Haunted by the Housing Market (2000 vs 2002)
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The document discusses the state of the housing market in 2002, highlighting the macroeconomic challenges, declining consumer confidence, and the impact of changing demographics on real estate trends. It outlines factors such as rising rents, increasing unemployment, and the potential for a double dip recession, while also addressing public policy influences and broker practices affecting market dynamics. Warnings from industry experts emphasize concerns about an overheated market and potential declines in home values as economic conditions shift.
Haunted by the Housing Market (2000 vs 2002)
- 1. Halloween 2002 Haunted by the Housing Market? Perspectives on the Real Estate Bubble Bill Wendel The Real Estate Caf辿 Cambridge, Massachusetts bwendel77@aol.com 617-661-0878
- 2. Cover stories & special reports Consumer Reports, Nov, 2002 Fortune Magazine, Nov. 2002 The Wall Street Journal / Realestatejournal.com Kiplingers Magazine / Kiplinger.com Inman News
- 3. Presentation Overview Macro Environment Wealth effect Demand factors Public policy Demographics Limited supply of housing Broker tricks Underlying fundamentals Warnings from experts
- 4. Macro environment Overall economy Consumer con鍖dence Interest rates Internet bubble Global economy
- 5. Overall Economy Jan. 2000: 8th year of economic boom has resulted in best economy in 50 years
- 6. Overall Economy Jan. 2000: 8th year of Oct 2002: Economy economic boom has trying to emerge from resulted in best mild recession, which economy in 50 years began 1st quarter 2001, but double dip recession looks increasingly likely
- 7. Consumer Con鍖dence Jan. 2000: Consumer con鍖dence is at near record highs
- 8. Consumer Con鍖dence Jan. 2000: Consumer Oct. 2002: Consumer con鍖dence is at near con鍖dence index fell record highs to the lowest point in 9 years, plunging from 93.7 in September to 79.4 in October (Boston Globe, 10/30/02)
- 9. Interest Rates Jan. 2000: Lowest interest rates in 30 years
- 10. Interest Rates Jan. 2000: Lowest Oct. 2002: Until interest rates in 30 recently, interest rates years were under 6%, a 40 year low. Since Oct. 9th, rates have risen to highest point in three months.
- 11. Internet bubble? Jan. 2000: $1 BILLION in venture capital invested in Massachusetts in 1997 alone (鍖nd subsequent years)
- 12. Internet bubble? Jan. 2000: $1 Oct. 2002: Venture BILLION in venture capital investment in capital invested in Massachusetts way Massachusetts in 1997 down, although exact alone (鍖nd subsequent 鍖gure unknown years)
- 13. Global economy Jan. 2000: Predictions range from 25% to 70% chance of worldwide recession because of Y2K (Yardeni)
- 14. Global economy Jan. 2000: Predictions Oct. 2002: Fears of a range from 25% to Y2K recession have 70% chance of been replaced by the worldwide recession reality of war against because of Y2K Iraq, a worldwide (Yardeni) recession, and talk of a Japan-style de鍖ation in the US (link to white paper on Fed's site)
- 15. Wealth effect Stock market Local jobs Inheritances
- 16. Stock market Jan. 2000: Stock market spinning off record pro鍖ts (20 to 30% per year) creating $8 trillion in wealth (con鍖rm stat)
- 17. Stock market Jan. 2000: Stock Oct. 2002: Stock market spinning off market has lost $7 record pro鍖ts (20 to trillion in value 30% per year) creating (con鍖rm), NASDAQ $8 trillion in wealth down 75% from peak (con鍖rm stat) in March 2000
- 18. Local jobs Jan. 2000: Boston emerged as the 2nd leading 鍖nancial center in the nation
- 19. Local jobs Jan. 2000: Boston Oct. 2002: Recession emerged as the 2nd & corporate scandals leading 鍖nancial causing layoffs in the center in the nation 鍖nancial sector, including XXX at Fidelity investments in Greater Boston
- 20. Inheritances Jan. 2000: $10 trillion in baby boomer inheritance between 1994 and 2000 pouring money into the high end of the housing market.
- 21. Inheritances Jan. 2000: $10 trillion Oct. 2002: Once in baby boomer projected to continue inheritance between at $1 trillion per year, 1994 and 2000 inherited wealth is pouring money into shrinking with stock the high end of the wealth and millions of housing market. baby boomers are now worried about their own retirement nest eggs
- 22. Demand factors Unemployment Job creation Rent control Rising rents Doubling up Substitution effect New factors
- 23. Unemployment Jan. 2000: Unemployment is at a record low, locally and nationally.housing market.
- 24. Unemployment Jan. 2000: Oct. 2002: Unemployment is at a Massachusetts has lost record low, locally and 134,000 jobs since the nationally peak of the late 1990s boom (Boston Globe, 10/30/02)
- 25. Job creation Jan. 2000: 2,000 new jobs created in Cambridge each year from 1995-1997 (3 years) versus 500 to 700 condos available for sale each year.
- 26. Job creation Jan. 2000: 2,000 new Oct. 2002: Cambridge jobs created in still generating jobs, Cambridge each year including high paying from 1995-1997 (3 jobs in biotech, but years) versus 500 to of鍖ce market is now 700 condos available softer than it has been for sale each year. in years (con鍖rm?)
- 27. Rent control Jan. 2000: End of rent control in 1995 affected 100,000 households (one year demand statewide, 7 years worth of sales in Greater Boston)
- 28. Rent control Jan. 2000: End of rent Oct. 2002: Excess control in 1995 demand created by the affected 100,000 end of rent control has households (one year now passed. Even so, demand statewide, 7 Boston's Mayor years worth of sales in Menino is leading Greater Boston) campaign to bring back rent control which would protect 70,000 households
- 29. Rising rents Jan. 2000: Rents are rising faster than housing prices (55% in last 4 years, vs 45% in last 5 years)
- 30. Rising rents Jan. 2000: Rents are Oct. 2002: Housing rising faster than price appreciation now housing prices (55% double rent increase in last 4 years, vs 45% (con鍖rm in Wall Street in last 5 years) Journal, or other recent articles), and asking prices on high end apartments are falling across Greater Boston
- 31. Doubling up Jan. 2000: Students and other roommates doubling up pushing room rents to new heights: $600-$750 per bedroom
- 32. Doubling up Jan. 2000: Students Oct. 2002: and other roommates Willingness of doubling up pushing roommates to pay room rents to new unlimited rent seems heights: $600-$750 to have peaked, and per bedroom vacancy rate has risen
- 33. Substitution effect Jan. 2000: Now cheaper to buy than rent ($1,500 on a 2 bedroom apartment buys a $200,000 condominium)
- 34. Substitution effect Jan. 2000: Now Oct. 2002: Even more cheaper to buy than true than before rent ($1,500 on a 2 (Current market rent bedroom apartment of $1,600 for a 2 buys a $200,000 bedroom now buys a condominium) $400,000 condo because interest rates are so low-con鍖rm.)
- 35. New factors Oct. 2002: Amateur investors pulling money out of stock market to buy real estate, driving up prices on homes, while creating increasingly soft rental market (link to article in WSJ)
- 36. Public policy Affordable housing Low / no down Capital gains
- 37. Affordable housing Jan. 2000: Innovative affordable housing programs, creating record new homeownership rates--70%-- nationwide
- 38. Affordable housing Jan. 2000: Innovative Oct. 2002: Many, affordable housing including economist programs, creating Karl Case, worried record new that relaxed standards homeownership have contributed to rates--70%-- new record foreclosure nationwide rate (get date)
- 39. Low / no down payment loans Jan. 2000: 97% loan products now require less money down than renting, which often require four months of upfront payments: 鍖rst and last month's rent, security deposit, and rental fee.
- 40. Low / no down payment loans Jan. 2000: 97% loan Oct. 2002: No money products now require down and interest only less money down than mortgages have renting, which often reduced the barriers to require four months of home ownership even upfront payments: 鍖rst more for people who and last month's rent, would otherwise rent. security deposit, and rental fee.
- 41. Capital gains Jan. 2000: Changes in capital gains tax treatment has generated more demand at high end of the market as empty nesters are trading up, too.
- 42. Capital gains Jan. 2000: Changes in Oct. 2002: Additional capital gains tax capital from change in treatment has tax laws, magni鍖ed by generated more low interest rates, have demand at high end of pushed housing prices the market as empty up, making it more nesters are trading up, dif鍖cult of 1st time too. buyers to 鍖nd the 鍖rst rung on the housing ladder
- 43. Demographics Baby boomers Singles Two income households
- 44. Baby boomers Jan. 2000: Baby boomers reaching peak purchasing power (one turns 50 every 7 to 9 seconds?) are trading up.
- 45. Baby boomers Jan. 2000: Baby Oct. 2002: First wave boomers reaching of baby boomers has peak purchasing passed through and by power (one turns 50 2006 some of them every 7 to 9 seconds?) will begin trading are trading up. down.
- 46. Singles Jan. 2000: Single person households are the most rapidly growing market segment.
- 47. Singles Jan. 2000: Single Oct. 2002: Most person households are single person the most rapidly households now priced growing market out of the market in segment. Greater Boston?
- 48. Two income households Jan. 2000: Massachusetts has highest percentage of two income home buyers in the nation: 83%
- 49. Two income households Jan. 2000: Oct. 2002: Rising Massachusetts has prices mean that two highest percentage of incomes needed more two income home than ever in MA. Two buyers in the nation: income households 83% more vulnerable to foreclosure is one loses their job.
- 50. Limited supply of housing Little land Longer life expectancy Lower turnover Negative equity New signs New factors
- 51. Little land Jan. 2000: Limited land and prolonged permitting process slows production of new units, limiting the housing supply in Greater Boston
- 52. Little land Jan. 2000: Limited Oct. 2002: This land and prolonged 鍖nding was repeated permitting process in the Housing Report slows production of Card (link to article), new units, limiting the and is the reason some housing supply in argue Boston will not Greater Boston experience a sharp decline in prices despite the real estate bubble
- 53. Longer life expectancy Jan. 2000: People living longer and 80% of elderly in need of health care would prefer to have it at home
- 54. Longer life expectancy Jan. 2000: People Oct. 2002: Still true, living longer and 80% and arguably even of elderly in need of more elderly not health care would moving now because prefer to have it at stock market losses home have eaten retirement savings
- 55. Lower turnover Jan. 2000: Low turnover of desirable properties in desirable areas
- 56. Lower turnover Jan. 2000: Low Oct. 2002: No longer turnover of desirable true? It appears that properties in desirable Lincoln has many areas more properties for sale than it has in recent years. 33 out of 100 properties on the market in Lexington are over $1 million.
- 57. Negative equity Jan. 2000: Not everyone has recovered from the decline in values in the late 1980's.
- 58. Negative equity Jan. 2000: Not Oct. 2002: Market everyone has recovered, but high recovered from the end buyers, buyers decline in values in the paying unprecedented late 1980's. prices in outlying areas or putting little or no money down are in danger of sliding into negative equity if prices go 鍖at or fall.
- 59. New signs Oct. 2002: Executives at publicly-traded housing companies began selling stock in September (link to lead story in Investors Daily)
- 60. New factors Oct. 2002: Lowest interest rates in 40 years, generated 1.8 million new housing starts nationwide which could result in an oversupply of new housing and falling prices at some point in the future.
- 61. Broker Tricks Pocket listings Bidding wars FSBOs
- 62. Pocket Listings Jan. 2000: Brokers doing more pocket listings, making it appear that fewer properties are on the market. Overeager buyers engaged in bidding wars routinely paying more than
- 63. Pocket Listings Jan. 2000: Brokers Oct. 2002: As market doing more pocket shifts from sellers to listings, making it buyers market, pocket appear that fewer listings could fall. properties are on the However, Coldwell market. Overeager Banker's purchase of buyers engaged in DeWolfe could mean bidding wars routinely even more pocket paying more than listings & in-house sales.
- 64. Bidding wars Jan. 2000: Brokers, particularly 鍖rms practicing dual agency, manipulated bidding process to routinely achieve sales prices over asking price.
- 65. Bidding wars Jan. 2000: Brokers, Oct. 2002: Bidding particularly 鍖rms wars played a large practicing dual role driving up prices agency, manipulated across the market. bidding process to With Coldwell routinely achieve sales Bankers' purchase of prices over asking DeWolfe, should be price. interesting to see what happens with in-house bidding wars.
- 66. FSBOs Jan. 2000: More people selling "For Sale by Owner", see Wall Street Journal article, July 10, 1998
- 67. FSBOs Jan. 2000: More Oct. 2002: NAR people selling "For claims FSBOs have Sale by Owner", see declined. Not sure if Wall Street Journal that is true, but FSBOs article, July 10, 1998 should rise in the future as home equity is squeezed by falling prices, and sellers look for ways to minimize transaction costs.
- 68. Underlying fundamentals Aging baby boom Income growth Price / income ratio 1 Price / income ratio 2 Affordability gap Pent-up demand
- 69. Aging baby boom Jan. 2000: Housing market slump when baby boomers hit retirement age (2010)
- 70. Aging baby boom Jan. 2000: Housing Oct. 2002: Loss of market slump when retirement savings baby boomers hit may delay downsizing, retirement age (2010) particularly if selling means losing money. That could result in a gridlock in certain segments of the housing market.
- 71. Income growth Jan. 2000: Household income increased 5% per year from 1995 to 2000 in New England.
- 72. Income growth Jan. 2000: Household Oct. 2002: Growth of income increased 5% household income per year from 1995 to predicted at just 1% 2000 in New England. for the next 鍖ve years. That means it will take 鍖ve years to equal the income growth of just one of the 鍖ve previous years.
- 73. Price / income ratio 1 Oct. 2002: Boston highest on the housing Richter scale with rating over 9
- 74. Price / income ratio 2 Oct. 2002: Housing prices up by 85% but income only up by 20% in last 鍖ve years. In contrast, during the last real estate cycle, price rose by 78% while incomes rose by 28% (con鍖rm and link to article in WSJ.)
- 75. Affordability gap Oct. 2002: Gap between seller expectations and buyer purchasing power at record high (HomeGain.com monthly stats)
- 76. Pent-up demand Jan. 2000: Housing market still absorbing pent-up demand post rent control.
- 77. Pent-up demand Jan. 2000: Housing Oct. 2002: Oct. 2002: market still absorbing Record low interest pent-up demand post rates have brought rent control. "future demand" into the marketplace to compete with existing buyers, increasing prices & vulnerability when interest rates rise to traditional levels.
- 78. Warnings by Industry experts Consumer Reports Federal Reserve Mark Zandi, Economy.com Nick Retsinas University president (con鍖dential)
- 79. Consumer Reports Oct. 2002: Boston overpriced by 31% to 48%
- 80. Federal Reserve Oct. 2002: "Housing markets can and do change abruptly."-- July 2001
- 81. Mark Zandi, Economy.com Oct. 2002: Areas that have seen big run-ups in value recently might see home prices fall as much as 30 percent if and when the Federal Reserve raises rates. (Boston Globe, 10/30/02)
- 82. Nick Retsinas Oct. 2002: "Boston housing market continues to defy the underlying fundamentals."-- Boston Globe
- 83. University President Oct. 2002: Fannie Mae & Freddie Mac could be in trouble at some point in the future