Don't worry. You can afford this house.
I will show my client the offer, but I just want to let you know that we have another offer for more coming in this afternoon.
Trust me.
It’s not just the commission. I really care about you.
In a buyer’s market these ploys are all lies (the truthfulness of these statements is questionable in all market conditions). Don't believe them.
Liar liar liar liar Liar that's what they keep calling me
Do not forget that when you are buying a house, the realtor is the agent of the seller. The primary responsibility of the realtor is to serve his client by obtaining the greatest possible purchase price. The realtor may be nice and disarming, and you might honestly believe they have your best interests at heart. They don't. In a perfect world (for them) they would lead you to believe they are looking out for you while they are extracting as much money out of you as possible. That way, you will be inclined to use them again when it is your turn as a seller to get as much as possible from your buyer.
Realtors are paid to say the things that would make you cringe with a straight face and a smile. That is how they get that extra few percent out of buyers that justifies their existence. Sellers pay them to say all of the things in the list above for one simple reason: it works. Buyers fall for it, almost every time. Financial manias are not enabled by realtors presenting rational arguments and objective advice. Housing bubble psychology is exploited by realtors to sell homes. That is their job.
When I sold my home before moving to California, I used a realtor. When it is my turn to sell a home here in California, I may do the same. If I find someone who I believe will get me at least 4% more in a sales price than I could on my own, I will hire them. I just won't be there when they go into their sales pitch. My facial expression would give me away...
Today's featured property is in the Northwood II neighborhood. The stress of the low end is working its way up to this next tier of the housing market. This one is going for less than $300/SF.
Once 100% financing became widely available, it was enthusiastically embraced by all parties: the lenders suddenly had a huge source of new customers to generate high fees, the realtors and builders now had plenty of new customers to buy more homes, and many potential buyers who did not have savings were able to enter the market. It seemed like a panacea; for two or three years, it was. There was a problem with 100% financing (which was masked by the rampant appreciation brought about by its introduction): high default rates. The more money people had to put in to the transaction, the less likely they were to default. It was that simple. The borrowers probably intended to repay the loan when they got it, however they did not feel much of a sense of responsibility to the loan when the going got tough. High loan-to-value loans had high default rates causing 100% financing to all but disappear, and it made other high LTV loans much more expensive, so much so as to render them practically useless. It was all part of the credit tightening cycle.
Maybe I'll win Saved by zero
Besides stopping people from saving for downpayments, 100% financing harmed the market by depleting the buyer pool. In a normal real estate market, first-time buyers are saving their money waiting until they can make their first purchase. This usually results in a steady stream of first-time buyers that enter the market each year. When 100% financing eliminated the downpayment requirement, it also eliminated any need to wait. Those who ordinarily would have bought 2-5 years in the future were able to buy immediately. This emptied the queue. This type of financing appears periodically in the auto industry, especially in downturns when it is necessary to liquidate inventory. The term for this is “pulling demand forward,” because it reduces demand for new cars in the next few years. This might not have been a problem if 100% financing would have been made available to everyone forever; however, once downpayment requirements came back those who would have been saving were already homeowners, so there were few new buyers available, and any potential new buyers had to start over saving for the downpayment they thought would never be required. The situation was made worse because those late buyers who were “pulled forward” from the future buyer pool overpaid, and many lost their homes. This eliminated them from the buyer pool for several years due to poor credit and newly tightened credit underwriting standards. Thus, most who thought 100% financing was a dream come true found it to be a nightmare instead.
Today's featured property is another 100% financing deal, and get this: the lender was Zero Down Mortgage! I wonder if they are still in business...
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
The conventional wisdom in California real estate is that you buy a home, and when it appreciates, you sell it and move up to a better home. There is some truth to this idea, but not in the way most people think. Let's examine how it really works.
Let's look at a hypothetical example. Assume market prices are stagnant, and a small starter home can be purchased for $200,000. The next level up can be purchased for $350,000, and the high end can be purchased for $500,000. The price differential required to move between these classes of housing is $150,000. In a stagnant market, the only way anyone could move up would be to save or make more money. Someone would have to either save the $150,000, or get a large enough pay raise to finance an additional $150,000 to upgrade to the next level of housing. So how does appreciation change the equation? It doesn't.
Let's say house prices appreciate at a rate matching the level of inflation. If so, all the properties would become more valuable, and the gap between price levels would increase at the same rate. It would still require savings outside of the house appreciation or a raise in pay to move up. Appreciation alone does not close the gap because all properties will appreciate. There is a belief in the general public that the only requirement to end up in a Mansion on the beach is to climb aboard the "equity train" and wait for the appreciation to transport you to your beachfront paradise. It doesn't work that way.
So what happens when appreciation exceeds the rate of inflation? Nothing different. All properties will be similarly affected. The rate of appreciation does nothing to close the gap between the various rungs on the property ladder. It is important to note that excessive appreciation is a demand-push phenomenon. When the low end starts to appreciate, prices close in on the next tier of properties. If the gap closes, even by a small amount, people will move up. These move ups, cause prices to rise at higher and higher property tiers. In short, the prices at the bottom of the market push prices up all the way to the top.
Now we're up in the big leagues, Gettin' our turn at bat.
In case you didn't notice, there is a great deal of price volatility in California. There are significant periods of time where house prices will appreciate faster than incomes increase. This is purely the result of irrational exuberance and kool aid intoxication. Prices cannot rise faster than incomes on a sustained basis, but prices can certainly go up faster than incomes when we are inflating a bubble. When prices start rising faster than incomes, price change alone can serve as a precipitating factor that ignites a rally. When prices rise faster than incomes, people see that the quality of the house they can afford declines. They do not need to fear being priced out forever; they just need to see the reality that they are slowly being marginalized by the increasing prices. This often prompts people to accelerate their buying plans and get what they can today rather than wait until they are more financially capable tomorrow because if they wait, they will have to settle for less. This buying further drives up prices. The rising prices causes more people to notice their buying power is decreasing which prompts even more buying. The irrational rally is on. Once it gets started, then people start buying out of greed to profit from the transaction, and the rally really takes off.
A very similar phenomenon is at work even during our current price decline. As many have noticed, the high end is not falling as fast as the low end. This is happening for two reasons: first, the subprime loans that have already imploded were concentrated at the low end of the market, and second, the activity of prime borrowers with cash (the only people buying right now) is at the higher tiers of the market. The low end has an extreme imbalance between supply and demand while the high end does not -- yet.
So why are knife catchers being active in a decline? There are two reasons: 1. They believe they are buying at the bottom (foolish but that is what they believe,) and 2. They fear being priced out of another rally. It is the second fear that is self-perpetuating. As you can see from the chart above, the low end has fallen much more than the high end. This is increasing the gap between the move-up tiers. In this circumstance, people who want to move up are seeing their buying power diminishing, and they buy before it diminishes even more. It is the same phenomenon that it witnessed in a price rally, but it is operative in the initial stages of a decline. This is one of the main motivations of knife catchers, and it explains a great deal of the foolish buying we see today.
Let's examine the math of this. Go back to our example, and we will start at peak prices where the low end is $500,000, the next tier is $750,000, and the top tier is $1,000,000. Let's assume each of these tiers has a $250,000 mortgage from their starter home (equity transfer and savings to move up the property ladder). Over the last few years in San Diego, the low end has dropped almost 45%. That would take a $500,000 property down to around $275,000. This would leave the owner with only $25,000 in equity for a move up. The next tier up has only dropped 33%, so the $750,000 property is still selling for $500,000, and the owner would still have $250,000 in equity. The highest tier has only dropped about 20%, so the $1,000,000 home is still selling for $800,000, so the owner still has $550,000 in equity. Despite the huge decline in prices, the gap between the tiers is still very large, and the lower tiers are losing equity faster than the upper tiers. If the price gap is increasing or only decreasing slowly, and the equity in low-end properties is declining rapidly, what money is left over for a move up? Obviously, none. The move up market is dead.
The increasing gap between properties tiers and the lack of equity at the bottom to create the move-up demand push is going to create the opposite affect: demand price pull. Falling prices at the low end is going to pull prices down at the high end. Even if the Alt-A and Prime resets were not looming, this price pulling phenomenon would be enough to clobber the high end.
There is a limit to the number of knife catchers capable of paying the extremely inflated high-end prices. The transaction volumes are very light, and any increase in supply (which is coming) at the high end will crush this segment of the market. There is no support coming from the move up market to help out high end pricing. It is only a matter of time before these market segments join their subprime brethren in the 50% off club.
The San Diego market lead Orange County by one year on the way up, to the peak, and on the way down. Watch their market to see where ours is going. We are not 45% off the peak at the low end yet, but today's featured property is one of those low end properties getting totally hammered. It is being offered for 32% off its early 2007 purchase price.
Irvine Renter will be on the radio again this weekend. I will be a
guest of John McCauley on KBPK FM 90.1. I can be heard on Sunday
November 30, at 6:30 PM. The streaming internet broadcast can be found here. I invite you all to tune in.
I would like to make an announcement. Irvine Renter will be on the radio again this weekend. I will be a guest of John McCauley on KBPK FM 90.1. I can be heard on Sunday November 30, at 6:30 PM. The streaming internet broadcast can be found here. I invite you all to tune in.
AZDavePhx has been busy at the IHB. Last weekend I featured several of his works, and this weekend we have even more.
Like many people, he saw the rampant expansion of credit and a debt-fueled lifestyle to be a problem. It was a problem encouraged by our government and the purveyors of credit.
Many people used their homes as ATM machines, and this money was a huge stimulus to the economy.
Like many of us, AZDavePhx wonders where all this money went...
The lure of real estate was all the free money is generated.
Of course not all these purchases worked out as planned.
Some people are finding their purchase is very scary and painful.
Now our government wants everyone to step up and buy an overpriced house to bail out the banks.
The loan modification terms are good. With the fear of death, the lenders are suddenly willing to negotiate.
Are these companies too big to fail?
Has our government given them a get-out-of-fail-free card?
