Markets Going South

I am not a purveyor of negativity. I believe that there are opportunities everywhere, and that "Fortunes have been made in real estate in good times, bad times, and in between times." So in addition to Randy's information above, I'm including here an article I found informative relative to changes in fast-moving markets.

4 Reasons the Housing Bubble May Pop in 2014
by Rick Aristotle Munarriz

The housing rebound is on a roll. Home prices continue to inch higher, and the number of indicators showing economic improvement suggest we'll enjoy an even rosier 2014, when the Fed won't have to do quite as much to keep the good times going.

However, there are also more than a few hints that in the year ahead, the housing market's rebound may take a breather -- or we may experience something far worse. Let's take a look at some of the warning signs.

1. Mortgage Rates Are Moving Higher

The economy's gradually getting on track, and that has resulted in interest rates inching higher. Naturally, the higher the rate, the less bang potential homebuyers get for their bucks.

There's little reason to expect this trend to reverse. The Fed recently announced that it's ready to begin tapering its rate-suppression plan by reducing its bond purchases by $10 billion a month. Easing up on this latest round of quantitative easing -- QE3 -- will have an impact on interest rates. After all, if the Fed's $85 billion in monthly bond purchases created the illusion of demand, what will the reduction do to the real demand?

In other words, interest rates for a range of investments are likely to continue inching higher in the year ahead. There's a reason why savvy investors have been pouring money out of bond mutual funds in recent months as higher rates result in lower bond prices.

2. It's No Longer House-Hunting Season

The National Association of Realtors has reported three consecutive months of declines in existing home sales.

Housing bulls will argue that the market is still strong. The association representing real estate professionals still expects 5.1 million homes to be ultimately sold in 2013, and that's the highest tally since 2007. Is that worth bragging about? Is it merely a coincidence that 2007 was when the last housing bubble popped?

Either way, the last several months have not been kind, and that's enough to kill any of the favorable momentum the market experienced earlier in the year when rates were bottoming out.

3. The Mortgage Market is Starting to Dry Up

With homes getting more expensive and interest rates getting higher, you might expect interest in buying to dry up, and that's exactly what's been happening.

Weekly home mortgage applications have fallen to their lowest level since late 2000. The spike in rates has killed off refinancing applications, but loans for home purchases are also starting to slump according to the Mortgage Bankers Association.

That certainly isn't a good sign for a housing market where a rebound in prices needs a fluid mortgage market to keep sales coming at a reasonable pace.

4. Home Builders Are Getting Greedy

All of these factors would seem to be warning signs for developers, but they don't seem to be heeding the cautionary signals. Housing starts are soaring as U.S. home builders broke ground on new homes last month at the quickest pace in five years.

It's easy to see why the builders are getting more aggressive given the rising home prices, but who is going to pay for these new digs in 2014?

In its latest quarter, luxury home builder Toll Brothers (TOL) reported that the average price of its new homes clocked in at $703,000, a whopping 21 percent ahead of what it was charging a year earlier. However, there's a "Toll" to be paid for this sort of behavior in the market. Orders for new Toll Brothers homes fell by 10 percent during the quarter.

Toll isn't the only developer experiencing a slide in orders. So what will happen after all of the new construction that's underway hits the market next year?

The housing market bubble may not pop in 2014, but it's highly likely that it will lose some of its sudsy essence.

This concludes the article, so let me remind you, this is not intended to be a negative. The lessons should be that rapid growth should be approached with care, and not to bet on continuation. Make solid investments that have some margin in them in case adjustments occur in the future.

here's an excerpt and link to an interesting article by Christopher Matthews:

"But from economist David Blitzer, here’s one chart that shows why we shouldn’t be worried about the housing market suffering another 2007-style bust anytime soon:

The above chart shows the loan-to-value ratio for all owner-occupied homes in America. In other words, before the crisis, the average homeowner owed roughly 60 percent of his home’s value to the bank, and that percentage has fallen now to 49%. And this change has made the American economy and housing market much more resistant to a dangerous real estate bubble explosion"

Read more: Real Estate Market: We're Not in Another Housing Bubble | TIME.com http://business.time.com/2014/01/04/this-one-chart-shows-why-we-shouldnt...

It's good to know what's going on in other market besides my area of investing (south florida).

I appreciate everyone who weighed in on this post.

God bless!

Valerie: I always appreciate your comments. I actually had run across the information that you mentioned in your post, and had wanted to bring that into the forum, but could not seem to find it again, so I'm glad you did.

Now, for comments for everyone:
I am what you call a realistic optimist. What that means is that I digest the information I can find, then look to find the bright side, and hope for the best of all possible results.
From a risk standpoint, I encourage people to view pro and con, and form their own opinions. I think this string is shaping up to be an opportunity for pro and con posts, and really hope that people will put forth the information so that each individual has collective data to review that represent differing perspectives.
I'm not here to make any decisions for other people, I'll be happy, though, to help provide information that can help others to make their own informed decisions.

Dallin,

I too like it when there is an opportunity for everyone to post their opinions in a thread; definitely makes it more interesting...

and I also like to keep up with the real estate market news because as a real estate investor I think it's imperative that we do; however, we should always take the news with a grain of salt...

thank you for sharing your knowledge with us!
Val

The recent slowing in market activity demands careful attention. The two prior major slow downs occurred in late 2005 and 2010. The decline in sales at the end of 2005 was our first clue that the housing bubble was about to burst. The decline at the end of 2010 was due to the ending of the first time homebuyer tax credit, which reduced demand. Today we sit in a very different situation from either of those events.

https://www.propertyradar.com/reports/real-property-report-california-ja...

There's a really interesting thing about investors. They all still live in one house, or possibly have a second home. And that's all they occupy. So any time an investor buys more than one or two homes in a year, it is absolutely true that they will not be consuming (occupying) those extra homes.
As such, in order for there to be a balanced and stable situation in any market, there need to be as many consumers available as there are properties being sold or that market will not sustain.
Investors, then, are also in competition with developers and builders for the consumers in the area. And when investors go into an area in large numbers and stimulate activity, they help raise property values, which, in the current economy, also means that they generate additional competition from homeowners who were upside down in their properties, but where property values are now reaching the point where they can sell their property without having to come out of pocket with large amounts of money to make up for the deficiency in value.
Don't you just love the way things interplay with each other? This is not a negative thing, but it means that investors need always be vigilant of their market and the outside factors that can affect them.
Several markets around the country fit the above statements. For those in those markets, there is still going to be great opportunity. Money is moving again, wholesaling opportunities will not go away, BUT, and this is the really important factor, while it will not be as difficult to find properties, it will be critical that you develop solid, diverse, and creative methods to market the properties that you place under contract as there will be more competition for cash buyers.
Real Estate investing will always have one side that is out of balance with the other, that is the nature of supply and demand. And we as investors have the ability to sharpen our creativity and adaptability to keep up with these changes. I hope that excites each of you the way it does me, because this is what assures the viability of our industry despite market changes, new laws, etc.

“Rising home prices and interest rates along with little to no income growth has resulted in a substantial erosion of home-buyer affordability over the past year,” Nothaft says. “If rates continue their upward trend, it will be difficult for many families to purchase a home without seeing some income growth.”

An improving economy is helping to bolster the housing market but lackluster labor reports in January is resulting in a slow start for the residential sector, according to Freddie Mac’s latest Economic and Housing Market Outlook.

Freddie predicts unemployment to stay at 6.6 percent in the second quarter and fall to 6.4 percent by the end of this year.

Despite the Federal Reserve beginning to taper its $85 billion per month bond-buying stimulus program in January, 10-year Treasury yields and fixed mortgage rates mostly eased over the month, falling about 0.3 percentage points between January and early February.

“It appears mortgage rates may have given the market a reprieve for a month or so and provided some borrowers another chance at refinancing, especially those folks that may be holding older mortgages,” nothaft

This year started off with a slight plot twist. After mortgage rates rose most of 2013, 2014 began with a slight drop in rates, although they did not sink back to the levels seen at the beginning of 2013.

According to the latest Economic and Housing Market Outlook from Freddie Mac, borrowers who were holding older mortgages were given a second chance to refinance due to a pullback in mortgage rates.

"It appears mortgage rates may have given the market a reprieve for a month or so and provided some borrowers another chance at refinancing, especially those folks that may be holding older mortgages,” Frank Nothaft, Freddie Mac vice president and chief economist, said.

But should borrowers bank on being given this same opportunity again?

Freddie Mac explained that other factors besides rising rates could negatively impact borrowers.

“If rates continue their upward trend, it will be difficult for many families to purchase a home without seeing some income growth,” Nothaft said.

“Rising home prices and interest rates along with little-to-no income growth has resulted in a substantial erosion of homebuyer affordability over the past year,” he added. “Therefore, jobs and income growth are necessary for 2014 to turn in another gold-medal performance for the housing recovery."

The key to a strong 2014 is broad-based improvement in employment and family income, Freddie noted.

“We expect housing to come out of the gate at a good clip at the start of 2014 bolstered by an improving economy, but the lackluster labor market report for January has resulted in a slow start for the residential sector,” the report stated.

The enterprise predicts the unemployment rate to stay at 6.6% in the second quarter of 2024 and fall to 6.4% by the end of the year.

And although the Federal Reserve began its tapering activities at the beginning of January, 10-year Treasury yields and fixed mortgage rates generally eased over the month, dipping about .3 percentage points between early January and early February, which helped give refinancing activity a second wind, Freddie noted.

However, in the end this could all be unfruitful without income growth. freddiemac

and informative too!

An interesting dynamic may be on the horizon that can impact several specific markets that are on the cusp of growth, with more minor impact in all markets. This dynamic is described in the following excerpt from an above post:

“Rising home prices and interest rates along with little-to-no income growth has resulted in a substantial erosion of homebuyer affordability over the past year."

In other sections of this forum there has been mention of this erosion of homebuyer affordability. The concern for investors is that in order for a market to be solid and sustainable, it must rely on actual consumers, not just upon investors who are a conduit or pass-through for properties.

My recommendation is that you look at yourself as a part of the living economy of the area where you are investing, and review what contribution you are making to that economy. If you are just removing money and inflating the prices of properties, that will eventually collapse. Find ways to contribute to the ability of consumers in the market to have a reasonable place to live, and your efforts can continue through the ups and downs of the market. Find properties that are solid investments even if the market starts to slide.

To paraphrase from something President John F. Kennedy said: Ask not what your market can do for you, but what you can do for your market.