Will All Price Ranges Be Going Down?
Readers suggested a topic on weakness in different price ranges. “I think the lower end houses will remain more stable in the upcoming downturn. That’s what I have observed in prior downturns, (except if its in a area were major job loses take place ). The upper middle takes a major bath in downturns in the past that I have witnessed, that would now be the $700k to $1.5 mil range. Who knows what’s going to happen with this market this time. It stands to reason that all price ranges are going to be going down.”
Another added. “I am out of the market now (obviously), but for at least 5 years I have been trying to tell people how housing downturns work. The stuff at the bottom is always more stable, because there are more people who can afford those homes.”
“Its the stuff that is now priced above $300,000 that is going to get ugly. Especially as you mentioned the stuff in the $750K range. These people can’t really afford their homes (for the most part), as they would need to make upwards of $200,000 under traditional lending standards.”
“Oftentimes people say to me ‘but we can afford the payments.’ What these people fail to realize is that their home is only worth what a similar income-level family can pay. So if rates go up (or the ARM stuff goes away) prospective buyers have to qualify at the current rates/guidelines. If they cant, then by definition the home is worth less money.”
“Similar principle when you look at FB’s who bought homes above $500,000 to rent out. How many people can actually afford to pay over $2,000 in rent. Here’s a clue for these FB’s - not many. So when they are unable to secure tenants for their homes, then ‘walla’ the lightbulb turns on in their head: ‘I’m *ucked aren’t I?”
And another. “Beg to differ…”
a) Job losses hit the low end first and hardest.
b) Low end households tend to have little or no savings.
c) Low end households have little or no assets to liquidate.
“Watch ‘Cinderella Man’ for a good take on what’s coming.”
A reader from Australia. “The Australian experience over the last couple of years is quite complex and doesn’t fully support either (of) you (first two posters). I will post at greater length if this is used as a topic.”
To add another element; in northern Arizona the sector falling the hardest right now is raw land. And that is when it is selling, which is much more seldom than homes.
That makes sense - there’s no reason to buy raw land except to build on it.
It’s hard to say what’s getting nailed the hardest in our neck of the woods, but I would say the high-end suburban McMansions are getting it the worst. What seems to be “different this time” is that rather than just bona fide developers building too much, there were an awful lot of small time investors using the easy money to buy those things and flip ‘em.
Somebody elsewhere posted a FSBO add that touted proximity to a bus stop and a “short, 45-minute commute” to the Pentagon. The rub is the price tag - $1.45 million. Who the fluck in that price range cares about the bus? Who the fluck at the Pentagon (besides Rumsfeld) has a million five for a house? Good grief!
Actually, the “near a bus stop” is not for the owner; it is for the hired help - i.e. the maid and nanny.
Actually, ric, the “near the bus stop” in an ad for $1.5 million house is the mark of an out-and-out amatuer. Is the “easy” commute from the Pentagon for the hired help, too? Does the buyer pay an admiral on the side to do the lawn, or what?
That’s nothing! here in Salinas the owner of a quote $900K house was advertertising that it was near “Starbucks”. BTW, come Nov the house will have been on the market for a full year.
land is always a leveraged - my old house is worth doodle ,but the land has gone up - and is now plunging
desert land near BLm holdings is super scary =poof
Ya know I have to post these links. Some RE agents REALLY BELIEVE this is only a lull in the action. I HAD to response to a hilariously “upbeat” RE ad on craigslist.org last week. This agent had a listing on the San Mateo Coast where I live (she lives in the East Bay). I gave her the link to http://www.thehousingbubbleblog. Needless to say she was quite pushed out of shape. Anyway she sent me this link to apparently show how “firm” prices are http://www.rereport.com/alc/pc/
I quote her here…
“Blog these, please. One woman’s ceiling is another man’s floor…” http://www.pamelacrawford.com
TALK ABOUT OUT OF TOUCH WITH REALITY. The sales have fallen off a cliff here on the coast in the last 90 days but she thinks everything is OK
Way too funny!
Quoteth the RE Harpy:
“Blog these, please. One woman’s ceiling is another man’s floor…”
In another six months she’ll be lying on another man’s floor, staring at the ceiling as she hopes against hope that THIS will finally produce a buyer….
I happen to agree with Buffet, the high end is going to get whacked. In southern California, the mid-high (Which I put as $1M to $3M currently) is going to get hit the hardest.
I’ve seen 2bed 1bath homes going for $700k in neighborhoods that should be going for 5X median wage ($250k ish); so we’re going to see *everything* go back into balance.
We just started the process to transfer jobs to Arizona.
You won’t see any news (its a purely voluntary transfer). Another reason it won’t make the news, we had these employees on travel outside of California, they are simply flying back to a new base.
So-cal job loses: Boeing in LongBeach/Anaheim (What a haircut, 5,500+ of 1.5X median wage and better jobs.) Nissan is gone, Lockheed is shifting Orion work to Florida, Texas, and LA…
For southern California this is just the start. Every hiring manager I know is scrambling to keep their “30 somethings” and “near retires” within the company. Not many want to stick around in this housing market. This is in aerospace, medicine, banking, and a few other industries in so-cal.
The exodus is about to start; it won’t make the MSM until next summer IMHO. But its going to happen. Every job I’m talking about is at a minimum of 1.25X median income; so its going to make the real estate imbalance even greater (these jobs leaving will drive down the median income).
Neil
Agreed.
So Ca jobs are getting tighter and tighter. These nit-wits that move to RIverside, Palmdale, Bakersfield, San Bernadino have zero prospects of high paying employment.Those markets are mostly retail. Although, ‘In and Out’ Burger pays the most.
Intel is doing cuts as early as Tuesday. Could
have impact all along the west coast. The numbers are not trivial.
We live next door to a guy who workd for Intel, he says that they are planning to fire 20,000 people (approximately 15-20% of the work force) over the next few weeks.
The Intel cuts will be scary.
But if this is a “lull”… it doesn’t explain the sentiment I’m seeing amoung hiring managers.
And I avoided mentioning the #1, #2, and #3 sources of job growth in California since 2000:
#1: Jobs making homes
#2: Jobs involved in home transactions (Realtors, mortgage brokers, appraisers, etc.)
#3: Jobs that sell durable goods to newly purchased homes (durable retail).
This is not going to be a pretty Christmas.
We have one coworker that the running joke is he’ll be working for the Lancaster IN & Out soon. Hey, $10/hour!
When companies are priced out of hiring reasonably priced talent… they adapt. I do not think the golden state is going to like how they adapt.
Neil
I am visiting India and am sorry to report that all the jobs are moving here. I visited a city called Gurgaon and they have 30,000 acres developed with 300 MNC’s already established here. The big corporations have already sold out the average working american. The cost of a sorry to say harder working 65 hours a week engineer here is 7k per annum. Now I here that the R&D is shifing here for the big pharmaceuticals also for the same reasons. I to believe that the big corporations who provide campaign contributions have in their quest for new markets and cheap labor already bribed the goverment officals and the Average American is betrayed. They are eyeing the emerging middleclass in countries like India ( Estimated over 100 million people making $24,000 per annum) and china with the same kind of numbers maybe bigger. So get used to a lowering of standards of living over the next 20 years. The jobs are going and he investments are going overseas where they will generate the higest return. The tenants in these buildings are Microsoft, Dell, Sap, Ge etc etc.
Our giverment has betrayed us !
“The upper middle takes a major bath in downturns in the past that I have witnessed, that would now be the $700k to $1.5 mil range.”
—
In a lot of areas of CA, 700k and above is the floor for a simple 3bd home. That downturn is going to hit the avg home owner.
I’d just like to say, from a bubblehead’s perspective, what I see in San Francisco has been a bit discouraging. In the city itself, sellers are still asking peak prices, and if their asking price is okay then more than likely they will get it. We aren’t overloaded with for sale signs. Inventory is relatively high: around 2400 properties, sales at 485/mo from 637/mo same time last year. These are July’s numbers, we’ll see for August. Well that’s getting to be nearly a five month supply of inventory, which is looking much better than last July which was closer to 2.5 months (around 1600 on sale through MLS). So maybe I shouldn’t be complaining as things are moving in the right direction. But damn the inventory is still pretty low relatively speaking and the GFs still seem to be out there. Just venting.
Back on topic: the lower priced houses (under 800k in CA) will take a hit the soonest, as those buying at the entry level would have had the least reserves. Higher priced houses will take longer to come down as probably many of them were funded by selling lower-priced places at outrageous prices–so they are partially bolstered by the bubble.
Nobody is going to willingly accept a haircut of more than 100k if they can at all hold on– sellers are going to hang on to negative cash flows and all hoping for a turnaround, unless they absolutely have to sell. This will happen first in the lower priced houses.
So the collapse of the bubble will be stratified I forsee.
doh… for “asking price” on the third line I meant “the condition of their property.”
“So the collapse of the bubble will be stratified I forsee.”
And, the longer it takes to get to get on with it, the collapse will be more violent.
I think it’s a cryin’ shame that we can say “lower priced houses” and “under $800k” in the same breath….even for San Francisco, given the overall median salary of $60k, give or take (2005 numbers). With that kind of reality even Stevie Wonder can see that the numbers don’t work for qualifying for mortgage loans for abodes that cost $400k, 500k, 600k and up. And this doesn’t even take into account the high cost of living out here. Clearly there are a LOT of people living beyond their means andor living completely off credit cards to appear that they are fine.
What a shame.
BayQT~
I live in the SW quadrant of San Francisco - Ingleside Heights. There aren’t a high number of homes for sales in my area - the ones that are for sale continue to sell pretty fast. Very discouraging that people continue to pay over $1M for very small 2 to 3BR / 1.5BA homes. Endless supply of GFers here in the SF Bay Area unfortunately. It still seems that lenders will happily hand over $800K to anyone with a pulse. When is that going to end?
There’ll be a recession and there’ll be a dearth of buyers at any price.
It’s not over till it’s over - but when it’s over, it’s really over.
Rich people have plenty of money. It’s just the middle class that is getting gouged. Places in the 1-3 million range I think will take the longest to come down. Though all will eventually return to fundamentals.
In the last housing bust here in the OC, the low and median housing market got hit just as hard as the upper end. Some of the areas that were hit hardest were low-end condos, where some people just walked away. Granted, there really is no bottom end housing in the OC - our less expensive housing is out in Riverside and San Bernadino counties.
OT, the housing bubble and option ARMs mentioned on the very popular blog Boing Boing:
Exotic debt-trap mortgages about to turn on their owners
“Exotic debt-trap mortgages about to turn on their owners
It’s amazing that banks can get away with offering these “option ARM” mortgages that let people buy way more house than they can afford, and then give them the option of actually making no mortgage payments so that the interest owed is added to the principal, in a cascade of compound-debt that will rapidly mount.
“The only question I have is whether the banks will be able to cash in on all those repossessed houses after the real-estate tumble, or will prices be so low that they also lose their shirts?”
I say the middle-high end gets screwed the most. I’ve seen professionals making six figures a lot more stretched to make those 850K mortgage payments than your typical low income family to cover its 350K mortgage. At the low end, they have no problem renting out bedrooms, the garage, bringing in family from their country to work to add income, etc.
Comment by lainvestorgirl
2006-09-02 10:55:07
I say the middle-high end gets screwed the most. I’ve seen professionals making six figures a lot more stretched to make those 850K mortgage payments than your typical low income family to cover its 350K mortgage
Yes and I do feel sorry for the folks that had the 350k house paid for, then traded up to the 850k. Late in the game all of thier equity will go to money heaven.
The guy at 350k that is cut in half usually hold it together some how as you sugested. Anyway how do you jump out the window when you live in the basement?
Okay, you are kind of describing me for the “middle-high” end. I was about to buy the kind of place you described. I would have been able to make the mortgage payments, I just would have had to really strech to do it without much left over. I was about to buy such a place with a 20% down payment and 30-year fixed. If I had, I’d probably never would have discovered this blog. I would have been moderately unhappy with all the extra amount I would have been paying. Also, I know I would have been working full time, whereas now I am enjoying life in comfort, renting and working half-time. So it’s better that I didn’t buy the above place, but I don’t think I would have ever had to foreclose.
Nothing like a little rest and relaxation to improve mental and physical health. Having a big loan over your head that you worry about, even if it’s only once a month is nice to live without.
Hey,
Great thread. I have been wondering about this a lot. Seems like here in S. Oregon we have boatloads of Cal. equity locusts coming in all the time that seem immune to our market limitations. Hence, the McMansions that everyone wants to build on the limited land we have in town. Yet I also seem to be seeing the quickest and biggest drops in the poorer parts of the value. I would agree with LaInvestergirl that upper middle (folks who want to think they are rich, but are simply ostentatious) will fall hardest.
Sweet Je$$%!! If $350k is “lower end”, my budget is positively subterranean….As a sole breadwinner earning ~$65k, carrying two student loans, and a $200k mortgage, I already feel like that little dog pulling the sleigh in the Grinch who stole Christmas…I pity the fool with a PITI on $350k.
During recessions people don’t seem to be interested in the luxury high end or the the big sq. ft monsters . People still buy property ,but they have a different mindset .I have always noticed that the lower end prices held up better in the past. This time the industry put a ton of people in low end houses that they couldn’t afford , so I’m sure there will be a lot of foreclosures in the lower end also .Also the over-building has occured in all price ranges ,but it seems like the builders over-built more in the higher end price range than the lower price range .In fact, Builders didn’t build enough lower price range homes ,(or you could say builders were charging high end prices for what should of been lower end homes).
more zillow lag
they have a house at $ 540k that just sold for 440k
The condo low end will definately crash first and hardest. Why, because in many areas the majority of them are owned by wannabe speculators (i.e., folks without enough cash to sit something out) who were looking for a quick flip.
IMHO the Luxury Condo high end will crash first and the most ,followed by the middle and than the low end condos . Lets face it, builders built to many condos everywhere . Builders built alot of luxury high priced condos thinking that the demand would be high from the baby boomers .
I am not convinced and never have been that the ‘Boomers are going to want to go from a nice big house in the burbs to a small in-town condo. I think they will be more likely to go for the over-55 communities near outdoor activities (hiking, biking, etc.). They might have the equity in their house to buy the luxury in-town condo, but I don’t see them wanting to pay the BIG fees/taxes, etc.
Here, here. This whole “boomer” thing is ridiculous IMO. The “baby boom” officially lasted for almost twenty years after the war. There are “boomers,” then, that are almost a generation apart in age. However it is they are able, and choose, to live, will manifest itself very slowly over the period of a decade, minimum. They are not coming out the hills next Thursday en masse with mortgage pre-approvals to save anybody from the housing bubble. Sheesh.
It always interests me that when I was in my teens, in the 70’s, I was not a boomer, and now it appears that I am. I wonder why the definition changed.
Boomers were born ‘46-’64. As I recall the data, peak births were in ‘55.
Whatever definition was used in the late 60’s, I wasn’t in it, and I was born in 1958. At some point the definition of baby boomer was changed to include later years.
I think this whole “Boomer”, Gen “X”, Gen “Y”, etc. labeling is nonsense and degrading. A Boomer who grew up in Alabama has about as much in common with a Boomer that grew up in San Francisco as a catfish has with a stone crab.
The grouping and profiling of such a large number of people was dreamed up by marketing people to synthetically create a generational “brand” to simplify product positioning which was perpetuated by the Man as a catalyst for generational rivalry.
You would think there were 50 million people with tie dyes smoking weed in San Francisco by the way the “Boomer” myth has been spun.
False generational rivalry has been pushed in order to mitigate class rivalry.
Gee, Kim, I don’t know what you’re referring to. I was born just a few years after you and I always knew I was a boomer.
We have a retirement community in our town and I think that it’s very nice. It’s a development with houses about 2000-2200 sq feet, everything on one floor, two bathrooms, garage, driveway, wide streets, walking trail, next to a nice YMCA. These houses cost about 20% more than your typical 3 or 4 bedroom home in town. These were built in the 1990s and I don’t think that there’s been a lot of turnover. I suspect a lot of folks moved up here after selling more expensive homes in MA.
The town loves these developments. Lots of property tax revenues with no school costs. There have been a few for-sale signs lately that I can see from the road leading to the development. I’d guess that they don’t allow forsale signs in the development.
Good point about condos. They are really expensive apartments and when people realize prices aren’t going up, look out.
Yeah, condo’s first, consisent with entry level buyers and flippers getting hit first and hardest. Low-end condos first because basic apartments are meant to be rented and not bought. I know a number of young professionals who have bought such with full anticipation they wouldn’t be living there for very young and would be trading up. The vast majority of examples in my sample population are single women. Luxury condos will still have some appeal for those established in life, so are coming down, and relatively quicky, but not as fast as the apartment -> condo conversions.
agreed, but for a reason a little more twist. Harlem is my golden boy example now. Once RE is really frowned upon by all the sheeple, neighborhoods like this will loose their investment dollars, become more blighted, and further lowering prices. When the job hits start comming there will be more unemployed fustrated people in these areas than more affluent areas. It truly is a micro depression spiral mindset for the neighboorhood. Everyone saves, because jobs are scarce, don’t pump money around their economy, and inflows are scarce. you get the idea. just because price drops to an abnormally low level, doesn’t mean it cant drop further espically with our FIAT currency, where everything is manulipated. for examples look at the early 90’s and lare 80’s movies of innercity life. Remember Rocky V (1990) when Rocky’s son called Rocky’s old neighboorhood “Blighted”. Rocky was like “ayyyeeee whats dis blight stuff” and he proceded to explain it to Rocky. Well that movie was a real time economic indicator, as were most movies in thoes few years telling the same economic story. Looking art for clues into a civilization’s attitude has been a technique used for centuries, and maybe we can start a topic of what great art works will be formed out of the housing bust.
two words that rhyme with blight, not mine, but I think relevant
“WHITE FLIGHT”
“white flight”
of course, white flight — from europe — could conceivably re-inflate the u.s. housing bubble . . . oh, say, about 2020 or so….
of course white flight from the US to Tawian will re inflate the chineese housing bubble. Tawian will be the next Ellis Island.
sarcasm? i don’t see the parallel.
I’ve noticed the biggest price run up on the lower end. % wise anyway.
Will All Price Ranges Be Going Down [and by the same proportion]?
That is THE single most important question I have about the bust. Hopefully, we’ll be seeing lots of state here that flesh this out.
In Reno (so far), the higher end (600K - 1M+) seems to be retaining value more that the lower end. Don’t know why…
Supply. Lower end homes and first buyers had the most to borrow, unable to cash in on bubble equity from prior properties. Being younger, they would have the least reserves. People in the middle range are better able to ride this out. Flipped properties, new constructions, and foreclosure properties are more likely to be in the lower range. More supply.
…more specifically, supply relative to willing and able buyers, which are also straped on the low end. From both a supply and demand perspective, the lower end is going down first and hardest, then trickling upward.
SF Mechanist …But from the demand side the lower priced homes/condos usually do better in recessions because they are affordable .The mid range price owners hunker down and put off buying the bigger house or the luxury buy up house .Everything depends on location and all locations have different prices from low to high end but it will be interesting to see which sectors are affected the most .
Another point is that on the very high high end ,(3mil to 10mil ),you usually don’t see foreclosures and those people usually have the bread to ride out any cycle .
Below is from an iTulip blog site. There is a chart attached to this that I cannot copy and paste. It reflects the downward trend of home equity extraction from here onward over the next 15 years. Even without the chart you still get the picture by reading the steps below: Attached is the link to the blog site: http://www.itulip.com/forums/showthread.php?t=132
We’ll use home equity extraction as our yardstick to project the bust. Thanks to my friend Paul Kasriel at Northern Trust for the original of Chart 2, which shows home equity extraction from 1950 until 2005. I have modified it to show a possible trajectory of home equity extraction decline in seven steps, A through G, from now until 2020. While I’m fairly confident in the length of the entire process, the length and timing of each step is subject to a wide range of error.
Step A: You are here. Whether the rate of home equity extraction implodes from here (as shown) or decreases more gradually is a matter of debate, although in past boom-bust cycles, the bust rate of decline has been significantly more rapid than the boom rate of growth. What is not debatable is whether the rate of home equity extraction will revert to the mean rate of about zero, from the current rate of more than $250 billion annually. It will.
In fact, the rate of home equity extraction will tend to overshoot the mean to reach an extreme negative rate of equity extraction (building equity) that’s twice the rate of positive extraction that occurred during the boom phase. This relationship occurred in the previous two cycles, which bottomed in 1982 and 1995, respectively. This implies negative equity extraction of minus $500 billion per year at the cycle trough. Chart 2 shows a more optimistic prediction of negative $250 billion occurring between 2015 and 2020. This more prosaic estimate accounts for government efforts to mitigate the impact and minimize the overshoot, by offering specialized loans, making direct purchases of securitized mortgage debt, and so on.
Step B: As housing prices begin to decline, sales will continue, though more slowly and less frequently. Old habits die slowly. One year into the decline, housing speculators will have left the market, but home owners will generally still believe that prices will either resume their rise or at least flatten out, not continue to decline. Remember the first year of the stock market bubble decline, when most people hung in there until they’d lost all of their money? The first lesson of behavioral finance is that the most common mistake made by market participants is to hang on too long and fail to cut losses.
While home owners at this stage will borrow less against their houses, and loans will be more difficult to come by, the average home owner will still make frequent trips to Home Depot or hire contractors to make home repairs and improvements, believing they’ll “get their money back” in an increase in the value of their home at least equal to the cost of fixing it. Some home owners will put their home up for sale—if they purchased early enough in the boom so that they can still realize a profit, even selling at five to twenty percent below the peak price.
Step C: After prices have declined for two years, large numbers of buyers who purchased near the top of the market will begin to feel the psychological effects of being underwater on their mortgage. They will be less inclined to borrow money, or to spend money fixing up their home, as home improvement value increases will be swallowed up by general market price declines. There will still be profits to be made by those who bought very early in the previous boom cycle, but fewer people will have this option.
As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed. Coincidentally, major employers—such as the U.S. auto industry—will be going through major restructuring, adding to pressures on housing prices in some areas. Some home owners will need to sell at a loss in order to move to regions of the country where the labor picture is better, and will do this if they have enough equity and are not paying cash out of pocket to cover their remaining mortgage obligations. These sales will further depress home prices.
Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually. As prices fall, homeowners will have less access to home equity loans. Many will not be able to afford repair and maintenance expenses. Homes in some neighborhoods—and in some cases, entire neighborhoods—will begin to look neglected, further depressing prices.
Step E: Five years into the downturn, rising unemployment will begin to more seriously affect the market, as indicated in Chart 1. As unemployment rises, homeowners will leave housing bust regions to move to areas where there are more jobs. Many houses will be sold at a loss, or even abandoned, as the market price falls below the loan value. Given the choice between paying cash out of pocket to sell their home or leaving the keys with the bank, many home owners will make the latter choice.
Step F: Ten years into the downturn, real estate will be widely regarded as a terrible, “can’t win” investment. McMansions will be subdivided for rental as multi-family homes.
Step G: Ten to fifteen years after the start of the decline in housing values, prices will bottom out, setting the stage for the next boom. Time to buy.
thanks for posting that itulip commentary — it’s a real mind blower! note in step f: “McMansions will be subdivided for rental as multi-family homes.”
i can’t wait. but not until 2016??? most of them will have fallen apart by then.
You need to put ‘affordable’ in there, ‘affordable housing multi- family homes.
It’s funny, but the first time I saw a development of “McMansions”, I thought that they would someday make some great multi-family homes - three (or more) garages, plenty of rooms, etc. The subdividing will then provide renewed employment for all those who will be losing construction jobs in the next few years.
Yeah, I’m not thrilled either about that timeline either. Time will tell, and I can only hope it unravels faster. Given the over extension of credit unique to this situation– which will have broad effects across the economy– I think that it might.
But if it’s that long I suspect there will be a major shift of cultural attitude toward the advantages of renting.
With all the condos being built there will be no need to subdivide a McMansion for affordable housing. The first affordable government projects will be the unfinished condo buildings from developers that went bust. The government will let contracts to another developer to finish them off and offer them as projects.
“note in step f: “McMansions will be subdivided for rental as multi-family homes.”
i can’t wait. but not until 2016??? most of them will have fallen apart by then.
Manhattanite…In a lot of older neighborhoods (in L.A., Pasadena, California, and Great Western NY) this has become the norm. Sad to see 1900-1920s-era built traditional two-story Craftsman’s, Victorians, Colonials, Italianates, Tudors, etc., chopped up and turned into rentals. One tradtional two-story Craftsman in the 90019 zip code built by a noted architect (can’t remember the name) has been butchered into a 6 unit complex! I couldn’t help myself, I just had to see how it was done. It was heartbreaking. One unit claiming to be a 2 bedroom 2-bath unit was asking $1,800 a month. One of the bedrooms was so small that a Queen sized bed was the only thing that could fit in it. The kitchen had been “created” at the back end of the unit, where the once two-car garage and turmac was now being used as storage areas for tenants. The front lawn had been paved over and turned into a parking lot. The house had literally been split in half on the first floor and split in four sections on the second floor to make up the four single units. I stumbled out of there speechless.
The guy who lives next door to this house was angry about the changes going on in his childhood neighborhood. The constant change of faces is very discomforting. You don’t know who your neighbors are anymore.
Mary
“Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually.”
Any thoughts as to what the are including in the upkeep? I find it hard to believe that it would cost $30,000 - $60,000 annually to keep up a $600,000 home. I am not thinking taxes, insurance, etc., but rather only the stuff that gets repaired/replaced, cleaned, etc. Let’s say the house would cost $300k to build. At $30k per year to upkeep, the house would be completely rebuilt every ten years. This seems a bit extreme to me.
It’s way extreme. Three percent is more like it, probably less due to inflated prices. Remember, the only thing that has run away is sales prices. Lawnmowers, paint and plumbers’ wages have not kept pace.
in my country you can get away with 1-2% for maintenance/repairs. But then our homes (especially the old ones) are probably of better quality than most of the new stuff in the US …
We had a house build in 1773, extended in the 1960s, and redone in 1980s. We redid it again in the 00s. Owned for 10 years. Spent about 20% of purchase price on all of the work.
I agree with the itulip timetable, especially for Europe where the bubble has been growing for 10-15 years already and is still expanding (outside Europe). It will probably take a whole generation to erase this housing/credit mania for good.
I agree that for the US things may speed up because of the high percentage of speculators in some areas - but this will also depend on the FED and at the moment it looks to me like they are going to do everything they can to bail out all the FB’s by lowering rates (plus far more manipulation of the actual CPI to keep the sheeple happy). Shutting down the credit spigots would be the end of central banking as we know it, so that is simply no option to the people in charge.
“this will also depend on the FED and at the moment it looks to me like they are going to do everything they can to bail out all the FB’s by lowering rates”
Everything I’ve heard them say lately suggests the opposite of that:
1. One voting member of the fed voted AGAINST the last pause, voting for a rate hike. I understand dissenting votes are rare at the Fed.
2. With the announcement of the last pause, the Fed said it does not rule out the possibility of further hikes. No rate decline/FB bailout talk there.
3. The chief of the Chicago fed wrote that concerns of inflation outweight possible effects upon growth.
4. Then the Fed said it was not responsible for the housing bubble through loose credit standards and low rates, and it said the bubble was driven by fundamentals. Now everybody seems to pretty much agree that is complete nonsense, but the Fed can say what it wants to, and the implication here is that they are not responsible for bailing out FBs. Besides, bankers want their mortgages to be repaid with real money.
Those are the four expressions by the Fed since the announcement of the pause with possible implications regarding their next move. I am aware of no other statements on the matter, particularly any suggetive of a rate drop. Taken together, these four statements in my mind suggest a rate hike.
They are not going to bail out FBs. If they do that, then that is game over leading to inflation and probably Hyperinflation, which will be total anarchy here in the US. Besides, Bernanke is going to have to keep the foreign creditors happy as well and rate cuts will not do that. Ain’t happening NHZ…keep dreaming this isn’t Europe.
I hope both of you are right (because I think the FB’s need their lesson and I don’t like the alternative). However, the FED has been inflating away for years, what makes you think they are suddenly concerned about inflation? I think they will keep happily far behind the curve and fool all their foreign lenders as long as possible.
I remember a lot of old victorian houses in Newton, MA going through the process of getting converted to multifamily/condex housing. It was a long time ago. We’re talking long econ cycles here.
yes, this has been happening for several years already in my region in the Netherlands (with big 17/18th century merchant homes). Until about 2000, most of those homes (4000-10000 sqft) were used by just one family (often just one elderly couple). Now they are split into 3-5 ‘luxury apartments’ that are usually 2-3 times more expensive each than the whole building 10 years ago. It’s one of the ways to keep prices effectively going up while the price level is already ‘extremely unaffordable’. If it happens on a significant scale, it also results in average/median price growth seeming relatively low compared to what is really going on.
Sh!t rolls downhill.
I suspect that as the over leveraged FBs, flippers, etc. try to escape the “crushing” weight at the mid/higher range ($500k and up), that this will compress the lower ranges. If an $800K house A is suddenly $725K, then house B that was $725k gets “crushed” downward and so on and so on.
Right now in MA there is very, very little at the low end (below, oh say, $300k). I think this lack of foundation has priced out the entry level, non-speculator buyer. There just aren’t enough buyers out there with a big enough downpayment or income to have nearly every house/condo be over $300k. Sure, there will always be some “bargain basement” properties, but not enough to act as a support structure for the levels above.
One thing here in MA that has really changed is the property tax bills. It used to be that a normal annual tax bill was $2k - $3k, now it has jumped to more like $5k and up. I think it is more like $6k in most towns, even on modest homes. Just think that’s $500 per month. The bank says, even at 36% of gross, that you need to make around $20K per year jsut to pay your taxes.
It used to be said that “cheap always sells”. My question is, “what happens when you run out of cheap?” I suspect that we have just about run out cheap. Condos, townhomes, small ranches and capes are now in the high $300ks (and need lots of work - plan on at least $50k to get it decent).
No reason to suspect, this is obvious. You see it in the price of any product once it faces competition/price pressure.
Of course all ranges will get beaten down. Anybody who thinks otherwise is clueless. It will come back to each area’s job market.
Last summer I looked at a house in a Boston suburb for less than $300k. Yeah, it was a real beauty. It must’ve been all of 700 sq. ft. with a postage stamp yard and it was on a road choked with traffic. It was also over 100 years old and had asbestos in the basement and lead paint. A real gem for only $290k!
I agree totally (I suspect that as the over leveraged FBs, flippers, etc. try to escape the “crushing” weight at the mid/higher range ($500k and up), that this will compress the lower ranges). You may get a bigger percentage reduction in price in La Jolla and Rancho Santa Fe compared to Rancho Bernardo and Poway, and certainly you may get larger absolute price reductions in the high end, but you will never reach a point where Rancho Bernardo and Poway are more desirable than La Jolla and Rancho Santa Fe. Because of the underlying preference structure, a drop in La Jolla and Rancho Santa Fe prices will lower the ceiling over Rancho Bernardo and Poway prices.
But there is a complication. In the Bay Area after the dot com bust, the Silly Valley prices dropped by maybe 20%, but East Bay prices continued to rise. There were two possible explanations which I thought of that might have accounted for this: (1) the East Bay job market was not as tech-heavy as Silly Valley’s; (2) the homes in the East Bay were so much more reasonably priced than Silly Valley prices that I believe a fair amount of tech loot was sunk into buying homes in the East Bay, where the risk of a big drop would not sink one’s net worth as far. If the rich guys cross over from the high end market to the slightly-better-than-low end, you could see a drop in the high end alongside an increase in the moderate-priced segment.
That would kind of suck for ordinary guys wouldn’t it?
We have three stlyes of home in our neighborhood, and it’s the least expensive townhomes that are still being snapped up. Everything else sits and sits.
The crash will depend on the local economy. I can predict several patterns:
1. High cost areas with jobs (San Francisco, San Jose, Manhattan) - flat markets, predictable declines across the board to just barely match local incomes.
2. High cost areas without jobs (Monterey, Santa Barbara, Hawaii) - sharp dropoffs possible. The areas combine tourism, service workers, and wealthy retirees. If no one can sell in the big cities the resort towns will have no buyers, and the prices will have to adjust. Many, many retirees couldn’t afford to buy their own home today. The service workers will get burned at the $500K Option ARM “low end.” The true luxury market (2 million +) was never part of the bubble and will be unaffected.
3. Overbuilt less desireable cities with jobs (Sacramento, Las Vegas, Fresno, Phoenix) - Historically new housing is easy to build and frankly no one really cares if they have to move. Lots of upside down mortgages and across the board stagnation or declines.
4. Less desireable places without jobs never bubbled…and will continue to stagnate…
Jobs are the primary driver of prices, resort destinations are the echo weaker second driver, while locations without either are extremely vulnerable.
I would argue that it may “different this time” insofar as the local economy will depend on the crash. A huge amount of job growth in the past five years has been real estate-related, just about everywhere.
There is also the great unknown with respect to easy money. A three bedroom, single family rowhouse where I live costs somewhere around 10 times median income. Lacking “creative financing,” a qualified buyer will have to gross about $200K and have a six-figure cash downpayment.
When the switch is eventually flipped down at the bank, this whole thing goes down the tubes. Jobs and current salaries across the spectrum won’t, can’t, support “stagnating prices” in the absence of interest rates at 40-year lows and unprecedentedly low lending standards.
Yes, there *IS* likely to be a national effect and the horribly overpriced California market is vulnerable across the board.
But, just like with the dotcom crash of 5 years ago, a large percentage of the residents in each area sat on the sidelines during the whole thing. Those who own houses free and clear will preserve the basic nature of each local market. If this holds true then the more established communities without too much recent growth are likely to be less affected.
The chance of a true ’switch flipping’ is low because banks effectively conspire to avoid it at all costs–even if they have to sit on unsold real estate. Prime lenders haven’t been involved with the wacky loans, ever, and they form a substantial part of the market.
During the boom, municipalities bulked up on school systems, pension benefits and other city and town expenses (our Town Manager put hardwood floors in his town office while property taxes were going up double-digits which was a bad move).
When the downturn hits, there will be all kinds of pressure to trim municipal spending and I think that there will be tax payment issues. In addition to HOA payments as some in the HOA won’t make their payments.
Don’t forget all those municipal retirees dependent [directly or indirectly via pension funds] on MBS, REIT and other RE related “investments.”
it’s not just the current/ex-employees who will feel the pain of bubble bursting. Retirees won’t be exempt. San Diego is a classic example in the news today. Just think how bad other cities are doing [not in the news yet]…
Right Tako, your argument is a good one that price ought to reflect local economic conditions and overall desirability of the area, but there is a flip side: as the bubble was driven by speculative psychology, so the speculation might be relatively greater in such areas, and so the collapse relatively harder. Not saying you are wrong, just a counterpoint. I think rentals are the best reflection of what housing prices “should” be, which factors in local economy and desirability of the location, without the speculative psychology.
Double agreement. Add the prices in those, toxic air, frying pans are not cheep.
experience from the Netherlands: when the Dutch housing bubble seemed to be popping (around 2001) the higher segment of the housing market (2.5-4x median price) was hit the hardest, with sudden price drops of 25-30%. This is also the market segment that had the biggest gains (400-500%) in the previous 10 years. For lower priced homes (around the median price) there were some minor declines in price. But prices recovered in a few years (partly because of lower rates) and are now (much) higher almost everywhere; in hindsight it was nothing more than a small bump in the road.
1-2 years ago we started to hear about trouble again, but this time it was with the lowest priced homes. Seems that those homes are so expensive now that (even with all the subsidies and plain fraud) they are unaffordable for the type of low-income buyers that usually buy these ’starter’ homes. There were pictures in the magazines of old apartments blocks that were hidden behind a forest of ‘for sale’ signs. But these problems quickly disappeared as well, probably thanks to even more crazy lending and ’starter subsidies’.
At the moment the only trouble sign is that inventory for sale in the higher segment (over 3x median or so) is growning strongly again. But maybe that is just because more of those owners put their homes on the market, trying to sell near the top.
nhz,
didn’t ecb just raise rates? won’t the fed also have to raise rates to keep u.s. debt market competitive ?
I’m not NHZ, but the answer to your question is most likely yes if inflation expectations do not fall.
yes, but apparently inflation expectations ARE falling (or the ECB /other banks try to fool everyone into thinking this by manipulating market rates). Obviously these inflation expectations are totally disconnected from what is happening in the real world …
Also, and this applies to the stratification of the housing bust, aren’t they about to tighten up on subprime lending? Like this weekend or something? That’s gotta effect demand on the lower side of the spectrum more than the upper. I don’t think you buy 6 million dollar houses with subprime loans, but who know, I’m sure anything was possible over the last couple of years.
the ECB has raised their rates 0.25% for four times in the last year and is expected to do another 0.25% hike later this year; that will be it for this cycle. But the funny thing is that mortgage rates (and rates on savings accounts) in Europe are hardly moving along, mortgage rates in Netherlands are maybe 0.2% higher than before those 4x 0.25% rate increases. And with money supply growth at around 10% and actual inflation around 7-8% the current ECB rate is nothing more than a joke. They have at least 5% (that’s 20 hikes) to go before they are in neutral territory.
You can hear exactly the same kind of noise from the ECB as from the FED, with most voters suggesting that we shouldn’t look too much at inflation but concentrate on the risks to the economy instead. And behind the scene, they do everything they can to manipulate the CPI down.
“Similar principle when you look at FB’s who bought homes above $500,000 to rent out. How many people can actually afford to pay over $2,000 in rent. Here’s a clue for these FB’s - not many. So when they are unable to secure tenants for their homes, then ‘walla’ the lightbulb turns on in their head: ‘I’m *ucked aren’t I?”
I was at a BBQ with my colleagues last weekend, and vague hints of overpriced housing began to trickle up in our conversation. I have learned over the past few months to seal my lips tight and throw away the key in these situations, but an example of a housing investment came up using these exact numbers.
The house in question was the neighbor of one of the people there, and has an asking price of 550k, though he thought he might be able to get 500k for it, and was thinking about it seriously as an investment. Unable to hold my tongue any longer, I peeped: “how much do you think you can get for rent on it?” Oh, about $2000/mo. was the response.
I couldn’t resist: “Okay, fine, what if you invest it in a treasury bond at 5%: that is 25k per year. Rent on your house is 24k per year, minus property taxes and insurance.” Tax savings did come up but generally the group agreed that would be an unwise investment. Of course I could have gone on and on, but left it there.
Does anyone know if the housing market in New Zealand is heading for a bust also. The prices there have also double in the last 5 years.
It certainly isn’t going to continue to boom. The NZ Reserve Bank governer has stated openly they will continue to raise rates (which are already over 7% !!) as many times as it takes to stop house prices increasing further.
“The stuff at the bottom is always more stable, because there are more people who can afford those homes.”
I’m not so sure this time around, in previous boom/busts, yes. But the whole IO craziness suggests that first time buyers were dependent on suicide financing and teaser rates, even to stretch into “entry level” housing. When was the last time you heard of a first time buyer putting 20% down and getting a fixed 30-year loan? With rates moving up, I think even entry level is going to get whacked until it is more in line with wages.
Spot unleaded is down 60 cents. NG supplies
look pretty good. Crude is down 10% from the highs and at support. So some commodity prices have come down somewhat.
Japan is going on another liquidity binge so
it’s hard to say what Ben has to do. I’d vote for hike but then I’m biased.
I think that this time around it’s hard to make predictions based on past events.
The higher end held up in previous bust cycles, but largely because 10 years or more ago, if you wanted to buy a 500K home, you had to prove that you could actually afford it. This time around, a lot of people were sold on the idea that they needed to buy the most house they possibly could, regardless of what kind of sacrifices such a move would entail. Many of them took out I/O, 0% down, no-doc loans and drastically reduced their saving’s rate to do so, banking on 10%+ returns.
In the past, living in a nice neighborhood and driving a nice car was a genuine reflection of high income. These days, I think it’s as likely to be a reflection of high consumer debt. I joke with my husband that people in the local trailer park probably have a greater net worth than many of the people in the gated McMansion communites a few miles away.
If people go back to thinking of a home as a place to live, not an investment vehicle, then the low end should do alright, provided the local job market is good. Granite counters will be less important than money in the bank.
“In the past, living in a nice neighborhood and driving a nice car was a genuine reflection of high income. These days, I think it’s as likely to be a reflection of high consumer debt. I joke with my husband that people in the local trailer park probably have a greater net worth than many of the people in the gated McMansion communites a few miles away.”
It may be true and no joke. A few years ago I had my aunt’s accountant do some tax work for my Aunt and Uncle’s estate. This accountant lived in a gated (24/7 guarded) mobile home park with her husband, a retired engineer. They explained they used to own apartment buildings and had to move to the guarded gated area due to belligerant tenants who made threats. Living in a mobile home park is like looking out on boxes. Not my cup of tea. But those people had security. Your remark is probably more accurate when describing renters today. Many of them have a high net worth. I pay $500 per month on two apartments combined (roommate in each, one is a sister). My income is well into the 6 figures and I only started to have high income in the fall of 2000, so my net worth is only $700,000. My wealth is building up fast. Nice thing about having a high income is that you can invest in low risk things such as T-bills, muni bonds, and savings bonds, but quickly build up your net worth. That means on the upward path, there are fewer peaks and valleys. I can easily live 8 years on my conservative investments (with no job and based on $1,000 per month rent, a car purchase/payments, various insurance, dining, occasional travel, medical bills, clothes, and other expenses if I have to live alone again).
I tend to agree, but IMO the low end still needs to adjust backwards. Otherwise, first time homebuyers are still priced out and the only ones buying will be those who bought too much and are downsizing. So at that point what will sit will be the homes they could no longer afford - and that certainly a first time buyer can’t afford - and then what?
“McMansions will be subdivided for rental as multi-family homes.”
This is so true. I’m sure it happens in all large cities, it did in Oakland and Alameda, CA at the turn of the century. All these wonderful, huge victorians were once homes to affluent banker’s and their families - Now, these large victorian mansions are multi-unit apartment buildings, or, multi use office space like dental, doctor or CPA offices.
History does repeat itself.
That would repulse me to see this become commonplace. My feeling? Tear the eyesores down and build smaller homes.
The typical “habitat” of those re-purposed single family victorians, though, is a high-density urban environment. They came to fill a need in an opportune and appropriate environment that grew up around them. I really can’t picture that kind of graceful aging in a setting of suburban sprawl, even if these crap zero lot BigBoxes were built to last the way those Victorians have.
And don’t forget how many may sit empty - for how long? - with the paper changing hands through whatever convulsions in a market that continues to decline. I think quite a few properties may become uninsurable and uninhabitable/unrehab-able from a practical standpoint; i.e. cheaper to bulldoze.
As promised, more details on Australia.
The boom here in Eastern Australia peaked in the first half of 2004, with most of the phenomena posters were commenting on late last year in the US. Massive construction of new apartments (the term includes condo’s here), people camping out in purchase queues for new developments, multiple resales of new properties before completion, equity locusts from Sydney/Melbourne ravaging the markets in outlying states, strange (although different to the US) new financing mechanisms, an army of true believers in RE being the fount of all riches etc. etc.
(In Western Australia, and to a lesser extent Queensland, the boom is still raging, due to a mining boom in those states. The best analogy in North America is probably Alberta in Canada, or maybe Wyoming.)
Initially;
1. The genuine top end, $2M and up, was hardly affected at all in terms of prices. Sales slowed, however.
2. New-build high rise apartments dropped 10-15%.
3. Older apartments were unchanged.
4. Middle-class SFH’s fell 5-10%.
5. Bottom-end SFH’s fell about 5%.
Since then;
1. The top end is still largely unaffected.
2. New-build high rise hasn’t changed in terms of asking prices, but sales are very slow and tales of foreclosure sales surface from time to time. (There are also a lot of lawsuits working through the courts in this area.)
3. Older apartments are still largely unchanged, both for purchase price and for rents.
4. Middle-class SFH’s are slowly recovering in older areas, but are very soft and may still be falling in the newest built outer suburbs.
5. Bottom-end SFH’s are still flat to slightly further down.
The overall Sydney median is expected to change between 0 and -5%
over the next year. Melbourne is about the same, and I read an article just this past Friday where the main Melbourne paper highlighted the differences between suburbs.
The top 10 Melbourne suburbs for appreciation over the last 12 months (8%-14% up) had medians between $A650K and $A2.1M and included 3 of the most expensive 4; the bottom 10 suburbs (9%-16% down) had medians between $A290K and $A370K and included 5 of the least expensive 7.
Ajh…..Do you know the reason why the older apartments went unchanged ?
In Australia, “apartment” can mean what you call condos.
That said, the main reason is that investor psychology still hasn’t changed all that much. A lot of people (I know some personally) are still expecting medium-term price appreciation of 7%-8%, so they still see RE as a wealth builder.
The Australian tax laws are also a factor here. You can write off RE expenses against non-RE income, and we have had until recently high top income tax rates (effectively 48.5%) that cut in at fairly low levels, whereas capital gains for assets held more than 12 months are 25%.
Rents have stayed firm, so there is still demand from investors prepared to pay high rent multiples. A 5.2% gross yield is considered normal.
Oh, there is no capital gains tax at all on sales profits from your primary residence. (But on the other hand there’s no mortgage interest deduction on a primary residence, and you can’t claim any losses.)
There should be data from the last downturn available regarding this topic. It is not in my purview to locate this data, but if someone can do so readily, it would be helpful, since it seems likely to me that the price decreases for different housing tiers would be similar this time, and it would be a valuable addition to the anecdotal responses.
My guess from greatest price drop to least:
1. raw land (starting from remote areas and moving toward urban centers)
2. far-flung subdivisions in areas which were newly developed during this boom (since 2000). (Arizona, for instance)
3. high-rise condos and “condo-tels”. (think FL, San Diego and NV)
4. Condo conversions and condos (esp located in bad neighborhoods).
5. New McMansion tracts which are located in “desirable” neighborhoods. (Temecula, CA and places like San Elijo Hills in SD county)
6. mid-high priced homes ($600K to $2 million)
7. mid-priced homes ($350K to $500K)
8. low-priced homes (under $350K — yes, it **is** idiotic to call a $350K home “low priced”).
Totally agree that price drops are usually most dramatic at the higher levels. With this credit bubble, however, I think EVERYTHING is going down by about 35-50% in bubble areas — more if the recession/depression is bad enough.
Ca. Renter ……I think you hit it on the nose .
If there is a “soft landing,” ie. homeowners refuse to sell for less, so there are few sales until income catches up, the “high end” falls farther. Most sales will be suckers with high-end incomes buying the low end homes they can afford; new McMansions will take a bath.
If there is a price plunge, recession, and an excess of homes due to construction/doubling up, low end homes fall faster. Price become MORE affordable than they were pre-bubble, everyone moves up, and the least desirable housing is abandoned. Its value drops to zero.
OMG..The housing toothfairy is the REPO MAN in DRAG ?