Housing bubble..

[GMichael]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....

[mystic]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....

Over the long-run prices should continue to rise. You should be ok if you plan to live in the home for a long time. I lost a liitle on a house I bought in the late 1980's and sold in the early 1990's. However, if I still had that house and were selling now, the price would be triple what I paid.

I do think there is great risk in some of the "creative" financing arrangements buyers are using.Today's CNN describe a kind of ARM that sounds scary. I'll quote CNN:

"The riskiest is called an option ARM, which features several payment choices each month, including a standard interest-and-principal payment, an interest-only payment and an interest-only minimum payment that's so low it doesn't cover the month's interest charge. The unpaid interest is rolled into the principal, meaning that -- yes -- you're charged interest on your unpaid interest."

The article goes on to say this means your mortgage grows instead of shrinking.

[GMichael]

Over the long-run prices should continue to rise. You should be ok if you plan to live in the home for a long time. I lost a liitle on a house I bought in the late 1980's and sold in the early 1990's. However, if I still had that house and were selling now, the price would be triple what I paid.

I do think there is great risk in some of the "creative" financing arrangements buyers are using.Today's CNN describe a kind of ARM that sounds scary. I'll quote CNN:

"The riskiest is called an option ARM, which features several payment choices each month, including a standard interest-and-principal payment, an interest-only payment and an interest-only minimum payment that's so low it doesn't cover the month's interest charge. The unpaid interest is rolled into the principal, meaning that -- yes -- you're charged interest on your unpaid interest."

The article goes on to say this means your mortgage grows instead of shrinking.

I passed on MOST of the creative financing. But I did go with the 10 year fixed rate that changes to an adjustable after 10. I do have the option to switch to a 30 year fixed at the end of the construction period (est. April 2006). Rates will most likely go up by then though. I'm counting on the rates to come back down within the next 10 years. If not, I'll need a raise or a second job. My wife works at a bank and gets 1 point off on loans. But they don't do construction loans. If rates don't go up too much in the next 6-9 months I can switch to her bank and go for the 30 year fixed rate before the C.O. After the C.O. I'm locked into the loan I have unless I want to pay another closing charge.
I do plan on being in this house for many years (knock on wood). But, as I'm only putting 10% down, I was hoping for it to be evaluated 10% higher than my cost to build so I could avoid the PMI charge. Not that it's alot, but why pay it if I don't have to?
I knew it, I knew prices would come down. I predicted that they would as soon as I signed the contract. But I still hoped that I'd be wrong.

[topspeed]

Well it happened. I knew it. I just inked the contract to build a new home on Friday. Today the paper says that prices are coming down in our area. Grrrrrrr.....

If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

[GMichael]

If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

Thanks Top,
I'm sure we'll be ok. But I bugs me to know that I am paying the highest price possible. Dang I hate being right!

[Woochifer]

If it's any consolation to you, you won't be lonely. Some parts of the country such as Texas and the Midwest have been in a downcycle for over a year now. Other areas that are dramatically over-valued (read: Caliornia) will see the same adjustment in the very near future. Don't sweat it though. As Mystic said, if you look at RE as a long term investment instead of day trading, you'll do just fine.

In the Bay Area, it looks like the market correction could have already started. In July, the median home price went down and sales were down as well. And from what I've read elsewhere, the number of listings on the MLS has been way above the numbers from last year.

A friend of mine in Sili Valley sold her place a couple of months ago, and plans to rent for at least a year before she goes looking for a new place. With the windfall she got from the sale, she paid cash for a new car and plans to take a month-long vacation at the end of the year. She's basically betting that the market has peaked, and that she will have some decent housing deals to choose from by this time next year.

Up to this point, the optimists have been mostly right and the article below quotes a guy from Dataquick who says that July was only a temporary hiccup and projects new record highs in August. The guys who've been projecting a market correction say that it will happen at some point, and I think the correction would have occurred already if not for the huge growth in these alternative financing methods. The articles below talk about what the July numbers point to, and also the drastic steps people have resorted to so that they can buy a home in the Bay Area.

Totally agree with you on viewing real estate as a long-term investment. In most cases, homeowners come out ahead if they hang onto their home for a long time, and they got a place to live in the meantime.

http://www.sfgate.com/cgi-bin/articl...UGAJE8R9P1.DTL

http://www.sfgate.com/cgi-bin/articl...NGNDE9H7V1.DTL

[GMichael]

In the Bay Area, it looks like the market correction could have already started. In July, the median home price went down and sales were down as well. And from what I've read elsewhere, the number of listings on the MLS has been way above the numbers from last year.

A friend of mine in Sili Valley sold her place a couple of months ago, and plans to rent for at least a year before she goes looking for a new place. With the windfall she got from the sale, she paid cash for a new car and plans to take a month-long vacation at the end of the year. She's basically betting that the market has peaked, and that she will have some decent housing deals to choose from by this time next year.

Up to this point, the optimists have been mostly right and the article below quotes a guy from Dataquick who says that July was only a temporary hiccup and projects new record highs in August. The guys who've been projecting a market correction say that it will happen at some point, and I think the correction would have occurred already if not for the huge growth in these alternative financing methods. The articles below talk about what the July numbers point to, and also the drastic steps people have resorted to so that they can buy a home in the Bay Area.

Totally agree with you on viewing real estate as a long-term investment. In most cases, homeowners come out ahead if they hang onto their home for a long time, and they got a place to live in the meantime.

http://www.sfgate.com/cgi-bin/articl...UGAJE8R9P1.DTL

http://www.sfgate.com/cgi-bin/articl...NGNDE9H7V1.DTL

HAHAHAHA
We plan on the "a lot of peanut butter and jelly" method. That's great.
Well, I don't feel so dumb knowing that the "experts" can't even agree on what will happen. Can't help this feeling in my bones that says prices will drop though. Maybe it's just paranoia. But just because I'm paranoid, it doesn't mean that no one is out to get me.
Hey, who said that? Who's there? Show yourself...!

[topspeed]

I thought this article was pretty interesting.
http://money.cnn.com/2005/08/15/real...zzle/index.htm

[Woochifer]

If you plan to stay in your home long-term, and you didn't way overextend on the financing, then it doesn't matter what the housing prices are doing in the short-term. Here in Sili Valley, I know people who bought their homes at the peak of the late-80s housing bubble. For years, they actually owed more than their house was worth, but they needed a place to live and if they tried to sell their home, where would they move and how would they pay for it? They stayed, and over the last few years, they've more than recovered the value on that home.

Also, there are two ways to look at housing -- in terms of use value and exchange value. Unlike other investments, homes have very high use value because we live in them, and unlike other investments that have high use value (such as automobiles), homes don't automatically depreciate their exchange value the minute we move in and can still appreciate despite wear and tear. The housing bubble is more of an exchange value issue, i.e. it's primarily an issue if you're looking to make a transaction gain. Unfortunately, a lot of other facets of the economy are tied to that exchange value, and IMO that's where the real economic impact occurs. (i.e. reductions in consumer spending, slowdowns in the sectors tied to residential real estate such as construction, mortgage lending, appraisal, brokerage, etc.).

[GMichael]

If you plan to stay in your home long-term, and you didn't way overextend on the financing, then it doesn't matter what the housing prices are doing in the short-term. Here in Sili Valley, I know people who bought their homes at the peak of the late-80s housing bubble. For years, they actually owed more than their house was worth, but they needed a place to live and if they tried to sell their home, where would they move and how would they pay for it? They stayed, and over the last few years, they've more than recovered the value on that home.

Also, there are two ways to look at housing -- in terms of use value and exchange value. Unlike other investments, homes have very high use value because we live in them, and unlike other investments that have high use value (such as automobiles), homes don't automatically depreciate their exchange value the minute we move in and can still appreciate despite wear and tear. The housing bubble is more of an exchange value issue, i.e. it's primarily an issue if you're looking to make a transaction gain. Unfortunately, a lot of other facets of the economy are tied to that exchange value, and IMO that's where the real economic impact occurs. (i.e. reductions in consumer spending, slowdowns in the sectors tied to residential real estate such as construction, mortgage lending, appraisal, brokerage, etc.).

Thanks Wooch,

We're not OVER-extended. But still, it feels like someone was up there watching me and saying, "There, Mike signed, it's OK to lower housing now." Now I'll have to pay that darned PMI charge. It's just a smidge over $150 a month. There go the maggies I wanted.

[dean_martin]

Thanks Wooch,

We're not OVER-extended. But still, it feels like someone was up there watching me and saying, "There, Mike signed, it's OK to lower housing now." Now I'll have to pay that darned PMI charge. It's just a smidge over $150 a month. There go the maggies I wanted.

Yep, PMI sucks. I bought in January and got stuck with the PMI (although I put as much down as I could, it still wasn't enough to eliminate PMI). I asked whether I could make an early lump sum payment to the principle that would get rid of the PMI. The closing agent said no because it was an FHA loan. That really wasn't all that expalnatory. I believe that you should be able to pay a lump sum to get rid of PMI and lower your monthly payment because the PMI charges only last for a certain period of the loan. Everything's negotiable if you push hard enough. I'll check with the bank. Of course my laying down a big chunk of money at one time would depend on a bonus, but it could happen.

We just went through a period of extremely inflated real estate values on the Alabama gulf coast. Even unrepaired properties that were damaged by Hurricane Ivan were going for almost 2x the prices before Ivan. People were making offers at $10,000 more than the asking price on properties from 650K and up just to make sure their offers were accepted. It was unbelievable. Now, the market is settling back down, but there's no bust yet.

[GMichael]

Yep, PMI sucks. I bought in January and got stuck with the PMI (although I put as much down as I could, it still wasn't enough to eliminate PMI). I asked whether I could make an early lump sum payment to the principle that would get rid of the PMI. The closing agent said no because it was an . That really wasn't all that expalnatory. I believe that you should be able to pay a lump sum to get rid of PMI and lower your monthly payment because the PMI charges only last for a certain period of the loan. Everything's negotiable if you push hard enough. I'll check with the bank. Of course my laying down a big chunk of money at one time would depend on a bonus, but it could happen.

We just went through a period of extremely inflated real estate values on the Alabama gulf coast. Even unrepaired properties that were damaged by Hurricane Ivan were going for almost 2x the prices before Ivan. People were making offers at $10,000 more than the asking price on properties from 650K and up just to make sure their offers were accepted. It was unbelievable. Now, the market is settling back down, but there's no bust yet.

PMI is charged if you don't put down 20% as a down payment. I was told that after we reach the 20% mark the bank does not have to remind us, but if we ask in writing they have to remove the charge. I don't know if that is the case in all states. And I don't know what an FHA loan is or how it's different.
Durring the early years of a loan, most of your payments go toward interest. So getting to 20% on the priciple can take awhile. If the assesment on this house turns out to be 10% higher than what I am paying, then the 10% we already put down would be enough for us to skip the PMI. Even if it's only a 5% increase, we have the option to pay the difference, in one lump as you say, to beat it. But if the assesment turns out to be lower, yikes!

[mystic]

Paul Krugman talks about the housing buuble in his column today in the New York Times online. He thinks Alan Greenspan is partially to blame. I'm not sure I agree, but his reasoning is interesting(see link). I'll quote one thing he said:

"As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China."

http://www.nytimes.com/2005/08/29/op...29krugman.html