“Blindsided By The Turn In The Market”
The Record reports from New Jersey. “Two years ago, builder Meron Sason paid $1.5 million for a small Cape Cod on a wooded lot in Saddle River, tore down the home, and started to build a luxury stone-and-cedar house. Now, with the new six-bedroom house on the market for $3.87 million, Sason has run smack up against the reality of a new housing market.”
“The supply of houses in North Jersey with an asking price of $2.5 million or more is so high that it would take about 2½ years, at the current sales pace, to sell them all, said Jeffrey Otteau, an East Brunswick real estate appraiser.”
“Sason is afraid he may not be able to sell the house at a profit. ‘When we started, we thought we’d be able to sell for $4.5 million,’ Sason said. ‘Then, the profit would have been OK.’”
The Baltimore Sun from Maryland. “Last year was a turning point, the region’s first full year of deceleration after a string of double-digit annual increases that had boosted average prices 80 percent since 2001. Listings have mounted, more homes are sitting vacant and some homeowners are juggling two mortgages.”
“Frances Bond got blindsided by the turn in the market when she bought a townhouse condominium last summer, never dreaming it would take months to sell her Stoneleigh home of 41 years. She listed the Baltimore County property in July, didn’t get a contract until December and won’t settle until Wednesday.”
“‘I could not believe my sense of timing was so poor,’ said Bond, ‘because when I bought the condo, I didn’t quibble whatsoever. She was asking for a certain price, and I said, ‘OK, I’ll take it.’”
“Sales plummeted more than 20 percent in the county section of her ZIP code last year. For a while, she despaired. She buried not one but two statues of St. Joseph in her yard. In the end, Bond lowered her price about $68,000 to $482,000, not as much as she had expected.”
“Melanie Kelleher put her family’s Canton home on the market in June after buying a new house in Baltimore County. Despite the Canton home’s Jacuzzi tubs, marble floors and rooftop deck, it got no offers until last month, after she had dropped the price three times, $76,000 in all. She sold it for $353,000, relieved to stop paying two mortgages.”
“The average price rose 3 percent in Canton last year, but Kelleher thinks values really declined when comparing similar homes. Hers was appraised at just over $400,000 in fall 2005.”
The Tribune Review from Pennsylvania. “The steady, stable Pittsburgh area housing market hasn’t suffered the bumps and bruises that have battered other, higher-flying U.S. markets and the nation as a whole. ‘There definitely has been no burst of the housing bubble in Pittsburgh, because we haven’t had a housing boom,’ said George Hackett, current board president of West Penn Multi-List Inc.”
“Veteran real estate agent Lou Ryan listed a home at 132 E. Crafton Ave., Crafton for sale twice and sold three times, each time for an increased price. ‘The first time, I sold it for $93,500 in 1990,’ she said. ‘Then, in 2003 it sold again, this time for $134,000.’”
“The next time, she listed the home in February 2004 and just over a month later had an agreement to sell it to the current owners for $175,000.”
“Richard DeKaser, chief economist for National City Corp., oversees compilation of a national survey that at the end of the third quarter of 2006 found the Pittsburgh market to be 3 percent ‘undervalued,’ and thus at little risk for a major fall.”
“‘That doesn’t mean prices are not soft,’ he said. ‘In fact, they are.’”
From WCPO 9 in Ohio. “If you own a house, you need to know that a lot of homeowners are finding it harder to hold on to that home. The foreclosure rate is so staggering in the Buckeye State, it’s being called an ‘epidemic,’ and it’s effecting even those of you who can afford your home.”
“John Hamilton has made a second career out of buying foreclosed houses and fixing them up for renters. ‘It was like once every three weeks an auction,’ said John Hamilton with J&D Heritage Investments. ‘Now, it’s like every week and sometimes twice a week.’”
“The 9News investigation showed about 200 houses were foreclosed in Butler County in 1995. In 2006, the number jumped 550% to 1,300. The situation is similar in Hamilton County, where in 1995 there were 1,300 foreclosures. In 2006, there were 5,700.”
The Dayton Daily News from Ohio. “Homes sale prices in the Dayton market have reached a three-year low, according to the Dayton Area Board of Realtors.”
“In January, 2,460 homes were placed on the local market, for a total of 8,919 homes, up 192 units from December’s listing. The Miami Valley experienced a 5-year high for inventory figures in November, when 9,656 homes remained on the market.”
“‘We’ve had a special blend of problems here with foreclosures …, but what has been at the forefront is the very large inventory which is problematic for home prices,’ said analyst Barry James. ‘Locally, the problem has been that we had so much building going on for so long.’”
“Officials with the Home Builders Association of Dayton and Miami Valley have said builders have stopped building homes on speculation due to the large number of unsold homes. ‘To a large extent, I think we’ve gone through what the rest of the country is getting ready to go through, and in our opinion, we’re not in the dire straits other places will be,’ James said.”
“…and in our opinion, we’re not in the dire straits other places will be,”
Like San Diego!
Or Miami/Ft. Lauderdale, WPB? Or pretty much all of S. FL in general? But I thought that we were special? Everyone wants to live here!!
Or the Inland Empire, check out this find on the master planned community of Tuscany Hills in Lake Elsinore. 11 homes for sale on one street. But better yet, 6 homes in pre-foreclosure. Mostly all empty of course.
Enjoy
A Flipper’s Delight: Tuscany Hills
I swear the first picture looks like a cemetary. Coincedence.
That website is a riot, how can all of these people that are still RE bulls see what is coming?-(coming to a town near you).
Sorry, I meant to say how can they not see what is coming?
yeah, they look like tombstones…wonder what that means
Agree with the cemetery comparison. As for the flip statistics, the one that’s really staggering is the person who paid $650K in Aug 2006 for a house that had sold in Aug 2005 for $570K. Was the last flipper blind and deaf, or just dumb?
Those are some truly fugly houses.
Notice the crafty, slippery, flipper at 33 Via de la Valle. Kinda looks like flippy came up with a 20% down payment in 2004, then refied in 2005 scarfing up some cash in the process. Alas, it was all in vain, as the nod has been sent, and flippy has joined the rest of the school circling the drain at goo lagoon.
OT, but with so many flippers, subprime borrowers, etc going into default/foreclosure/bankruptcy and destroying their credit, doesn’t it kind of bake your noodle that their credit history will be wiped clean of this mess in 10 years …
just in time for the next RE bubble.
Wait a minute!
You have Tuscany Hills in CA. I’m in Florida and we have the Lakes of Tuscany. And then there’s Italy? But of course we all know that’s in Epcot in Orlando. It’s all so confusing!
the third quarter of 2006 found the Pittsburgh market to be 3 percent ‘undervalued,’ and thus at little risk for a major fall.
and yet they’re falling
they tax you up the booty there
I love how the MLS president says they won’t bust because they didn’t boom, and then someone else gives an example of a home sold for $134K in 2003 and $175K in 2004. Sounds like a 30% increase in one year. Whether or not value was added, that sounds pretty bubbly to me.
Reading the entire Baltimore Sun article shows the uneven nature of the decline. Some areas even had price increases. Then there’s the Pittsburgh article that says prices are still steady to rising slowly.
Which brings me to this question for the blog.
What in your opinion will constitute the end of the decline? What measure, or combination of measures, will have to reverse their current trend? Median prices? Number of sales? Number of homes on the market? Also, will we be seeing continued weakness in places like California and Florida long after the national aggregate numbers turn positive?
IMO, the supply and demand is functioning as expected; if your market is over-priced, it will become overbuilt.
‘Locally, the problem has been that we had so much building going on for so long,’ said analyst Barry James.’
And that’s in Ohio!
This can’t be fixed will simple price changes. Places like the Miami, FL with the condo glut, may fall into disrepair before the market absorbs the oversupply. Builders will continue to build until prices drop below breakeven, so this happy talk and ’sticky pricing’ is looking to make matters worse.
We will see out-of-kilter bust prices just as during the boom.
Prices were flat in Florida for something like a dozen years, after the last bust. I still remember my grandmother selling her nice tract house in Melbourne around 1999. and only getting $80K for it.
Anyway, I would say the bust is over in an area when you at least see a majority of the following:
- Foreclosures dropping for 4 consecutive months
- Lots of homes avaliable for 120x equivalent monthly rent
- Homes easily available for 4x the gross median income
- Mortgage payments 27% of net median income with a fixed rate and 10% down
- You don’t know anyone flipping houses… and people even joke about buying them as speculative instruments, they way we might laugh about Worldcom, Qualcomm and Erricson today (”Really? How much did you get stuck with? Hah ha ha. Those were the days, eh?”)
In 2000, bought a nice little concrete block home with a garage and about 3/4 acre in Tampa area for $80,000.00. Modest but nice middle class neighborhood. When I can do that again (or buy for even less, taking into account the insurance situation), I’ll know we are back to normal.
Good question:
My specific answer is:
a) When the inventory is roughly 5 months
b) When loans are made only to people who could reasonably be expected to repay - after all resets
c) When prices are flat or increasing at less than inflation for 6 months
d) and when our president, whom I voted for twice (specifically due to the clueless alternatives), admits that his approach to this “ownership society” - opening up the debt floodgates - was completely wrong.
Thats very funny…havent you been paying attention? THE “DECIDER” doesnt ‘do’ mistakes.
LOL… it’s a good thing you didn’t vote for those clueless candidates. It would be a real downer to have a clueless president.
AJH
where are you getting 10x income for mort
the sites I show are 5%+ for 1 and 3 year int only arms
hate to be thick ,but what’s your calculation?
flatff, are you working in two windows at once? Your post appears to be a response to something that isn’t here . ??
Well, not often I get a chance to speak of the Pittsburgh market.
“Veteran real estate agent Lou Ryan listed a home at 132 E. Crafton Ave., Crafton for sale twice and sold three times, each time for an increased price. ‘The first time, I sold it for $93,500 in 1990,’ she said. ‘Then, in 2003 it sold again, this time for $134,000.’”
“The next time, she listed the home in February 2004 and just over a month later had an agreement to sell it to the current owners for $175,000.”
And now, in 2007, he’d NEVER get anywhere close to that amount. My first home was identical, just a mile away. Built in 1906, all brick, big, the kind of home in which the town mayor would have lived. Servant’s stairs, stained glass windows, pocket doors, French doors, huge finished 3rd floor, full length front porch with carved spindles, fireplaces in every bedroom, plaster walls, oodles of exquisite wood finishes. Also, ancient inefficient furnace, no insulation, leaky windows, one bathroom, closets so shallow you coudn’t even use hangars. This kind of home is for sale ALL OVER the older sections of Allegheny County, and in neighborhoods a lot more upscale than Crafton.
“Richard DeKaser, chief economist for National City Corp., oversees compilation of a national survey that at the end of the third quarter of 2006 found the Pittsburgh market to be 3 percent ‘undervalued,’ and thus at little risk for a major fall.”
What the hell is his point? Inventory here is outrageously high and in other month or so will be headed even higher. There are several dozen homes for sale that I pass on my way to work. Most of these homes have been for sale for almost a year now, and only ONE has sold in the last 12 months.
This market certainly has seen little appreciation in the last 5 years (1% a year is about right), but inventory is high, foreclosures are high, and condo projects in downtown and elsewhere are starting to fizzle out and switch to rental. At work I have a house listed for sale at $24,500, and I’m now wondering if I can even, literally, give it away. I have clients choking on condo projects. I have other clients reducing their asking prices, and the homes continue to sit without a bid. I have another client who is a manager for a major realty firm, who considered moving back into sales and now has abandoned that thought altogether.
The entire Allegheny County area is inundated with new home projects, precious few with starting prices under 200K. This place ain’t New York. We can’t afford these prices, at least not enough of us to soak up this supply. Every Sunday, the classifieds are loaded with open houses, at least 10x the amount that we saw 10 years ago.
There is absolutely nothing healthy about the Pittsburgh market.
‘Then, in 2003 it sold again, this time for $134,000. The next time, she listed the home in February 2004 and just over a month later had an agreement to sell it to the current owners for $175,000.’
My calculator show a 30% increase in one year. No bubble here…..
“My calculator show a 30% increase in one year. No bubble here…..”
Yeah, but Ben, we don’t know how the home may have been updated or improved. I did the same thing — bought my first home in 1999 for $50k, spent a bunch renovating, and sold in 1992 for 79K. The brand new 4/3 home I bought in 1992, and in which I currently live — purchase price 178K. Current approximate value — 240K (tax assessed value is 220K). That’s nominal 2.3% per year, and has depreciated in real terms after inflation. This is far more typical of this area.
“in which I currently live”
Well, that’s technically inaccurate.
Long story …
Ex wife occupies and you pay?
Close. Current wife occupies, I don’t, but I still pay.
“Yeah, but Ben, we don’t know how the home may have been updated or improved.”
Let’s not forget that if there *were* improvements, it depends on what was done as to if it would *increase* the value of the house. Not everything that people do is value-added. A lot of folks make that mistake when listing their *wishing price*.
BayQT~
The Pittsburgh Tribune Review article shows the Review is being very careful. Its RE advertisers have indicated that the Review may not let the cat out of the bag. These are the main supporters of the paper, those to whom it it is beholden. So the Review writes an article in which the RE party line is quoted. But in order to cover their assess as being far and balanced, they do quote the pricing history for a SFH, which clearly shows a bubble in progress. Of course, they never mention why exactly they are quoting this pricing history. Persons who do not know of the bubble will just move on, but those persons who do know will think that the Tribune is being fair, quoting both sides. Neat bit of propaganda, but that’s the news business.
I remember 2 and 3 years ago our friend in northern New Jersey telling us about all of the rebuilds. Some bigshot would come in and buy a decent house. It wasn’t decent enough. They would knock it down and rebuild and ask for a gajillion dollars. Every time we went to visit the stories got to be more and more numerous.
Those stories came to an abrupt end last summer. It changed almost overnight. There are going to be a lot of greedy “geniuses” stuck holding those multi-million dollar bags. It couldn’t happen to nicer people. I wonder how Carmela Soprano is doing on her “spec house”.
The NT Times this morning reports a thaw in the NY market, e.g.:
““Even during the slowdown, about 24 percent of all single-family home sales in 2006 were in the $1-million-plus range,” he noted. “Westchester’s high-end market has always shown strength.”
He speculated that the thriving condo market and lower-than-average unemployment rates in Manhattan were enabling some owners there to sell and begin their search for homes in the suburbs”.
http://www.nytimes.com/2007/02/25/realestate/25wczo.html?ref=realestate
Oh yes, I think we know your theory that all high-end stuff near New York will just keep soaring no matter how bad the economy gets. Thank you for once again making that obvious.
Westchester is right there with Fairfield County in Ct., in terms of withstanding market dips. At least the fancy towns.
Martha Stewart is coming out with a line of “Katonah Collection” furniture. I think this will add 2-3% to home values in Katonah, NY - just as the Clinton’s arrival did for nearby Chappaqua. It’s all about cachet. Westchester has it. Some place out in the Bakersfield suburbs doesn’t.
This is all local. Always has been. Always will be.
I wonder how Carmela Soprano is doing on her “spec house”.
I find it funny how the Sopranos have addressed both bubbles - Carmela also played the market in the DotCom bubble. The only problem is, by the time they get those episodes out, the bubble has already finished and her situation is a foregone conclusion.
How does one, find these auctions? Just planning ahead for the future. I doubt you can get any significant deals currently but in another year, we might see some real capitulation.
Be careful with these - they seem to be mostly shams by brokers to draw in novices.
I would suggest that you figure out what property you like, estimate its value at today’s prices, and then set yourself a top price of between 30 and 50% of that number (with 30% being for markets that are totally insane). Don’t bid a penny over that number - and ALWAYS keep in mind that there will likely be shills (i.e., people planted by the owners) that will try to get you into a bidding war. Also make sure you get clear title.
I’ve never been to one - but they look like great entertainment. I’d expect others on this site to have much better insight and advice.
“‘To a large extent, I think we’ve gone through what the rest of the country is getting ready to go through, and in our opinion, we’re not in the dire straits other places will be,’ James said.”
According to Jim - Ohio has bottomed out….and the rest of the country will play catch up.
It’s important to recognize that there isn’t one bubble, there are thousands of them. Each is a different size and each hit at a different time. Some overlap with other regional bubbles, but they are different bubbles. In some areas, the bubbles have already popped. In some, they are just now at peak inflation. Some are big, some are small. That’s what makes it so difficult to determine anything based on national trends.
You will get a lot of grief saying that on this blog. Anytime someone points out how their market might be faring better than another, they are assaulted with “It’s different here”.
Well as you point out, it’s basically different everywhere.
That goes for within the same market too.
When do the Class Action lawsuits start ?
new six-bedroom house on the market for $3.87m… ‘When we started, we thought we’d be able to sell for $4.5 million,’ Sason said. ‘Then, the profit would have been OK.’”
Anybody else outraged? There would be a small profit but profit nonetheless at $3.87m. If this speculator had gotten $603,000 more profit that qualifies as “OK.” Of course even at that this jerk is lying about costs and profit. $1.5m lot, two years of carrying costs, fees and the new house do not add up to anywhere near $3.87m. Low $3m at best and that’s with high building and carrying cost estimates. Crying all the way to the bank no doubt.
Yeah, I have been seeing alot of seller comments like this over the last few months on this blog. Even though they paid, lets say(for example) 100K 5 years ago, and similar homes last year were selling for 500K. Now maybe the market is at 350K, somehow this seller feels he is out 150K even though he can make a profit of 250K, still he is out raged, he almost feels he is entitled to the entire 400K because some buyer was foolish to pay it last year, hilarious. This kind of reminds me of the tech bust where after the first decrease people held on when they could have sold for a huge profit and followed the market right into the ground, will this happen again?
will this happen again?
I sure hope so!
“Now maybe the market is at 350K, somehow this seller feels he is out 150K even though he can make a profit of 250K, still he is out raged, he almost feels he is entitled to the entire 400K because some buyer was foolish to pay it last year, hilarious.”
Yeah, that kinda psychology is a killer. These sellers saw a greater profit than they can now realize, and banked it. In their minds, its already been spent, or invested to fund whatever else they wanted to do with their lives. It’s pretty tough to make that adjustment back to reality.
“…he almost feels he is entitled to the entire 400K because some buyer was foolish to pay it last year…”
Entitlement. Folks can’t stand it when their “entitlements” are cut whether it’s Social Security or the high-watermark price in their neighborhood. The reality is that no one is entitled to anything.
Slightly OT - I’ve been reading this and other housing blogs for years, beginning in ‘05. Back then I told my wife it wasn’t a good time to buy in SoCal and we would need to wait a few years (recently married). So here we are in ‘07 with almost double the income we had in ‘05 and much more in savings, and I hate to say it but it looks like it will be a few more years. There is no way we’re buying in as the whole market begins to fall apart.
Also, because we didn’t get in over our heads in ‘05 with a huge mortgage or toxic loan that is about to reset, we have never had a disagreement over money. I believe the downturn in housing will lead to an even higher divorce rate as couples will no longer be able to tap the equity in their home to fund their llifestyle.
I really do hope “cash will be king” in a few years…
While you will probably get a shot at a lower price if you wait some, you may pay more in interest rates and have less selection.
This is not unlike buying a computer - the longer one waits, the more one gets for their money thanks to Moore’s Law. But then you never end up buying.
At some point you just jump on the train of home ownership and if you are willing to stay on board for a long time, the fare you pay today will seem absurdly low one day. Unlike a few years ago, there are now seats on the train and it’s accepting passengers at lower fares.
It’s tough to say when it will close its doors and pull out of the station. But it’s a when, not an if.
Troll alert. I don’t think you are “jumping on the train” at this point. You are jumping “in front of the train” if you buy in SoCal know. If it’s such a great deal right now, how many houses do you currently have under contract? You should be buying up everything and not letting this little secret out.
“You should be buying up everything and not letting this little secret out. ”
lol nyc i needed a good laugh
ot-driving around in queens today saw alot of open house
signs and the paper is laoded. one in particular i saw was a brand new home (real tacky looking crackerbox off the lie)
and alot of balloons (balloons always get me to sign on the dotted line) and a realtor in front looking awful lonely and bored. this should be an interesting next few months to say the least
TROLL ALERT: the train metaphor is cut-n-pasted from an identical post a year ago. I remember because it was spectacularly idiotic then, and it has not improved with time. Don’t feed the troll any more; he’s full.
Thanks for the advice. My thoughts on buying today are as follows: If a house that sold for $600K five years ago is now selling for $1.2M and the increase has been built largely on speculation (which is now gone) and easy credit (which is now dissapearing), what will happen to that $1.2M price over the next 2-4 years? Wouldn’t a person be better off renting than jumping in for “selection” or fear of interest rates rising? Also, wouldn’t it be a good idea to wait through ‘07 as $1.5T in ARMS reset and put more downward pressur on housing?
No, no, just do it. Stoutmaster said you will be okay. Remember, prices skyrocketing again are not a matter of “if” but “when” in Southern Cal. Don’t think it through because if too many people do that guys like Stoutmaster won’t be able to unload their “investments”. Bwahahahaha.
rotfl.
Or… you build up a huge down payment, realizing that Americans cannot afford today’s monthly payments. So you walk in as one of a small select group of buyers.
With the negative savings rate… higher interest rates don’t scare me. In fact, they are to my advantage from an afford ability standpoint.
I’m still spectating. I’m going to laugh watching the current playing field. Its obvious what is coming due to the recent implosion of the ABX market. Now… it will take 6 to 12 weeks for the Realtors ™ to wake up to the fact the rules have changed. Even then, in most areas it will only push them into Fear and an early bit of desperation.
Wait… be patient… very patient. This is a long slow drawn out process.
Got popcorn?
Neil
If you can at least buy for 2003 prices I would say that you’re not a fool. Still paying more than I would… but I can understand a family needing to settle in for the long haul someplace.
Definately wait 2007 out, though.
I agree. 2003 prices, while not as low as we’ll go, were pretty reasonable. If you can truly afford it (without a suicide loan, at 3x or less of income, etc etc.) and you can handle the home’s value dropping (by waiting it out or bringing $$$ to the table if you sell), and the fact that you bought pre-peak doesn’t keep you up at night, then it’s not all that bad to jump in.
Judicious1, Of course it would be a good idea wait through ‘07. Possibly through ‘08 as well. The asking prices have been very slow to come down. Just wait till the house is selling for less than 15x the annual rent. Even then, you will not be getting a bargain, but you will certainly not miss The Train. stoutmaster must be a realtor or a flipper in distress.
Not tough at all stoutmaster.
Rent ≥ Mortgage
Mortgage = 30% Salary
Price = 100x Rent
When you get close to any of these metrics you can buy if you plan to stay for a few years.
waaahoo,
Mortgage = 30% Salary —> gross, correct?
Depends on how well you want to sleep I imagine as I’ve heard both gross and net. When I was growing up I was told to spend no more than 25% income. I’m guessing if you get close to that you would be OK but I think we will undershoot this time around and you will be able to buy for 20-25%.
Tough when you are buying a house because not everyone has the luxury of waiting until the exact moment the market hits bottom. That’s why I said if you get close to those metrics and “have” to buy you should do OK if you can live there long enough for the next round of inflation.
Thanks for the clarification.
Call me conservative, but just because I can “afford” something doesn’t mean I will be comfortable buying it. I’ll wait for those other metrics (rent/own) to make more sense.
I’m all for sleeping well. Here’s a stat I just came across.
According to the Marcus & Millichap Real Estate Investment Brokerage Company, the national median rent for 2007 will be US$943.00 a month, only 60% of the median mortgage payment of US$1,566. With housing prices expected to decline further, one must ask why buy when you can rent?
And Judicious, the 25% salry rule is not so much about being able to afford a house as it is about house prices coming down to a level supported by incomes. Historically it won’t drop too much below those levels.
I like to call 27% of NET salary a sensible purchase. up to about 35% can be defensible based on your fown family situation and how much you like the house and neighborhood.
But at 27%, you can be pretty confident of being able to make the payments on part-time income during a downturn. After all, we DO plan for those possibilities, right?
How realistic is 27% net for the vast majority of people? I think I earn a decent wage but I don’t think I can pull that off. I am single with no dependents, living in San Francisco but considering relocation to SoCal. Approximate finances:
annual income: $150k (sometimes higher with extra consulting but let’s not count on it for this calculation)
federal income tax 25%: $37.5k
CA income tax 9%: $13.5k
self employment tax 15%: $22.5k
IRA contribution 15%: $22.5k
Net income: $54k
27% of that is $14.5k, or $1200/month
I pay more than that in rent. I don’t think there’s much I can buy in SoCal or the Bay Area for $1200/month, even with a large downpayment and assuming prices drop by over 50%. Yes, I recognize I have overstated my taxes somewhat, but not by the factor of 2-3 which would be necessary to make this work. And I believe my income is almost twice the median household in CA - so how many people can realistically do this?
I agree though that 30% of gross is too much - in my case that would give me a budget of $3750/month for housing but would only leave $9000/year to cover all other expenses. Anyone who takes on that kind of debt burden is nuts.
Realistically if I can keep my PITI payments below $2500/month and can afford the 20% downpayment, I’d consider buying once prices bottom out and I’m not competing with waiters and mechanics with 0% down ARM mortgages.
The taxes are clobbering you.
I know when I lived in CA and biut my first home in Anaheim in 1999, I was making about $52,000 a year and my take home pay was about 72% of that.
My rule makes a payment of $842. And OK I did bend it because I wanted a house and my mortage was $950. But the house had already risen in price quite a bit and the reason I bought was to avoid being “priced out”.
I don’t live inCA anymore, and my mortgage payment really is under 27% net nowadays.
“According to the Marcus & Millichap Real Estate Investment Brokerage Company, the national median rent for 2007 will be US$943.00 a month, only 60% of the median mortgage payment of US$1,566. With housing prices expected to decline further, one must ask why buy when you can rent? ”
I think it’s probably safe waiting through 2007 - but obviously not just anywhere, real estate being very different from locale to locale.
As for comparing median rents and median mortgage payments, I would caution you for several reasons:
- mortgages do not reflect current prices but rather those at the time the mortgage was taken less the downpayment.
- Almost certainly, mortgages represent considerably larger dwellings than rents (on average).
- You don’t get a tax deduction on rent paid
- You have less maintenance expense on rentals vs. mortgages
- You don’t expose yourself to a market downturn if you have to get out of a rental early; perhaps you just lose your security deposit
- You don’t expose youeslf to leveraged equity buildup in a rental in the event of a market upturn.
OK, end of lunch break - back onto the ski slopes from our ski on rental house.
1) rent ≥ mortgage
to me you should have purchased way before this , and I think I would live in a tent , sooner than pay someones mortgage.
2) Mortgage=30% salary
I agree this is the entrance point, and is different for each individual (# of children, age, job security, lifestye expected)
#) price =100X rent .. This metric in my area hasn’t been achieved for 20 years, so I wouldn’t wait for this to happen.
I have a son and daughter looking at first time home purchase. To me if they achieve #2 they should buy in this window, as long as it is decent housing and is not a money pit, and will retain its value in the long term. Opportunity doesn’t seem to knock that many times . It has knocked twice for me in housing, once in1981 and once in 1991. These years were far from market lows, but it was my window of no children and young children, and I had it paid down before university tuition hit. From my perspective when the window appears pounce, and it may not be in a favourable market. Just don’t consider housing a pension plan or ATM and stick with a conventional mortgage.
houses will always be bought and sold, there always will be a house out there you’ll ultimately like and be willing to live in… i thought it was always better to pay less for a house & get a higher interest rate vs. the opposite… prices are inflated, even if you get a worse interest rate in a year or so, you’ll always be able to refi when the interest rates DO come back down again… if you pay too much and the house has “negative appreciation” you’re in a worse situation, no?
I used to think this too but now I suspect the real dynamic is that incoming home buyers will be getting less house for the money in a higher-rate environment.
How do you figure thye will get less house for the money? If prices rise on low rates, they will drop on higher rates. People who have to sell will have to lower their prices to match the amount the buyers can get financed. There will be millions of foreclosures in the next few years to choose from. I am in no hurry to buy “before they run out of houses”
Just pay cash. Then, interest rates mean exactly squat.
Paying cash helps in other ways. There are a lot of financing junk fees plus title insurance, which are keyed to the mortgage amount. When you pay cash and do you own title research, there is a real savings to be found.
Cash buyers, I salute you. It’s really the only way that makes any sense. Have mentioned before, one of the best things about a cash purchase is, that if you decide to get out, you can offer seller-financing, which will bring you a better sale price. And believe me, holding a note is an awful lot less of a hassle than being a landlord.
There are many closing cost fees you can save when paying cash. I for one have never turned down title insurance on such a purchase. Call me an idiot but some things are worth piece of mind.
Not when rates are at historic lows. They bump up to 9% and you’ll be lucky to see anything below 7% for at least a generation.
Home prices will NEVER dip as much as interest costs that go from 6% to 9%.
Yeah, but if 9% interest coincides with house prices down by say 30%, then you still come out way ahead by waiting. For one thing, your 20% downpayment prior to the price drop becomes a 28.5% downpayment after the drop. (Yeah, yeah, I know, “what downpayment?”, but let’s assume for the sake of argument that you are a buyer who actually wants to do things the conventional, non-suicidal way.)
Example calculation:
2007: 7% interest, $600k house, $120k downpayment, mortgage balance is $480k, monthly payment for 30 year fixed is $3193/month.
2011: 9% interest, $420k house, $120k downpayment, mortgage balance is $300k, monthly payment for 30 year fixed is $2413/month.
This doesn’t even account for the extra money you can save toward a higher downpayment in 2011 versus today!
I guess if rates are more like 6% now, I should modify the 2007 calculation thusly:
2007: 6% interest, $600k house, $120k downpayment, mortgage balance is $480k, monthly payment for 30 year fixed is $2877/month.
The basic point I was making still holds - lower prices trump a rise in mortgage rates from 6% to 9%, if you hold the downpayment fixed.
Another point - with the lower required monthly payment, you can still choose to pay more to match the 2007 payment, thereby paying off the house earlier.
In the above example, if you pay $2877/month on the 2011 mortgage, it will be paid off in 17 years instead of 30 - almost TWICE as fast!
Don’t forget that the tax write-off will offset part of the increase.
“The basic point I was making still holds - lower prices trump a rise in mortgage rates from 6% to 9%, if you hold the downpayment fixed.”
********
I had nearly the same exact discussion with others in the SF Bay Area back in 2004 and 2005. Rates were going up and the “buy now or…” mantra was in full song.
I resisted them.
Great points about saving more in the meantime and then paying more to finish payments off sooner are right on.
Yep, and despite what the original poster said, there’s a good chance that sometime during that 17-30 years, interest rates will fall below 9% again, so you can refinance and save even more.
Not to mention the much lower risk of being underwater in case you have to sell sooner than you expected.
I don’t think a good case can be made for buying now, unless you are wealthy enough that you just don’t care about these considerations.
What a flame magnet that was. You must be famished.
http://www.troll-hundefor.no/
“While you will probably get a shot at a lower price if you wait some, you may pay more in interest rates and have less selection.”
C’mon, you should know better than this.
I’ll take the lower price, every day of the week.
Carefuly, Stoutmaster, suggesting that someone might actually want to buy a house is considered troll-talk around these parts. You’re right, though. The trick is getting the timing right. I suspect that in a few years, there will be a lot of people complaining about how they got shut out of the market because of high interest rates or because the prices started rising again sooner than they should have. Apparently, the only time that some consider it appropriate to buy a house is when prices hit rock bottom. The only problem is that the only way to know when rock bottom is hit is after prices start rising again - at which point you’re going to have to wait for a new crash to buy. My idea - buy a house you can afford when you consider the price to be fair, not when you think you can make a killing, then live in the house for a long time. It’s old-fashioned, though. Most people, even here, seem to think of homes as investments that should only go up, never down.
No Diane, you are wrong.
About a month before the bottom is hit, NYC Boy will send everyone an advisory. But you will only get one such alert as he subscribes to a universal bottom.
High interest rates have never shut me out of a market. I have had mortgage rates up to 15%. It was just an incentive to pay it off faster, and when the rate drops you are further ahead in the long run . High interest rates wouldn’t stop me from buying, unrealistic prices would.
When not if? Tell it to the Japanese.
During the Great Depression, divorce rates went down! Why? Because no one could afford the luxuary of living in their own separate place. The deflationary pressures prevailed over marital discord. So, we may just see more depressed, unhappy couples forced to living together to avoid foreclosure or a sale at a loss. The Great Depression was called the Great Depression for a reason. LOL.
Hey Prudent Bear I think you are right. From what I’ve seen divorce lately has just been another extravegance made possible by free money.
Yep, they’ll be fighting over the house.
“YOU take it”.
“No YOU take it. It was YOU who convinced me Suzzane had researched it”.
rotfl that is funny
a house is an albatross in many situations especially in a falling market with no skin in the game
http://www.youtube.com/watch?v=Ubsd-tWYmZw
LMAO. Many wits in here have waxed creative in posting sequels to Century 21’s infamous “The Debate” (a.k.a. ‘Suzanne Researched This’) TV ad.
Regardless of what the trolls might say, for a given payment it is MUCH better to have a high interest rate, than a low interest rate (assume both are 30 yr fixed, of course).
There are lots of reasons for this, and here are a few:
1) You will have paid less - meaning that the chances of appreciation are higher.
2) You can later refinance when rates drop
3) If you don’t want to refinance, you can simply pay down principal when you have extra money (I used this on my high-rate houses of 10 years ago - worked great - got these fat checks at closing).
And, of course, you don’t want to buy until this shakeout is over.
Also, in a lot of places the property taxes are based on the sales price. The interest you pay is tax deductible. I don’t think paying for a house is tax deductible!
Good point - your tax basis will be lower. And the percentage of what you pay in interest will be higher (with a higher interest rate), over the course of the loan.
This is playing out just like the dotcom - where people built alot of software that noone really wanted - substitute homes for software, and laws of supply and demand still hold. I don’t believe the stickiness of the past will hold this time because loose credit made houses as easily purchasable as commodities, and will allow them to be confiscated just as easily.
I’m still of the mind that most of the fundamentals which made housing sticky in the past are still at play now. Yes, the internet blog news and globalized financing are changing things too, so my vote is for a “faster” drop - but not a “real time” crash.
“‘I could not believe my sense of timing was so poor,’ said Bond, ‘because when I bought the condo, I didn’t quibble whatsoever. She was asking for a certain price, and I said, ‘OK, I’ll take it.’”
Idiots like Ms. Bond deserve every bit of the regret and financial loss they are going to suffer. They fed the seller greed and sense of entitlement that ran up the housing bubble to insane levels, and helped put decent housing out of reach of more responsible buyers who refused to take on reckless levels of debt for grossly overpriced assets. I hope other would-be fools learn something from her example.
Wow, Sammy, that’s a lot of anger. Did your parents abuse you?
Ms. Bond’s story should instruct all of us not to expect a rapid decline. Not everyone reads the financial press, and the MSM broadcast a lot more stuff about Natalee Holloway, Anna Nicole, Elian Gonzalez, etc. than about any macroeconomic trends. Many people profit from the ignorance of the likes of Ms. Bond, and I suppose the social system benefits from the absence of an immediate crash.
He’s right. In 2004 I witnessed people lined up to feed greedy sellers and driving up prices. Let them all suffer for being idiots.
“Two years ago, builder Meron Sason paid $1.5 million for a small Cape Cod on a wooded lot in Saddle River, tore down the home, and started to build a luxury stone-and-cedar house. Now, with the new six-bedroom house on the market for $3.87 million, Sason has run smack up against the reality of a new housing market.”
Another greed-blinded idiot that deserves to end his days living in a cardboard box, drinking Ripple from a brown paper bag and dining on rat kabob. My guess is that little Cape Cod would have made a charming, cozy home for someone, with a nice yard for a garden or kids, but no, this greedy “builder” had to tear it down to make way for one of his gaudy, grotesquely overdone spec McMansions. The demise of him and his ilk, and the money-grubbing, ultra-materialistic posers who tend to go for such monstrosities, will usher in a new era of simple distinctiveness embodied by the Arts & Crafts revival.
http://www.artsandcraftshomes.com/
Yeah but remember that “cozy cape code” was bought at 1.5 million. If I had $1.5 million to pay for a house that has a garden, I would have more important things to do than putter around in my garden. I could buy a lot with a garden for well under $25,000 where there is enough rainwater (in the northwest) to grow my own vegetables. Geez.
Go Sammy!!
” My guess is that little Cape Cod would have made a charming, cozy home for someone, with a nice yard for a garden or kids, but no, this greedy “builder” had to tear it down to make way for one of his gaudy, grotesquely overdone spec McMansions. ”
excellent point sammy, that type of behavior is rampant in the outer boroughs of nyc and long island.
i agree let these glutonous pigs drown in their own stupidity
i have no sympathy for these idiots, let em rot!
Ben, thanks for the great blog.
I agree with you about the overbuilding. It’s inevitable unless it’s physically impossible, and it happens in manufacturing too. Producers, both current and potential, see strong demand, extrapolate that demand into future, and gear up to produce. When they all do that at once, they end up producing too much.
Then “Builders will continue to build until prices drop below breakeven”. This can be rational but risky when prices are falling and sales are tanking. Here’s the analysis: HB has bought land and put in streets and utility stubs. Let’s say this has cost $150k/lot. His original plan was to price the completed homes at $450k, but that won’t fly any more. It costs HB $150k to build a house on a finished lot. So his breakeven sale price is $300k, right?
Yes, if he’s looking at total cost. But here’s a twist (which is taught in business schools) that encourages continued building at even lower prices. The $150k cost of each finished lot is SUNK cost, which HB has already incurred no matter what he does in the future. So, looking forward, HB should only consider MARGINAL (incremental) costs and revenues. If he can sell a house, which costs $150k to build, for say $200k, he’s $50k better off. Sure, he still has a net loss on the house+lot, but he’s reduced the loss by $50k.
The problem is, if most of HB’s colleagues do this, the glut just worsens, and HB’s home may not sell for any price. This is something for us bargain hunters to consider: what if the development never gets built out or fully occupied? Especially if there’s a HOA?
Yes, until the day the BK judge closes their doors, builders should only look at marginal costs. If they lose less money finishing a project rather than abandoning it… they must finish.
There is so much “tear down and rebuild” construction going on around here. 2/3rds of it speculative.
We just need to wait for the right time…
Got popcorn?
Neil
We’ve covered this ground many times. A lot of builders will continue building because they expect to be one fo the last ones standing, a few years down the road. They don’t want to let their best crews go to waste, so that they’re still oiled and operating when times are better.
Builders build. It’s their business. They don’t just close the shutters and wait out a bear market. This rule may bend a little for mom’n'pop spec shops. They’ll switch beck to remodeling or basic home repairs if necessary. But the KB’s, Lennar’s DR Hortons, etc will just keep on going until they go bust, or enter the next bull market.
Builders must build if they don’t the cash flow stops! This will never change. Ford can’t stop building cars can they? Only the banks can stop this nonesense when the must call the loans for fear that they will not be paid back. That will be the only time the building stops.
SF Bay: unless top management at JPMorgan and Bank of America reads your comment! Then they will realize that it is not in their interest in which case they will tell the builder that he isn’t going to get the $150k that he needs to complete.
You know, I first learned about the perils and inevitability of overbuilding in a credit training course at a major bank. The construction lenders have probably cut off the small builders already. But as Mozo says above, the biggies like Lennar, which still has more than $600M in cash, can and will keep going.
Off topic a bit, but germane. Can anyone explain why a group would be interested in buying a tanking subprime lender? I just don’t get it.
Thanks in advance.
Because housing always goes up, silly. Haven’t you been reading the newspapers and watching TV ?
The only thing I could see is that you buy a subprime for is a major tax loss to offset a tax gain somewhere else or a wish to corner some perceived untapped market. Subprime may still have a future albeit at much higher market interest rates reflective of risk. Who knows, this usurous bunch may have mortgage plans to covert an 3 year ARM to 90 year mortgage that will include a clause to back it up with sale of the morgagee’s children into bondage, the pet’s into fur coats and the grandmother into drug testing. The “Bond” market may come to mean something else in the future.
Actually, I think the buyers have something to cover up, like how moronic they were to lend money to a bunch of thieves in the first place. That is, the buyers seem to be drawn from the ranks of lenders to the subprime criminals.
Correction, that’s the mortgagOR’s children who will be sold into bondage. I know we have all agreed here not to correct minor spelling and grammatical errors, but the distinction between a mortgagor (who pledges his property to obtain a loan) and a mortgagee (who receives the pledge) seems more substantial.
Yours truly, a multiple mortgagEE
Just a guess but maybe they would buy one of these subprime lenders to dump all their shit into and let it go BK so as to affect there core business stock holders to a lesser degree?
maybe for all their fancy office furniture?
Seems to me it would depend on ow far the lender has tanked. For example, if it tanks 50%, when you buy them you have lots of mortgages failing, but you only paid 50 cents on the dollar for the houses. If house prices drop 25% you’ve made a lot of money.
That Saddle River house. Note they hold back 90% of the information on the MLS listing, not even the lot size. Bet that “gourmet” kitchen is not what they claim, relative to the price being demanded -typical for many builders
All they need is one idiot buyer
http://www.realtor.com/FindHome/HomeListing.asp?snum=3&locallnk=yes&frm=bymap&mnbed=0&mnbath=0&mnprice=3500000&mxprice=99999999&js=off&pgnum=1&fid=so&stype=&mnsqft=&mls=xmls&areaid=63002&poe=realtor&ct=Saddle+River&st=NJ&sbint=&vtsort=&sorttype=&typ=1&x=67&y=9&sid=081CF261A042C&snumxlid=1054824223&lnksrc=00004
That Saddle River house. Note they hold back 90% of the information on the MLS listing, not even the lot size. Bet that “gourmet” kitchen is not what they claim, relative to the price being demanded -typical for many builders
All they need is one idiot buyer
and it’s effecting even those of you who can afford your home.”
And obviously, if you can’t understand the difference between “affect” and “effect,” you are a ripe candidate for not understanding your loan documents . . .
Glad you posted this, Arwen. Makes me feel less shy about having reposted the definitions of “mortgagor” and “mortgagee”
The Dayton, OH area has suffered a net out-migration of jobs and population, but that didn’t stop new home construction. I lived in Dayton a few years ago, and I could not believe how many new homes were being built over the past 5 - 7 years.
That is what is going to kill the “non-bubble” areas. The credit bubble caused new homes to be built in areas where there should never have been rampant new home construction.
I visited my family in Dayton back in 2005. I couldn’t believe all of the new construction. It was simply amazing.
if you really want to sell, like in three months, you have to drop your price 25% from the peak, there are a lot of people who cannot afford a 25% cut because they owe 95% of the price at the peak.
God bless America!
“The market is just starting to come alive”
From “REAL ESTATE 101″ show -quoting RE MAX real estate/broker talk host airing this morning on WPRO-am, Providence, RI
Any buyer believing this would have to be an idiot
reply to Harry D
I think the average Joe sees the houses being built and says folks must be buying. in my area(near Tucson), the “in” subdivision the builder is throwing up houses like planting rows of corn. It is only on Ben’s site and a few others that i learned cancellations are running about 50% for the company and there 4th qtr 2006 compared to 4qtr 2005 was a minus 89% !. i doubt 1% of the homeowners in the subdivision know this. Probably about May 2007 they will begin to hear the news.
oops revenus was down 89%
Where in Tucson? Can you give the name or at least area? I am tracking Saddlebrooke for future buying as I want a 55+ community being an old guy. :>)
Chris
ReChrisinpnw
Saddlebrook, north of Tucson has only one highway,Oracle road, coming down to Tucson. Because of all the devlopment clear up to Oracle,AZ the road is packed most of the day.Don’t know if that is a consideration.
The devlopment I was speaking about is Canoa Ranch in Green Valley. There are lots of 55+ developments in GV. I have a GV address ,but live out on the dirt so to speak, as we brought our llamas with us from Montana. Everywhere you live is a bit of a trade off, but if you don’t mind 3 months of HOT(though not Phoenix hot) Tucson has a lot to offer. spring traning, hiking,reataurants, theatre, even sking on Mt lemon in the winter.
Thank you for the comments.
Chris
By the way - for the person using “effect” as a verb (e.g. “the way one thing acts upon another”), that use is entirely proper, although utilized less frequently than the word “affect.”
The poster pointing this out as an error is simply incorrect.
Sorry, Harry, I believe you are wrong. It’s true that “effect” can be a verb, but when it is, the direct object should be the result of the actions taken, not the person or thing affected. You can “effect a reduction in housing prices” but you cannot “effect those who can afford homes” — the correct verb in the context used in the article is definitely “affect”. Check a dictionary carefully.
This is correct. Ironically, as a verb, “effect” means “cause”!
The Record reports from New Jersey. “Two years ago, builder Meron Sason paid $1.5 million for a small Cape Cod on a wooded lot in Saddle River, tore down the home, and started to build a luxury stone-and-cedar house. Now, with the new six-bedroom house on the market for $3.87 million, Sason has run smack up against the reality of a new housing market.”
“The supply of houses in North Jersey with an asking price of $2.5 million or more is so high that it would take about 2½ years, at the current sales pace, to sell them all, said Jeffrey Otteau, an East Brunswick real estate appraiser.”
We were talking bubble in early 2005 all over the place. And this dufus tears down an already overpriced $1.5 million McMansion to build something more than twice as grotesque? Is this guy a mormon or Catholic? WTF does he need 6 bedrooms for? These stories get more elaborate as people put themselves deeper into the quicksand. Good grief!
This is a bit rude. Do you really think Catholics are still giving birth to lots of children? I don’t know any with more than three human ones (I count pets as children). I can’t address the Mormon component of your comment, because I don’t know any Mormons.
In any event, the big Catholic family stereotype is really old, even in Ireland.
It is humor to a reformed Catholic such as myself. Lighten up.
My old neighborhood was heavily Catholic, as was (am) I.
My next door neighbors had … count ‘em … 9 boys. They wanted a daughter and kept trying, and trying, and trying …
bill in phx
i think these people need 6 bedrooms for all their toys and
sweat shop made crap they will buy with all the equity in their newfound investent vehicle oops i mean home
as for large catholic families i believe that is past generations
these days if you have more than 3 kids you are a brave soul
and you better make major bank
btw pets are people too!
my dog has been very ill and it is not cheap.
if you are a dog lover please say a prayer for my dog
my wife and i are childless so this is our baby
I just did. Please let us know how the little one does. My pets are my kids, and I know exactly how you feel.
From WCPO 9 in Ohio. “If you own a house, you need to know that a lot of homeowners are finding it harder to hold on to that home. The foreclosure rate is so staggering in the Buckeye State, it’s being called an ‘epidemic,’ and it’s effecting [sic]even those of you who can afford your home.”
How is this possible, if the bubble was confined to the coasts, and middle America did not overpay for its houses?