Housing bubble

[MikeHgl]

There seems to be some insightfull and talented people posting on this subject and I would like to field a question to all of you related to this subject:
 I live and invest in lower mid - Michigan (Midland, Bay City,Saginaw area) This area has seen steady, if not spectacular, value appreciation long term with prices bumping up yearly in the 5 - 10% range , usually closer to 5%. We have NOT experienced anything remotely resembling a price bubble. Michigan, for the most part, does not have the dynamic economic base enjoyed by states elsewhere, such as the NW. This holds true especially for the I -75 corridor of Michigan, home to the auto industry.Unemployment here is well above the national average but housing remains very affordable to most,especially in the M/BC/S area. My question to all of you is this:

Given the circumstances of the area I live and invest in , and with the housing dynamics prevailing now in the country overall, what would you expect to happen to prices in this area?
My guess is that we will continue to plod along , with valuations inching up at about the rate of inflation. Am I on the mark here?

[carlittle]

So we have jobs...good paying jobs...yet...

I guess it all depends on what you consider a "good paying" job.  While unemployment rate has decreased, the jobs that I have seen created have not been high paying jobs.  In my neck of the woods they have been retail sector jobs for the most part.  What does a high paying job in retail pay you?  Management might get $10-$15/hour if they make really good money.  Most other workers get minimum wage up to $10.00/hour.

Don't get me wrong, jobs are great and the pay is good for the job that you perform.  The increase in pay that I have seen occurring has been the increase in the lower end paybands.  The higher end pay bands (executive management not included) have been basically stagnant to mild when compared to past years.

Overall the increase in family income is a good thing, but it still requires that both parents work to struggle to make ends meet.  Housing prices in the NW, Florida, and California are outrageous and when you combine the increase in energy costs (about 75-100% increase for me over the past 2 years) the increase in wages and jobs really has no affect.  Any extra income I have earned in the last 2 years has been quickly consumed by infaltionary pressures.

So what is my point.  Housing will continue to fall.  Not chicken little fall, but fall to normal levels.  I expect a steady slowing in the rate of year-year appreciation with some negative in there before leveling back to "normal".

The national average will probably slow, but not dip dramatically.  As investors in the Phoenix and other hot markets begin to dump their properties (which they already are) the markets there will begin to cool and the investors will bring in the profits to invest on the Dow Jones.

[aak5454]

MikeHgl,

I'm not real familar with MI geography, but I have done some studies of markets in the Washington DC and its impact on pricing in VA (that's where I'm from originally).  Interesting I found what I would call a "halo" effect that radiated out for DC for >100 miles (beyond commuting distance to jobs DC).

So, with that said, the turmoil that will continue in the auto industry could cause a similar (but opposite) effect in MI and surrounding states.  Also consider age demographics and popluation growth or decline.  Housing prices are juiced by rising incomes and increasing demand/ competition for available supply.  Rising interest rates will definate put a damper on the market even if the other two factors are present.  Another thing to mention is icnome may be rising, but I know my raise for the past 2 years have been chewed up and spit out by increasing health cost/co-pays etc.  I make pretty decent money; people lower on the pay scale get crushed by this type of thing.

[MikeHgl]

My so - called wage increases have also been eaten alive by increased health care costs. In fact, I'm sure that on a inflation adjusted basis ,I have probably taken a pay cut over the last few years. But ,hey, I got a steady job and decent pay so I'll put a cork in it.
Carlittle - you bring up some good points about demographics in this state. Can you hear that sucking sound? The old motto from the 80's was "Will the last person in Michigan please turn out the lights before you leave."However, I'm here for the long term (forever is more like it) and there is oppurtunity in any market, right? The economy in this area of MI is better than other parts, worse than some too. I'm just hoping that housing prices remain stable here. I really cannot see them dropping drastically as this is one of the most affordable areas to live in the nation already.

[MikeHgl]

Oops sorry bout' that. Those comments were from aak5454, not carlittle. Just don't want to mis-represent..

[Infowell]

MikeHgl-

Likewise...I'm unfamiliar with your region. I do know it's been referred to as part of the "Rust Belt" by many Investor's, and I therefore, haven't analyzed the demographics, construction permits, or other factors I'd normally consider before investing in a region.

Basically, very basically, I want to know two things; what's the demand for a region relative to new construction permits. For instance; in the Pacific Northwest; we've significant in-migration for our good job markets. Simultaneously; we have significant lack of supply (especially in the more affordable price ranges), and new construction can barely keep pace with the increasing demand.

That's why the PNW area is said to be, "one of the most underpriced regions on the West Coast." In fact--the NAR Senior Economist was recently quoted in the Seattle Times as saying, "...the Seattle region (Everett north to Tacoma south) could see 30-40% appreciation the next couple years."

I guess it all depends on what you consider a "good paying" job.

I know Carlittle...I was thinking the same thing. It's my understanding that the jobs coming back to the PNW do not pay as well as the jobs lost due to the bursting 'Tech Bubble.' However, the statistics I'm hearing & reading about are referring to the nation overall, and they're from reliable sources in my opinion.

Regardless, and as aak5454 has elluded to; whatever increases in pay people are seeing are undoubtedly being chewed to pieces by their personal inflation index.

"Housing prices in the NW, Florida, and California are outrageous..."

Just wait my friend...I like making predictions (despite having been proven right over a period of months in this thread, and in spite of being called a "naive idiot,"). Prices in the PNW are nowhere near their peaks! The Seattle Times ran an article this morning referring to the fact the median price in King County just 'hit' $405k. I say they're going higher due to an imbalance in Supply vs. continuing Demand.

Here's somemore predications courtesy of FTN:

We're beginning to see current indicators of a future turning point; economic growth will begin slowing considerably between now & year end.

Rising rates will begin taking their toll...resulting in tighter credit conditions = slowing home sales & spotty retail sales. Look for tightening mortgage loan standards & coming changes in mortgage regulations to result in further declining sales & prices (prices...in some formerly 'hot' regions...i.e., areas of AZ, CA, FL, NV & NY).

Existing home sales have been declining since last July...look for that decline to accelerate in March & April.

Housing alone could cut GDP in half in the next year. Look for GDP Growth to bottom towards the end of this year @ about 1.5%...after which...expect a rebound.

The Fed has been tightening for 2 straight years. However, the housing markets have peaked, borrowing is slowing, and spending will soon slow as the economy slows. Look for the Fed to tighten again 25bp in May & then move into a holding pattern (perhaps I'm I just being optomistic!). Look for them to cut 25bp in the 4th quarter & 50bp in the 1st quarter of '07' (now that is optomistic isn't it?).

10 yr. bond has little upside left. Look for a fractional decline this quarter followed by a faster drop later this year. Look for the yield to bottom to 4.5% by late 2007.

Synopsis?: No Bubble (Bubble-Heads are finally starting to dissapear after 5 years & counting). The soft-landing scenario is unfolding in some areas of the country & will continue with the biggest declines in prices coming in those areas that saw the greatest speculation the past few years. I look for those markets to begin recovering by mid-late '07'...with the possible exceptions of So.Cal & Lost Wages, NV (may take to '08' in those areas due to over-speculation).

-Infowell

[Lexicanum]

Pardon my ignorance, but what makes you feel the 10 year note will come down to 4.5%? The note isn't attached to short term interest rates, it is a function of investor demand right? I guess I'm confused, please explain.

[Infowell]

"The note isn't attached to short term interest rates, it is a function of investor demand right?"

You're quite correct.

"I guess I'm confused, please explain."

Predicting the future is tenuous @ best and nobody's always right...not even Dione Warwick's pals (do you think they saw the end of the psychic friends network coming?).

Courtesy FTN:

After trading for about 2 1/2 years in a relatively narrow band, the 10 year Treasury yield broke to the high side of it's range in the first quarter. Lots of economist expected yields to rise in the first quarter, but most had not forecast a big enough increase to break the range.

The consensus of bond investors seems to be that the economy is stronger than previously thought, that inflation is a bigger threat, or some combination of the two.

From here (and for the reasons cited in my previous post--slowing economy) I don't think it will take long for the consensus to swing the other way.

As I said once before, earlier in this thread, time will tell,  

-Mike