Housing Bubble Talk at CNN Money

A few days ago on Cnn Money there was a blog post on Generation Risk t that has exploded into opinions regarding the softening housing market is going to bring down the economy or not.


As of this morning there is 96 posts attached to it with opinions varying greatly. One of the post is mine which I give a theory why the market is still softening, which I have posted in it's entirety below...

When people say "Bubble" they visualize property values dropping overnight
or pop.. hence the reason REALTORS say there is no bubble because
it impossible for property values to drop 20-30% overnight. So housing
bubble is simply a misnomer and hence the talk of a soft landing vs. a crash... even while it's happening. What currently happens is housing data used to determine if things are slowing down is 2-4 months old from closing. When looking at current home price statistics... these are buyers that started the process maybe 8-12 months ago, not today. Therefore it difficult to correctly indicate what is going on because the intent of those recent closings was established so long ago. The real estate market is a really big ship and it takes a long time to turn it around because the data
is so slow to come in.

A good indicator as to what is happening is quite simple to arrive at. Look at the number of people searching REALTOR.com, the number one real estate site
(click here to view the Alexa chart on REALTOR.com)

... less people searching means less demand, less demand means drop in home prices.

As you can see, the search volume of real estate listings is at a 5-year low when last year 79% of home buyers
used the internet to search for homes and 5 years ago the figure was only about 25%.


So apply the basic economic rules of supply and demand and you already know
home prices can only go in one direction, down until buyers and re-enter the market, which would be easily track able by the number of searches on realtor.com, which
is not happening.Now, combine this with lot of the other reason stated above like a credit bubble happening on wall street. Take away the easy financing and thousands of buyers who were buying are no longer doing so. Again, a further drop in
demand.

Add in 2/28 adjustable rate mortgages which will adjust in record numbers
this year and you can see from this 2/28 mortgage calculator many home owners will be in for a bad surprise. Especially, since they will no longer be able to refinance out of the situation. This leads to foreclosures and short-sales.

Then combine that with the pay-option ARMS with ridiculously low start
rates that are now fully indexed at over 7.5% - 8.5% while clients are paying
minimum payments of 2.00%, there is about 5-6% of negative amortization being
added onto their mortgage loan balances. Many of these people don't understand the recast clause of the mortgages, which state that if the original loan balance increases to 110% - %125% of the original balance, their loans will automatically switch to a fully amortized, fully indexed rate based on the remaining amortization term. This pay option arm mortgage calculator explains the picture pretty well. Again, more foreclosures or short-sales.Foreclosures are "must sell" real estate listing
inventory. This means, sellers will continue to drop prices until someone buys.

Mortgage lenders cannot afford to wait-out the market like homeowners can.
Therefore as foreclosures raise in numbers they compete against each-other to
get sold, which leads to significant discounting by the mortgage lenders to off
load the inventory. These same distressed properties then become a comparable and traditional home sellers are forced to compete against them if they really need
to sell. The remaining buyers flock towards foreclosures and short sales looking
for good deals. That leaves no option for traditional home sellers but to drop
prices.

Then factor in the one thing that many don't seem to acknowledge is the age of the average home owner. Baby boomers have the highest ownership. These same 100 million baby boomers (a full 33% of the US population) will be of retirement age by 2009 or so according to Harry S. Dent.

They have been taught their whole life that your homes equity is your retirement
nest egg. Recently they have viewed their homes as great investments due to value
increases. As they approach retirement, thousands will watch their only real
nest egg disappear as home prices drop. Many will panic and sell to save the
equity they have left at the moment.

There is an argument that states if properties drop, people will wait it
out. From my conversations with boomers, they don't feel that they have 8-10 years to wait for values to come back especially if they are on a fixed income, they are not interested in scrapping by as they are going from their peak spending years immediately into the lowest spending "golden" years, in that transfer from older workers to retiree's.

The economy will slow since real estate has created hundreds of thousands
of high paying real estate jobs like lenders, underwriters, real estate agents,
escrow, title, appraisers and all of the related services like contractors,
decorators, home depot, movers, furniture stores, etc all feel the pinch and
downsize and stop spending. Additionally the home atm machines are gone so no more extra billions a year pumped into the economy of leveraged refinance money.

Remember that 2/3 of the US economy revolves around consumer spending... no
spending... no US economy.

Keep in mind, if we only have about a 4% unemployment rate and people are
already losing their homes what happens when it goes to 6%? Factor in all
the other items noted above and many people will have a few options like trying
to sell their homes FSBO in order to try and save the 6% real estate
commissions allowing them to discount their asking prices while not tapping into
the remaining equity and many of those who have no equity will simply walk-away
from the property they are upside down on.

There is lots of other excellent points made in the Cnn Money Generation Risk blog post, so go take a look or post you ideas regarding my comments here.