Not a UFO, Just the Housing Bubble

The main stream press has discovered that unidentified flying object is not a transport vehicle for aliens from outer space.

The New York Times advises: Do Not Fear the Bubble. Love the Bubble. Be the Bubble.

Los Angeles Times reports: Unsold New Homes Hit Record as Sales Slip

Business Week tells us: How to Ride a Housing Bubble

Contra Costa Times: Home sales hit five-year low

More from the New York Times: Hoping for the Best in Home Sales

San Francisco Chronicle: Home Sales Falter

Axis of Logic claims: Entire US Real Estate Market Falling - Should you buy or should you rent?


Does it tell us what kind of shape we are really in when the mainstream press goes from passing on the Real Estate Sales industry hot air- to admitting that there IS a bubble and that it at the very least is losing air?

So how do we look today? Tell me honestly, does this bubble make me look fat?


"NEW YORK - The America's savings rate has been negative for an entire year, a first since the Great Depression.

Are we a spendthrift nation on its way to the poor house or are we looking at the wrong numbers when we calculate savings?"

"The personal savings rate is, essentially, the amount of after-tax income left once household bills are paid. The personal savings rate used to be 10 percent of disposable income from 1974 to 1984, according to the Bureau of Labor Statistics. It fell to 4.8 percent by 1994, and was negative for all of 2005. As of January, the personal savings rate was minus 0.7 percent."

"Some economists say that's far-fetched. They argue the personal savings figures are artificially low, since the numbers don't include increases in assets such as equities and homes."

"European countries count capital gains and home appreciation when they calculate personal savings, said William Hummer, chief economist at Wayne Hummer Investments."

The other side argues that American consumers simply spend way too much.
"The decline in the U.S. personal savings rate and the dearth of internal saving raise concerns for the future," The San Francisco Federal Reserve said in a November note titled "Spendthrift Nation."

"..., many of today's workers are saving almost nothing and taking on large amounts of adjustable-rate debt with payments programmed to rise with the level of interest rates. Failure to boost saving in the years ahead may lead to some painful adjustments in the future. ...."

"Bernard Baumohl, executive director of The Economic Outlook Group, said Americans are increasingly dependent on borrowed money. In 1980, about 78 percent of spending was financed from wages and salaries, he said. By 1990, the figure had dropped to 71 percent and it's been falling ever since. In January, it slipped to 64 percent."

"Reminiscent of the widespread margin purchases by unsophisticated investors during the stock market mania of the late 1990s, today's housing market is characterized by an influx of new buyers, record transaction volume, and a growing number of property acquisitions financed almost entirely with borrowed money," the note said.

"With borrowing costs on the rise and the wealth effect from real estate assets diminishing, something has to give," said Baumohl.

The federal government's stance is that we should — and will — change our ways.

WASHINGTON (Reuters) - The U.S. economy faces risks that could alter both its path and the direction of interest-rate policy.

Federal Reserve Vice Chairman Roger Ferguson said on Friday.

"The U.S. economic expansion appears to be solidly on track," Ferguson told a Howard University forum. "Nevertheless, the outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further."

"Given the considerable uncertainties facing the economy and the outlook for (Fed) policy, policy decisions in coming months will depend heavily on the implications of incoming economic data for future growth and inflation," he said."

"Still, he said home prices may have risen above justifiable levels, creating the risk of a sharp adjustment, and cautioned that it was hard to know how that would impact the economy."

"'Exotic' mortgages tempt more buyers
As US housing market stalls, concerns mount that falling prices may force foreclosures."

"The cheap mortgages that fueled America's real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are causing payment shock for those who said "I do" to exotic loans.

The result: A growing number of Americans have little equity in their homes, making them vulnerable to a housing slump."

"Because you don't accumulate any equity in your house when you take out these interest-only mortgages, if house prices don't go up, or go down, then you have negative equity, and a lot of these people who had speculated are going to lose money," says Jack Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania, who provides mortgage advice at mtgprofessor.com.

Signs of slumping home values became more evident this week in some regions.

"When values stall, as they now seem to be doing, those prospects disappear. Instead, buyers may face mounting difficulties. Many cheap loans carry flexible-payment options, such as interest only, or even negative amortization, which can increase the homeowner's debt load.
Those flexible-payment options used to be the province of the very wealthy. But during the real-estate boom, brokers marketed them aggressively to regular home buyers as a way to improve cash flow or finance a second home."

"Mr. Guttentag and others acknowledge that nontraditional loans help many people afford homes. But mortgage ads, they say, often emphasize only the low, introductory rates. Consumers often get stuck with risky loans, ignorant of the complex factors that could raise their payments down the road."

"A lot of people who've taken on exotic loans don't understand them," says Scott Hanson, a senior financial planner at Hanson McClain, based in Sacramento, Calif. "The mortgage industry has sold these loans as a way to buy more house than you'd otherwise afford. Anyone who goes out today and gets an adjustable rate has got to be loony."

"A year ago, however, it didn't seem so loony, particularly in premium real estate markets such as California. With home values skyrocketing, buyers tried to maximize the purchase - and minimize the monthly payment - with lower-cost adjustable-rate mortgages (ARMs). During periods of double-digit price appreciation, like most of last year, that strategy can pay off, either through selling for a quick profit, or by tapping into the home equity as a source of income."

"In 2001, 1.5 percent of borrowers nationwide took out a loan with an interest-only option, according to data from LoanPerformance, a research firm in San Francisco. Last year, one-third did."

"The buyer can get much more home for their money," says Ron Porter, a buyer's broker serving California's Silicon Valley area. But "it may burn them in the long run."

Indeed, financial experts are sounding the alarm.

"We are really seeing people pushing their finances to the absolute limit," says Erica Sandberg of Consumer Credit Counseling Service of San Francisco. "They're using every dollar of their paycheck."

"Some observers blame lenders for predatory practices, seducing consumers with introductory rates that hide the true cost of home loans. At least one lender has been sued for allegedly misleading consumers."

"And federal regulators are trying to make it harder for people to qualify for exotic loans, warning of the risk they pose to banks and borrowers."

"Former Federal Reserve Chairman Alan Greenspan, for example, expressed concern in a speech last fall about the popularity of exotic mortgages."

"In expensive markets across California, an option ARM may be the only way to afford a home. One-quarter of all the new mortgages and refinances in California last year had the negative-amortization option."

That is worrisome to Mr. Hanson, a financial planner. "My biggest concern with these products is that yesterday's generation wanted to be debt free," he says. "Today's generation is very different."

"The American dream of homeownership used to have relatively simple requirements: a 20% down payment and a 30-year fixed-rate mortgage. Not anymore. Faced with record-high real estate prices, new buyers are turning to so-called specialty mortgages designed to make homeownership possible even with a checkered credit history and little or no down payment."

"Specialty loans used to represent only about 3% of the mortgage market, but a survey by the Federal Reserve shows that they now account for more than a quarter of new business at some of the nation's largest home lenders."

Still, not all trends are worth following.

"NO MONEY? NO PROB Scraping together the traditional 20% down payment is the biggest hurdle to homeownership, especially with home prices up an average of 54% over the past five years."

"That may explain why a recent survey by the National Association of Realtors found that a startling 43% of first timers signed up for no-money-down mortgages."

"These loans are a losing proposition," says Dean Baker, a co-director of the Center for Economic and Policy Research. "When these markets cool down, the people who can least afford it will end up with the biggest monthly payments."

"If you bought a $300,000 home, put down 10% and signed a 5.75% interest-only adjustable-rate mortgage, you could expect monthly payments of $1,294. If after five years interest goes up to a more normal 8.75%, you would find yourself staring at a $2,200 monthly mortgage payment. Whose bright idea was that?"

"43% Proportion of first-time homeowners who bought their houses with no money down, up from 28% two years ago."

In Sonoma County

"Builders continue to open new development phases and release more homes for sale even as the county's real estate market cools."

"The county's median price is up nearly 15 percent from a year ago and remains on pace for a third consecutive year of double-digit price gains. But purchases of resale homes have slowed."

"Inventories are at a three-year high. And the median price has dropped the past two months, to $590,000."

"With greater choices, buyers are taking more time to consider purchases, said Karen Reid, sales manager at Ryder Homes' Vintana development in Windsor."Only recently has the market shifted a little bit. We definitely don't have a mass of traffic now," she said."

"People are savvy buyers these days. They understand there's a lot out there on the market. If something hits them and they absolutely fall in love with it, they go for it."

"New housing construction in Sonoma County is the strongest in six years and the pace is expected to increase."

"Builders put up more than 2,000 houses and apartments through the first 10 months of this year, more than in all of last year. The surge is reversing a slowdown that began when the high-tech-driven economic boom went bust five years ago. It is a surprising trend in a county where all cities but one have adopted growth boundaries and reflects greater efforts to maximize construction of new places to live on increasingly scarce and expensive land."

"Santa Rosa: More than one-third of the housing in Sonoma County has been built in its largest city. While much has been in single-family home subdivisions, a sizable amount of the housing is in apartment complexes, including some targeted for low-income residents."

"Petaluma: Housing construction also has rebounded in the county's second-largest city. While some space remains for more traditional suburban subdivisions, town homes and apartments in the city center are leading the development renaissance."

"Windsor: Two large subdivision developments continue to account for much of the town's new housing. Both are nearing buildout and the emergence of downtown continues adding more town homes to the housing mix."

"Rohnert Park: Few new homes have been built in recent years; the city had a surge in apartment construction this year."