Real Estate Speculation

Discussion in 'Economics' started by ShoeshineBoy, May 10, 2005.

  1. Interesting article with a few stats about the magnitude of real estate speculation in some markets:

    Mortgage lenders warn about speculators in the market

    Nation’s Housing


    WASHINGTON-- One of the key players in the home mortgage market quietly signaled this year that it believes real estate speculation in some parts of the country is approaching worrisome levels.

    PMI Mortgage Insurance Co. told its network of lenders in March that it would no longer insure new loans made to borrowers who already have more than four mortgages outstanding or who represent more than $350,000 worth of "risk exposure" to the company.

    A second large underwriter, MGIC Mortgage Insurance Corp., confirmed that it, too, is carefully monitoring real estate speculation in hot housing markets, and has serious concerns about certain interest-only mortgages that investors are using to buy multiple houses or condos.

    Both companies’ comments came in the wake of a study that found that nearly one house out of four purchased in the United States during 2004 Was bought for investment, not for owner occupancy. Another 13 percent of all purchases were vacation homes, according to the National Association of Realtors.

    Mortgage insurers, who underwrite loans with low down payments, are highly vulnerable to defaults by speculators who find themselves with negative cash flows on multiple houses. Mortgage insurers generally cover the first 25 percent of a lender's losses on a home loan that goes belly-up, but in some cases they cover even more.

    "We’re seeing an increase in investor loans," said PMI spokeswoman Beth Haiken, "so from a risk management standpoint" the company decided to tighten its guidelines for borrowers with home loan debt on multiple properties or who present high potential loss exposure.

    MGICs vice president for credit policy, David Greco, said "we are watching a number of markets closely" for signs of excess speculation, such as individual investors buying houses or condos solely to hold for short periods, then flip for quick profits.

    The problem, say insurers and others in the mortgage industry, is that when property appreciation rates decline in the hottest markets, speculators are likely to be stuck with properties they can’t sell at the prices they need. Negative cash flows are then likely to push them into default.

    Anecdotal evidence has mounted for a year or more that speculation is helping push prices higher in southern California, Las Vegas and Reno, Nev., Miami and metropolitan Washington, D.C. All those areas racked up substantial double-digit home-price gains in 2004, but also showed signs of significant cooling in the final quarter of the year.

    For instance, Las Vegas saw a heady 36.2 percent average gain in home prices during the past calendar year. Yet prices in the fourth quarter gained just 6.7 percent on an annualized basis, according to a new survey by the Office of Federal Housing Enterprise Oversight.

    In San Diego, prices in the fourth quarter jumped by an annualized 8.96 percent versus a 24.4 percent rate for the year as a whole. In metropolitan Washington, annualized price gains slowed to 9.8 percent from 21 percent.

    PMFs Haiken said certain r types of mortgage financing plans commonly used by investors can worsen the problem. Interest-only adjustable-rate mortgages with two- and three-year initial periods of low monthly payments followed by sharply increased costs can force investors to sell on disadvantageous terms, when appreciation rates are on the decline.

    "We are approaching interest-only loans very carefully," said Haiken, particularly when these are the types of mortgages small- scale investors are using to buy multiple houses or condos for speculation in hot markets that may have hit their cyclical peaks.

    Haiken's firm has identified a handful of high-froth metropolitan areas that have the greatest likelihood of home value declines over the next 24 months. The PMI Risk Index looks at median household incomes, median mortgage payments, employment changes and home affordability.

    Tops on the list are Boston and San Jose, Calif., both of which have better than a 50 percent chance of seeing home price reversals in the next two years, according to PMI, followed by San Francisco (48 percent chance), Providence, R.I. (40 percent), metropolitan New York and Los Angeles (36 percent). Metropolitan Washington D.C. is rated an "average" risk by PMI, with just a 15 percent chance of property value declines during the coming 24 months

    The takeaway here: Before you start playing Monopoly with real houses and condos, give serious thought about whether you might be buying into the top end of the current boom, and may not reap the big, quick gains you want or need.

    Write to Kenneth Hameyat Box 15281, Chevy Chase, MD 20815 or, by e-mail at
  2. Retired


    The California effect

    Flush with equity, Californians are driving up home prices in markets outside the Golden State.

    SALEM, Ore. (CNN/Money) – As the great real estate bubble debate drags on, markets in California are most often singled as those ripest for a fall.

    But if California falls, will other markets go with it?

    Already, Californians wield unprecedented influence on real estate throughout the West. Flush with home equity made from huge price gains in their own state, they're staking their claim on Oregon ski towns, fueling bidding wars in Arizona golf communities and doubling down in Nevada.

    "Probably 60 percent of our residents over the past 10 years have been from California," said Cary Krukowski, director of marketing at Lake Las Vegas a resort community about a half an hour outside of Las Vegas. In downtown Vegas, roughly half of all buyers in the Newport Lofts are from California, according to the Newport Beach, Calif. developer Seegmiller & Partners. Home prices in Las Vegas increased about 50 percent last year.

    "We call it the echo effect," said J. Lennox Scott, CEO of John L. Scott, a real estate company with 126 offices in Washington, Oregon and Idaho. "People move to California for work or the weather and then eventually they travel up the West Coast."

    And eventually buy property. Recently, between 40 percent and 50 percent of Seattle buyers who work with John L. Scott's relocation division came from California.

    "I'd say that about 75 percent of my clients on the buyers' side are from out of the area, and about half of those buyers are from California," said Bryant Green a real estate agent with The Hasson Company in Bend, Ore., a mountain town in the central part of the state. Some are relocating, he said, but in many cases they're buying a second house, typically paying for it with cash-out refinancing or a home equity line of credit.

    "The prices in California are so high for the typical house they can take out $200,000 from their home equity and come down here and pay cash for a house," said Dennis Alaburda, a broker with Arizona Best Real Estate in Scottsdale, Arizona, where prices have increased more than 20 percent in the past three months.

    Some are buying property for personal use, he said, but many are pooling their resources and buying up inexpensive "first-time buyer" homes purely for speculation. "All of those houses are being swallowed up by California investors," he said. "All of them."

    $200,000? I'll take three.
    One of the reasons Californians are influencing other housing markets is, of course, because there are so many of them. One out of every eight Americans lives in California.

    Some are house rich and enthusiastic about "diversifying" their real estate portfolios. Others, priced out of their own communities, are leaving California in search of more affordable housing.

    "There is this 'Go East' mentality in California," said William Frey, a demographer with the Brookings Institution, citing U.S. Census statistics showing a net loss of domestic residents. The reason: high housing prices. "Even people who have lived there most of their lives, when it comes time to retire are cashing out and leaving."

    The median home price in Los Angeles, now $446,400, is up 54 percent over the past two years, according to the National Association of Realtors. In Riverside and San Bernardino counties, the median price, $296,000, has increased 69 percent over the same time.

    Few economists believe that California home prices can continue appreciating at that pace. David Stiff, a senior economist with Fiserv CSW expects that home prices will increase less than 10 percent in the coming year.

    Title insurer First American Corp. is predicting that prices in Southern California will flatten, with small increases and even small declines in some areas.

    According to mortgage insurer PMI Group's risk index of housing markets, six California metropolitan areas rank among the 10 markets most likely to see price declines.

    "Hawaii's home prices suffered in the 1990s because of economic trouble in Japan," said Dean Baker, co-director of the Center for Economic Policy Research. "If home prices in California reverse, it will have ripple effects."

    Soft prices in California could dampen enthusiasm for real estate in surrounding areas, said Stiff. To what degree depends on whether California buyers are shopping for property in earnest or looking to make a quick buck on real estate. Again.

  3. Interesting article. The problem is that in Phx the demand can always outstrip the supply via illegal immigrants and growth w/o even taking into account CA and NV investors. Phx has never had a down real estate year as far as I know...
  4. saw this on google news tonight

    _-_BEIJING, May 15 (Xinhuanet) -- Despite macro-control policies by the central government, those business persons engaged in China's housing industry still belong to the richest group in the country.-

    __-__Ninety-four of the 500 richest people in China are in the real estate business, according to a latest list released by the Guangdong-based "New Fortune" magazine.-
  5. Good read , especially limits of $ 350 k or 4 loan limit.:cool:
  6. read this on ""

    wonder how much of these mortgages
    are in CA or FL or NY ?

    - In 2001 just 1.6% of all new U.S. mortgages were interest-only. But last year a stunning 31% were.-
  7. Wow! Living on the edge, are we?!?
  8. yeayo


    Another real estate thread - I love it. I love a booming market no matter where or how irrational. The bigger the better.
  9. jem


    regarding the interest only ones.

    Have you reviewed the products they are offering now.

    30 year fixed rate. Interest only the first 10 years.

    right now you would get it at 51/2 to 5.5/8.

    same thin with 5 and 7 and 10s.

    Why not lock in an interest only deal. Considering the tax write offs and get a bigger house. ??

    again is it a bubble if people are acting rationally?
  10. I didn't know they'd have a time cap of ten years. I have to admit that could make sense as that gives considerable time to wait for a "reasonable" rate. Plus, I know that many interest only's let you pay off some principle every month if you want to...
    #10     May 25, 2005