5 Reasons We're in a New Housing Bubble

NVR (NYSE: NVR  ) reported disappointing quarterly results on Monday. The historically conservative homebuilder posted revenue and earnings growth that fell short of Wall Street expectations. The shares recovered most of Monday's losses, but the Virginia-based developer still closed 2% lower on the day.

This is going to be a busy week for homebuilders. Pulte (NYSE: PHM  ) and D.R. Horton (NYSE: DHI  ) will join NVR in reporting later this week. Analysts see strong growth at both companies, but investors shouldn't be surprised if Pulte and D.R. Horton also fall short. 

The housing market may be booming right now, but buyers are starting to get cold feet judging by a surprising year-over-year spike in the cancellation rate of new orders at NVR. 

The increase in folks backing out of their contracts is just one of the five signs that longtime Fool contributor sees in arguing that we're in a housing bubble in this video. Agree? Disagree? Check out the video, and then post your thoughts in the comment box below.

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  • Report this Comment On April 24, 2013, at 7:53 PM, zukerman wrote:

    Most of what we are seeing in the housing market is the result of big money buying up whole neighborhoods with a plan to white wash them then rent. Blackstone has been on a spree here in Tampa Bay recently. There are several reasons homes have been selling here for the last 6 months. Many people that in the past would just sit back and bank the money saved after paying off the house are instead looking for less responsibility and liability by renting. With housing values down in some areas as much as 40-50% from the highs an 11% uptick in prices isn't unexpected and it's an average including CA. The cancellation rate rising is likely the result of increasing demand with the lenders refusing to remove the strict guidelines for a mortgage. Credit Unions always have better deals but to lend with zero down must take the very best credit score bar none. I'm also not sure what area can sell a home in 62 days and would question these numbers as I'm sure you would. When I get my next tax bill and it says the value of my property went up 30% again in a year I'll believe a bubble exists, or with the purchase of your new home we'll throw in a new car, maybe. If you were to say bubble when referring to the share price of say DHI, PHM, or LEN I'd have to agree with you 100%. I wouldn't be long any of these names I just trade them right now. Great article and hope to see more soon.

  • Report this Comment On May 02, 2013, at 5:20 PM, ROEoutshinesGOLD wrote:

    I'm not convinced by your argument, Rick.

    It seems as though you found evidence to support your theory but did not bother to to weigh it very diligently against the counterargument - confirmation bias was at work here:

    en.wikipedia.org/wiki/Confirmation_bias

    Here's a good example of a counterargument:

    "What's This Talk of a New Housing Bubble?":

    fool.com/investing/general/2013/04/30/whats-this-talk-of-a-n...

    Moreover, either unwittingly or otherwise, you attempt to paint a picture in which the business practice of Navy Federal is a wide-spread phenomena. You achieve this rhetorical feat by failing to address the fact that it is the only lender that offers the "Housing Bubble Era" loans - as the CEO of Rockville-based Apex Home Loans Inc., pointed out when he said that he hasn't heard of other lenders offering similar deals.

    bizjournals.com/washington/blog/2013/04/navy-federal-feeds-t...

    You may also be surprised by what the rest of the article (I linked to it above, as a source) has to say:

    "The credit union began offering these loans in 2005 but stopped in the middle of 2008 so that it could evaluate how well those mortgages performed. It found that its members didn't default at the high rates at which other institutions' borrowers did."

    The author goes on to point out that this is old news, Rick. If we were to use Navy Federal as a metric - then you would have to declare that: "We have been in a housing bubble since February of 2010":

    "Navy Federal started offering them [the aforementioned loans] again in February 2010, but didn't attract much attention until Monday, when it put out a news release plugging the loans."

    Now, lets look at the evidence of why Navy Federal Credit Union is not seeing high defaults on their loans:

    "There are major differences between Navy Federal's loans and those made by subprime lenders ahead of the last downturn, which often set borrowers up to fail. Those subprime loans often were interest only, where borrowers weren't paying down the principal. Those loans also often featured introductory teaser rates that reset after a few years, causing monthly payments to increase dramatically. Navy Federal doesn't do that kind of thing. It's a nonprofit with the mission of serving its members, who all have ties to the U.S. military or the U.S. Department of Defense."

    in addition, the moral hazard ( wikipedia.org/wiki/Moral_hazard ) that is consistent with the "subprime brokers of yesteryear" are eliminated at Navy Federal because of the incentives in place:

    "While the subprime brokers of yesteryear collected their transaction fees up front before passing all the risk off to the secondary market, Navy Federal keeps all of these 100 percent financed mortgages on its books. So it has a major stake in making sure borrowers can pay them back.

    Miller also points to the credit union's ties with its members, which she says go deeper than the sort of transactional relationship most people have with their mortgage servicer, and makes Navy Federal's customers less likely to walk away from their loans.

    "The relationship we have with our members is unique and especially loyal," she said. "They're loyal to us, and we're loyal to them in offering this product."

    Here's another example of you "cherry picking" your evidence and unwittingly using Navy Federal as a rhetorical device. In your argument, especially by mentioning: "Navy Federal - the biggest credit union," you imply that Navy Federal is analogous to the broader market and invite your followers to extrapolate or generalize the current market condition based on a behemoth in an industry. You lead one to believe that it is a common practice not only at the credit union but banks in general. That's sophistry because the reality is:

    "Navy Federal did $740 million of these loans in 2012, which was about 7 percent of its total mortgage originations."

    "Two-thirds of the borrowers who have gone with 100 percent financing so far this year were first-time buyers. Borrowers can only use the program to finance their primary residence."

    bizjournals.com/washington/blog/2013/04/navy-federal-feeds-t...

    Another reason why the military members are not going to default on loans at the same pace as the average has to do with the fact that one of the only ways to prematurely loose one's military career is to do something illegal, like drugs for instance. Lenders know that it is one of safest paychecks around.

    Furthermore, the rank based pay-scale never goes down and neither does the "extra" pay received on top of the base-pay, which is specifically provided to address the living-quarters for the military members and their families who are living off-base. This BAH rate is pegged to the cost of housing in a given area:

    military.com/benefits/military-pay/basic-allowance-for-housi...

    "The Basic Allowance for Housing (BAH) is based on geographic duty location, pay grade, and dependency status. The intent of BAH is to provide uniformed service-members accurate and equitable housing compensation based on housing costs in local civilian housing markets and is payable when government quarters are not provided."

    [...] "The overall average military Basic Allowance for Housing rates across the country increased over the last year [2012]. The 3.8 percent increase cannot be tied to any single factor. As noted above, BAH rates are based on the combination of local costs for rent, utilities and renter’s insurance for various housing types. Any fluctuation of one or more of those factors in a given location will affect BAH rates for that location."

    "Any active duty service-members who see a drop in BAH for their locality will have their BAH protected, thanks to "individual rate protection," which was adopted by Congress over a decade ago. On the other hand, those who live in an area that sees a BAH increase will enjoy a bump in the paycheck."

    (source):

    military.com/benefits/military-pay/basic-allowance-for-housi...

    Rick, given its niche demographic, can you now see why a non-profit, Navy Federal, who caters to all branches of the military, is not overly concerned with the risk-of-default on its loans?

    Now, I realize that debunking only one aspect of your argument does not make it invalid but it does make the whole argument seem very poorly researched. It seems you had to reach outside of your circle-of-competence to bolster your argument - it backfired. I suspect you will do much better in the future and that you change your stance from "we're inside a bubble" to "maybe we're not in a bubble but the housing prices may have a correction in the latter half of this year."

    I appreciate your time, Rick.

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