“Free-Market Gravity” Takes Hold In California
The LA Times reports from California. “If all you have ever wanted for Christmas was a second home in Mammoth Lakes, this may be the season Santa delivers. The current market is so glutted with unsold units that even St. Nick might pounce if prices start to melt. The numbers tell the Mammoth Lakes story: There are 217 condos listed for sale and 220 licensed realty agents trying to sell them.”
“The 2006 fall buying season was as flat as a dying aspen leaf. Only 124 condos and 20 homes were sold from June 1 to Nov. 1. That compares with 214 condos and 53 homes in the same period last year.”
The Press Enterprise. “The cooling housing market finally caught up with Inland builders last month, as the construction sector posted some of its biggest job losses of the year, according to a report. Though economists have predicted construction-job losses for most of the year, this was the first time the losses were reflected in the state’s job numbers.”
“‘While sales of houses had slowed considerably, many of the construction companies already had projects on the books and continued working,’ said John Husing, a Redlands-based economist.”
The Press Democrat. “The jobless rate in Sonoma County unexpectedly rose in November as retailers kept a tight grip on hiring while construction companies and manufacturers continued to lay off workers, the state reported Friday.”
“‘It is a signal that in general the economy is slowing down,’ said Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University. ‘This is the bread and butter stuff that happens at the end of a recovery and beginning of a recession.’”
The Record.net. “The median home price in San Joaquin County has dropped 13 percent since January, as free-market gravity took hold of the Valley’s once-booming real estate industry. But that still is not enough to make owning a home affordable to thousands of San Joaquin County residents.”
“Fred Sheil believes 2006 is just a prelude to an even greater decline that will bring real estate back on par with the county’s wages. ‘They’ve run out of people that can afford to buy a $500,000 home,’ said said Sheil, who builds and rehabilitates homes for local low-income families. ‘Who else are they going to sell to?’”
The Gilroy Dispatch. “Home prices in Gilroy have been steadily declining during the past year, but that doesn’t necessarily mean now is the right time to buy. From November 2005 to November 2006 the median price for a home has dropped from $739,000 to $687,000, a 7 percent slide, according to REInfoLink database.”
“The lower prices and good interest rates have local real estate agents advising those looking for a home to take advantage of what they are calling a buyer’s market. ‘There is no reason not to buy,’ said (realtor) Susan Jacobsen. ‘There is more supply and less demand than there was a year ago and this is a great time for buyers to negotiate.’”
“Despite claims by real estate agents that the time to buy is now, John Mark Brady, an economist at San Jose State University, said that buyers will be better off waiting a few months. ‘Prices have gone down, but they will continue to go down,’ Brady said. ‘In my opinion, buyers - if they can - should try renting for a while as prices come down farther.’”
“Buyers like Gilroy resident Juan Biruetta said that it is still too expensive to buy a home. ‘It’s not a good time to buy. The prices are too high,’ said Biruetta, 19, who was told by lenders and real estate agents that right now is a good time to buy. He is in the process of buying a home in Madera, six rooms on two acres, for $400,000.”
“But the question remains how real-estate agents believe most people will be able to afford homes. Yahoo Real Estate lists the median annual family income in Gilroy at $65,330 a year, not enough to afford a monthly mortgage on a median-priced $687,000 home. In Morgan Hill the median home price is $775,000.”
“To afford a median price home in Gilroy, a household would need to earn an annual income $162,099 to afford a 30-year, 6-percent fixed-rate mortgage, according to Interest.com.”
“The current market is so glutted with unsold units that even St. Nick might pounce if prices start to melt. The numbers tell the Mammoth Lakes story: There are 217 condos listed for sale and 220 licensed realty agents trying to sell them.”
I doubt St. Nick would be dumb enough to buy one of these “free-market gravity” alligators. Good luck to the 220 Realtors in finding GFs to buy all 217 condos on the market.
Ever seen some of the garbage trying to be passed off as homes there? Unbelievable. That place needs a serious haircut.
The same is true with many rural and urban locations in California.
Poor idiots come to the state and really do believe that homes REALLY do cost more than other states. This is not true but thats what they are told. And no Im not talking about LA or SD or other parts of SoCal.
Here is the bottom line:
144 houses/condos sold total in 5 months (June-Nov) –> 28.8 houses/month –> for 220 realtors, each realtor sold 0.13 house per month –> 3% commission (split 6% between 2 agents) with avg house price at $450K –> $1768/month income per agent. Agents have expenses too. So their take-home may be half of that amount.
Start the rumor of the ‘Volcano’ again. Too many people in Mammoth. Then you’ll see a readjustment (crash) in asking prices.
Always liked Mammoth Lakes. Used to ski there when I was working at China Lake. I don’t recall the typical construction there being “garbage.” Prices are less expensive than Jackson Hole and Vail. The snow is not as great as the rockies, but probably the best snow in California. The scenery is great there too. For people who love that part of the Sierra, price may not really be a consideration. I may check the area out in a few years.
“For people who love that part of the Sierra, price may not really be a consideration. I may check the area out in a few years.”
WTF? A lot of the people who love, and grew up in the Sierra (myself included) are priced out. What I have noticed, is quite the opposite of what you say. People who truly love and respect it, cannot afford it. And the people with money, love it BECAUSE they can afford it. It is more a status symbol than a true love and affinity for the area. Big difference.
Hmm well someone should tell my sister in the Truckee/Tahoe area who hasn’t sold a house all year (NONE, ZERO, ZIP) what a great deal the Sierra’s are. She’s never seen this happen in over 25 years in the business.
I have to tell you about what I heard and overheard on my trip to SoCal to visist family this past weekend. WOW people down there are just in denial about where the market is right now and where it’ll be in the spring. Seriously, we have friends who swear it’s going to go back up in the spring so they went ahead re-fied with some other squirrely loan…AGAIN! Then I overheard a guy talking in the hotel lobby, going on and on about how great the Phoenix area is and gee they’re going to be building thousands more homes…and boy in the spring it’s going to break loose!
Funny though, when we went to the Carlsbad mall on Christmas Eve at 1pm there was no traffic backed up around the mall and side streets as we had seen in previous years when we lived down there. I guess some people are not so confident (or totally tapped out) that the spring will bring them all salvation.
That’s why I will “check it out in a few years.” It’s all pricey still. I did not say it was cheap. I lived near Yosemite in the early 1960s as a child. Up until 2003 prices were affordable. But I was more into stocks in the 90s and government securities starting in 2001. Now the prices in that small town are way out of line. They will go back down in a few years. High gasoline prices down the road will drop real estate prices in the countryside.
Average HOA in Mammoth Condo’s near Warming Hut II are $500/mo, year round.
I had a buddy ride the wave up and sold in 2004. He was happy about it.
A couple of lean snow years and an earthquake or two (Mammoth is very seismically active) and RE will go back to being affordable by local wages.
A grumpy burger with a pitcher of suds sounds good.
Grumpy’s isn’t the same since they moved from the old location to the former Mammoth Brewing Co bldg.
I remember when the tremors were hitting big time up in Mammoth back in the 80’s. Tons of for sale signs. I think the housing ATM drying up will affect Mammoth.
‘There is no reason not to catch a falling knife,’ said (realtor) Susan Jacobsen.
-
Is that our Susan that posts here?
“The cooling housing market finally caught up with Inland builders last month, as the construction sector posted some of its biggest job losses of the year, according to a report. Though economists have predicted construction-job losses for most of the year, this was the first time the losses were reflected in the state’s job numbers.”
I didn’t realize EDD counted illegal immigrant labor in job statistics.
I was at a small gathering in SoCal — EVERYONE had a job in real estate and not in the tradional sense: one person worked for a major bank in the community development division. Another worked for a foundation that worked with schools buying property and leasing it back. Etc. Etc.
And real estate would never go down because they aren’t making anymore land.
Although many continue to talk of moving out of state. And stories of resetting ARMs are now about.
Oh, and I almost forgot, one couple was pissed because the condo development they live in is officially 51% sold but hardly anyone lives theres. They are not pissed about being alone — but that they had a poor choice of locations (lower floor, no view) and were told there were no other condos left — they now think that is a load of BS given there’s no one around.
“And real estate would never go down because they aren’t making anymore land.”
The new paradigm for 2007 and on: “They aren’t making any more Fools.”
Or maybe “Real estate will never go up again because they aren’t making any more greater fools.”
Of course we are all now familiar with Upton Sinclair’s classic quote about people having to not understand when their livelihood depends upons it. These people are classic Kool-Aid drinkers. The smart developers and investors are out, waiting for the blood. It will be fun watching the greedy and inept get bought out for pennies on the dollar after their brilliant plans fail to materialize.
‘The smart developers and investors are out, waiting for the blood. It will be fun watching the greedy and inept get bought out for pennies on the dollar after their brilliant plans fail to materialize.’
That seems too easy. Aren’t there are checks and balances against people who are patient getting to find fire sale bargains? ( /sarcasm off)
“Though economists have predicted construction-job losses for most of the year, this was the first time the losses were reflected in the state’s job numbers.”
Most local contactors/subcontractors in specialty construction operate as independent self-employed small businessowners. They could go months without work/or are only getting few jobs, and still be counted as “employed”. The vast pool of unkilled illegals who get paid cash and are now standing idlely on street corners are not even counted in employment/unemplyment stats, so Gov,t stats on employment are meaningless. Actual numbers of the IE unemployed/underemployed/contractors with little or no work could be much higher, as much as 10% of IE workforce without jobs.
“unkilled illegals” ?
Interesting typo
posted ““unkilled illegals”
That should not be.
Anyone even TALKING to a 19 year old about buying a $400,000 home should be reported to child protective services.
Good thing Juan didn’t Juant.
While not entirely clear, I think the article says he IS buying, but not in Gilroy.
Any word on how large a downpayment Juan is planning to make?
None of cousre unless it is mommy and daddys money. These little schmucks piss me off. They are so clueless about finance and just follow the sheeple.
No problem for Juan, He’ll get a couple 10-15 illegals,and rent out space. Once a couple more drop a few kids there will be another couple of grand in welfare payments coming in…easy! Aint ‘merica great….
I would love to see that household’s monthly SSI payments.
He could get a couple of mobile homes on the remainder of the two acres.
Nineteen years old and buying a $400K HOUSE?! In Madera yet?!
Unbefreakinglieveable. I’ve seen it all in this housing feeding frenzy now.
“I’ve seen it all in this housing feeding frenzy now.”
So true. Just when you think there are no more greater fools, something like this comes along. What a mess this will all be.
Vote For
PedroJuanOK, Napolean Dynamite, whatever you say
I caught you a delicious bass.
No. He should be promoted president !
Vote For
PedroJuanNapoleon Dynamite reference. Nice.
“‘They’ve run out of people that can afford to buy a $500,000 home,’ said said Sheil”
They didn’t run out, because there never were those who could afford them, just lenders who told them they could.
Good point bubblegum. For the past couple of years the folks buying at $500K had no business buying. But this guy is pretty much right on in that this is all one has to understand. Those who are betting on a great spring are delusional. As DinOR has stated, we’ve pulled our books way too far forward when it comes to RE. Just who these people plan on selling to is way beyond me. A fool and his money are soon parted, but this really isn’t difficult to comprehend. They are still building 1K condos near me, and every time I drive past them I say out loud: Just who in the hell is going to buy all these? My wife is getting tired of my broken record, but seriously, these projects are disasters in the making. They are damn ugly too, at least from the outside. If they are going to swamp us with inventory, at least put up something that is stylish and unique.
Ca guy reassure your wife that your are doing the right thing for your future. My ex pressured me early last year. She bought her own condo in rockln at the height of the bubble for 380k. I can pick one up now for 336k .Aren’t she brilliant now?
dude: fortunately for me the Mrs. knows we are headed for a big downturn. The other day we got a flyer from a local RE agent, and the number of active listings in our neighborhood made her comment that this is a really bad sign. We knew there were lots of speculator units here abouts, but this was a big list! Not one was at the price that they were selling for a year ago, so you know there are alot of people underwater. Good move on dumping the FB girlfriend. No doubt divorce lawyers will be seeing lots of business during this bubble burst.
A lot of those splitting up will no doubt have the bulk of their assets in RE - even more reason to wait and watch.
Yes I’m better off without her I think. Her hobby was spending money and it drove me nuts. Her life was all about impressing others with stuff.She was also a pretty lousy shag so that really sums our relationship up.
That’s pretty much 0 for 3 - 1) Spending foolishly, 2) Impressing others with stuff high on the list, 3) Making it a no-brainer to just watch porn.
“‘It is a signal that in general the economy is slowing down,’ said Robert Eyler, director of the Center for Regional Economic Analysis at Sonoma State University. ‘This is the bread and butter stuff that happens at the end of a recovery and beginning of a recession.’”
Wouldn’t it be interesting if this Sonoma State University economist’s outlook turned out to be more accurate than the “soft landing” prediction made by all the highfliers on the eastern seaboard?
where was he last year- it’s old news
Where are the eastern seaboard highfliers now that it is old news?
“Soft landing — soft landing — soft landing — na-na-na-ny-naa-naa”
“The median home price in San Joaquin County has dropped 13 percent since January, as free-market gravity took hold of the Valley’s once-booming real estate industry. But that still is not enough to make owning a home affordable to thousands of San Joaquin County residents.”
At least San Joaqin County homes are less valuable than PV homes ($1m+ until recently), where prices have fallen 20% YOY.
What is it your looking for? Affordability for all?? It is not your “right” as an American citizen to own a home in an upscale area. Part of this mentality has caused this crazy run-up in prices as average American citizen feels it’s their right to own a million dollar home. I look forward to things correcting regardless of how it affects my current property values. I am a net buyer of RE, just like I’m a net buyer of equities. Diversified to the point that I don’t worry which way the wind blows. “Seek oppurtunites, don’t solve problems!”
Paraphrased:
I have so much money, I really don’t mind (possibly enjoy) losing money.
I was merely commenting on the interesting price decline data that has recently come out for CA, not trying to make any kind of political diatribe.
Political? Nice try… Sunset, no one likes losing money, including me. Matter of fact, it’s because of my utter disdain for losing money that I have become so conservative… Conservative investments over time yield wealth.
And just for you Stucco, No whiners!
pv tom: I really think you misunderstood Stucco. I don’t believe any of the regulars here believe we have a right to own anything. I think Stucco is thinking like me. As in, why did people allow housing to get so far out of control. It is so absurd, the current values, that it confounds the mind.
pv tom, that 20% PV haircut must sting a bit. Next year, look for another 20% PV drop. I hope you are very well diversified to ride this one out. Best of luck.
Remember the stages of grief –
1. Denial - The “This can’t be real” stage.: “This is not happening to me. There must be a mistake.”
2. Anger - The “Why me?” stage.: “How dare you do this to me?!” (either referring to God, the deceased, or onesself)
3. Bargaining - The “If I do this, you’ll do that” stage.: “Just let me live to see my son graduate.”
4. Depression - The “Defeated” stage.: “I can’t bear to face going through this, putting my family through this.”
5. Acceptance - The “This is going to happen” stage.: “I’m ready, I don’t want to struggle anymore.”
I am happy to see that at least some posters here have moved past the denial phase and on to the anger phase. It is my humble Christmas wish that you may soon find acceptance.
http://en.wikipedia.org/wiki/K%C3%BCbler-Ross_model
From ‘Manias, Panics, and Crashes: A History of Financial Crises’:
Lord Overstone, the leading British banker of the middle of the nineteenth century, saw a similar pattern and was quoted with approval by Walter Bagehot: ‘quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [sic], pressure, stagnation, ending again in quiescence’. — The Collected Works of Walter Bagehot, ed. Norman St John Stevas (London: The Economist, 1978), vol. 9, p. 273
“Home prices in Gilroy have been steadily declining during the past year, but that doesn’t necessarily mean now is the right time to buy. From November 2005 to November 2006 the median price for a home has dropped from $739,000 to $687,000, a 7 percent slide, according to REInfoLink database.”
$687K to live in Gilroy?! I never realized garlic farming was so lucrative.
http://www.gilroygarlicfestival.com/
While there are a few wealthy farmers there, you are absolutely correct. For Santa Clara County, I think Gilroy will be one of the worst hit on the downside. The median there should be half of 687K.
A lot of long-time Gilroy farmers/rednecks sold out to developers and made a killing these past few years. The new Beverly Hillbillies.
CA Guy … Right on… Half.
Lots of land in Gilroy and prices were under $200K 10 years back
For it to be $600-700K is crazy. HA! What will they say Buy this
home because its close to the Garlic Festival… God Help you
You will Stink of Garlic all day for a week. You can smell it from South San Jose.
If you like the prices, you’ll like the smell even better. The area reeks of garlic and stucco boxes.
Mark Twain said Gilroy was the only place on earth that you could marinate a steak by hanging it on a clothesline.
LOL! :-))
Sunsetbeachguy, Right On!
Wow! Great Twain quote! That guy was worth 100 poet laureates. He would have had a hell of a lot of new material with Lareah & co.
me thinks that Juan Biruetta (JB) is about to turn into an FB.
DOH!
“There are 217 condos listed for sale and 220 licensed realty agents trying to sell them.”
Somebody call the Beachboys, there must be a song in this !
‘Now that home prices are sinking each month, working-class families and housing activists are talking about taking back the local real estate market. And some are predicting the floor for prices is a very long way down.
“It’s looking more promising than it has in five years,” said Fred Sheil, who, along with Stockton resident Larry Johnson, builds and rehabilitates homes for local low-income families. “It’s going to come down to where working families can afford to buy a house again.”
His optimism might be strong, but it is shared by few: The county’s median home price would have to drop another 25 percent to reach the $250,000 level that would be affordable to families earning less than $50,000 a year.’
I share Larry Johnson’s optimism. Absent government intervention to keep prices propped up at current unaffordable levels, the price of homes will continue to revert to a level where they are in equilibrium with local incomes and rents on comparable homes.
Agree, GetStucco. I don’t see how the gov’t can intervene any further. Seems like the limit has been reached and perhaps natural reversion can take place. The longer and larger the boom, the steeper and cheaper the bust.
palmetto: I was thinking about that this morning. I have seen the optimism in people’s eyes when they consider a Fed cut. But honestly, no matter how low the borrowing costs, there is the limit you speak of, and we have absolutely reached it and then some. If we hadn’t then there would be no need for all the crazy sub-prime lending. And even with a big rate cut, who is going to buy? Will present owners buy more homes to rent out at negative cash flow? Don’t think so. With the % of ownership at a record level, the only people left fall into three categories: too poor and/or too sub-prime, people who actually prefer to rent regardless, and people like us who refuse to buy into this great Ponzi scheme. Yep, the bigger they are, the harder they fall. See you at the bottom. Oh yeah, and a Merry Christmas to everyone here!
Right on, CA Guy. My mantra for the New Year is “Steeper and Cheaper”! Yee-haw and a Merry Christmas, Happy Holidays, or whatever to all!
Correct me if I am wrong but is not 250k, 5 times 50k? Should’t folks only pay 2-3 times their salary?
The home price to income ratio is higher in the Central Valley than in the rest of the world, because everyone wants to live there.
Well, They’re not making any more Garlic.
You two guys are too funny, and really make this blog so great! Re: central valley. I don’t even want to drive through it, let alone buy a McShitbox there.
“Well, They’re not making any more Garlic.”
LOL!!!!
My nomination for BEST QUOTE OF THE YEAR!!!
Thanx Imploder….I haven’t laughed this since the last time Liarreah perjured himself (ad nauseum…)
Merry Christmas to all on this great board…and a BIG thanks to Ben!!!!
Classic! Or if you prefer… “they’re not making any more feed lots.”
“Correct me if I am wrong but is not 250k, 5 times 50k? Should’t folks only pay 2-3 times their salary?”
Happy Holidays all..
quick question/thought…when talking about paying income times ‘n’ (e.g. 3x) for a property, should it be the purchase price or mtge amount that is referred to. For example, if the purchase price is 6 times income, but the mtge is 3 times income and PITI comes in between 25% - 33%, is that affordable, even thought the purchase price multiple is 6x income?
Thank you. I think the assumption is generally that 0-20% down is all anyone has…..
(and why not …. look at the bulk of purchases in the last few years).
The traditional seat-of-the-pants affordability factor is 2.5X income, assuming a 20% down payment and a 30-year fixed rate mort. IMHO, 3X income would be aggressive.
This guy has to be doing a no doc. Case in point:
$45K for a down, closing, cash on hand etc.
$6800 mo gross
no other debt - zero including student loans paid.
Credit score over 700
= 297K and that will buy what around Sacramento? a 2 br sfr in one of the worst neighborhoods here.
I have no idea how anyone can buy anything here. It’s completely insane. And if you talk to any sales people they insist that prices will not go down any more. They plan on releasing 4 or 5 homes at a time now. Incredible
I’d have to argue that the price they say is the best one for the “median income” is even realistic. It needs to be lower.
said Biruetta, 19, who was told by lenders and real estate agents that right now is a good time to buy. He is in the process of buying a home in Madera, six rooms on two acres, for $400,000.”
A 19 year old…with no advanced education and likely few skills, looking for a $400K home? This is crazy! But, at least even he is smart enough to know prices are too high. There are plenty who haven’t even come to that realization based on recent buying activity here.
Biruetta is a housing bubble shoeshine boy, as a 19 year old with no advanced education and few skills who believes that he could afford a $400K home and that now is a good time to buy one, just as newspapers are beginning to throw the term “real estate bust” into their business stories with increasing frequency.
Lend 400K to a 19 year old? A new paradigm shift in lending. Maybe mortgage brokers should create a new slogan like: Mortgage Brokers Gone Wild.
It’s complete turn around of lending. Instead of convincing the lenders that you can pay the loan, the lenders are looking for anyone that willing to sign the dotted line disregarding financial history. What is next? Charge your house on VISA or Master card with zero interest for the next six months then adjust to 12% after that?
“Lend 400K to a 19 year old? A new paradigm shift in lending. Maybe mortgage brokers should create a new slogan like: Mortgage Brokers Gone Wild.”
The Re lenders have been shelling out $400,000-500,000 loans in inner LA city slumzones which would have been redlined districts only a few years ago. Lots of RE funny money being transferred into the LA ghettos and repackaged-sold in the secondary MBS markets. When these loans default in a couple years after their FB’d borrowers have lived in their POS clapshacks basically for free, then these REO LA crackhouses will come back to market as ‘investing’ opportunites at firesale prices
“What is next?”
Drive-in lending:
‘Would you like a car with that McMansion?’
“A 19 year old…with no advanced education and likely few skills, looking for a $400K home? This is crazy….”!
He just needs a little mentoring. Maybe someone can get him hooked up with Casey Serin before that RE mogul’s site gets shut down.….
From the LA Times story on the Mammoth condo bust underway:
‘Then there are the 200-plus other listings. So this should translate into prices starting to fall right around the time the snow does, right?
“Not necessarily,” said Realtor Nelson.
Mammoth’s market historically defies predictability.
Back in 1996, when Intrawest arrived on the scene, heads were scratched in disbelief as people lined up to pay what were considered unheard-of prices for Mammoth. Mark Myhedyn, sales director of Playground, the Intrawest marketing and sales arm, recalls a sales event held at the Santa Monica Airport in 1998 when 129 of Juniper Springs’ 174 units were sold in an incredibly short space of time. “We sold $36 million in real estate in six hours,” he said. At the time, prices averaged $370 per square foot.
That was followed by all 77 units in the Sunstone Lodge complex selling out in three hours at a Santa Monica hotel. Just for good measure, Playground also sold the last nine available units of Juniper Springs during those three hours.’
Hint to real estate investors: The last CA bust was in 1990, and 1996 was the start of recovery. So wait until 2012 to pick up Mammoth bargains.
Just took a look at ZipRealty. They no longer show the listing dates for Sonoma. That wasn’t the case a couple of months ago.
Listing dates are a bit irrelevant, anyway, given the common tactic of taking one’s home off the market then relisting to hide the fact that it has been on the market forever.
Regarding unemployment in Sonoma County:
“The unemployment rate has remained low, in part, because the size of the county’s workforce is declining as people move to less expensive areas, or back to places like Silicon Valley that are creating new jobs.”
My first guess would be that the unemployment rate has appeared low because the telephone survey they use isn’t geared to call the households of illegal immigrants.
It’s just so stupid that I can’t stand it that the spin is,” It’s a good time to buy “. The REIC is trying to control inventory , they are cheating with incentives and kickbacks , and there aren’t any normal buyers that are willing to go on dog loans with no appreciation in the cards anymore . I don’t want one of their dogsh-t borrowers ,bound for foreclosure, to move to my street with the weeds in the yard .
What about the fact that Lenders have a duty to not destroy areas with faulty lending .If a area has a high foreclosure rate ,those lenders failed in their duty to protect property values for the other qualified buyers .
All sellers/RE agents are looking for that GF buyer who doesn’t care about prices sinking .I am getting sick of the NAR/REIC trying to control prices and the market . The REIC should be ashamed at how they put people into houses they couldn’t afford ,while others were priced out because of this dogsh-t false demand . Evil , evil ,evil evil ,evil ,evil ,keep the party going .
On one of the news boards there was an article about some RE agent in Houston who offered a “free gun” (worth about $500) to anyone buying a home.
One wonders if the gun was just an FB alternative to burning down the house…creepy.
Free gun. Love it. Operate when you’ve figured out that your mortgage will not be paid off during your lifetime.
To be fair, I recall this offer was only to law enforcement personnel.
It’s supposed to make the bank think twice come foreclosure time.
I live near the the town of Sonoma. Within 6 blocks of my home 11 homes have been forsale, many since Jan 06.
One is in Escrow. All have lowered prices from $620 to $550-several to $450. Many are owned by Realtors who did major remodel jobs.
“Many are owned by Realtors who did major remodel jobs.”
lineup: you just made me smile! While I do on occasion feel just a tinge of sympathy for the truly ignorant FBs, realtors get zero from me. When it comes to these snake oil salespeople, my schadenfreude runs strong!
“There is no reason not to buy,’ said (realtor) Susan Jacobsen. ‘There is more supply and less demand than there was a year ago and this is a great time for buyers to negotiate.”
Whoa. Isn’t there a Susan Jacobson realtor who posts here from time to time? Or am I confusing her with somebody else?
Nope you are not confused. And judging by her comments here I would suspect she is part of the REIC or a really F’d borrower. I don’t know if this is the same Susan, but both of them are idiots.
CA Guy,
Why would you say that Susan Jacobson, the realtor from Wisconsin, is an idiot?
The poster Susan Jacobsen is from WI.
Probably a Susan Jacobson Realtor in MN, one in HI, one in NY, one in Il, one in FL, etc., etc., etc.
Not that I am on a SurRealtor love fest today, but Susan from WI is ok in my books.
Mine too. Susan Jacobson (from WI) and I are on opposite sides of the street in many regards, but she represents a viewpoint that deserves to be heard in here. Calling her an “idiot” is uncalled for, and inaccurate. While I seldom agree with her, she is effective at presenting her case and maintains her dignity in spite of taking a lot of abuse in here.
I honestly think 2008 will be at least as bad as 2007, and here’s my reasoning.
We are just beginning to see notices fo default picking up in CA. It commonly takes several months beyond that, to get a trustee sale (auction) to take place, and another month or two more hat before the homes are cleaned up and placed back on the market as REOs.
Things will be getting progressively worse as we head towards autumn of 2007, but be patient. It will take time for the sales of REOs to bring the comparables down.
Mozo, I am sure you are right. Things are going way too slowly for me. Some posters have come up with scenarios that involve downward acceleration in 2Q 07 or 3Q 07, allowing one to buy by the end of 07 if one doesn’t mind assuming a LITTLE downside risk. But this would be a dramatic change in the pattern we are now seeing, where every little bit of a decline in asking prices takes many months to evolve.
Mozo,
Agree with your assessment. We need to shake a critical mass of the unqualified buyers of the past 5 years out of the market. This will take time. We need to see the lenders’ books fill up with REOs. We need to see the stop-gap govt “rescue” measures get enacted and fail.
Patience will be rewarded…
Friends bought a “chalet” as a spec flop from a builder. Paid mid $200s now worth mid $2 millions. Anybody who thinks Mammoth houses are going back to 1996 prices is overreacting.
What Ben didn’t mention from the LATimes; months supply.
A snapshot of realty activity in Mammoth, week ending Dec. 16.
Condos on market: 217
Price range: $239,000-$2,225,000
Median listing price: $625,000
Condos to escrow: 1
Condos sold/closed escrow: 3
Homes on market: 70
Price range: $619,000-$6.5 million
Median listing price: $1.3 million
Homes to escrow: 0
Homes sold/closed escrow: 0
And don’t think mid December is a slow season, this is Mammoth.
Robert: do you have the address for this property?
Yes, why? Mammoth Knolls area. Comparable to:
http://tinyurl.com/vd68a
They got a wicked steal at the bottom and like the home here, “worth” is more “wishing price” these days.
Robert:
I don’t understand your original post.
Are you saying that real prices will never reach 1996 levels in Mammoth?
In the article itself they talked about the dynamic of dumping 2nd homes in vacation areas.
Vacation areas will get hit harder (IMO) than primary residences in areas with jobs.
The Mammoth of 2006 is nothing like the Mammoth of the 80s and 90s. The area has undergone a sea change in community makeup, wealth, housing stock, etc. Prices will take a vicious and well deserved hit but the sleepy ski town is no more.
What might be interesting is if people start dumping their 1st homes and living in their 2nds. Palm springs is another area with a huge overhang of 2nd residences.
dumping their 1st homes and living in their 2nds. ??
That could be the big wald card in all of this….ANY sign that we are going to loose the $500K exemtion OR a move towards a flat tax thereby eliminating the tax benifit of home ownership could move a lot of equity fat homeowners off the fence….Cash is mobile…A home is not…
sorry;..wild…
Shesh;…exemtion..I better start useing spell check first…
I would expect no major tax code changes for some time. Gridlock in govt now due to dems control congress.
Also keep in mind with 70% americans being homeowners any changes made will benefit them and thier 2+ homes. Democracy works that way. There will only be MORE benefits/subsidies to homeowners over time but it happens slowly.
I gotta agree with you there.
Mammoth now sucks compared to as recently as the mid-90’s.
The good news is no jumbo jets landing at Mammoth Airport for the foreseeable future.
Mammoth always was/is the furthest out suburb of LA/SD.
As such it will be subject to the same dynamic.
“The Mammoth of 2006 is nothing like the Mammoth of the 80s and 90s. The area has undergone a sea change in community makeup, wealth, housing stock, etc. Prices will take a vicious and well deserved hit but the sleepy ski town is no more.”
You got that right. And the same goes for Tahoe. Both are ripe for a cleansing if you ask me.
2nd homes were big THIS TIME compared to 1980s
combined w high gas prices they should crash hard THI TIME
Reasons not to buy .
(1) Foreclosure rates will bring property values down .
(2) False short term demand from speculators and unqualified buyers needing to unload creating excess supply that will bring inflated prices down .
(3) Shortage of GF buyers for massive inventory at inflated prices .
(4) Sub-prime lenders leaving market which will create excess supply taking prices down .
(5) Lack of wage growth to support inflated prices .
(6) Lack of rich baby boomers to absorb excess supply .
(7) Builders will take the market down rather than hold standing inventory .
(8) Even if your going to stay long term in a house ,why would you buy until the market corrects enough and becomes a stable market .
Bad time to buy ……… market isn’t stable ……….
Great observations Mr housing wizard. I think your #7 is very crtical to the whole picture. Why aren’t the new home sales used as comps in an existing home sale? Something seems a little shady there to me. New home sales are the real, current market situation.
In my area it is difficult to use new homes as the standard because they hide the real price through incentives. The YOY for Orange County showed a 4% drop in most categories, but a 4% gain in new home prices. I have seen $100K incentives in some communities, so the new home prices are severly inflated.
These condos are toast. I mean think about what they would go for in a normal market. Then subtract out the $500/mo HOA fees. I wouldn’t touch one if you gave it to me. The municipality is gonna get creamed. These things won’t sell for back taxes. Typically they don’t sell for taxes until 3 years accrue. Plus penalties the tax bill on a $800k condo would be $30,000-$35,000. Second in line is the HOA, even forgiving half of 3 years’ worth and you’d still owe another $10,000. So $40k to get a $800k condo for “free.” Then you resume say half taxes and half HOAs; $500/mo+$300/mo = $800/mo after $40k “down” for a FREE condo. “I wanted a T-Shirt but all I could afford was a Mammoth Condo.”
So you wouldn’t buy a condo for 40K? Come on now you are exagerrating. They havent seen 40k prices up there since the 70’s.
A car cost 40k now.
$40k down and eight hundred freakin’ dollars per month in taxes and HOAs for a recreational condo? No, I wouldn’t want to “own” one of these. Might make a nice afforable apartment for the local fry cooks but they don’t have the $40k. See the problem? If I want to go skiing 6-10 $1000 weekends would be cheaper.
Yep…Same reason we did not buy a beach house…
Its possible a ski condo would ‘break even’ and give you free vacation lodging when its not rented if you paid a certian price definitely under 300k. It only makes sense if you vacation in mammoth A LOT and are a big ski hound and like the summers there also. Part of this equation is the 25k passive loss rule for rental property being able to write off your ‘vacation’s’ effectively up to a point.
I will be looking in mammoth when prices come down A LOT. Maybe spring 2010?
If there is a significant downturn that is when you need to pick up rentals so you lock in low prop 13 tax basis like Cote’s friends who own that 2 mill+ house up there and are paying tax on a 200k purchase price. That is a cash cow, half of it due to prop 13 low rate locked in 4ever. They should thank Howard Jarvis everytime they go up there.
Yeah but, lots of “buts.” Many of these have restrictions and/or if you do rent out then crushing management fees and you are at the bottom of the priority list. And face it, you’d be at the mercy of the worst weekends etc.
I too will be again looking at mountain properties. I suspect 2009, this is unravelling quickly. Most likely a few townhouses/4plexs and a SFR for us. That way the entire costs of the “management” trip is deductible as we actively handle the properties.
Yeah spring 2009 is likely to be good entry point. I’m going to take vacations in places I might want to own so I become familiar with the areas. Arrowhead/Mt baldy might be nice, the problem is the rental income is a wildcard on all these places. However in theory the weak hands will fold fast on a vacation rental in a recession since rents will be down and its probably an alligator anyway so they all rush to sell at the same time. Spring following a ’snow drought’ there should always be lots of listings. Good luck in your search.
“Many of these have restrictions and/or if you do rent out then crushing management fees and you are at the bottom of the priority list.”
A SFH in the South Lake Tahoe, CA area that is rented out on a weekly basis (vacation rental) is subject to local sales taxes whereas the same place rented to a permanent tenat is not.
Observation for Susan Jacobsen (realtor). You said, “There is no reason not to buy. There is now more supply and less demand.” THINK before you yap, sweetheart. If there is more supply and less demand that tells me if there is no demand there will be even more supply and even LESS demand so why would now be a good time to buy?
I don’t know what the state exam is for someone to become a realtor is, but when I hear some of these realtors (who usually only quote the realtors handbook with stock phrases like “Now is a good time to buy,” or “Prices can only go up”) make comments like Susan Jacobsen, I assume you need to know the square footage of a house (Ohhh, that’s really hard! Duh.) then cut the tops off two cornflake boxes and send them into some state office with a $10 sign up fee. Bingo! You’re a professional realtor. It sure seems you don’t need too much brain power.
Mike: that pretty much sums it up! I would venture to bet that the majority even know how many SF are in an acre (43,560). It all honesty you really don’t need much intelligence to sell houses, but because of the value of the transaction you would think they should have a fiduciary responsibility to not make those ridiculous comments you mention.
Their fiduciary duty is to the person who pays them - the seller.
Yep - unless you have a buyer’s agent contract with an agent, but this is very rare. This seems to be a little-known fact. Very important!
It will be a good time to buy when prices are low.
Prices are not low now.
Reasearch for my upcoming article:
http://therealtygram.typepad.com/realtygram_blogger/2005/03/statistics_reve.html
March 27, 2005
Statistics Reveal The Shocking Truth
Behind Real Estate Agent Qualifications
The National Assn. of REALTORS® is touting membership of some 1.2 million nationwide, but not all of the rank and file are cheering. There is a great deal of discussion among real estate professionals about “thinning the herd.” Anthony Marguleas of A.M. Realty in Los Angeles, who is currently working on a book about the secrets and myths of the real estate industry, has conducted research into the time it takes to become a qualified real estate agent, versus other professions. The results, he says, make shocking reading.
Of 20 professions he compared, from pilot to plumber, from teacher to chiropractor, a real estate agent could qualify to sell homes as a professional to the unsuspecting public with a mere 48 hours of training (in California; other states vary). The next lowest was an esthetician or beautician, who required almost 12 times more training: 600 hours, followed by a police officer, required to complete 1120 hours of training to qualify for their job. A hair stylist has to complete 1500 hours of training, a chiropractor 3840 hours, a CPA undertakes 5980 hours. Says Marguleas:
“It confirms the beliefs that the public has about the generally low level of professionalism that is still rampant in the real estate industry. Most people consider a ‘professional’ to be an ‘expert’- someone who has undergone specific training for their career and has a certain level of knowledge and experience too.
“The fact is that many people are becoming real estate agents with a minimum of training — because the industry makes that possible — in order to make a fast buck. Many real estate agents don’t have much grasp of the business at all, let alone the intricacies: keeping on top of changes in legislation, for example. The typical real estate agent probably started out in another occupation and either wasn’t making enough money, lost their job and couldn’t find another in the same area of business, or just decided to ‘give it a go.’”.
“In California, the number of REALTORS® has increased 44% in the last five years. Now there are almost 400,000 people with real estate licenses in California, 66,000 of them in Los Angeles. “In the early part of 2004, the number of real estate agents in Los Angeles outnumbered properties for sale at a ratio of 7:1. These figures make for a cut-throat industry.”
Given that real estate agents are assisting people with the most important — and usually the most expensive — purchase of their lives, Marguleas believes that the training to become a real estate agent should, at the very least, be equal to that of a stock broker (1920 hours).
This is a dead end. Why not investigate the fake bids as Louie below has pointed out. I bet we catch a ton of realtors pumping up prices with FBs. Shoot I keep hearing about these multiple offers from realtors but can never get anything of out them.
I have been pondering the idea that “it is different this time.” It seems pretty obvious that the runnup was caused by a change in lending standards. I remember telling my wife that we couldn’t afford a house, when in reality; we could have easily gotten a loan for whatever we wanted. It would have been more accurate for me to say that we couldn’t afford a home on terms I would find acceptable. That is still true today.
To buy a home at today’s prices with today’s toxic financing terms, you have to believe the person to whom you are going to sell the home at some point in the future is also going to use these financing terms. If those terms are not going to be available (which I think is likely), the value of the house drops significantly.
But what happens if the new “toxic” loan terms are a permanent addition to the marketplace? If this is the case, home prices will not crash (correct 15% maybe, but not crash 40%). Yes, there will be bankruptcies and foreclosures as the sub-prime lending market develops new standards and screening criteria for its applicants, but this will be a minor shakeup if potential buyers still have access to interest-only and negative am loans. As long as these terms are available, the market will continue to be overvalued.
When I hear people talk about how great Orange County is and how everyone wants to own a home, etc., I hear them conflate desire with demand. We all desire a lot of things, but “demand” can be measured by the amount of dollars we are willing and able to put toward something. The change in financing terms allowed us (collectively the market) to put a great many more dollars toward home ownership without taking any more out of our pockets (same payments). If these terms dissappear, the amount of money we are able to put toward home ownership will decline, irrespective of any changes in our desire for home ownership.
IMHO, the key event to watch out for in the coming correction is whether or not there is a drastic change in financing terms. If there is not, the market will decline 10% - 20% and remain “permanently” overvalued (at least relative to the old paradigm of financing). If however, the flood of bankruptcies and foreclosures causes a tightening of credit terms, the market will likely experience a complete meltdown of between 35% and 50%. And I suspect this decline will be quicker than anyone imagines because the downward momentum will be overwhelming.
The thing is that if these loans turn out to be a permanent fixture then by definition they aren’t toxic. The problem is that we will continue to extend credit until the the system crashes. When I was a rocket scientist we called this testing to destruction. Fun stuff when you get to break entire airplanes and blow stuff up (yes, I got paid to do this) but destructive loans are going to destroy lives. It isn’t going to stop or even plateau, it will get worse until it snaps.
Well, it looks as if we might be getting some indications that the system is buckling. Last week I received the tuition papers for my kids’ private school. To my amazement, the papers came with a loan application. I was so surprised I dropped all the papers on the floor. This is a private elementary school. I would suppose we could all agree that it is a major expense that you make with “real” money, especially since there is the option of sending your child to public school. But it looks as if so many parents were asking for info of this type that the school just decided to save them the phone call and include the info with the tuition papers. My kids have been in this school for years, and this is the first time I have seen this.
I understand private school when appropriate or necessary but taking on debt to do it? That’s so wrong. That’s encumbering your kids not freeing them. I basically paid extra for my house location so that I could avoid paying tuition. Tall order in California where the best school districts are merely adequate by the standards of most of the nation. Tougher for me as my mom was once a Massachusetts education standards officer.
Loans for elementary school? Somebody needs different priorities.
It’s not that paying to give your kids the best possible education is a bad thing. It’s that it’s a continuing expense. Borrowing for college; you’re paying for four years of expenses by spreading the cost over more than a decade. But if you start borrowing for your childs education in grade school, when will you pay it back? Your kid will have 12 years of grade school. You simply can’t really spread that out much more. If you can’t afford it, than you can’t afford it. Borrowing isn’t really going to make it any easier.
Robert and Jim, you’re totally right. That’s why I was so taken aback. For us, the decision to pay for private school was a difficult one, and it did have some influence in the fact that we didn’t buy a house or move to a bigger rental. But we preferred to have education as a priority rather than the nice house. What we did understand was that this was a choice between two options, but I suspect too many people want to have their cake and eat it too. At today’s prices, deciding to go with a private school AND a mortgage AND the big SUV AND living in SoCal AND expensive vacations means that you either make close to half a million per year or that you are bound for ruin. Even as I am writing this, I am realizing how ridiculous it sounds, but there it is, that’s how much money you need to pay a traditional mortgage for a house that cost 1.3m (and I’m being conservative), lease 2 large SUV’s, pay tuition, go on vacation and still manage to pay for groceries (and don’t forget the nanny). It’s amazing how totally out of wack it all seems. How many households with two working professionals can you think of who bring in that kind of money?
Hey, maybe they’ll offer 100 year student loans for my 4 year old when he’s ready to 1st grade.
IrvineRenter wrote:
“IMHO, the key event to watch out for in the coming correction is whether or not there is a drastic change in financing terms. If there is not, the market will decline 10% - 20% and remain “permanently” overvalued (at least relative to the old paradigm of financing). If however, the flood of bankruptcies and foreclosures causes a tightening of credit terms, the market will likely experience a complete meltdown of between 35% and 50%.”
I think you are right. The main thing to watch for is which of these two scenarios plays out in the end. No one really knows. That’s why now is the time to sit tight and watch things closely. In the meltdown scenario, I would be a buyer, but I don’t see that happening (yet) in LA. OTOH, the meltdown scenario is so scary that I find myself wishing for the “softer” one, just for the sake of everyone’s sanity.
The human cost of what is coming makes me sad as well. The tech bubble took its toll on people, but that will be a minor inconvenience compared to what a housing market crash will bring. When stock prices tumbled, many people lost their entire investment portfolio, but the brokerages sold out the positions before people went underwater: there weren’t many bankruptcies or people thrown out on the street. There is no “stoploss” exit for housing prices, and the leverage is much more extreme.
Any FB who is 100% financed could easily get $200K underwater or more. They will lose everything. After foreclosure, the lender will go after all their personal property, savings, investments, etc. Bankruptcy will be the only alternative for the vast majority of these FB’s. Think of all the stress, lost dreams, broken marriages, and suicides: it is almost too much to bear (no pun intended). At the beginning I will feel some shadenfruede, as will many other people, as the greedy idiots get what they deserve; however, as this drags on and impacts friends and family members, it will just be sad.
I wish I could see a good way for this to end, but right now, I just see pain and suffering for a great many people.
I wish I could see a good way for this to end, but right now, I just see pain and suffering for a great many people.
IrvineRenter, and the worst part of it is most of them have no idea what they are in for. There is an element of shame that comes to play with losing a house that did not seem to play a part during the dotcom bust. It had just been a bad investment, and some people were stupid enough to play with rent money. This time it’s going to hit where it hurts the most.
Good. They FBs deserve it.
The main thing to watch for is which of these two scenarios [one of which is permanent availability of toxic loans] plays out in the end. No one really knows.
Actually, it is impossible for 0 down, neg-am loans (in particular) to continue to be made indefinitely, as that would require house prices to go up faster than interest rates forever, or the ultimate lenders to knowingly make loans that could never be paid back. Once the knowledge of the unsustainability of these loans is widespread enough, it will not be possible to find suckers investors to fund them.
I guess the strikeout HTML code didn’t work: it was supposed to say “suckers” crossed out followed by “investors”.
Irvine renter,
You raise a very important issue. I happen to believe the toxic mortgages are here to stay. If they took away all these new mortgages that created the bubble there would be disaster, soup line scenario. Buying a house has become like buying a car, just give them the payment and thats all that matters. Look at ford motor. I always here about all there problems but never hear that the cost of their cars might be way to high.If they dropped their prices they might do a lot better. I will not pay 20-30k for a car that depreciates as soon as you roll off the lot.
arizona: personally I think the toxic loans will go away as more sub-prime lenders go under and the number of foreclosures rises. But even if they did stay, who is left to buy at these prices? It sounds very simple I know, but we have borrowed way too much from future demand.
I think prices will come down but I just cannot see these new creative loan programs disappearing.This is just my opinion and I might be wrong.Seems a lot of subprime folks are rolling over but that is due to competition. Too many folks in the business during the boom.
Exactly. When mort buybacks, foreclosures & burned MBS holders become commonplace next year, the toxic-loan spiggots will be shut off quickly.
I think we need to lobby congress to regulate the industry better and MAKE the toxic loans go away. Giving a huge loan to anybody who can steam a mirror is a disaster for our national economy and creates these bizarre situations. I’m hoping congress will do something during this crash, isntead of just caving into K Street.
Hopefully the fake multiple bids will also go away.
This hit the fan in Australia. Be very careful when realtors tell you there are multiple bidders. Its a way to drive up prices with out any confirmation and max commission. Buyer never knows what hit them.
http://www.smh.com.au/news/national/dummy-bidders-now-face-55k-fine/2005/10/29/1130400400817.html?from=moreStories
Dummy bidders now face $55K fine
By Michelle Singer
October 30, 2005
The Sun-Herald
Tougher dummy bidding laws were introduced to the real-estate industry yesterday on one of the year’s busiest auction days.
The NSW Government yesterday announced dummy bidders would be penalised as well as agents or auctioneers who participated in collusive practices during the auctioning of a property.
Fines for breaching the dummy bid law will also increase to a maximum of $55,000.
Fair Trading Minister Diane Beamer said introducing heavy penalties for people who make dummy or false bids during an auction would help strengthen the industry.
“We decided to introduce amendments to the existing laws to make them clearer,” Ms Beamer said.
“We think changes lift the level of consumer confidence in the auction process. These laws also help lift the reputation of real-estate agents.”
Penalties were introduced in September 2003 as part of sweeping real-estate reforms that aimed to improve the industry’s transparency and ethical standards, after concerns from buyers and sellers on the practice of bidding and estimated selling prices.
add to prior comments
“The numbers tell the Mammoth Lakes story: There are 217 condos listed for sale and 220 licensed realty agents trying to sell them.”
“The 2006 fall buying season was as flat as a dying aspen leaf. Only 124 condos and 20 homes were sold from June 1 to Nov. 1. That compares with 214 condos and 53 homes in the same period last year.””
I sure bet the realtors in each case were saying there are multiple bidders.
Will we have a fair and open market?
I have refused to buy because I would not use this kind of financing. I wonder at what point you just accept that is how it is done now and jump on the bandwagon? I have a hard time imagining me accepting the idea that debt is something you permanently service. Am I not simply renting from the bank at that point with the hope of some upside equity participation? When does debt go into retirement? Don’t we need to pay off loans anymore?
I may rent forever, and I am OK with that.
Maybe there will be a time to jump in the bandwagon if prices drop significantly and become proportionate to rents. If the money you “lose” monthly on rent is equal to the money you “lose” paying for your house, then I guess it would be OK. However, the big caveat is that prices have to come down to that level.
I came across a real estate flyer a few weeks ago that showed a McMansion for sale for $1,250,000 or for lease for $3,500 a month. The cost of ownership is more than double the cost of rental. We have a LONG way to go before those numbers balance.
Agree with you. I see many, many situations in different parts of the country where the asking price for the property is 20x to 40x the annual rental fee, when by traditional standards it should be 8x to 12x. Sometimes I wonder if an aging population is part of the problem: older people are more likely to put a premium on “owning” so they won’t get jerked around too frequently. I see this among my clientele. The least affluent would rather own a tiny mobile home than rent a decent apt.
Toxic loans aren’t toxic if they follow the Federal underwriting guidelines and the borrower is fiscally disciplined.
Oops, that rules out 80% of the population.
My bad.
IrvineRenter, you have put my thoughts into words. I doubt the theory that housing values will deflate to any historical norm for based on psychological exhaustion or the lack of GF’s. The dream of real estate wealth creation is all American middle-class society has left to cling to. The country was built on the idea that you could work and get ahead with each progressive generation - that has stopped and is reversing.
The dream will not die willingly. For the bubble to deflate significantly, buyers would need to be forced out of the market by being denied credit. Historical lending standards would need to be reestablished. Will that happen? I don’t know. The up front fees made on sub-prime loans are very high. Could the losses by forclosure be factored in and the result still profitable for the lenders?
One sign that this is a possibility is the marketing term, “ownership society.” In reality, this process represents the opposite, thereby the need for marketing verbiage. It is in reality a process toward a new “sharecropper society,” where little is ever owned by the masses. In their quest to own, the masses are now perpetually owned by the bank.
When I was in my late teens (late 80’s), I had a credit card with a $300 limit. After years of responsible payments, the limit was gradually increased. Today’s young people without an established credit history are being given an astonishing amount of unsecured credit.
When auto leasing became popular, I thought it was completely absurd and doubted it would catch on. Now, leasing and a never-ending monthly payment is the cultural norm and is presumably profitable for the lenders.
Could the financial markets have determined that this “new paradigm” of lending standards is ultimately more profitable? The closure of some sub-prime lenders is the most promising development I’ve seen in the past few years, but could this just be consolidation (as would be expected)?
The two unknowns that keep me awake at night as I rent and save my hard earned pennies:
- Will the new lending standards becoming permanent?
- Will inflation/decline of the dollar punish the savers?
Some people think I am “throwing my money away on rent,” but I always felt I was throwing my money away when I paid interest. I see no benefit to paying interest, and the cashflow drain is tangible. If the “cost” of home ownership is perpetually throwing my money away on interest, I will probably choose to rent forever. Right now, renting is certainly less expensive.
The government subsidizes your interest payments (by tax deductibility) but not your rent (unless you are poor). But, in the current situation, even the highest income-tax liability does not justify the owning/renting differential.
Bzzzzt. Landlords deduct their interest payments thus lowering rent. People absolutely refuse to believe this. The HMID is one of the most misunderstood tax policies. The HMID exists to level the playing field twixt owner occupiers and landlords w/tenants not to give owner/occupiers an advantage.
You guys are both right. My little rule of thumb is that the mortgage deduction about covers my property taxes, insurance and HOA, so when rents equal mortgage payments, things are approximately at parity. We are currently nowhere near that level.
If they ever did eliminate the HMID, you would see a lot of (smart) people establish flow-through tax entities to own their property and deduct the interest that way. The HMID does level the playing field between owners and landlords.
HMID?
Please elaborate…
HMID = home mortgage interest deduction
Housing Mortgage Interest Deduction?
“If they ever did eliminate the HMID, you would see a lot of (smart) people establish flow-through tax entities to own their property and deduct the interest that way.”
My guess is no. IRS regs would probably close up that dodge.
“Will inflation/decline of the dollar punish the savers?”
It’s seems like everyone ass..sumes that mortgage interest rates will always be
Sorry, bad tag.
Will inflation/decline of the dollar punish the savers?
It’s seems like everyone ass..sumes that mortgage interest rates will always be less than 10% for the next 20 years. Just how may houses and at what prices will SELL if interest rates go beyond 10% ????
10% interest rates would be a complete catastrophe for the housing market.
And an absolute boon to renters who have money making 5%, currently.
There is clearly an advantage in these scenarios for the bank. They own the house/car, receive an ongoing income stream from the asset, yet have no liability involved nor any of the carrying costs that go with ownership.
Imagine being a property manager, owning rental units and collecting the rents without ever having to do cleaning, maintenance, landscaping, finding new tenants, doing credit checks, evictions, etc. Sweet!
Paul
Regardless of what sort of loan terms are available, I don’t think prices can be sustained when it costs a great deal more to own than to rent. In such circumstances, no one would choose to buy unless they expected substantial appreciation, enough to make up for the differential between renting and owning.
At this point, who expects that kind of appreciation?
This is why prices will fall, even if interest rates go to zero.
I agree. Without the expectation of appreciation, owning becomes a bad choice at more than 3x income. And very clearly so.
When RE transaction costs alone surpass annual after tax income of homeowners (+/- 40K), prices can only go up, or down (to long-term price/income levels). They cannot remain stagnant.
“It would have been more accurate for me to say that we couldn’t afford a home on terms I would find acceptable. ”
You have hit the nail on the head. Anyone and everyone who wanted a home “at all costs” has done exactly that.
Those of us who know better (and who are fiscally conservative) will wait and buy when fundamentals adjust back to long term values.
We will buy value while the herd is slaughtered.
“Toxic” loans simply shift the payment schedule into the future. This is borrowing from future demand. This results in a temporary surge in demand but a long term decrease in ability to pay. Thus you get a bubble followed by a severe crash.
Higher prices can be supported long term only by fundamentals - incomes and interest rates. Tweaking the repayment schedule does not change fundamentals. Look what happened in Japan.
I will also say that once the market decline becomes obvious enough even for the cowbows running the hedge funds and the Chinese Mr. Market will do away with toxic financing.
“Toxic” loans simply shift the payment schedule into the future. This is borrowing from future demand. This results in a temporary surge in demand but a long term decrease in ability to pay. Thus you get a bubble followed by a severe crash.”
Well stated.
What’s a cowbow?
Another subprime lender down : HMIC
To All HMIC Business Partners,
It is with deep regret that we announce Harbourton Mortgage Investment Corporation will cease operations effective the close of business today, December 20th, 2006.
We are extremely proud to have had the opportunity to serve our Brokers, Investors and Business Partners and wish everyone much success in the future. Provided below are areas of contact:
http://www.hmic.com/
Take the money and run. These people are dropping like flies.
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20061208005520&newsLang=en
I thought one of the reasons for these lenders dropping was their inability to handle the cash demands associated with the forced repurchase of bad loans?
Out of curiosity, who handles these bad loans if these lenders close shop?
The MBS holders get f’cked.
I suspect that you’re right, but I predict legions of lawyers beating the bushes looking for new bagholders.
The amount of ignorance here is staggering. If a loan in an MBS pool goes bad, several things happen.
0) The master servicer notifies the special servicer of a problem.
1) The special servicer makes cash advances to the pool while the situation is being investigated.
2) A workout plan is made by the special servicer and approved by the master servicer per the PSA.
MBS holders of the investment grade tranches don’t see any of this.
What happens is that eventually the equity/below investment grade tranches get marked down after the SS says the situation is hopeless and the special servicer takes care of the loan by selling it or renegotiating it.
Oh, boy, MarketParticipant, I probably get about 10% of your explanation, but I guess the gist of it is that lawyers are in for some boom years….
While I bow to your industry knowledge, I think you’re being a bit optimistic here.
Surely if loans in a pool continue to go bad, at some point all the tranches get downgraded. The MBS holders would certainly see that.
“What happens is that eventually the equity/below investment grade tranches get marked down after the SS says the situation is hopeless”
Read: “The MBS holders get f’cked”
“What happens is that eventually the equity/below investment grade tranches get marked down after the SS says the situation is hopeless and the special servicer takes care of the loan by selling it or renegotiating it.”
So who wants to buy a non-performing loan? Or maybe the renegotiated loan will have payments lower than the original interest only payment? The smart money made it to the exits long ago.
Another one bites the dust. Guys that started these things weren’t dumb. It is a clear screw the public and disappear shame.
I hope they know if things get too bad their may be some people who may look some of these guys up though.
HMIC is active in over 30 states, and will fund approximately $1 billion in 2005.
This stuff makes me sick.
Wasn’t there a movie called “The Punishser”?
Here is your first million. Write the screenplay for a sequel in which a FB stalks the RE agent, appraiser, and mortgage broker who helped “trap” him into an exotic loan that has put his family out on the street.
If you are a FB you are as much at fault (for being stupid) as the industry who were only too happy to accomodate you….but a LOT of people would really identify with a movie like this.
Release date fall of 2008…by then people will be screaming for blood.
Good one, Moose, it would be a little like that Michael Douglas movie some years ago, I can’t remember the name of it, or you could give it the “Wall Street” angle and watch how everyone gets screwed but the protagonist lands on his feet, maybe to be stabbed by a FB at the very, very, end. There are very few happy endings in real life, so we need Hollywood to give us one…
Merry Christmas to everyone!!
Did I read that correctly?
A 19 year old being given a loan for a $400K house?
That is one for the books. I’m more than twice his age and I wouldn’t buy a 400K house.
Ben, if you’re keeping stories to read after this bust is over, that’s got to be one you keep.
A slightly older friend of mine has a house in Gilbert he bought before the bubble. He advised me to not put more than $200,000 into a house. He makes some sense. I went beyond that conservative advice and put $0 into a house. Renting for the next few years!
This has to be a troll on the SD CL board:
http://forums.sacramento.craigslist.org/?ID=54791946
How do I find a good appraiser 12/24 13:29:33
I need to refinance my home, but the appraiser I hired says he can only put that it is worth $525, but I need it to be worth $575 because I have to pay for my daughters wedding this summer and my son starts college next fall.
I am willing to pay and extra amount for the appraisal if you can get the full appraisal amount, it is just for a re-finance
DR Horton is claiming they will raise prices in sacramento. Anyone thinks they are bluffing ??? Any real facts backing up ???
Cool.
Cow_tipping.
Nothing is selling.. DR Horton wouldnt sell a dog house with that attitude.
All I ever see in these reports when talking about relative income to prices is, “Who can AFFORD a house?”. What about the people who are smart and can afford a house, but won’t pay the inflated prices because they know they will lose money in a falling market? Isn’t common sense a factor anymore or does the realty business consider everyone is willing to hock their futures, and their first born just to rent a house from the mortgage lender?
Speaking of smelly developments, near Chino Hills Californa, near Corona, near Norco there were developments right next to dairy farms. The stench was paralyzing some days yet these developments were selling bubble houses for 400, 500k. I can’t imagine the embarrassment I would have felt inviting someone over to my “stinkpot” had I owned one.
Yup, well we went up I-15 thru there last week…..the last dairy farm is shut down now & covered w/grafitti. The “Stinky road” as my kids would call it is almost all tract homes & industrial parks. Including one with a “FOR LEASE” sign out front, for 1 million sqft.