“Waiting To See Prices Fall More” In California
Dataquick reports on California. “Bay Area home sales held steady at a five-year low in October as buyers and sellers circled each other in a game of wait-and-see. A total of 7,979 new and resale houses and condos were sold in the nine-county region in October. That was up 0.9 percent from 7,907 for the month before, and down 24.1 percent from 10,508 for October last year, according to DataQuick.”
“‘The market is in the midst of its post-frenzy rebalancing phase. The sky is probably not falling, as some have predicted. But there will be those who bought near or at the peak, and who could find themselves in financial trouble if they need to sell and move sooner than they had planned,’ said Marshall Prentice, DataQuick president.”
The Contra Costa Times. “The 1,586 homes sold in Alameda County represented a 27.5 percent drop from a year ago, as the median home price increased 1.2 percent to $578,000. In Contra Costa County, 1,658 homes changed hands in October, a 21.2 percent decline from a year ago, as the median price dropped 5.4 percent to $544,000.”
“The 653 homes sold in San Mateo County were off 13.4 percent from a year ago, as the median price dropped 1.8 percent to $745,000.”
The San Francisco Chronicle. “‘There’s some turbulence here as the market continues to rebalance,’ said DataQuick analyst Andrew LePage. ‘We had a huge shift this year in the supply of homes for sale and the level of demand. It’s clear there’s less demand. Many buyers who are out there and interested are on the sidelines waiting to see if prices will fall more.’”
“New homes experienced the biggest price decline, down 7.9 percent for the Bay Area as a whole.”
The Noe Valley Voice. “Noe Valley homebuyers took advantage of a retreating housing market to purchase real estate at less than full price in September–the first time that has happened in years. Randall Kostick, Zephyr’s general sales manager, said one home in the $2 million range sold for 5 percent below the asking price. And buyers closed escrow on a $1.1 million home, for 14 percent below its initial price tag.”
“The lower sales figures and long waits were examples of ‘both sellers and realtors not taking into account that the market is not what it was a year ago,’ Kostick said. ‘If you overprice your home or don’t price it correctly, it just sits there.’”
The Daily Bulletin. “‘Certainly buyers are apprehensive, and in some neighborhoods that have high fees or homeowners association memberships, prices may actually fall. But overall, the only ones that aren’t selling are the ones priced higher than they should be,’ said Bill Velto, manager of Tarbell Realtors in Upland.”
“San Diego saw prices fall 5.5 percent to $485,000. ‘We’re really watching the condominium market down there,’ regional economist Jack Kyser said. ‘And I’m somewhat concerned about condos in downtown L.A. as well.’”
The Orange County Register. “Bob and Sara Bell put their Silverado Canyon house on the market in May, hoping to move to a bigger home. Six months and $81,000 in price reductions later, they pulled their one-story house off the market, opting to stay in their 1,100-square-foot home until the market improves.”
“‘We didn’t get any offers,’ Sara Bell said. ‘We decided it just wasn’t the time to sell.’”
“The Bells are among a growing number of sellers who are keeping their homes, or renting them out, rather than selling in today’s buyer’s market, industry insiders say. That resulted in a slight decrease in the number of homes for sale.”
“Last month also marked the first four-month price drop in the 19 years that DataQuick has been tracking local housing. It also was the 12th straight month in which sales were worse than the year before, and the worst October in 13 years. And with 2,715 homes soldOctober’s sales were well below October’s average of 3,530 homes sold.”
“Prices for existing houses and condos also have declined steadily in the past several months. The median price for existing houses, for example, fell $40,000 after hitting $705,000 in May, a 5.7 percent price drop in the past five months, according to DataQuick.”
“Condo prices fell by almost $30,000 since hitting $469,750 in March.”
“Sara Bell of Silverado Canyon doesn’t think buyers will be ready until next spring or summer. She and her husband plan to take out an equity line of credit and start fixing up their home to attract a buyer when the market returns, she said.”
“Waiting makes sense, she said, after learning that a home comparable to theirs sold in the $450,000 range, nearly $140,000 less than their original asking price. ‘If we have to go down to $450,000, we wouldn’t be able to afford (a house) anywhere else,’ Bell said. ‘So we decided to stay crammed in here.’”
‘Four weak months may not be a clearly definable home-price trend. All told, these four weak months pushed the (Orange County) median selling price of all residences down 3.25 percent to $625,000. This losing streak, so to speak, stands out to me because four down months in a row has never happened before in the 19 years DataQuick has tracked this market. That includes the serious depreciation we witnessed during the great real estate depression of the early- to mid- 1990s.’
‘ L.A./O.C. bosses cut 9,826 workers in so-called mass layoffs (invloving 50 or more workers) in the third quarter, federal job counters said today. That’s …Up 148% from same period a year ago.’
The Record.net: ‘The Stockton metro area, basically, San Joaquin County, had 1,050 mortgages in some stage of the foreclosure process. California metro areas accounted for seven out of the top 50 foreclosure areas in the country, with only the Riverside/San Bernardino area (12th) and Stockton (20th) in the top 20. The latest quarterly data report from DataQuick showed that third-quarter residential foreclosure activity in San Joaquin County increased to its highest level in more than seven years. Lenders sent out 898 default notices in San Joaquin County last quarter. That was a 178 percent jump year to year from 323 notices in the third quarter of 2005.’
‘Statewide, lenders sent out 26,705 default notices to California homeowners during the July-to-September period, up 111.8 percent from 12,606 in the third quarter of 2005, the report said. Ben Balsbaugh, residential sales manager in Stockton, said that more houses on the verge of foreclosure are hitting the market, especially ’short sales,’ where a bank is working with a seller who owes more than the property is worth.’
‘Short sales are up these days, Balsbaugh said, but this doesn’t necessarily mean bargains for home buyers. ‘There are so many homes for sale out there right now, the chances of getting a deal is better with an individual seller who is highly motivated in this competitive market,’ he said.’
“This [4-month] losing streak, so to speak, stands out to me because four down months in a row has never happened before in the 19 years DataQuick has tracked this market. That includes the serious depreciation we witnessed during the great real estate depression of the early- to mid- 1990s.”
That is pretty incredible. Even during out last slump/bust in SoCal in the 1990s, when properties lost approximately 30%, there was not a string of 4 consecutive down months; yet, here we are in the beginning of the bust with the economy still relatively healthy (not sure how long that will last) and we’ve had 4 consecutive down months. And, since we are now at 12 consecutive months of lower sales, it seems that more price declines are on their way (just my personal observation watching the other markets like SD, LV, etc. that it seems like 12 consecutive months of lower sales seems to be when the price decreases really start to show up).
So, a 3.25 rate of decline over 4 months works out to an annual rate of decline of approximately 9.5% (approximately $61,000), if I’m doing my math right. Pretty brutal for those that bought anywhere near the top.
Merced was also building because of the new University of California based there. Let’s see how many foolish parents want to buy their dearest little ones a house or condo in a down market?
Aaaahhhh the UC. Every home for sale ad mentions the UC — 5 minutes away, 30 minutes away. Actually, I don’t rule out that buying a condo instead of renting “for their dearest ones” may be the best option in the near furture.
Just like every property in SoCal has “Blocks from the Beach!”
Wait until gasoline prices rise in the spring. Many of these towns are home to long distance commuters.
Find out why the housing bubble burst will be 10X more devestating than anyone ever expects! Crazy information over at http://www.realestatedecline.com
…It blew my mind!
“Short sales are up these days, Balsbaugh said”
Bank REO’s are up way more than short sales. The increasing number Trustee’s Deeds at the foreclosure auction tell me the banks are not willing to forgive and forget so easily, especially if the house is in pretty good condition. I went thru this during the RTC crash 10 years ago, and if the bank smells any profit potential wiping out all the HELCO’s and 2nd, and the borrower has some sort of income, they aren’t going to sell short, no matter what the realty spin says. It’s a game of chicken, where the bank is betting that the borrower will wait till the last moment of the auction date to somehow find the money to stay in the house.
Does any one know how long it will take for the bank to get the borrower out of the house after the sale? Court order? Sheriff physically moves em out?
At least here in Cal, the bank has to go through an unlawful detainer action, get their writ of possession, and have the sheriff serve it. Basic timeline (I haven’t done these in about 7 years, but timelines should be about the same) is FB has 5 days to file a response (answer, demurrer, etc.) to the lawsuit after being served, trial in about 3 weeks, then another 2 weeks for actual eviction (sheriff has to post the writ, and then comes back 5-7 days later to enforce it). So, about 6 weeks total, although it can get dragged out if the FB knows what he’s doing (demurrers, motions to quash, etc.), and it tack on another 1-2 months if he declares BK. It can be a little shorter if they don’t file a response and the bank gets a default, but that only shortens it by 2-3 weeks.
In California if the bank now owns it (as opposed to you now owning it) they sometimes have a standard form to give cash to the existing tenant in exchange for moving out…..but first they usually assign the property an agent for listing and that in itself takes x amount of weeks once again depending on the bank. In California tenant after a trustee sale is still subject to existing eviction law.
Spot on, there is no incentive for a bank to short-sale at this point.
Somebody better tell Casey about this.
Pismo, if the borrower is living in the house, then the purchaser at the trustee sale has the right to immediate possession. If the borrower refuses to vacate, then the purchaser needs to bring an unlawful detainer action. Say a bit over a month till the sheriff’s eviction.
When a person has used an 80-20 loan, does he have to get approval from both lenders to make a short sale?
Because if he does, then of course the primary lender would rather foreclose. The holder of the first trust deed, by foreclosing, would wipe out the junior lien and suddenly have up to 20% “free” equity as a cushion to absorb the foreclosure costs.
That’s much preferable to what a short sale would probably have to involve, namely, an agreement by both lenders to accept less than 100% of what they were owed.
When a person has used an 80-20 loan, does he have to get approval from both lenders to make a short sale?
Yes and this is why most short sales will be unsucessful in the early goings
My teacher-buddy just got rejected for his short sale attempt about 2 weeks ago. The 80% people said they wouldn’t even talk to him about it until he got permission from his 20% people - even though they are different lenders. Since the agreed-upon sale price was just about 80% of the sum of his two loans, I think foreclosure/bk is the next step. Oh, and he didn’t pay last month’s bills.
Curious for the knowledgeable folks around here: if a person makes over the median income in a particular area (no more chapter 13, right?), why the heck would any lender agree to a short sale, when they have a chance at some payback over time when their borrower goes chapter 7? Would it be only if legal costs outweigh the losses for pushing foreclosure instead of the relatively quick short sale?
“County increased to its highest level in more than seven years. Lenders sent out 898 default notices in San Joaquin County last quarter. That was a 178 percent jump year to year from 323 notices in the third quarter of 2005.’”
I live in San Joaquin County. They’re still building Mc Crapboxes. What a joke. This default foreclosure news doesn’t surprize me one bit. Just wait till the ARM reset flood hits in 07′. Zoweeee!!
DOC
Short sales won’t save anyone. You end up with 1099 income for the difference if a recourse loan. Plus the drop in the market here in San Diego has pretty much already eaten up the entire 20% second (or HELOC) people took out to get into the home.
The list of real estate professionals filing Bankruptcy has grown by leaps and bounds.
What, exactly, is a “real estate professional”?
A Starbucks Barrista with a head shot and a navy blue blazer.
LOL!!!!
add another log to the inflation fire
$10.64 an hour to clean toilets
City Council approves ‘living wage’
2:09 PM PST, November 15, 2006
The City Council today voted overwhelmingly to require hotels near Los Angeles International Airport to pay their employees wages and benefits equal to $10.64 per hour — the first time that Los Angeles has demanded a “living wage” from businesses who have no financial relationship with the local government.
The 11-3 vote, with Councilmen Bernard Parks, Greig Smith and Dennis Zine in opposition, advances the bill but does not end the matter. The council must vote again next week — by a simple majority — to approve the measure, a step that supporters and opponents of the legislation consider to be a formality.
“This is a historic moment,” said Councilman Bill Rosendahl, whose district includes the airport-area hotels and who actively supported the ordinance.
The vote also thrust the council into one of the most high-profile and contentious labor organizing battles in the country, with the city taking the side of the workers.
As part of a nationwide organizing effort, Unite Here, the union that represents hotel workers, has spent more than a year and hundreds of thousands of dollars attempting to organize about 3,500 low-wage workers at a dozen hotels near LAX, one of the largest collection of non-unionized hotel workers in the country.
The union has demanded that the hotels recognize it as the bargaining representative of the workers based on union cards signed by hotel employees. The hotels have aggressively fought that effort and demanded that workers submit to secret balloting.
The proposed ordinance dovetails with the union effort to create public pressure on the hotels to bargain.
About 300 people were arrested in September outside the hotels for blocking Century Boulevard as part of a civil disobedience action designed to put the spotlight on working conditions at the hotels.
Faced with fierce opposition from the business community, council members passed a motion to make clear the ordinance was strictly limited to the airport-area hotels. And supporters, including the idea’s sponsor, Councilwoman Janice Hahn, also said the vote was an attempt to help working people and not boost the union.
The language of the measure, in effect, urges the hotels to recognize the union and engage in collective bargaining with members. The ordinance offers a choice: the hotels can either pay a city-mandated “living wage” of $10.64 — or they can negotiate an agreement that would supersede that through collective bargaining with employees.
The ultimate effect of the ordinance is unclear. Both supporters and detractors have been unable to pinpoint the benefits and costs of the measures.
Labor officials estimated that between 40% and 60% of the workers at the hotels make less than the “living wage.” Representatives of the hotels say that some of those workers, with tips, exceed the minimum wage and that a change in the payment structure may not benefit employees.
In addition, the Los Angeles Area Chamber of Commerce and other business groups have said they are strongly considering gathering signatures to qualify a referendum to reverse the ordinance. Under that circumstance, the law could not take effect until there is a public vote on a referendum, which could not occur until May 2007 at the earliest.
Could someone please give me a layman’s explanation of what a Short Sale is? Thank you.
Short sale means a mortgage lender accepts less than the amount that is owed on a mortgage.
The lender requires a financial statement. Any other assets that can be used to pay off the shortage will be required. The lender will look at income and other obligations to see if they can renegotiate payment terms. If the people own other property, the lender may put a lien on it. Any debt forgiven is given a 1009,because it is taxable income.
Wanted to put this where Stucco would see it. Apropos to comments early this a.m. This is from Kass on Street Insight
Disbelief Has Been Suspended
11/15/2006 7:50 AM EST
Equities surged yesterday as the S&P cash went through former resistance at the 1389 level (at which time more than 100,000 e-minis were executed on the buy side with a notional value well over $8 billion).
Shorts Scrambling for Dear Life
Follow-through in the swoosh up occurred as shorts scrambled for dear life (as they tried vainly to get off the cold linoleum floor drinking cheap tequila).
Drop in Bond Yields Added to Bulls’ Fiery Advance
To be sure, a drop in intermediate and long-term bond yields following the salutary PPI reading earlier in the morning (when coupled with a further 5% drop in the price of crude oil over the last week) served to add fuel to the bulls’ fiery advance.
Good and Bad News Remain Good News
It seems, to this observer, that in this bizarro investment world, good and bad news remain good news. Case in point: housing. The long arm of its developing hard landing is not being interpreted as a market negative. Rather, it is being interpreted by bulls as a positive and dampening effect on economic activity which will not require additional tightening measures!
Sailing Away on a Wave of Optimism
Nevertheless, as has been the case throughout the last several months, the burden of proof remains very much on the shoulders of the ursine crowd whose physical frames weaken daily under the pressure of a wave of optimism not seen in years.
Disbelief has been suspended.
I would not discount higher interest rates.
Beware: No RATE CUT TILL 2008http://money.cnn.com/2006/11/15/news/economy/minutes_reaction/index.htm?postversion=2006111516
Beware: No Rate Cut Till 2008
http://money.cnn.com/2006/11/15/news/economy/minutes_reaction/index.htm?postversion=2006111516
Take the knowledge quiz on the money site. I didn’t do to well. 22%? Wow!
I wonder if releasing this is really just them trying to “talk tough” on inflation. Still, if the market is already pricing in rate cuts in early 07, then there should be a reaction. But the market does seem to be ignoring everything and just running, so I’d guess there will be no reaction.
The market is currently testing the Fed’s resolve to take away the punchbowl before inflation expectations return to the stagflationary levels of the 1970s.
I can’t wait for the day these blind financial whizcompoops get their azz_s handed to them. This is predictable ‘financial text book’ trading behavior. These McFools see interest rates falling or staying put and interpret it as positive for IRRs and future stock value. What these Riskloves don’t see, however, is the underlying cause for future declining interest rates — slowing GDP and profit growth.
Great explanation! In econometric terminology, there is an identification problem when long-term rates are falling, as it is not clear whether this is due to increased credit supply (bullish, as the punch bowl’s alcohol concentration is increasing) or falling credit demand (bearish, as the economy is slowing down). Wall Street is nonetheless all together too ready to interpret falling long term rates as a buy signal. This interpretation did not work out too well in the early 1990s in the US, and it worked out really badly in Japan over the period from 1990-2005 or so.
Waiting? Watching paint dry is more like it.
Sara Bell of Silverado Canyon doesn’t think buyers will be ready until next spring or summer. She and her husband plan to take out an equity line of credit and start fixing up their home to attract a buyer when the market returns, she said.”
A HELOC, that’s ticket!
I have never understood this line of thinking, but perhaps I am in the minority. If you ever watch those shows on HGTV you always see people doing this. After living in the home for X number of years, the only time they attempt to make their home attractive and in good repair is when they want to move out of it! When the time is right for me to buy, I don’t want a bunch of junky fix-ups done by the previous owner. Chances are that their tastes and mine will not be aligned. They go and spend tens of thousands putting in new kitchen, one they chose! Then the buyers come through and the realtor gushes about the newly remodeled cooking area. BFD! It’s probably ugly crap scooped up at the Home Depot design center. I don’t want it! Sellers: save yourself the money and headaches. Do not re-model! Just lower the freaking price and let the buyers deal with things as they see fit.
I fully agree with you because I can envision the updates I plan to make. I can see past ugly carpet, outdated kitchen, etc. But most folks don’t. With all the new construction on the market, buyers expect used houses to appear as nice as new houses. Sellers are forced to do those hurried repairs and updates if they want to compete. It seems the only time you’d expect to find something that is still needing repairs are foreclosures.
We sold our house in Rancho Palos Verdes in Aug 05′ and I was one of those, running around, trying to make everything perfect. I spent $400 on new window screens, (I think the ones on there were original from 1967, not so nice) and it was all for naught, as the Korean-American flipper (85% of lookers were Asians) that bought our house, spent around $150k and 6 months redoing the house and the screens ended up in the trash, all beat up, brand new, my neighbor told me~
Exactly. What if I don’t like their granite countertops (I’m not really a fan of those) or their choice for a stove (I’m kind of picky on those)? I don’t want to pay for stuff that I don’t really want, and have to choose between either settling for stuff I don’t want or spending more money to get what I actually want and having to get rid of brand new appliances, granite, etc. (and these wouldn’t fetch much on Craigslist - not even sure if there is a market for used granite).
Hey, their loss benefits you and me. In 2004 I picked up a 2000-model Maytag Neptune washer and dryer set for $600. The set sold in 2000 for $1800+.
Upon hearing about this, two other friends of mine descended upon craigslist. One of them just picked up a 2003-model Neptune washer/dryer set for $800. That’s the all-digital set with touchscreen display (mine is not that fancy.) Retail price in 2003? $2200.
So bring on the used appliances.
And used high-end automobiles! I bought 2 Bimmers off of Craigslist at deeply discounted rates!
Agree with you on the granite, plus the grey granite look with the stainless steel appliances is so common these days that it’s become a look and it’s going to look dated in a few years. I don’t care how much it cost to put it, once the teens roll around and those things become so “turn of the millenium” it will all be money well wasted.
Granite countertops and SS appliances: the Avacodo Green of the future.
CA Guy,
Right on! It’s about time this folly be exposed. A lot of owners sit on their duff the whole 2 years they’re in a place and only get concerned about maint. and curb appeal when it’s time to get paid. I for one am sick of it. Reminds me of the guys in Chicago that flag you down for a “parking spot” at the game or concert, pocket your money and you come out to find your car towed! Turns out they guide people into lots they don’t even have any authority to allow you to park. It was just some dude w/ a flashlight and a sandwich sign.
Well how different is today’s seller. The only “equity” they have is from the manical market (none paid in) and they gussy the place up just before “game time” and when the money is done changing hands they got the cash and you got a ticket, or worse!
They only do this in Chicago???
Lip,
Well uh…. good point. It’s just that it’s where I recall seeing it first? I thought it was a fairly solid analogy b/c the average seller has about as much “skin in the game”.
Thank goodness the Tampa Bay Bucs and Devil Rays dont have enough of a fan following to have this scam applied to us…….yet. Ill be on the lookout for it.
“She and her husband plan to take out an equity line of credit and start fixing up their home to attract a buyer when the market returns, she said.”
Would you wait until you try to sell your car to slap a beautiful paint job on it - then you get to drive it for three days, looking all spiffed up, until the new owner comes by with a cashier’s check?
I’m all for fixing up houses, but it makes more sense to do that so the owners can enjoy whatever improvements they’ve made and THEN (much later) sell the house.
Same deal with waiting until the home inspection to put on a new roof - while for many years previously, you’ve lived with assorted tarps thrown over strategic areas and buckets “at the ready.” You’re going to have to spend the money anyway, why not do it so you can reap the joys of a well-maintained home?
Recovering Homeowner,
Exactly. Any veteran (or recovering) homeowner knows maint. is an on going never ending ordeal. You don’t get to just turn it off b/c you’re busy (or broke)! It’s a “til death do us part” kind of deal. Slapping on a roof post haste after using tarps and buckets may look better but wait til you get in the attic!
Why would you buy a house you’re planning to sell? (Rhetorical Q.)
Why would you buy a house you’re planning to sell? (Rhetorical Q.)
Rhetorical A: To make money so we dont have to have a real job.
(sarcasm off)
Consumer reports has an issue on home improvement and the ROI of various projects. Bottom-line, it’s a waste of money as a ROI. Maintenance is necessary to maintian value but home improvments are a net loss.
Sara Bell obviously inhabits the wrong side of the bell curve. They were trying to sell a 1100-sq. ft. rat hole for $590,000, when overpriced local comps only support $450,000? What is she smoking?
But she has a plan: Take out a home equity loan and ‘Fix the place up’ (and probably take a vacation and buy that plasma TV). So she was trying to sell a run down rat hole for $590,000? She will be throwing that home equity money right down the rat hole, regardless of what they do to the place, and by then the comps will be at $400,000.
Atleast she has the wording down for the FSBO sales brochure when they try to sell again: ‘The perfect house to cram yourself into to’
Oh why not? It’s their equity, they’ve earned it …
Oh why not? It’s their equity, they’ve earned it …
Yes emcee, it’s that emtitlement mentality.
This is financial darwinism at it’s finest.
Yes, but when these wounded Gazelles end up as food for the pride, they’re all skin and bones, almost no actual nutrition for the lions.
Nothing like a HELOC to take out all their perceived equity and to keep them permanently stuck in a house they dislike.
The thought process of some of these people is mind-boggling.
Yeah, because everyone knows that sellers get more than 100% back on their home improvement projects, especially after calculating the interest on the HELOC. WTF are they thinking?
This brings up an interesting possibility. Let’s say the house would theoretically sell for $450k. However, for a HELOC, it might “appraise” at $590k, or whatever pie in the sky number they want, with the aid of a crooked appraiser/lender. The appraisal would be sufficient to get a HELOC at the inflated value, even though there’s no realistic possibility of selling at anywhere near that price. It seems like it would be awfully tempting to the FB to get the HELOC now, while they can. They have the choice of cashing out $140k in “equity”, compared to no gain (or a loss) if they just sell.
In the long run, one of two things happen: the home price recovers and they pay off the HELOC, or it doesn’t and they go foreclosure/BK, which they might well have done anyway. Assuming they file BK, what does it matter how much the total amount is? Adding the HELOC to the total debt discharged isn’t going to make a difference: it’s BK either way.
What is really going to stop the FB from taking the HELOC in this situation? Other than good financial sense, which seems to be lacking these days?
I’m working on a post that will answer the ‘appraisal’ side of things for you. Look for it tonight…
SoCalMtgGuy
http://www.housingbubblecasualty.com
http://www.housingbubblecasualty.com/forum
If it’s not ‘Purchase money’, the lender can get a deficiency judgement. IMHO, wait a minute, I’m not humble, the lenders won’t go for the deficiency because there will be too many of these HELOC’s going bad.
Important point. Refis or HELOCs are not purchase money so anyone that refis can receive a deficiency judgment in case of default. However the lender I, believe, will have to go to court to get the judgement.
Non purchase money or “I got some money out of the deal” = come sue me
And under the BK laws that went into effect a few years ago, won’t they have to pay SOMETHING back if they have any ability to pay? ie. They have a job.
How many people entering BK might just give up their job for the sake of getting out of the debt? It could happen - not probable, but possible.
Can’t do that. Similar to a soon-to-be-divorced husband quitting work so he doesn’t have to pay alimony. SOme of the attorney types might jump in and help me at this point, but I think in BK temrs it may also be fraudulent conveyance - spending money right up to the moment of BK (and job quitting) with the intention to defraud and not pay debts.
They can keep their cramped little sh_tBox; they deserve it.
SF #’s how can every area (almost) be down significantly and the “bay area” is at 0% appreciation??? Fuzzy Math??
There’s so much pent up demand in the city of San Francisco that a large correction may never happen. People are still buying real estate because they can - SF has had a housing shortage for a long time so many who have been waiting and saving up for a down payment for 4-5 years are buying just to get into the market.
Even after the dot-com bubble popped and there were layoffs everywhere, prices here only fell about 10%, and that took two full years.
I know I’ll get bashed for this, but the Realtor adages of “They’re not making any more land” and “everyone wants to live here” actually hold pretty true for the city of San Francisco.
I agree with you. The demand is from around the world.
San Francisco proper may indeed be “land-locked” and have high barriers to entry (insane zoning/developer fees, NIMBY anti-development zealots, rent control, etc.), but it is a very big leap to say that a large correction cannot happen there.
Of course, “large correction” itself is an undefined term. If by that you mean “60%+ drop in nominal prices”, then I would agree. If you mean “30-50% drop in real (inflation adjusted) prices”, I heartily disagree.
San Francisco was not “bubble-proof” during the last market down-cycle (mid-90s), and this bubble is far larger in scope & scale than that one.
http://mysite.verizon.net/vodkajim/housingbubble/san_francisco.html
I have to agree that SF will probably hold up better than surrounding area - although relative outperformance can’t go on forever. The foreign demand is important right now - and is the reason why Miami will hold up better than Broward and Palm Beach.
Oh, you must be different in the Bay Area just like we are in Vancouver (running out of land, everyone wants to live here). Too bad you don’t have the Olympics - then you’d really be bubble-proof.
SFer: count me out. It is a beautiful city and fun to visit, but it is inhabited and controlled by freaks. They have the worst politicians in the country, and this is coming from a fiscally conservative, socially tolerant guy. From what I have read, SF is actually losing population, and I’m not talking about NFL players. And while they may not be making any more land, they are using their air space to its fullest extent. Just look at the Rincon Hill, Watermark, etc. Condos for everyone!
Amen.
SF is losing population because the whole city is gentrifying. Poor and blue collar families are replaced by young adults and wealthy with fewer children.
No bash here, I for one hope everyone moves to SF. I see nothing wrong with people that want, paying as much as they can . I’m sure we’ll see a million per 100 sq.feet in the not to distant future. Along with a minimum wage of $300.00 per hour(for Cali. only) I am biased though, I live in the deep south on the right coast and I wish everyone would move to California. Go West Young Man. That’s where the gold is!
For my sake, I hope I am wrong. And naturally I did not mean everyone in the literal sense (but if you come, wear flowers in your hair).
My point was that prices here will be much stickier on the way down than they will be in places like Phoenix or Vegas, where a stucco hut is cobbled together in 4 hours and there are a gazillion acres of flat, empty desert waiting for more.
But there are so many people here waiting to buy as soon as a 10%ish drop in price occurs, it’ll push prices right back up or at least keep them flat. And I’m not talking 25 year old cooks with 100% financing, I’m talking educated, well-paid 30 - 40 somethings with sizable savings.
SFer - I agree with HARM - all of the factors that you mention that prop up property values in SF (limited land, desirable place to live, etc.) have already been baked into the current prices. That is why prices in SF are higher than almost anywhere else. People in SF really truly believe (as you seem to) “buy now, or you’ll be priced out forever”. As a result, they bid prices beyond any rational level supported by fundamentals.
Maybe once people realize that they won’t be priced out forever, values in SF may drop even more than other places.
What happens in San Francisco when the crazy loans get taken away? Not because of major defaults there, but rather because of the defaults in more vulnarable “stucco box areas” (az, vegas. etc.) How will first time buyers finance the bottom end purchases that enable the move up buyers etc. which is the way a real estate market typically works. Do people really make the kind of salaries needed to support SF prices as they stand with more traditional based financing? Or do you just see the whole market locking up?
bullshiat
NYC has the same factors, limited real estate, tough zoning, NIMBYism, and is a desireable place to live.
I remember the real estate bubble of the 80’s and the hard times of the early nineties. It can happen again, and is likely under way. I think what will trigger the pop in NYC as well as in SF is not just the cost of housing, but the high cost of doing buisness.
But there are so many people here waiting to buy as soon as a 10%ish drop in price occurs, it’ll push prices right back up or at least keep them flat. And I’m not talking 25 year old cooks with 100% financing, I’m talking educated, well-paid 30 - 40 somethings with sizable savings.
Geez, where are my boots… it’s getting deep in here.
SFer is not exaggerating.
The city used to have blue collar neighborhoods but they are dying. The loss of the middle class is one more sign that the city’s real estate is being driven by changing demographics. There is a lot of money coming to the city and lot of people with money want to live in that unique lifestyle.
wmbz,
I’m a fellow southerner, and I for one can tell you that the best thing for the South would be for prices in Cali, NY, MA, FL, and AZ to go DOWN. I live in SF now, and frankly almost half the people I talk to here are thinking of getting the hell out of here. Where are they thinking of moving to? - North Carolina, Tennessee, Alabama, and Texas. Basically anywhere that’s affordable.
Know what happens when you get a bunch of people who think paying 500k for a little house move into your area? A repeat of what they’ve done to their own states- overinflation and a misbalanced economy.
All that commentary about prices not going down signifigantly, and tons of smart older people with money salivating on the sidelines to buy is rubbish by the way. Prices are coming down and will continue to do so since roughly 30% of California’s economy was tied to RE.
No pent up demand from me. Why in the world would I want to live in SF? Besides, the South Bay is getting all the sports teams - go Cisco Field!
Go Fremont A’s…
Go Santa Clara 49′rs….Warriors next…
Then why you spending so much time on this site? Look at the Stats. Even the prettiest tulips that were sold to kings and queens dropped in price like a lead balloon when the bubble burst. 10% is 2 years isn’t anything to shake a stick at either. And that was with the job market and the stock market bubble. SF will see another 10% dip, and probably 15-20% by the end of 2008-9.
It might be true of single family homes, but it certainly isn’t of condos. There are a large number of developments being build now, and plenty of land south of Market for future developments. I just don’t see availability of land being much of a factor in the condo market.
I know I’ll get bashed for this, but the Realtor adages of “They’re not making any more land” and “everyone wants to live here” actually hold pretty true for the city of San Francisco.
These things were true 10 years ago too. They don’t justify a tripling of prices during those ten years. It simply doesn’t make any sense to buy when renting costs half as much or less, and double-digit appreciation has stopped. This is basic common sense arithmetic, which is applicable from sea to shining sea, no matter how desirable the city.
So either rents must double or triple to catch up, or house prices have to come down, a LOT. Since you can’t rent what you can’t afford (landlords don’t offer liar loans!), and incomes have been stagnant at best since the dot-com crash, it’s hard to imagine rents doubling or tripling in the foreseeable future.
There are a lot of trust fund “babies” in their 30’s and 40’s in San Fran who are awash in money. Also the West Coast version of the Wall Street financial idiots who make insane bonuses.
These people can pay a lot because, well, they can use money they didn’t sweat blood and tears to earn. Personally I am very grateful I got out, although I can still see the city from my living room.
Yes, but are buyers on average 3x richer than the ones ten years ago? I think not, even in San Francisco. People stretched much harder to buy during the past several years, and they did it because prices were shooting upward and they wanted to get a piece of the action or avoid being “priced out.”
But the nice thing about being a renter in San Francisco is that you can’t be priced out of the city if you live in a rent-controlled place as most of us do. We may not own the roof over our heads, but our costs are controlled and predictable, which means we may lack some of the sense of urgency that renters feel in other high-cost cities. And most importantly, we get to enjoy the same city amenities as the trust fund babies. As a friend of mine stated very well: “who cares if our apartments are small and for the most part rickety, the whole city is our front yard!”
It would seem that SF rent vs mortgage prices may have one of the greatest disconnects in the nation.
One problem with your logic. Office space. SF peaked at about 18% vacancy around 2003, I think. Keeping in mind that I agree that SF is relatively desirable, and certainly at a lack for new space, remember that it didn’t make sense to put business there. They are still above 10% vacancy, I believe. The sports teams moving out of the city cores are just another data point. The Giants moved downtown because the whole area was awash with temporary dotcom money at the time. Take a good long look at Detroit, Cleveland, etc. Being an expensive place to live and work can change the whole equation.
Personally, I hope the city proper remains a desirable place to live, because it really needs some people to love it and hose it down every once in a while for the tourists. The ever-present threat of the big one is also a non-linear event to consider.
Yes, but layoffs didn’t necessarily mean that you could not qualify for a silly loan.
SFer is correct;….and it flows all the way to the south bay…
Crispy;…The O% number is also accurate…Basically flat for sometime now but with healthy demand…
No need to talk me off the ledge, I’m in no danger of buying anything. As pointed out, I’d never buy something I can rent for less than 50% of the mortgage payment. Especially when I can invest the difference and make 5 - 10% on the money rather than tying it up in real estate that’s likely to be flat to down for the next few years.
My belabored point is…unfortunately many of my fellow San Franciscans do not share our views, and have been waiting & saving so long to buy, that they’ll jump at the first hint of weakness. Make a bad financial decision to get 4 walls they can paint and a tax deduction, even if it means ramen noodles for lunch every day. Those of you living in the area probably know people with that mindset and can relate.
You have NO idea how much the Japs save, DO you?
My father-in-law’s golf club membership cost a cool 100k back in the day. A six-tatami mat apartment in Tokyo? Fuggetaboutit - millions. They have always saved. They saved in the 80’s. They save today (like there’s no tomorrow). Land? It’s an island full of mountains and forests that can fit inside CA - with little flat land for housing and rice paddies.
Now? It costs more to live in SAN DIEGO than it does in the suburbs of TOKYO, JAPAN.
By the way, one tatami-mat is about the size of a typical office desk (a little longer, but less wide).
Honestly, much of San Francisco is a dump. Even the (formerly) “middle class” areas of the city consist largely of those two-story, Archie Bunker style row houses.
People always talk about SF as if it’s either Pacific Heights, i.e. playground for trust fund babies, or the Mission District, i.e. a ghetto for homeless gay prostitutes with drug problems.
But the truth is that 90% of San Fransciso is like Queens. Nothing special about it.
When the SF suburbs decline in price, this will most certainly affect prices in SF proper. Would I rather pay $400k (post-bubble) to live in a comfortable 4BR house with backyard in Walnut Creek, or a 2BR 800 sq ft condo in the Richmond Distrct? That one is a no-brainer. And the commute wouldn’t even be that much longer, much of the city of SF isn’t that well served by public transportation.
I love SF, it’s my favorite city in the country. But let’s not kid ourselves, much of the city is pretty ordinary.
San Fransciso is like Queens
but with more Queens
and hills
San Fransciso is like Queens
but with more Queens
and hills
Ha Ha Ha Ha good one
“Honestly, much of San Francisco is a dump.” -Indeed. I recently took a trip to Nashville, TN. To say the least, Nashville was a hell of a lot nicer looking, cleaner, better kept, and faster developing than anything I’ve seen in SF.
I think people simply get sucked into group think when they move here. All they hear, day in day out, is how perfect it is here. Sort of like a love-hate relationship. Frankly, I’ve always lived in the East Bay because I can’t stand the city. It is a pain in the ass to get around in, parking sucks, you almost trip all over the bums on every corner, food is expensive, and rent is outrageous. I am renting an entire 4 bedroom home in the East Bay with 2 other people for $1500, which is about the same as many 1 bedroom apartments in the city go for.Yet people still clamor over each other to live there.
In my opinion, the Bay Area is highly over rated. True- other cities might not have a giant rust-colored bridge in a bay, or have 60 degree weather year-round, but if you add up all the negatives of the SF bay: schools ranked 47th in the country, a crumbling infrasctructure, an annoying baby-boomer population that holds property ransom with their stupid anti-development laws passed in the 70’s, way-way-way overpriced Real Estate, and endless traffic, I think Most cities in the country have SF beat by a long shot.
In a way I am glad most people in SF are brainwashed into thinking that they are somehow pulling the wool over the eyes of the rest of the supposevely backwards country, who are only too stupid to realize how wonderful the BA is. Perhaps it is actually the other wat around.
“Bay Area home sales held steady at a five-year low in October as buyers and sellers circled each other in a game of wait-and-see.”
The buyers are the dolphins and the sellers are the tunas.
‘But there will be those who bought near or at the peak, and who could find themselves in financial trouble if they need to sell and move sooner than they had planned,’ said Marshall Prentice, DataQuick president.”’
And then there will be those who bought near or at the peak whose homes will add to the growing inventory glut when they find themselves in financial trouble and need to sell and move sooner than they had planned.
“New homes experienced the biggest price decline, down 7.9 percent for the Bay Area as a whole.”
I guess we should add another 5-10 percent to that figure to reflect the value of incentives which were hidden in the sale price and inflated appraisal.
Silverado Canyon is a rustic section of Orange County a few miles from the ugly sprawl of Irvine. It’s kind of cool if you don’t mind being half an hour away from a grocery store. Only one problem: it’s in a very risky fire zone. I’ve heard that it’s not possible to buy fire insurance if you live there.
Not to mention the only way out is a narrow winding two-lane road, and all the houses crammed into the narrow canyon are literally overhung by heavy vegetation, which dries out tremendously in summer and fall. If a sudden brush fire ever hits there, the town will pretty much die to the last man.
“The sky is probably not falling, as some have predicted.”
Tell that to the guy who bought a McMansion one year ago and has already seen its value drop by $100K or so.
And he even had to couch that as “probably” not falling. Of course, he’s wrong. It is falling, it’s just that the velocity is slow in the beginning of the fall, but it will pick up speed as gravity (re-setting ARMs) imposes its pull. It’s sort of like throwing a ball straight up in the air - first the rate of ascent slows, then it pauses, then its starts slowly back down, but it picks up speed on the way down. (I’m sure those with a physics background could describe it better, but I was an English Lit major).
Gravitational Inertia.
Actually I think you described it better than many physics majors could!
A physisc major would just give a mathematical equation
h = ho + (vo) t - (1/2) g (t-squared)
where h = height, ho = initial height,
vo = initial upward velocity, t = time, and
g = gravitational acceleration.
A few months ago, we were at t = (vo)/g,
the time that WaitinginOC describes as a pause.
As t gets bigger, of course the negative term with the t-squared in it grows faster than the positive term (vo)t.
I knew the physics and math classes I took would be useful someday. Too bad, after 20 to 30 years, I have forgotten how to use them. Calculus for business was especially fun. Never used that, either! -
Please indulge imploder with some physics his grandfather lived by:
“When your B@lls hit the Walls, your Sh#t soon falls.”
Who are still buying in this market?
With tons of scary news are popped up daily, unless you have been in the cave somewhere, you probably have heard about them. So, this leads to the assumption that people know and are aware of the falling real estate markets. So, who are still buying?
Coworker almost bought in October. This coworker has degrees from Yale and Harvard. Another coworker talked him down from his cool-aid high. We almost had to get Jimmy Carter on the phone (”If you’ve got a can of beer, go ahead and drink it.”).
The psychology of this bubble propaganda will take a while to dissipate and there will be many who succumb, crumbling into a crushing mortgage just when they can begin to see light at the end of the tunnel. As has been said by others, when the prevailing view is that it is crazy to buy real estate and the dust has settled, we will have hit bottom.
Well, since the common wisdom is usually late, when everyone is saying it is a terrible time to buy, you may have already missed the bottom of the bottom. But you’ll be buying into a slowly recovering market, so no biggie.
I think that, even with all this bad news about housing, the run up in prices during the past 5 years has been so intense that it is going to take a pretty long time for people to truly believe what is happening with housing.
I think that the “housing as an investment” and “housing never goes down” and “buy now or you will be priced-out forever” is so ingrained in peoples’ minds that they cannot accept the fact that the bubble has popped and will a bear market for quite some time.
I think you’re right. It’s been exasperating to me, wondering who are all these people still buying. But I think it has to do with the fact that there are a lot of folks who bought in to all of the RE propaganda and heard so many stories of people getting rich, that it takes them awhile before they can truly change their mind. It’s pretty hard for most people to make a 180 degree turn in their thinking, and usually only happens slowly over time. Add to this the fact that many people want to believe that RE will be a good investment because they want to buy, and it makes it that much harder for them to accept the new reality of decreasing prices (the fact of the bubble is an old reality).
Very good point Andy.
So were tulips for a long time too.
“Ingrained”, yes. So what does it take for anyone to change a very stronly held perception?
I’d suggest it may often take a very personal event. Like witnessing a friend/relative go through foreclosure. As its been pointed out here relentlessly there isn’t any way to avoid the pain. There doesn’t seem to be much of anything you can do for someone (absent fronting them a huge chunk of cash) to help them get around reality.
I’d suggest that this kind of emotional pain, very personal pain, will spread pretty rapidly and impact pretty deeply.
And I don’t think it will be contained in one region or one economic group because the evidence of this bubble is that it isn’t regional, heck it isn’t even national! Its international.
So, who are still buying?
I can give you a couple of current examples here in Silicon Valley….
Youg couples (Late 20’s)…1 married the other engaged…All local kids….All work and gross between 120K & 150K for each couple….Parents are contributing the down payment of 20%…
You’re right on the money. Of the last few people I’ve met who bought, they fit your description above- good incomes and rich parents. Something seems horribly wrong to me if you’re making a 6 figure salary and have to beg money from mom N pop.
So basically those who can afford to buy and do not care too much about the markets. That makes sense to me.
John,
The problem is these people CAN’T afford to buy. Parent kicking in the 20% is in violation of lending standards pre-bubble and 120 to 150K per year wouldn’t get you much in Silly Valley so they are probably toxic on their mortgage. These people are just the continuation of the foreclosure wave coming to a theater near you soon with sequels every year for the next -oh I don’t know- 5 years….
50+ % divorce rate
There just aren’t that many weathly people out there nor high income earners or especially both. Check out the millionaire next door.
“The Millionaire Next Door”
Don’t care about the markets? More like don’t know. Even with the MSM catching on, we’re still a micro-sized minority here.
Hmmm, we have a 20% down payment saved and earn more than $150k and we STILL cannot truly afford to buy in the Bay Area. Most of the people I know who have bought recently are $50k millionaires with toxic loans.
“Parents are contributing the down payment of 20%… ”
Parents just blew 100k+. Astounding. Imagine the pain (if they really worked hard for that 20%)–just to watch it vaporize.
Unbelievable
DOC
“(if they really worked hard for that 20%)”
Not likely if their parents are from the Silicon Valley, just skim some of the parents’ equity off the top after triple digit appreciation, add in an interest only loan, and lots of contraception, stir and serve with some Napa wine.
The people buying are the same people who bought Nortel at $60 on the way down…
OT……but sobering indeed……………
http://www.insidefutures.com/articles/article.php?id=2469
Scary.
Thanks for that post. Very interesting, and sobering. I suffer from a disease where I occasionally forget what a bunch of ruthless scammers we have amongst us. As you say, these type of articles are sobering reminders.
Not surprised; unregulated hedgefunds; do the math.
It’s different here……………..
http://www.busrep.co.za/index.php?fSectionId=&fArticleId=3539875
Yeah right……….by a whisker
When you consider things such as inflation, taxes, repairs, insurance, HOAs, etc., people who bought last October in the bay area are well underwater. Even in those couple of counties that managed to squeek by above zero. Unless the corporations start sending their profits down to salaries, these price levels cannot hold, regardless of the high number of well-to-do around the area. There is a limit, and I don’t understand why the bulls just cannot comprehend that.
Hopefully this wasn’t posted…from Lansner’s blog
O.C. mortgage defaults at 7-year high
In October, bankers formally reminded 599 Orange Countians that they’d missed some mortgages payments. That’s the highest number of “notices of default” filed here since August 1999, according to new DataQuick figures.
It’s no one-time blip, nor is it anywhere near the last ugly cycle’s peak. Default notices, which start the formal foreclosure process, have been rising steadily for two years. To be fair, the cyclical low of 152 defaults in September 2004 was just as unsustainable as the 20-plus-percent home appreciation rates seen in that era.
But using a slightly wider lens, defaults now appear to back to levels that warrant some attention:
• Using scrolling 12-month totals, the past year has seen 5,147 defaults. That’s the highest since October 2002.
• Then look at the average monthly filings (577) since 1989 using First American data: Defaults the past two months are now above the average for the first time since 1998.
Defaults don’t always end in foreclosure. But homeowners are now losing properties to their banker in increasing numbers. There were 104 O.C. foreclosures in October, the first time above 100 since March 2000. The average back to 1989? 224.
Wow, that’s intense. Thanks. I have been tracking the public notices in the ocregister and they seem to have tripled as of late. It’s just a matter of time and I can wait.
“‘If we have to go down to $450,000, we wouldn’t be able to afford (a house) anywhere else,’ Bell said. ‘So we decided to stay crammed in here.’”
Oh, I see — It’s o-kay for me to overpay for your cramped little sh_tbox but it’s not o-kay for you to sell it at a lower price.
And of course it’s not true that they couldn’t afford a house ANYWHERE else. Right here in Florida typical houses are in the 200’s. But of course we don’t know if Bob & Sara Bell are qualified to do foreclosure auctions, which might soon be the only growing occupation in So Fla !
Also in regard to “‘If we have to go down to $450,000, we wouldn’t be able to afford (a house) anywhere else,’ Bell said. ‘So we decided to stay crammed in here.’”
Their logic doesn’t make sense if they are staying in the same geographical area. If their house has gone down in price, then the bigger house that they want has most likely also gone down the same relative amount. If they wait around expecting there home to go back up in price, then the house they want will also go back up in price. There best option if they had any brains would be to first NOT go further into debt (i.e. HELOC), sell at current market price, THEN try to get a current good deal on the bigger house as it may go down further in price by the time they buy…also, their property tax will be lower than if they wait for their anticipated spring bounce. We all see this warped logic everywhere…once people see paper profits, they just can’t accept the thought of “losing” those imaginary profits and it freezes them.
As someone here in the Bay Area, I can assure you that there is NOTHING moving in my neighborhood.Some of the same houses have been sitting for sale for over a year now. I wonder just how far back the sales data actually goes, for I would imagine that the market here isn’t doing as well as the report says at all.
I will agree that prices haven’t come down that much, but in my opinion, the longer sales lag, and prices stay, the longer the damage will be done to public perception, the mindset will change, and prices will come down more severely in the long run.
The biggest enemy in the face of making home sales come down in Cali is a population with a long-existing willingness to blow MOST of their incomes on mortgages.basic economics is not in the vocabulary of your typical Californian.
As usual Mercury News tried to give positive spin by burying the real news - THE NEW HOME PRICES IN BAY AREA ARE DOWN 7.9%. This is nominal, after adjusting for inflation its even worse. And count the interest which buyer pays on top of this and you can see how wise they are. Warren Buffet sold his california house last year. This is just the beginning - it’ll belong time before the prices are in line with the fundamentals. meanwhile I’m sure there are some suckers - just like last year buyers.
This year’s buyers are some more suckers.
Six months and $81,000 in price reductions later, they pulled their one-story house off the market, opting to stay in their 1,100-square-foot home until the market improves.”
Not so long ago, if you dropped the price of an 1,100 sf home by $81,000, you’d be dropping the price to zero.
And the moment it appears “prices have stabilized, inventory is ‘under control’” what will they be doing?
Like everyone else who chose to “wait” they’ll throw their property back on the market…..and the decline will continue.
All my friends think I am nuts. My wife thinks I’m nuts.
They think I’m crazy for wanting to wait at least another year to buy a house in san diego.
So folks….Am I crazy?
It is apparent to me (through my small group of friends - some of which are still buying) that people are still unaware of what is happening with the housing market. To be honest, I sometimes doubt my fervor to wait - bashed on all sides by people who think that my reasoning has no merit. This blog and others are my anchor in this otherwise choatic, ignorant ocean.
Rdub,
I live in San Diego too and I have been a bear for 3 years now. Just think about this, the 8% drop we experienced last month on a 500k loan is MORE than you are paying in rent right now. That always helps put things into perspective. Follow the smart money, not the dumb money.
Excellent point! I heard anecdotes from two SD-area homeowners last weekend (one directly, one indirectly) about how each of them guessed they had lost $100K in the market value of their homes since last year, which would be enough to cover a McMansion that rented for $8333/month, before even considering PITI!
It’d cover my rent for 7 years!
As a former SD home owner (got out in 2004), it is all about timing and the time frame you are talking about. If you have been on the side lines for the last 10-15 years, then maybe you were short sighted to not buy in the mid to late 90’s (if you could afford it) and the nagging is a holdover from your wife & relatives blaming you for missing the boat during the run-up. However, if you have only recently become a potential buyer in the SDGO market, you would have been nuts to buy anytime since late 2003, and would definately be nuts to buy right now. Like the other poster, I started being a bear at the end of 2003 and sold my house in summer 2004 when things (prices) had lost any basis in financial logic. Wait at least until summer 2007 and see how things look. I will think we will have clear indicators how low the market is headed. Things have definately been going down and will continue in that direction for a while. I’ve put my money where my mouth is (at inconvenince to my family) and am currently renting. I DO want and intend to buy again, but have forced myself onto the sidelines to wait until the earliest, summer 07.
Great Post. I believe that 70 years from now,this time period leading up to the bubble crash, will be viewed as being just the way we presently view the Roaring 20’s just before the great crash.
A time of great excess.
you will tell your great grandchildren that H2 Hummers roamed the streets freely in the time before the great Bubble pop. I think that H2’s will be just as big a symbol of this whole thing as granite countertops and subzero appliances.
Dave,
Whether you take my advice or not, it won’t bother me. I do find this is lightening rod for friendships so here is my honest advice and summary of facts.
1. Long term interest rates have been relatively stable lately. The question is how does that impact the housing market and the house YOU want to buy? It really does not affect the housing market because 80% of the loans in the last 4 years were Adjustable Rate Mortgages (ARMs). 60% of the loans in the last 4 years were Interest Only ARMs. What you need to evaluate is the short-term interest rates over the past 4 years. I’m not sure this link works:
http://www.bankrate.com/brm/graphs/graph_trend.asp?tf=1800&ct=Line&prods=325,360&gs=480,320&st=zz&c3d=False&web=brm&cc=1&prodtype=M
(short terms rates are up from 4% to nearly 6% - A MAJOR increase - play with a loan calculator)
I know you may ask, I am planning to use a fixed-loan product why does this matter to me? It matters because if 80% of your neighbors used an ARM or refinanced with an ARM that their % rates will reset over the next 5 years. For example if 80% of your neighbors bought and had a 4.8% ARM and the reset period for that loan is 1, 3, or 5 years, their current interest rate would be around 6%. This is inevitably happening to ALL 80% of these people. Their loan reset on a 500k home would take them from a mortgage payment of ~$2600/month to nearly $3000/month. Realizing that most people bought with an ARM because they could not afford a 30-year fixed at the time an ~20% increase in mortgage is going to put a lot of these people in trouble.
http://www.mortgage-calc.com/mortgage/simple.php
Now on to the scary part. 60% (60% of your soon to be neighbors) of all of the loans in the past 4 years were Interest-Only ARMs. These people got the loan based on paying no principle for 1, 3, 5 or 7 years. Their mortgage payment is approximately ~ $1650/ month on a 500k loan and interest rate of 4.8%. This term lasts for 1, 3, 5 or 7 years. At the end of the introductory rate the person not only resets an interest rate from 4.8% to 6% BUT they have to pay the principle and it is amortized over a shorter period of time 29, 27, or 25 years typically. The long and the short of this is that the mortgage payment for these people will jump to around $3400/month, an increase of OVER 100%. I predict that at a minimum 50% of these people foreclose, which means 30% of the homes sold over the last 4 years will be foreclosed. The graphs above show that it is IMPOSSIBLE for these people not to have a major increase in mortgage payment with an order of magnitude of 50-100% increase. Remember that the MAJORITY of these people bought with an Interest Only loan or ARM because they could not afford the other loan to begin with. How can they stomach a 100% increase? They better get a big big big raise. These people will not be able to refinance either because they do not have the income to qualify for a 30-year fixed loan!!! Their mortgage payment is not locked!
Now imagine when all of these people start realizing they are screwed and put 0 money down to begin with. They are going to file for bankruptcy and foreclose in waves. It gets worse and worse as more neighbors foreclose because house values are dropping and will probably drop below the owed value of their loan to begin with. It is basically an avalanche waiting to happen.
Watch the skyrocketing foreclosure rates. They are up over 100% from last year and trend will continue and increase exponentially.
http://www.dqnews.com has foreclosure rates BUT the site hasn’t been up for a few days. You can Google news “California foreclosure rates”.
“But wait, the Fed said they were going to stop raising interest rates and maybe even lower them…!!!” Be very careful what you read. It took almost 2 years for long term interest rates to START rising after the Fed started raising short term interest rates. It is extremely difficult to say that they fed had much affect on these rates other than the fact you probably won’t see a long term rate below a short term fed funds rate of 5.5%. % rates are somewhat dependent on the Fed but MUCH MORE dependent on other things. The short term interest rates rose as a direct cause of the increase of the fed funds rate. The Feds #1 concern is inflation. If inflation is not in check which is debatable at this point, they will NOT be cutting interest rates anytime soon. Remember, rates are still NEAR all-time lows and cutting rates weakens and already weak dollar and RAISES inflation.
The biggest question to ask is what happens to my loan after I purchase my home and what really controls interest rates?! Few people understand this concept. Mortgages get packaged together in lots of 100, 500 or 1000 and sold as a bond by Fanny Mae, Freddie Mac or the bank which originated the loan. Who buys these loans you may ask? The Chinese and Japanese purchase the majority of our homes loans because they are presumed to be VERY LOW RISK and keeping interest rates low helps keep the dollar strong and allows us to purchase more things from their country. The Japanese sell us electronics and the Chinese sell us everything including the kitchen sink. Imagine what happens if people begin to foreclose on their home loans? The basic premise that our loans are LOW RISK no longer holds true and the Japanese and Chinese will not buy our mortgage backed securities or they will demand a higher interest rate because of the increase risk! This is another part of the avalanche, if a few people start foreclosing interest rates tick upward which then triggers more people to foreclose and the cycle just multiplies.
“Housing is coming down” This is a very true statement. If you look at the history of real estate and California real estate in particular it is extremely volatile. It goes up a bunch it goes down a bunch. The good thing is that the housing market is not a very “liquid asset”. This means houses can’t be bought and sold over night or at the click of a mouse and that the transaction costs are HIGH ~6%. The affect on the market is that it is much more momentum driven. The turns are loooong as in years, the tops of cycles are looong as in years and the bottoms are looong as in years. You will know you are at the bottom of a cycle when you see no change in the market for 1-2 years. We dropped 8% last year and have a TON of crappy loans to deal with still, and everyone is priced out! Housing will drop for the next 5 years at ~8-12% per year. Condos will drop much more than houses.
“They aren’t making any more land” They weren’t making any more land in Japan when the real estate market went down 60% over 15 years (non-inflation adjusted)
“This is the best place to live, everyone wants to move here” GREAT!! Where is temperature on my mortgage application? The only thing that plays into your ability to buy a home is your income and your ability to acquire credit. Why were homes here the same ~price as everywhere else 5 years ago and for the prior 200 years? What changed over night…absolutely nothing! We just have a ton of speculators!!
PLEASE read this blog once a day:
http://thehousingbubbleblog.com/
Peer pressure - Everyone you know probably has made a ton of money in real estate and tells you it will never go down. That’s what I would say too if I had millions invested in something. You know a market is overbought and due for a correction when the taxi cab driver, bathroom attendant, and McDonalds worker starts telling you about getting into real estate. Follow the smart money and stay away while you can. Warren Buffett the best investor in the world Laughed at the southern California housing market and sold his house 2 years ago. Follow the smart money!!
“The tax incentives are wonderful, I save soooo much money” This is one of the biggest lies ever. Few people really understand the tax incentives. Lets do the math.
#1 - You only receive a tax credit for the portion of the loan that you pay interest to someone else. This means if you are paying $25,000 per year and only $20,000 in interest you only can claim the $20,000 that you are giving away anyway. Additionally you do not get a 20k tax write off, you don’t get taxed on the 20k you are giving away to someone else.
#2 - This means that if you are in the 37% tax bracket and pay 20k in interest that you get back 37% of 20k = $6400 per year!! Guess what, you get an automatic tax write off from the government of ~6500 per year already. If you get less than that your benefit for owning the house is NOTHING.
#3 - Lets say you pay 40k per year in interest. You would get a write off of $12,400 per year. Subtract the automatic 6500 tax write off you get and your net is about 6000 dollars per year of advantage for paying 40k in interest to someone else and having a 500,000 home loan. This tax write off decreases every year because you are paying less and less interest and the government increases your write off every year. Does that 6k really sounds like it is worth it in a decreasing home market? If your house drops 8% that year you already lose 40k . Infact that 40k drop probably covers rent pretty easily!!!
My plan is to save money like crazy and wait for the bottom and which point I won’t need to take a large loan for the property AND I can refinance as rates drop. Here is an old real estate adage, “Cash is King in a foreclose environment”. I would move to a place with cheaper rent and bankroll the money and buy CDs @ 5% or something like that. It will pay off greatly in the end. Just because the rest of the idiots jump off the bridge doesn’t mean you have to follow them!
Enough ranting.
Good post. Covers all the bases in a very accessible format. I’ve copied and sent to a few friends and family. Wonder how many will still be talking to me after reading it…
Whew, Rdub9000, if you still have the energy to read any more, I am just chiming in to tell you to keep your powder dry. There is no chance we are anywhere near the bottom.
Thanks everyone
I feel better now.
… and Markmax33 only covered housing directly.
Stick around… you’ll learn there’s a lot more going on in this world that’ll scare the bejeezus out of you (and will take prices back to a place everyone thought long gone).
Point #2 was off.
The standard deduction is a DEDUCTION - not a credit.
Otherwise… great, great, post.
Nicely done. One comment:
he basic premise that our loans are LOW RISK no longer holds true and the Japanese and Chinese will not buy our mortgage backed securities or they will demand a higher interest rate because of the increase risk!
Actually, what they demand is an appropriate risk premium. Thus, you do have the alternative to go back to large down payments, credit checks, income verification, etc. What will end is jumbo loans with less than a 20% down payment or non-FHA with less than a 10% down payment. Rates will probably increase too… but there are other scenarios.
Neil
Markmax33 – WOW – well done! It’s when I read posts like yours that I feel justified spending so much time here every single day.
I do have a question regarding the math for mortgage deductions. I’m probably going to do a horrible job at explaining it, but here goes:
You wrote: This means that if you are in the 37% tax bracket and pay 20k in interest that you get back 37% of 20k = $6400 per year!! Guess what, you get an automatic tax write off from the government of ~6500 per year already. If you get less than that your benefit for owning the house is NOTHING.
My questions: First of all, 37% of $20,000 is $7,400, not $6,400, but that’s beside the point. It seems to me that you’re implying that one’s taxes would be about the same if one took a $20,000 mortgage interest deduction versus if one just took the standard $6,500 deduction (I didn’t confirm that this is indeed the standard deduction). The $6,500 deduction is not a $6,500 decrease in taxes, it’s a deduction applied to gross income. So as I see it, in a 37% tax bracket, the standard $6,500 deduction results in a tax savings of $2,368 (37% x $6,500 = $2,405). A $20,000 interest deduction results in a tax savings of $7,400. So the tax benefit of the mortgage interest in the example I cited above is about $5,000 per year.
I’m not really trying to nit-pick, I’m just trying to get a clear understanding of the true impact of the mortgage deduction. I’m a little dizzy from thinking about it, and I really have no idea if I’m correct or not. Okay CPA’s – have at me!
I think bubbleboi has it right. A $20,000 interest deduction is worth a lot more than the standard deduction. However, annual tax savings pale in comparison to likely capital losses on any current house purchase.
a lot of times the full deduction cant be used. If yourt income is over 100,000 (who else can afford a CA house); deductions are phased out. a lot of california people also pay AMT which disallows the deductions for property tax.
Mortgage interest never gets phased out for AMT. It and charitable deductions are about the only things that don’t. However property tax does and you are limited to one million in principle (pal?) for the interest deduction.
The standard deduction was $5,000 for single and $10,000 for married. So the first 5k/10k of deductions is fairly worthless.
And of course at current prices $5k is much greater than the annual difference between rent and mortgage payments.
Give it a break!!
Awesome post, one of the best I’ve read in 18 months. Your thoughts echo mine precisely, especially the part about tax deductions. It has always driven me nuts when people talk about having to spend more (on interest) to get a bigger deduction (”I “need” to take a HELOC to buy a new Hummer/Porsche so I can save on my taxes). What dolts. And you are spot on that most people don’t understand a bit about the standard deduction they already get without itemizing, which by the way is 10,300 this year for married filing jointly. You were also generous in your example using a 37% tax bracket, as an interest deduction is even less if you are in a lower tax bracket, like most middle class folks. I’m going to cut and past your post and send it to my wife for some elementary finance instruction.
Some people refuse to hear. I have friends in San Diego wanting to buy as an investment for retirement. He’s about 5 years away.
I gave him the address for this website and yet, the last time I saw him, he’s looking to buy in SD.
Five years away from retirement, and he wants to buy a depreciating, illiquid asset like real estate (in San Diego)? The poor fool, the soon-to-be-literally-poor fool.
Or does he plan to live to be 90+ years old before cashing in, which is when that SD real estate MIGHT catch back up in real terms to what he paid for it?
Who are still buying in this market?
——————————————————————————
There are still alot of “uninformed” people out there. I meet them everyday…professionals, day laborers, business people, etc. They don’t realize what we all know and take for granted on Ben’s blog. At worst, they’re still listening and believing the RE professionals pitch.
That’s why we label them sheeple; they can’t think for themselves; they are told what to believe and consequently how to behave.
And how many of us would be in this position were it not for Ben’s Blog?
I knew it was all wrong in 2003. But could not articulate why. Fortunately, other commentors make a much better argument than I.
OT
is it ever a good financial decision to take a 30 yr fixed rate interest only loan?
and how to articulately tell this person that he made a big mistake? this is a friend of mine so i want to tell him gently how not paying principal is a mistake.
It was a good decision if you did it back in 2001 and you got out and/or refied to a 30 fix in 2005 and never took out any equity.
If, if, if… I know. That’s my point.
More info about my friend. He said, He will just pay the interest for 30 yrs on his house. it does not matter to him that in 30 yrs his loan will be the same as the time he bought the house. By the way he bought a condo also, this is in the Inland Empire the armpit of socal..heheh
i guest he a hopeless case
I’ve never heard of a loan product where you can just pay only the interest for 30 years?
If it’s a 30 year loan then there is a clause that would kick in after a few years I’m sure to reset the payment to fully amortize in the remaining time left on the loan. If you really could get a interest only loan, I’d have to say, YEA, it sounds like a great bet. Enough time to ride to the next up side of the real estate cycle with minimum in the game. But I personally believe such an instrument exists. Any loan guys here know better?
Sounds like your friend misunderstands his option ARM loan to me.
Correction
But I personally don’t believe
Clearly, you’re buddy demonstrates as a homebuyer you’re still a renter. In this case, he is renting the money not the home. With falling home prices, increasing taxes, increasing insurance, and the cost of renting the money, he’d be better off renting the home not the money.
If you are a doctor going into a high priced specialty just wrapping up your residency, then IO is fine.
Not many people get that kind of turbo boost on earnings from $20-40K to $400K in a couple of years.
Yes. For a very small segment of the market (top few percentiles), it can make sense. I/O is fine so long as you can weather fluctuations in the market and could, if necessary, qualify for a conventional mortgage. Same thing with Option ARMs: they’re a useful option for people who don’t need them, but could benefit by keeping other investments intact.
When they’re used by people who cannot quality for any other mortgage product by people with no other assets, it seldom ends well.
30 year IO? I would hve him check the fine print, he may find that for the first 10 years he pay interest then he needs to start paying principal. A true 30 year IO loan are far and few.
Yea, thats what I just posted above, before seeing yours. I think this guy is misreading his option ARM loans. I bet he doesn’t even have a 10 fixed. Just an option ARM. Sure you can make any payment option you want, UNTILL you hit the various limits in the fine print.
It is a good decision to take out a 30 year fixed rate loan, if you can afford the payment and want to live in the property, not rental property and are not intending to move for 5 or more years. Of course, you need a stable job, payments including taxes and insurance should be no more than 28% of income.
Never take out a (toxic) loan with negative amortization.
‘If we have to go down to $450,000, we wouldn’t be able to afford (a house) anywhere else,’ Bell said. ‘So we decided to stay crammed in here.’
$450K will still buy you a palace in maybe 75% of the US. But this dolt obviously has never looked beyond southern CA.
The civilized world ends at the California border. Haven’t you heard?
A lot of the SoBay beach folks think it ends at PCH.
Oh come on, everyone knows that the civilized world ends at I-5.
“But overall, the only ones that aren’t selling are the ones priced higher than they should be,’ said Bill Velto, manager of Tarbell Realtors in Upland.”
The only homes that aren’t selling (80-90% of the inventory) are the ones priced higher than they should be? The NAR is going to have this guy drawn and quartered if he continues to tell it like it is.
Even the ones that ARE selling are priced higher than they should be. Of course, if all of them were instantly priced as low as they should be (relative to rents and incomes), people STILL wouldn’t buy most of them, because the risks of owning RE would look too frightening.
Finally a RE professional calling it as it is.
I just closed escrow on my rental in AZ today, priced/sold it 10% below the comps. Got it under contract in 6 weeks. Buyer bought using 100% financing, amazing. 38% in two years, too much for me to see it decline, so I sold. Would have been 55% if I sold at the peak.
RE-ONLY-GOES-UP. If you care to say ,what area in Arizona was your rental .
congratulations
I have a ton of good posts. But time for my 2cents. I live in the So. Cal. area. My best guess is 50% decline…. add the toxic loans if you shoot with a rifle and not a shotgun ypo might nail a 70%.
To all good hunting, the tide has turned. Besides the decline and the nit- picking…. Look for a time to buy…. the rest is bs
Not sure I agree that “looking for a time to buy” is the only objective we can serve here. One of my objectives has to do with protecting the cash I lend on other people’s housing. Another objective has to do with looking for areas with super cheap rental deals due to FB implosion. Like, today I looked at a very nice 3BR/3BA one block off of Vero Beach, $1800/mo rent down at least 20% since last year. Several other objectives possible, too. Love your 70% estimate !!!!
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January, 1980 - Rep John Murtha and FBI discuss Housing Bubble:
http://www.youtube.com/watch?v=Pujo8mCQZcw
No kidding - It starts as soon as Murtha walks in - they start discussing housing prices/appreciation in DC and Florida.
Yea. Housing. Back in 1980. I’m SURE that’s why you posted this… Gotta hand to you, you’re always thinking. LOL
imploder……….you are toooo kind with those comments
I think Foley had the same conversation with Haster and the Pages!
I live in the city. Wife and I make over 180k combined. At current prices there’s nothing here that I can afford using traditional financing that I would want to call home.
A condo in my building is FSBO for $600k - or he’ll rent it to you for $1900. Yeah…
I’m seeing condos/houses that don’t sell being listed as rentals. I’ve counted 5 in the last few weeks.
We bot our first house in the previous peak (1989) in Milpitas, city next to San Jose. I paid 210k for a small house (1102ft). Three years later, an identical house next to ours sold for $160k, 23% drop. Don’t tell me house prices in Bay Area never go down.
My goodness, more froth…………
http://business.timesonline.co.uk/article/0,,9063-2455507,00.html
“The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.”
Translation:
They became concerned after realizing that the banks had been operating under the mantra:
“if it looks like $hit, smells like $hit, and even tastes like $hit, it must not be $hit, because $hit simply doesn’t exist these days.”
Heh, kind of like Wall St. Those 4uckers keeping eating $hit and swearing that it’s actually USDA prime filet. Perception is reality, non?
My f’n god. Nobody comprehends Risk. Speaking of which, is it time for retro board games to come back into style (again)?
But I wonder…perhaps there really isn’t any such thing as risk these days. I know…I know…it’s different; but is it really THAT different?
We rent a house in Napa. You can see in the DQ numbers that Napa County has not been a happy place for YOY numbers in the last few months. Somehow I doubt that Napa County was on many people’s list here to be close to the first in CA to post ugly YOY numbers.
But the median household income in Napa is only about $55K. This is expected given that main economic activity revolves around wine, restaurants, and tourism. When you contrast that with the median housing prices and potential for wage growth, places like San Diego are relatively affordable.
San Diego are relatively affordable….Are you crazy. San Diego is a crappy city for any time of employment with high wages. The vast majority of jobs in San Diego are low paying wages. The casinos suck the life out of the poor in SD and make the standard of living horrible. Working at WalMart just does not justify the home prices in SD.
Former San Diegan….
The key word is “relatively”…
Median household income for San Diego is probably about 20% higher than Napa. However, median household price for San Diego is about 15% less.
It’s why Napa County is taking the beating first well ahead of many bubble regions in CA. We moved here from San Diego and were promptly surprised that you could pay higher prices than San Diego and still get less of a home.
The food is quite good here though.
Phew, nice to know I’m not alone.
http://news.yahoo.com/s/nm/20061115/od_nm/russia_bears1_dc_1
“Waiting makes sense, she said, after learning that a home comparable to theirs sold in the $450,000 range, nearly $140,000 less than their original asking price. ‘If we have to go down to $450,000, we wouldn’t be able to afford (a house) anywhere else,’ Bell said. ‘So we decided to stay crammed in here.’”
Sara Bell must be the stupidest person in the world. This fool thinks she can get $140k more for her garbage. Stand in line Sara Bell.