Housing Bubble Redux
Posted by Trey Reeme on August 21st, 2007
I wrote the following two years ago this week:
On Monday, a Business2.0 blog post (Scary Housing Bubble Graph) pointed to a compelling NY Times article (Be Warned: Mr. Bubble’s Worried Again). The article profiles an economist who predicts the following about today’s housing market:
Today, nine years after his lunch with Mr. Greenspan and five years after the markets finally did crash, Mr. Shiller is sounding the same warning for real estate that he did for stocks. In speeches, in television and radio interviews and in a second edition of his prophetic 2000 book, “Irrational Exuberance,” he is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has.
These, in short, are his second 15 minutes of gloom. He predicts that prices could fall 40 percent in inflation-adjusted terms over the next generation and that the end of the bubble will probably cause a recession at some point.
Then I saw Mortgage banks dispell housing bubble notion (the link doesn’t work anymore, sorry) come across my RSS feed from the Dallas Morning News. Credit Union Times also picked up the story in today’s email version, giving it a better-fitting headline – “Housing Bubble? MBA Advises Caution, Not Panic.” (By the way, dispell’s correct spelling is actually dispel – so someone misspelled dispel. Clever, eh?)
If the bubble bursts (just talking worst-case scenario here), what actions should a credit union take? Is there a responsibility on the part of credit unions to warn/educate members if the economic indicators signal the worst-case scenario is inevitable?
You mean it hasn’t burst already?
I heard the other day that 12 of the top 25 mortgage lenders had filed for bankruptcy. That means less cash, fewer buyers and lower prices.
A few months ago, houses in my neighborhood averaged 10-15 days on the market. Offers frequently exceeded asking price. Now, average time on the market is 75-90 days, and houses are selling for $100,000 less than they were.
Trey, (my humble opinion)…Homeownership is too much a part of the fabric of this country to “burst” too badly. There is a very interesting article in today’s WSJ implying that Mr. Buffett has his eye on (parts of) Countrywide. Talk about a total cultural change for America’s number one “homeownership” player! One minute Countrywide is gleefully spouting that they are cherry picking some of the top people from defunct home lenders like American, and the next week…they have totally altered their model to that of a “conforming” lender. Who would have ever thunk it! Here is my nickel. There couldn’t be a better time for CU’s to grow their “homeownership” share (and image)…their way. By their way, I mean conservatively” (something they were criticsized for during the real estate rush). And they can couple their lending with a solid “educational” value added effort that no FI can imitate. But they have to do it! And of course, they need to start “segmenting” their marketing efforts. Just my opinion.
@JP – I don’t know, to tell you the truth. I certainly hope Roger is right – that the US economy can weather it.
I know from what I see in our community that the market is unquestionably weaker. I also know as a former mortgage originator that slumping home prices coupled with ARMs making their adjustments and property taxes on the rise… well it might just make the perfect storm.
I remembered writing the post two years ago and found it pretty relevant still. Like Roger mentioned, CUs can – and should – couple education with lending unlike any other FI.
@JP I thought the Seattle market was holding pretty steady! If not, that’s good news for my daughter and son-in-law who will be looking there very soon.
After a decade as a Houston residential broker, I’ve experienced the market swings in oil-town USA. One thing…residential real estate is a very, very local business (sounds like the CU industry). Houston is still doing quite well. Sure, every market is going to suffer some/more of the “national” fallout from this…and we definitely need a “sobering up” period of “back to basics” type behavior. But you were posturing your post from a CU industry perspective, right Trey? If “timing is everything” then this should be a positive strategic time for those CU’s who are so inclined, to tout their “homeownership” lending programs. And that “homeownership” lending umbrella covers a number of products…far beyond just “new home loans”. Here’s the deal…CU’s have pretty well escaped the huge fallout from sub-prime miscues because they, for the most part, stayed away from “exotic” lending. It’s time to “spin” (excuse the “marketing speak”) that story into a message of “trusted advisor” for all of a member’s “homeownership” needs (new loan, refi, home equity, etc.). Research reveals that when you become a member’s “homeownership” resource…your relationship soars (and for those solely focusing on products sold…that means a dramatic spike in the “number of products used”). I shall now stand down from my soapbox!
Good real estate info. Thanks for the read!
As far as the real estate bubble goes, it looks worse in San Diego. I came across a San Diego real estate broker’s blog post that is to be the only one I’ve seen that does not spout the ‘industry line: “It’s always a good time to buy real estate.” This broker calls it like it is. No it’s not PC, but it is amazingly informative and insightful. Bob Schwartz, the San Diego real estate broker who publishes the blog, wrote a great article back in 2005 that predicted today’s huge home deprecation. You can read this article at: San Diego real estate the url is: http://www.brokerforyou.com/brokerforyou/?p=11
@ Roger- Sorry to say but IMHO the housing market isn’t slowing and won’t be anytime soon in Seattle…yes houses are staying on the market a little longer than before but prices continue to increase.
I live Bellingham, which is about 90 minutes north of Seattle and like Seattle first time homebuyers are basically priced out of the market. The biggest thing that I see is wages haven’t increased but housing has nearly doubled to tripled in price.
First time homebuyers is a huge segment that CU’s need to focus on…you can create a perfect long-term relationship with that segment by helping them make one of the hardest, nerve-racking and important decisions of their lives. This segment is also made up of the highly sought after Gen X & Gen Y market. This is a much better way to reach out to that segment than with an iPod that they probably already own.
@ Jeffry- don’t know what part of WA you live in but I’ve never seen nor heard of$100,000 decrease in any WA area.
Wow, from childhood horror stories to adult nightmares.
I agree a bit with Roger (maybe its just wishful thinking). I know that the huge price swells in our area blew the rental market out too. So the people who were renting their houses sold at near the top of the market to people who wanted to rent out the house to someone else. This drove up rental prices. So as long as rental prices are up near the cost of mortgages, then people will be “Broke Millionaires”. By the way, rental prices in our area have gone up about 70% in the past five years.
I bought a 1500 square foot house for $210,000 in town about 5 years ago. It was priced averagely for the current market but about $50,000 over what houses of the same size were selling for a year before.
It was a nice neighborhood. I had a cop that lived to my left and a guy who worked in Pharmaceuticals (Merck I think) on the right. They both moved within 2 years and so did we. We sold that house for $450,000. We doubled our money in 2 years. You cannot sustain that kind of growth.
So we rolled our earnings into another house (2500 sq ft) that we bought with 20% equity built in. It was a newly built house that appreciated 20% before it was completed. Now, the comps in my area have dropped 20%. I am not terribly concerned right now for myself (though a smarter man would be).
Most in my area blame it on funky lending practices and the folks from the Bay Area that have moved into the valley and overbuying. Stockton California has been incredibly undervalued as far as real estate goes – however, we have a large population of finance ignorant masses that weren’t realistic about what they could afford. There are A LOT of bank owned properties.
To me, this just means opportunity for the right investors to pick up real estate at low rates. It’s not like homes go rotten. The market will rebound and like with everything else – the prices will go back up.
Just another guys opinion :)
I think a story that is starting to get out there is how most Credit Unions retain their mortgage loans, and didn’t get involved (or as much) in sub-prime lending…
Article title from Marketwatch: Don’t forget the credit union As lenders tighten mortgage standards, credit unions stay the course
Some insightful comments here, and I liked Tony M’s in particular. Some of the comments have an undertone of panic.
I think there is lots of room for sanity in this situation. Look on the bright side, that its not like the 80’s interest driven crisis, when interest rates peaked in the teens.
Talk of bubbles bursting tends to overlook the fact that every house has some value even in a crash. The crash only relates to values dropping, not value being eliminated.
The other point is that by and large, as someone pointed out above, the neighbour on one side is a policeman, on the other someone in pharmaceuticals, etc … in other words, peoples lives generally goes on. There will always be pockets where that is not the case, say in the event factories close down, but much of that occurred already in the 80’s and 90’s.
To my mind CU’s are in a perfect position to recognise the overall situation of each customer. To continue to provide education, guidance, and importantly, support, to their customers, to allay fears, and to continue to recognise the overall customers circumstance, and not get fixated on home values. Home values will experience some shock for some time, as the financial industry sorts itself out. Customers will remember who worked with them forever.
Thanks Collin. Great post…in both places! I hope we will keep this going, folks. I would have thought that all of the recent articles in reference to CU’s being a great resource “in times like these”, would have stirred a lot more blog chatter than it has. I’ve been checking the CU blogs and it hasn’t yet (until Trey turned it over yesterday). Check out this AM’s CUNA NEWS NOW about the three articles quoted there. I just love that many of the articles say things like…”credit unions don’t advertise much, but…” Many of the articles consistently imply that CU’s are a “best kept secret”. That should just not be! It’s time for CU’s to get out of the “best kept secret” mode and “come out swinging” with advocacy type marketing efforts.
IT’S TIME!! We need to promote thrift again!! That’s what the message needs to be (CUNA)!!!
Remember that “cause”? Today the average American household is saddled with $8K of unsecured debt, has negative personal savings and let’s just toss an eviction on top of that! We have failed miserably in our cause. How did this happen?????
Remember this phrase?
Credit unions will only lend for provident and productive purposes. (which, in my opinion does not describe courtesy pay, but that’s a whole big blog on its own)......where is THAT being printed…...????
Denise,
Yet again you are right on the money. “Thrift” has not been in the discussion enough. Greedy lenders who put people in houses they could not afford, and the borrowers who allowed them to do so are to blame for this mess. It’s definitely a two-way street.
Credit Unions must do a better job of promoting the wonderful world of living within your means, budgeting, and conservative personal finance. Until we improve the way we educate our members, we will continue to see situations like this.
The shame of this mess is how many good people got caught up in risky loans….educated people, smart people, dumb people, poor people, rich people. Greed, and a total removal from the value of thriftiness took over.
Finally…an industry pub reports on the huge opportunity for CU’s in the current “homeownership” chaos. Today’s CU Journal has three great articles but the one that stands out to me is titled What Subprime Mortgage Meltdown Means To CUs: No Retreat: CUs Positioned To Help Members-And Selves. And I’ve got to say it (you knew I would)…women could just be opportunity number 1, what with the fact that 22% of the homes last year were bought by single women and many of those women were placed in sub-prime loans…when they would have qualified for conventional. And not just the low income women homebuyers! Sorry…I’m having trouble with my “linking skills”…if you are so inclined, go to my blog at http://hermoney.blogspot.com/. Boy, did the NYTimes do a number on Countrywide in yesterday’s paper. More leverage for the CU’s message of “trusted advisor”.