Housing Prices And The End Of An Era
Readers suggested a topic on the recent banking problems and home prices. “My topic for discussion would be how fellow HBBers see the decline in housing prices over the next year in light of recent credit market developments?”
“As this saga unfolds maybe we should update our projections including the magnitude of the decline, velocity of price decline and the idea of large downward price steps vs. the historical grinding declines we have seen in the past. As we know this time is different.”
One replied, “In the highest-priced markets, how can there NOT be an immediate sharp price drop, if buying anything bigger than a 1br condo requires a jumbo mortgage or a Godzilla-sized downpayment?”
“Northern Virginia (my area) seems on the edge of this. Even with recent price drops, very few SFHs here are selling for less than $500k unless you go out to the far-flung exurbs. Condos and attached housing can be gotten for somewhat less than $400k, outside of the swankiest neighborhoods. But California has to be toast after this…”
To which was posted, “From your lips to gods ears. A 20 to 25% drop in some markets might mean that buyers looking for a plain old home could buy and only get mildly ripped off over 20 years. Some markets need 40% down, but with some inflation and some additional modest drops all those not directly involved with the 2004 to 2006 craze can get on with our lives.”
One suggested activism. “All real estate is local (!). So it’s time for local papers, broadcasters, and economists to figure out just how inflated their markets are and let everyone know that. This is especially important for ‘non-bubble’ areas, where overcorrection is more likely, and for areas not in the NAR/Moody’s 146 metro area data.”
One from the Washington area. “The recent rate increase for jumbo loans (among other things) will hit the NoVa area really hard. This fall and winter will be another big price leg down. A recession and/or a pullout of Iraq will be another long-term downward pull on the market, since most of NoVa employment is defense or tech.”
One also points to the jumbo loan issue. “I am starting to see cracks in the dike, price drops are getting larger & more frequent. People are switching agents, upping the incentives and still not getting bites. Its the PRICE combined with the inability of buyers to get financing anything above the conforming cap, and then only if they are a PRIME credit risk.”
From Reuters. “Withdrawal slips in hand, customers lined up at Countrywide Bank branches on Friday to take back their money, as parent Countrywide Financial Corp. tried to assure investors and depositors that it and its bank were stable.”
“‘The bottom line is it’s your money,’ said Yumi Oshima, who had come to move her more than $100,000 out of Countrywide certificates of deposit if the penalty was not too stiff.”
“Oshima wondered how much worse the situation would become. She knew that her two CDs were insured by the Federal Deposit Insurance Corporation (FDIC) for $100,000, but said she was still concerned. ‘Do I trust them?’ she asked, referring to federal banking regulators. ‘They’re not doing so well for the entire economy.’”
The LA Times. “One concerned depositor at the Beverly Hills office, Woody McBreairty, said he heard about Countrywide’s troubles for the first time Friday morning. ‘I got out of bed and came right over here,’ said McBreairty. ‘It was a wave of shock. I thought, ‘My God, I’ve got to go and get my money.’”
“The retiree from West Hollywood said he intended to close his CD account, which holds more than $100,000. ‘Who wants to leave their money in a bank where they might lose it?’ he said.”
The Baltimore Sun from Maryland. “Market observers say the depth of the mortgage problem is impossible to ascertain at this point. Not only is it unclear how many more borrowers will get into trouble, but the problems can be masked by the fact that mortgages are repackaged by Wall Street and sold to investors around the world.”
“‘The underlying problem, of course, is that people are reneging on their mortgages, but that has set off a house of cards,’ said Michael Greenberger, a professor at the University of Maryland and a former securities regulator. ‘The big question is whether confidence will return.’”
The Rocky Moutain News from Colorado. “The unprecedented mortgage meltdown is hammering hundreds of thousands of homeowners nationwide who are trying to buy homes or refinance loans, at both the low end and the high end of the housing market.”
“‘It’s a terrible, terrible situation,’ said Steven Chotin, president of his namesake asset management group in the Tech Center, which structures mortgage- backed security deals. ‘The market right now is in turmoil.’”
“Many market observers, especially in Denver, where foreclosures have been raging for the past six years, had been warning that it was inevitable the lax underwriting standards, easy credit and creative financing deals, such as 100 percent loans, interest-only loans, and option ARMs, would lead to a correction, if not a collapse.”
“Even some well-heeled borrowers with good incomes and credit scores are being denied loans, face paying interest rates not seen for decades, or are being told to cough up at least 30 percent at closing.”
“Veteran mortgage bankers and brokers, some of whom have been in the business for the past three decades, said they have never seen anything like it. Liana Pomeroy of Cherry Creek Mortgage said she has been scrambling to keep loans afloat, so far with 100 percent success. ‘Every single one has been a challenge,’ she said.”
“Broker Susan Mathews said that many people are sitting on the sidelines, waiting for the markets to calm down. ‘There’s no sense of urgency,’ Mathews said. ‘People think that the house they are looking for will probably be here, and if not, there will be a lot of other ones to choose from.’”
The New York Times. “The turmoil in the international mortgage market is starting to make it harder for New Yorkers to get the large loans that are typical in a city where the average apartment in Manhattan costs $1.3 million.”
“‘It’s the end of an era of highly leveraged lending on residential apartments in Manhattan,’ said Keith Kantrowitz, the president of Power Express Mortgage Bankers in Lake Success, N.Y.”
“Less than two months ago, Mr. Kantrowitz said that the average mortgage request by Manhattan borrowers had nearly tripled, to $4 million from $1.45 million, in the previous two years. Now, he said, his company will not lend more than 90 percent of the value of apartments worth more than $2 million.”
“‘Buyers are going to have to liquidate their assets and put more money in,’ he said.”
“Mr. Kantrowitz said he had a client who was trying to buy a $3.6 million Upper East Side condominium with a $3.3 million mortgage. That would mean the buyer borrowed about 92 percent of the value of the home. The buyer had a strong credit score and had been pre-approved for the loan by a major bank. But last week that bank said it would lend only $3 million, or about 83 percent.”
“Jeffrey Appel, director of new development financing for the Preferred Empire Mortgage Company, said most banks still made loans for jumbo mortgages, but under stricter guidelines.”
“‘I have had people call that, two weeks ago, I could have gotten 95 percent financing,’ Mr. Appel said. Now, he added: ‘It’s just not available. Things have changed overnight.’”
“Yossi Notik, a broker for the Manhattan Mortgage Company, had a client who was trying to buy a $1 million Upper East Side co-op. His client, who makes nearly $500,000 a year with a credit score in the 600s, wanted to take out a mortgage for about $850,000.”
“But four days before the scheduled closing last week, the bank changed its mind and said it would not do the loan at all. Mr. Notik found his client an $800,000 mortgage with another bank. But the change forced her to delay the closing, put down more money and pay the seller’s expenses incurred by the delay.”
“‘She deliberated walking away from her $100,000 down payment due to the tremendous amount of stress,’ Mr. Notik said.”
“Robyn Sorid and her husband spent six months searching for a two-bedroom apartment in TriBeCa to buy for about $2 million. But as Ms. Sorid watched her friends have problems with changing mortgage rates, she decided to rent. Last week, she signed a lease for a place in TriBeCa.”
“‘Tons of friends are seeing their mortgage quotes being re-priced,’ she said. ‘We will probably sit it out for the next six to eight months, watch what happens and see.’”
“‘Buyers are going to have to liquidate their assets and put more money in,’ he said.”
What assets? We have a negative savings rate in the U.S.
Part of the horrible inequality of the upcoming mass bank run for most of our countrymen is…
In order to participate in the festivities, you need some do re mi in the bank~
Lots of folks back East, they say, is leavin’ home every day,
Beatin’ the hot old dusty way to the California line.
‘Cross the desert sands they roll, gettin’ out of that old dust bowl,
They think they’re goin’ to a sugar bowl, but here’s what they find –
Now, the police at the port of entry say,
“You’re number fourteen thousand for today.”
CHORUS:
Oh, if you ain’t got the do re mi, folks, you ain’t got the do re mi,
Why, you better go back to beautiful Texas, Oklahoma, Kansas, Georgia, Tennessee.
California is a garden of Eden, a paradise to live in or see;
But believe it or not, you won’t find it so hot
If you ain’t got the do re mi.
You want to buy you a home or a farm, that can’t deal nobody harm,
Or take your vacation by the mountains or sea.
Don’t swap your old cow for a car, you better stay right where you are,
Better take this little tip from me.
‘Cause I look through the want ads every day
But the headlines on the papers always say:
If you ain’t got the do re mi, boys, you ain’t got the do re mi,
Why, you better go back to beautiful Texas, Oklahoma, Kansas, Georgia, Tennessee.
California is a garden of Eden, a paradise to live in or see;
But believe it or not, you won’t find it so hot
If you ain’t got the do re mi.
Woody Guthrie
Well, as long as we’re in a sing-along mood, here’s one from Betty Comden, Adolph Green, and Jules Styne:
The party’s over
It’s time to call it a day
No matter how you pretend
You knew it would end this way
It’s time to wind up the masquerade
Just make your mind up
The piper must be paid…
Masquerade? I own two homes in Cumberland, MD and I bought them with my own money not a loan. The first home cost me 16K (that is less than 20,000) and my second’s purchase price was 2.6 K (that is less than 3K with an acre of land on Shriver mountain). The real trick is to get disengaged from bricks and mortar employment and work on the net. When it stops mattering where you live as far as a commute, your home options get better and cheaper. The tax on both homes totals to less than 800 bucks a year. So stop whining, work online and live real estate cheap.
Zing…it will be 5 years before significant numbers of new buyers can enter the housing market. Why - because they were told that it’s no longer necessary to save for a down payment - but now they must start.
Anyone who thinks this crash will end quickly is nuts - there are about 50 reasons why it won’t, but only one reason why it will (that being the totally discredited words of the NAR economist).
“Buyers are going to have to liquidate their assets…”
This means they are going to have to sell their homes (probably at a loss), furniture, collectibles, guns, and first born sons.
Good luck to them with that. Uber-consumers tend to have bad taste all around, so their baubles won’t fetch much at all.
I once read that in the WW II seige of Leningrad the better off townsfolk traded fur coats and jewelry (historically good purchases) for the potatoes of nearby farmers. Soon the farmers, awash in furs and jewels, wouldn’t accept anything for their remaining potatoes. How many poatoes will a “Love is…” figurine fetch?
Cigarettes might be a good buy - vacuum pack them for freshness - they’re always in demand when the SHTF.
Sounds like a good time to buy stock in the company that makes those vacuum-seal machines.
Stock up on the Jim Beam now and learn to brew beer at home in the bathtub.
coffee - lots of caffeine addicts out there
During World War 2 in occupied Europe, two things were of value and could obtain you whatever your heart desired…
Cigarettes & Gold
I bet I can get top dollar for my Elvis figurines and 45 records.
black velvet clown wall “art” and chia pets too!
DEFLATION. Period.
“‘It’s a terrible, terrible situation,’ said Steven Chotin, president of his namesake asset management group in the Tech Center, which structures mortgage- backed security deals. ‘The market right now is in turmoil.’”
Simple solution…..greedy MBS investors become unwilling landlords with low cost rentals while they wait…and wait…and wait for their asset values to go up again. Ya gets what ya pays for.
You are all being too negative. I have been told, over and over, that New York City will not decline in price. That was a close call.
“‘Buyers are going to have to liquidate their assets…”
Last time I checked, that was called a DOWN PAYMENT.
“His client, who makes nearly $500,000 a year with a credit score in the 600s, wanted to take out a mortgage for about $850,000.”
You gotta love these people. They make $500k per year, but can’t get their credit score out of the 600s. For most us, we probably average $100k, and have no problem keeping over 750. What a dingbat.
Or perhaps, just perhaps, the $500k per years was “stated”.
Yeah, the whole story smacks of BS.
I thought the exact same thing. Unless the person runs a sole proprietorship and has 500k in sales. No way 500k net. Why would a person making half a million live be moving up to a 850k digs?
The salary was $150K, the bonus $350K. That bonus will be greatly reduced next year.
In NYC, $850K is an OK 1 bedroom in a nicer building.
Yea, I know. Credit score and income levels are TOTALLY unrelated. Credit score indicates whether you pay your debts, while income level (among some other factors) indicates whether you can pay future debt.
Credit score should certainly be a factor when deciding on a loan, but so should income. I think that most of us on this blog would really have to make an effort to have anything but stellar credit with a 500k income. So if this guy walked into my office and I saw the 650 credit score (guessing), with a 500k income, I’d also send that clown to the showers - since he has major issues.
No, not true. You can have a credit score in the 600s or even 500s if you don’t use credit and thus have a “thin” file. I encountered that after going about 9 years without ever using any kind of credit at all.
On the other other hand, what do you suppose Casey Serin’s credit score was on the day he took out the first of his 8 mortgages which went into foreclosure?
Just curious… Why would not you use credit cards and pay the balance every month? I am getting 1% back and consider this a prudent financial planning.
I’d bet some people would worry about temptation, but I can’t imagine disciplined people like texaschick having a problem with that!
wow! Living on cash is such a rarety?
I have not used credit cards in almost ten years. My credit score is in the dumps. But, I sleep very well at night. I don’t even have car payments.
I suppose I’m the dummy for not considering prudent financial planning by charging for my daily needs. You know, The Outback, JC Penneys, Pinky’s House of Panties …
Call me a non-conformist. I am not a monkey! I will not pay to use my own money! Phttttttttttttttt!
I agree completely, no credit cards in 5 years, everything paid for, all ongoing expenses paid for in cash and I plan & shop for weeks to months for any purchases greater than 500$.
I sleep real good at night knowing that all household and autos are paid for in cash. People also think I am nuts but they are the ones on the telephone trying to find a new real estate person who sell their house before the next mortage payment is due and they are surprised when the ARM letters show up not once but many times.
you people who don’t use credit cards seem to be missing the bloody point…there are those of us who use credit cards and *get paid back* to use them! That is, the cards don’t cost us anything, but we get a rebate on what we charge, and we *pay in full what we’ve spent* every month!
Seriously, look into them. It used to be (long ago now) that you’d have to negotiate to waive the yearly fee, but those days are long gone and most cards now are fee-free forever, and they can’t charge you interest if you pay in full each month. And some, like the Discover Card, will pay you back at least 1% on your purchases. You get a rebate check at the end of the year. Really, you do!
Safer than cash, easier to track what you’ve spent on.
Cheers all…
Discover Card allows you to apply your rebate to your bill immediately; no need to wait for the end of the year. I’ve had one for about 20 years and it is convenient.
Hi Shel,
Thank you for your observation on credit cards, I am aware of all the “benies” of the credit cars. I used to have AMEX Platinum personnel and AMEX Gold business cards with a 100K line of credit on the cards, it felt very wierd having that kind of purchasing power on a piece of plastic, thank you very much.
Then I listened to a Warren Buffet interview a few years ago and the old Sage of Ohama was asked what was the best advice he could give, his response “Never get a Credit Card, the credit cards are designed to get you in debt and keep you there with the goal of keeping the individual in debt”. I figured the Sage of Ohama knew a little bit about business and credit. I simply heeded his advice.
PS it felt GOOOOOOD to burn those AMEX cards.
I love using my costco amex. 3% back on restaurants, and 1% on everything else. I have been carrying a lot of cash around recently after going to vegas and just kept pulling out $20’s like nothing for so long since I rarely ever use cash. I am also too lazy to go to the bank to deposit it back. Its weird just how long that cash has been lasting me. I am way too used to using my credit card instead of cash though. There seem to be so many benefits, such as cash back, extra warranties, you have any hassles you can cancel the charge, etc.
What would be the credit score of j6p realtor who has $70K in credit card debt, who is driving around a leased BMW SUV, and now has a subprime loan on an OC beach condo that he bought last year for 800K? What will be his credit score one year from now?
If he is paying all his bills, it is 800 today.
If he stops paying his bills, it will be under 500 next year.
Credit scores only measure how well one handles debt. For those who try to avoid debt as well as those who abuse debt, scores can be misleading.
That makes an excellent point. Like a PE ratio, the FICO score is a measure of past performance and not necessarily an indicator of future performance. Income would seem to be a better indicator of future loan performance except for the fact that most people live up to their income and spend it all. In that respect. FICO would seem to be the better measure, but as you point out, one could have a low FICO for reasons having nothing to do with credit worthiness. Damned if you do and damned if you don’t. Sounds like a one-way ticket to me.
I think it shows that the whole system has some built in error that is coming back to haunt us.
That’s why you combine income, assets, FICO and a down payment. At least they used to…
Nothing trumps a big downpayment, particularly one that was saved and not loaned from relatives. This demonstrates (1) the borrower has the financial discipline to save; (2) they have some skin in the game and therefore a strong incentive to make payments on time; and (3) the house can lose 10-15% of value the day it is sold and the bank breaks even (less transaction costs) on an early foreclosure.
Credit history and income ratio matter as well, but jobs can be lost, credit histories can be deceptive.
fico is somewhat BS.. sh!t in, sh!t out - in terms of data.
Example, certain credit cards (CapOne….) are not your best friend in terms of debt ratios. They do not report your credit limit to the big 3. They report your highest balance and current balance. It wrecks your ratios.
Example:
credit limit = 20000
highest balance ever = 10000
current balance = 5000
debt ratio if Chase = 25% or OK
debt ratio if CapOne = 50% NOT OK
dirty little secrets. Fair Isaac tuned me into this…. anyone else aware of other BS?
Oh that’s fascinating!
Another reason to detest Capital One (their constant junkmailings is another)….I’d be screwed with them, and their formula is such crap.
thanks for sharing that one…
Cap One recently decided to start reporting credit limits, etc. to the big 3 (Who said THEY are anywhere near 100% accurate anyway..but that’s another thread I suppose.)
What would be the credit score of j6p realtor who has $70K in credit card debt, who is driving around a leased BMW SUV, and now has a subprime loan on an OC beach condo that he bought last year for 800K? What will be his credit score one year from now?
Opps, sorry for the duplicate post!
I agree TX, and you have a valid point. Regardless of income, you can have a weak credit score without being a deadbeat…if you don’t have the history. I stand corrected.
Same problem, no debts, decent income, investments, but reports cite lack of credit history.
I have no idea as to what my credit score is but I haven’t had a loan since the 1990s. We do use credit cards but pay them off every month. I was pretty surprised to see someone “making” 500K/year with a low credit score and not able to score a loan.
Yet another “expert” opinion:
http://money.cnn.com/2007/08/17/real_estate/bc.property.coldwell.reut/index.htm?postversion=2007081706
“Home repossessions in the United States are having little impact on the fundamentals of the housing market, but the subprime crisis will delay a rebound in housing prices, according to U.S. property firm Coldwell Banker.
Jim Gillespie, president and chief executive of Coldwell Banker Real Estate, said foreclosures were adding a relatively low number of homes to an already oversupplied market.
“This added inventory would likely equate to at most a one-month increase in supply,” Gillespie said in an e-mail responding to Reuters’ questions.”
“Gillespie, whose firm is aiming to diversify into Asia, said the housing market was unlikely to fall further.
“I believe the subprime problem will not significantly hurt the real estate market. It may delay the rebound, but it will not cause a downturn,” he said.
“Remember, most who took a sub-prime mortgage before 2005 enjoyed strong appreciation and many have income to support a higher mortgage payment.”
Now, if I had a dollar for every time one of these guys have said the worst is over…..
I guess they think the worst is over because they know the FED will bail them out?
So let’s hypothetically imagine one of these groups coming out and saying, “The best time to buy is not right now because we see further price and equity erosions over the next 12 months.”
They would be skinned alive by their employee and all the realtors.
employer I meant.
The FED can’t bail them out. There’s no money to bail them out with. The worst thing to happen would be if the FED lowered the interest rate to 1%. Hyperinflation, stagnation, and poorer folk with rising home rates. UGH.
I still don’t see the argument that the FED can alleviate any of these problems. Making money easier to borrow will not encourage countries/companies/individuals to make loans on depreciating assets/houses. Moretgage holders do not have access to the window at the FED. The only thing the FED can do is buy up all the mortgages (via Freddie or Fannie) and let the taxpayer hold the bag. While that may be politically expedient among the people in trouble, the majority of individuals are not maxed out on credit (albeit by a slim amount). I am not sure that the move would guarantee a voting majority. What it would guarantee is the eventual destruction of the U.S. financial system.
Encourage more speculation and bad lending practices
Realtors will say anything and not be held accountable for it.
i have a friend of mine who is a residential real estate developer in Southern California. Talked to him last night and he said the Southern California market has already corrected 20% over the last couple of weeks because the marginal buyer cannot get a loan anymore…so they are having a really hard time selling their homes.
He thinks its going to hit the news in about 2 - 3 weeks that this is the situation on the ground now.
I think we will see this across all major coastal markets, and it will probably show up as both (1) a sharp downward bend in the median home price when high end homes stop selling; and (2) curve inflection down in Shillers index, which unfortunately won’t be available for a few months. When these stats come out there will be some serious panic on main street for the first time.
Then within a year or so this asset deflation will ripple out to the hinterlands.
So in a nutshell I agree that this bubble deflation is happening faster than in previous downturns and certainly faster than I expected.
Since I check parts of the Los Angeles market on a regular basis, I was surprised today to see that most of the REOs (condos actually) were the least expensive properties listed. Up until this point, they were generally listed in the middle range of prices.
Thought perhaps I could nail one bank and checked Countrywide and Wells Fargo and found only one of the 7 listings on Wells Fargo.
Overall, it appears that the banks are starting to loosen up here in LA.
REOs here are usually the cheapest (usually about 20% cheaper)because once they go back to the bank the 2nd is toast.
We probably won’t see the market rebound to what it was at its peak during our lifetime.
With the flood of illegal immigrants and rise of street gangs in Cali, I can’t see OC home prices staying in the stratosphere. California will become the next Brazil. There will be pockets of the super rich surrounded by masses of peons eating from garbage bins. This situation will spread across the country in the coming decades.
I don’t know if I agree with you Jerry. OC does have a lot of illegal immigrants, but street gang activity is much less than in the 1980s. It could change, but remember OC has crime rates well below the national average, and the vast majority of it is pretty nice. There are a lot of people from a lot of countries committed to OC. I agree their will be a lot of pain, but I think OC is a good place in the long run. I wouldn’t buy property there today, but I might in four years.
I’m tending to agree with this the more this environment builds. Even with the lending changes to date, how far would prices still have to fall to ensure an average buyer could get financed? 40%? 60%?
“how far would prices still have to fall to ensure an average buyer could get financed? 40%? 60%?”
Yup — IMO. Assuming, of course, that there’s no large bailout. Since virtually everyone, everywhere, is seeing that we’re working with a sow’s ear, I don’t see how a bailout can really rescue much of anything. People know, finally, that real estate can go down — so the bidding wars should be toast for a generation or more.
You’re right Magic Kat. Prices probably won’t rebound in our lifetimes, at least on an inflation-adjusted basis.
In fact, I sold at the peak in Las Vegas in Sept. 2004 and have rented ever since. I’ve been rooting for prices to come down, under the guiding assumption that I would buy again when the time was right.
But you know what? I’m not sure that time is going to come very soon, and even when it does, I’m not sure I’ll buy even then. I’m single, 44, no kids, no debt and pay reasonable rent in a wonderful, safe development.
Besides, I want to be ready to bail out of here quickly if/when the spit hits the spam. And if I have a lot of my net worth tied up in a house, that drastically cuts into my mobility and my options.
I may never own another house. That’s a strange realization, but surprisingly it doesn’t bother me. I’ve lived the “American Dream” twice already. It’s overrrated.
– Judge Smales
“You’ll get nothing and like it”
I wonder how many people, if they knew for a FACT that the house they were about to buy would not appreciate another cent, would go ahead and buy it. Especially considering the premium they’d be paying over just 5 years ago…
I did that last year. We sold our overpriced house with the plan to downsize and pay cash or rent. But then I made the mistake of falling in love with the house we bought and now live in. We can afford it and are on track to pay it off in eight years. But it is worth less than we are paying for it and will continue to depreciate for the foreseeable future.
This was actually a weekend topic a year or so ago.
“Even some well-heeled borrowers with good incomes and credit scores are being denied loans, face paying interest rates not seen for decades, or are being told to cough up at least 30 percent at closing.”
The credit pendulum will swing to an overly tight condition. This is to be expected after years of virtually no standards. Expect real estate prices to find a floor when the average borrower is able to put 20-30% down and finance the balance with a 30 year fixed mortgage where the payment does not exceed 28% of their gross income. This will mean a very large drop in current values but is really what’s needed to bring back stability.
A house is not an investment. It’s just a place to live. An apartment complex is an investment. The sooner this fact is realized the sooner sanity will return. I expect the Fed to bailout DaBoyz and not the rest. We are talking several years of downward price adjustments. So be it. Japan took 17 years to find a bottom in their real estate markets and that was with nearly zero % interest rates. What makes you think we will find our bottom any sooner?
I agree with you, except that I think our real estate markets will find a bottom faster than Japan’s did, for the following reasons:
1. Japan has a high savings rate, we have a negative savings rate. The Japanese in general are seemingly not as anxious to follow investment fads like jumping from stocks to RE to whatever is next in this country. So there wasn’t a bunch of pent-up hot money to chase RE investments in Japan’s case.
2. The U.S. financial system seems to promote “fail fast”, while the Japanese financial system seems to promote “fail slow”, at least as far as I have observed. So I expect something more like a seven year cycle in U.S. RE, unless something really major (bigger than the Reagan tax reform) happens here. This current mess in the credit markets should be cleaned up in a few years, and then we should see the next round “financial innovation” a few years later.
3. I don’t buy the demographic argument that we are running out of people to buy houses, and I expect that more immigration in the medium term will take up the slack from the low native birth rate.
Well time will tell how many years it is going to take until we reach a bottom in real estate prices. I don’t feel that it we will recover that quickly. It takes a long time to save up tens of thousands of dollars for a down payment. When’s the last time the average Joe put any savings away to buy a home?
The Fed wants you to believe that 401-K’s are another form of savings but I don’t buy it. A 401-K is your retirement fund. If you use that to buy a McMansion what in heavens are you going to live off? I guess you really like working as a debtor slave.
Isn’t it ironic that the Fed creates credit out of thin air, gets you to borrow it thereby enslaving you for a lifetime to pay it back all the while enriching a bankers wallet. Rich people live off the interest of others. Poor people enslave themselves by borrowing. Since our whole economy is based on borrowing (we didn’t get in the spot we’re in by saving), it’s no surprise that only the top 1% of Americans are getting wealthier and the rest of us poorer.
Even our tax code is geared towards borrowing (tax breaks) instead of saving (taxable).
You live off your house. What did you miss? Housing equity is the same as cash in the bank. More houses, more equity. We’ll reverse mortgage ourselves into prosperity. LOL
Great posts, both of you guys. Hope you keep posting here, Foreclosure Central and Sm Landlord.
I tend to fall into smlandlord’s camp, Foreclosure Central, due to the differences in Japanese and U.S. cultures. You have to remember the Japanese’s strong respect for tradition and the ways of elders versus the typical American’s penchant for living in the moment and the immediate future.
Japan’s paternalistic society help keep them in the housing dumps for close to 20 years.
I also agree that the demographic argument that many American bears continue to cite as gospel is way overblown. Apparently, people need to start looking at population statistics more closely.
The population of the USA is growing at 30+ million every 10 years - WAY over the forecasts of 30 years ago.
And no, illegal aliens are not included in Census counts.
Japan’s paternalistic society help keep them in the housing dumps for close to 20 years.
How do you explain the housing boom and bust that happened in Japan. I believe that in 1990 the property value of Japan exceeded the entire United States and at that time Japan only had the population of California. If population determines property values, India would be one of the most expensive places to live on Earth. I think the most important factor driving property values is an expanding middle class and local wages. The American middle class has had a decrease in their income since 2000 when adjusted for inflation. Only the very wealthiest have had income gains. If it wasn’t for the absurd lending standards that Wall Street was trumpeting, home prices would have never climbed more than the general rate of inflation these last 10 years.
I whole heartedly agree that Americans tend to live for the moment. Why save when you can buy it now with no interest for 24 months? Prices will never be lower. It’s always a good time to buy.
Right after 9/11 President Bush asks all Americans to go to the mall and shop. He said if we didn’t, the terrorists would win. Never once did he ask for us to buy War Bonds. Isn’t it a little odd? Do you feel patriotic when you buy plasma TVs? Is this how the war on terrorism will be won by buying a McMansion and filling it with goodies from overseas all bought on credit? How long can this country prosper by living beyond our means? When is the last time you heard the White House, the Fed, the retail sector or your local real estate agent recommend that you should save some of your earnings? It’s always shop till you drop! The last person that probably told you to save some of your money was your parent. I guess that’s too old fashioned because things are different now. Indeed, they are.
Just a little correction. Japan has 1/3 the population of the USA (approx 130 Million) and about double the area of California, or approx 1/30th the size of the USA. You know what they say… they aren’t making any more land in Japan!
I don’t buy the demographic argument that we are running out of people to buy houses
The population will continue to grow, but the capability of that population to purchase houses will be greatly diminished.
Is it possible that with Japan’s savings rate, that there was a much lower instance of foreclosure, delaying the inevitable for some as they burned through savings over time?
The foreclosure rate in the States would indicate that there really is a lack of reserves among Americans. This would be one reason things will happen faster here.
In spite of the negative news, most of my friends want to own investment RE. Not apartments as you suggest, but another house. I have a friend in Phoenix who is convinced prices in his area have dropped 30%. He wishes he had money saved as “now is an incredible time to buy” another house as a rental.
People have only caught on in the last week that something’s wrong. But they just think it’s the stock market running up and needing and adjustment. They haven’t made the link as to the underlying cause. So while I think it happens faster than Japan, people collectively still have RE fever. That’s gonna take a while to change. Once that psychology does a 180, I’m in.
People are still tracking home prices as they would follow stock trends. THey aren’t running the numbers, looking for good cash-flow positive investments. Then again, most folks don’t look too closely at stock P/E ratios either.
Most people just will not stop buying crap. They wont. Stop. Ever!
Savings ?? No wy, not with the constant cradle-to-grave nonstop barrage of ads to buy buy BUY NOW NOW NOW.
It’s just like the brainwashing session in a “Clockwork Orange “. You just constantly, relentlessly inundate the subject(s) with the message you want to get accross. Hard to resist, very few will be able resist & think for themselves. The ones that do question the system are looked at as nutcases.
Take the Matrix movie for example. Even when Joe Pantaligione knew the truth, he preferred the illusion as it was so much more comfortable. Easier. No pain. No worries.
Thats our main weakness which is being exploited to our downfall.
Sure, people have feeewill, but just try to use it for anything unapproved, unpopular . . . unacceptable. You’re a pariah.
Good points, I have yet to hear a practical explanation of how the populace will be weaned from hyper-consumerism. I mean what do we replace a consumption/service economy with anyway? Its not like we can just go back to manufacturing overnight. The shopping mania simply must go on for the time being - if the shopping stops, the economy in its current form collapses. Everything is predicated on growth right now - and how will consumers be able to spend 5% more every single holiday season with no end - trees don’t grow to the sky.
… a practical explanation of how the populace will be weaned from hyper-consumerism…
TURN THE TV OFF.
“TURN THE TV OFF.”
Too right!
Good points, I have yet to hear a practical explanation of how the populace will be weaned from hyper-consumerism.
Can you say “depression”? They didn’t call it the “Roaring Twenties” just because it sounded cute.
“… a practical explanation of how the populance will be weaned from hyperconsumerism.”
The populance will be weaned when there is no money to finance hyperconsumerism. We are entering the early stages of a tight money era, an era where cash is king.
When people see on the main stream news a actual run on banks deposits ,like with Countrywide Bank ,it isn’t a call to buy real estate . Also, investors at home or around the world are not going to want to put up the money for mortgages if they see a big home loan Company like Countrywide having problems .
These people that took out timed deposit accounts ahead of time are going to have a penalty also ,so that is panic .
I don’t know how any cheerleader can sell a bottom or a up market in the near future in the stock market or the real estate industry . The excess real estate that needs to be sold is mind-blowing especially if you include foreclosures along with excess building .
Seeking safe havens are the name of the game now .
If collectively we have a negative savings rate, who will “run on the banks”?
Good point . You can have a run on the bank of a bunch of 5K ,10K accounts that alot of people have for just monthly function .
I keep waiting for the bottom to fall out here in lovely D.C/NoVa but right now things are just sort of stuck. Nothing is selling very well but no significant price drops. If W EVER leaves office and “normal” gov’t spending returns, then maybe things will happen here. Can’t wait….
““normal” gov’t spending returns,”
Can’t have normal gov’t spending, IMO, without ending the intervention in Iraq — and I don’t see either of the two major parties doing that.
You’re right, Chip. And now we are hearing war drums beating again in the White House — looks like we’re headed to Iran next.
Normal as in bankrupt California selling more bonds? Schwarzenegger was against the bonds, but the people demanded their entitlements and the future generations should pay for it.
Cat 4 hurricane gonna be a Cat 5 by the time it hits the TX coast (probably Galveston if the law of unintended consequences comes into play).
What will that do to the nascent bull market in Galveston “luxury” beach houses and condos, as well as everything in southern Harris County where things are also bubbly.
Galveston hit with a Cat 4 or Cat 5 - all those beach houses will be history. Everything up to about Pasadena would be flooded I would guess from tidal surge.
I was in Houston for the last decent hurricane to hit there (Alicia) in 1983. It was a Cat 3 I believe. We rode that sucker out in my office on the 24th floor of the First City Bank Tower. Me and the dogs and cats. Electricity was off for a week. I had a backyard full of tree branches to the top of the fence and other people’s lawn furniture.
Should be quite the spectacle.
Interestingly, in most years, a high pressure ridge forms in North Texas in mid summer and establishes itself. The effect of that is the very hot dry weather that Dallas gets in the summer which also sometimes serves to repel hurricanes that try to come onshore. There were two monsters in the 1980s in the gulf, Allen and Gilbert, both Cat 5s sitting out there which were pushed away from the upper Texas coast by high pressure ridges established north of there.
No such this year. It’s a wide open door for a hurricane to come onshore this year. Dallas is as muggy and soupy as Houston right now. Nothing to hold it back.
and really, it was the hurricanes of ‘04 that ended the bull market in Florida. I suspect that it will be the same here.
I hope your not close to where the hurricane action might fall this time Txchick. I know you have alot of animals and it’s hard to deal with animals in a storm .
250 miles north. We’ll get rain here and storms but nothing I can’t deal with.
I’d go down to Houston though and help with rescue efforts.
Yup, hurricanes made the insurance rates skyrocket. The final blow to South Florida was Hurricane Wilma in October 2005.
See, now I want to hear more about that. You, txchick, rode out a hurricane in your office with a bunch of dogs and cats? And you just sort of leave it at that?!
How many of each? What were their names? Did anyone get eaten or defenestrated, prior, during, or after the hurricane? Did you set desks on fire, shoot guns out the window and scream wildly? Because that’s my personal plan for most emergencies I’m confronted with, and so far, so good. Although something tells me that you, txchick, probably handled it differently.
Did you have adequate stores of coffee and beer and cat food? And water, of course. Well, I guess you did, ’cause here you are.
Unless, of course, you went out and looted for water and catfood. I just thought of that possibility.
You’d probably be a great looter.
Nah, she would make sure her generator could power her laptop and her Verizon Aircard worked so she could get on this blog and post.
Yeah. You’re right. Then she could grab a beer, bundle her cats in tidy mewing stacks all around her for warmth, and sit down to blog. That’s not an emergency, that’s Heaven!
She might be sweating her arse off though with no A/C. But hey, she’s got internet!
They had a great time running up and down the halls and riding on the elevators. In Houston, if you’re smart, you keep a “hurricane stash” in the garage (food for everyone, batteries, bottled water, etc.) so we just threw it in the trunk and took off. Left about 12 hours before everyone else too because the roads become a nightmare if you wait too long.
It’s not something I’d want to do again but watching a hurricane out of the 24th story window of a skyscraper is kinda interesting too.
Ha, I was in Houston for Alicia too. We rode it out in our house just north of Houston. I remember hearing all the trees cracking - when it was over, our town looked like a warzone. Then cabin fever set in as we waited in the sweltering heat for a week while the power was restored. Couldn’t go anywhere because trees were down all over and nobody had power anyway. Fun times.
Hey, dc, my experience in South Florida after Andrew was much the same. Fun times, indeed.
watch for the price of gas to go up if TX gets hit
Curious if any of the smaller but very feelable earthquakes in Southern California have been on the national news recently? Whenever the weather gets weird like it is right now, small earthquakes seem to happen. And then bam a decent sized one hits. I can’t even begin to imagine what a decent sized quake would do to the southern california economy. especially with all the junk houses built so close to fault lines.
I never really understood why so many people die in hurricanes since there is some kind of warning, isn’t there?? i see a big thing moving around on cnn.com saying category 5. earthquakes are like what a 10 second warning before they happen?
I rode out Jerry in a stilt house in Kemah and that was one of the scariest nights of my life. That little house was moving all over the place. The front door blew open twice - until I nailed it shut with a 16 double head. The oak tree next door was almost doubled over in the wind. People calling to a radio station as the eye moved up from Galveston toward me and that made it all the more frightening as you knew this sucker was coming at you. (hmmm, maybe that is why we see some acceleration in this bubble busting - the internet is like that radio broadcast and the FBs see it coming at em) I took my Landy out afterward to check my sloop. Could not see the road for the branches and debris. Surge was so high that the dock was underwater. I was walking chest deep to check my spring lines. And watch out for that floating branch or bunch of debris cause it is covered with fire ants looking for a better place to crawl onto. On the way back I pulled someone out of a ditch who had been out driving in the storm - yikes!
Is Dean headed for TX, chicks? In 57 hours?
Jas
I’m amazed but not surprised at this. What I find scary is that even your higher income people, real income or otherwise, are even having a hard time in their finances. I always wanted to believe that people who drove around in fancy cars and lived in big homes were wealthy. Even when that illusion was shattered, I still wanted to believe that your top crust of society like your NYC types were very wealthy. Now, I’m beginning to wonder if they even are wealthy at all. I haven’t been on the earth for very long, but I’ve always thought that I was one of the poorest people in my community. Now, I’m beginning to realize that most in my generation have nothing, or worse. I find it scary that my net worth many be higher than 70% of most Americans, and mine isn’t very high. I guess the $1,000 millionaire stereotype does hold true.
I find it hilarious that people making $100K per year are broke!!! HAHAHAHAHA….must be a lot of drinks there, eh?
Big hat, not cattle?
It’s true: the more you make the more you spend… it’s all about MARKETING.
Ahh, the bulb is lit.
Most Americans believe themselves to be of a higher socio-economic class than social scientists would place them in. Me, I earn 100K in California, and I consider myself working class because my income comes from my labor and not from inheritance, investment dividends, etc. I don’t feel I have very much in common at all with the upper 2%, and I don’t vote as if I do or as if I ever will.
When the offal hits the ionizer, the truly wealthy will be outta here. They won’t hesitate one minute to leave all of the flag-waving psuedo-wealthy behind. And in that minute, the average “wealthy” American will have a lot more in common with the unwashed masses than they ever imagined.
Cmyst - truer words were never blogged.
where would they go? i think this is somewhat global…
I made almost $100k last year in SoCal (28 now) and still cant understand how someone could really afford the cars I see them drive around. I mean its easy to pay the $1000 lease or whatever, but how can you save for retirement or savings? I also can’t believe how many arguments I was getting into about how can anyone afford these mortgages? I still live at home and was more interested in saving into my 401k, roth, and playing the stock market with my downpayment money, then going out and buying a $30k+ car. I am still shocked by who drives the expensive cars on our street. They are all the ones renting their houses. But then most of the neighbors who own, have lived here for almost 40 years and bought in a different era. They just play all day in their retirement. Kind of makes me see how important it is to save for later, because I would like to just play all day long like they are doing.
Actually, its the people driving around in Hondas and wearing last years fashion(or the years before) that are probably doing the best. If people (especially those under 55) are flashing their “wealth”, it’s most likely credit or temporary luck. Read the millionaire next door.
The real national pastime is lying about what you make. I’ve never heard a soul (until this blog - and outside my family) openly profess it to be a good idea to keep that info to yourself. Most folks are plenty happy to tell you they make more than you.
I live in Mansfield, Ohio which is a small town of 50,000 or so Americans. I live in nearly the most expensive part of town. Recently, I spent a few hours checking online what my neighborhood homes were appraised at and what mortgages they had on them. This is what I found. On my street there are 72 homes. 12 of them had no mortgage. Good for them. Fully 1/3 or 24 have mortgages that exceed their apprasied values. The rest had anywhere from 3% to 70% equity in their homes. What shocked me is the number of my neighbors who have little or no equity. The yards are well kept and the Hummers washed but underneath it all lies a house of debt and little savings. I am willing to bet that your neighborhood is like mine. What you see on the outside is for show. Luckily, I paid off my home several years ago. I really don’t care if the price dropped in half. This is just where I live. I never intended to make a profit off of it. This is not my investment. If my house goes up in price, so do my taxes, insurance and the next house I may want to buy someday. I’d rather see it’s value rise at the rate of inflation and no more. Call me crazy!
I haven’t paid off my home yet, but it IS my home, and I don’t care how much it’s worth. I think I can keep going to crack my nut each month, but its looking worrisome out there. I’m off-the-grid with my own well, garden and solar panels, but my bank looks vulnerable right now. Trying to keep the panic out of my voice…
On CNBC they were trying to come up with a name for the current markets… like Asian Contagion and Tech Wreck.
The viewers were pushing for names like “Morgage Meltdown” and “The Great Debt Reconing” in emails.
The insiders on the show were pushing for “Sub-primal Fear”.
The people know it is not just a normal correction. The insiders still want to make people believe it is just fear and that sub-prime is contained….
“We don’t know what we don’t know.”, are the buzz word on CNBC.
“Yeah, but we can look at the fundamentals and make a highly educated guess at where this is going!”, yells back the vast majority of informed and thinking Americans. (All 100,000 of us.)
There’s 100,000 of us?! More than I thought.
“‘Tons of friends are seeing their mortgage quotes being re-priced,’ she said. ‘We will probably sit it out for the next six to eight months, watch what happens and see.’”
One or two morbidy obese friends can easily skew the median.
Is Jen Bones a guy? Is he also a Professor B?
Jen Bones? Jen bones who?
It seems that we don’t have a liquidity crisis as much as we have a greater fool crisis. Does the Fed have a discount window where asset holders can go to get all the greater fools they need to stay solvent?
Perhaps. But the window for fools has existed for quite a while already re: housing. It’s known as the Junk Loans and Hedge Funds window.
One replied, “In the highest-priced markets, how can there NOT be an immediate sharp price drop, if buying anything bigger than a 1br condo requires a jumbo mortgage or a Godzilla-sized downpayment?”
If it were only up to the free market, I would concur. But given the apparent willingness of govt to intervene overtly and covertly in order to prop up sagging markets, I am not sure.
I see no support for anywhere near the current list prices I see around San Diego, yet I see very little equilibrium adjustment thus far to the new lending market reality. ‘Tis a puzzlement!
Case in point: Rancho Bernardo W (92127 zip code) had a median sale price in a recent month (May or June — I forgot which) of $760,000, but the current list price shown on ziprealty.com is just short of $1.3m. Now that is $100K less than a couple of months ago, mind you, but there is still a gap of more than $500K between the median list price and median sale price that needs to be closed before I am convinced this is over.
I personally expect the median sale price to drop in the next couple of months thanks to the tightening availability of Jumbo-the-Elephant loans! Not sure how long the list prices can stay stuck up in the stratosphere.
I’m confused. Is it Prof Bear during the week and Stucco when the coat and tie come off on the weekend?
Alt-Ego
Long ago, we had a regular poster who used the handle Professor Bear and who posted a lot of very useful stuff. But, as best I recall, he got pissed off at the trolls we had to suffer with in those days and vanished. GetStucco suffers fools with reasonable grace, so my assumption is that he may have claimed the long-unused handle via adverse possession. GS?
We have a similar situation on Long Island. Big disparity between median selling prices and median list prices. There’s probably a few reasons for it. I suspect that one of the reasons is that sellers list prices are often well above what they are willing to accept, they reason that any offer they get will be higher if they have a high list price, or maybe they’ll just get lucky and find a fool. The problem is that buyers typically don’t bother making an offer when they feel that there is to much disparity between what they are willing to offer and what the seller is asking. The buyer feels that it will be futile and frustrating to even try. As a result the over priced home sits and no one bothers.
That’s where I’m at. The houses I’m tracking are all still about 30% to 50% too expensive (I only seriously look in areas where the median income is around 40 to 80K, older suburbs). I was told by an aquaintance that I should just offer what I felt places were worth to me and take a chance, but I’m in no mood to be laughed at and/or to anger someone. At this point, I don’t think many sellers are able to bring the price down by enough for buyers to be interested. It’s going to be up to the banks when they are forced to clear off their REO to bring down the prices.
Do check out the Credit Suisse reset chart…October resets start in a big way and go thru November. Jan. up north is a nice, bleak month with Christmas bills arriving, and folks who are looking at taxes, heating costs and maintenace thru the winter may be getting a little desperate. Of course, if you can wait til next summer, prices will be even lower.
Time flies when you start seeing prices come down–continue to build up your cash reserves. That’s what I’m doing. The urge to buy anything–I’m thinking 2009 or 2010, and paying cash. And remember with a new prez, the tax laws may change, and housing write-offs may change which will impact your decision. There are a lot of moving parts in this deal.
Nobody wants to” mark to market “,and everything is being sold as a future market . How often have real estate agents advised people to wait until some kind of future up bounce takes place .Now the stock market is selling future rate cuts and buy cheap stocks now for a future bounce .
Really ,it all depends on how long you have to hold on to something if you consider the holding costs and loss of other opportunity . Now maybe stocks are at bargin prices and maybe real estate is at a bargin price …….But I don’t think so .I don’t think a recession as been priced into the price .
Reality will hit these home sellers soon as loans will be hard to get with real “cash” down payments when most buyers will have little or none, even those with high credit scores, when savings has been look down upon by the talking heads on TV, Wall St. etc.
High price homes will drop 50% or more and no real estate agent, home seller can now stop this decline. Reality wins everytime only many just can’t face or deal with it. Sorry there is no Santa Clause coming this Christmas for those who hitched a ride with the Wall St. boys ride to wealth by levarage and greed. I guess many of the old timers who saw this coming may now get a little respect.
Jerry — for some reason, as soon as I read your post, “Reality Realty” came to mind as a good name for a new RE company — maybe with a slogan, “If you want to list high, you’ve come to the wrong place!”
Nah — standard mortgage loans will become 40- and 50-year term. Cash won’t be king. Hell, it won’t even be a duke.
Remember, the goal for today’s workers is the same as it has always been: to preserve the present to detriment of future generations.
To assume that any generation over the age of 20 will alter their love of consumption is folly, I think. Things will get better 20-40 years from now only if today’s 10-year-olds are are taught to respect work, earnings, money and investment.
But they won’t be. Because, every little girl is now a princess with her own bedroom and $1,000 birthday parties! Boys are trained to be addicted to designer drugs. Nowadays, dogs have assumed the passe role of children.
Jerry, our galloping entitlement culture practically guarantees that the needed shift in ideology won’t happen any time soon.
You reference “old timers” who have seen this coming set up the system in the first place. Well, I have no special regard for a generation that voted in socialists for the past 70 years.
They are as responsible as anyone else for setting up the current mess we find ourselves in. And they have profited handsomely from it. Once today’s senior citizens decide to send back their Social Security checks by the millions, then I’ll consider them something more than ‘The Average Generation’.
To assume that any generation over the age of 20 will alter their love of consumption is folly, I think.
The Great Depression altered a lot of consumer behavior patterns for life.
True. But there won’t be anything close to a Great Depression this time around.
Why not go with the latest data, July:
http://sandicor.com/statistics/stats2007/07-2007/sfd-7-07-stats.pdf
Sandicor usually lists last months data about the 10th-12th of the month.
Zip code 92127 Ranch Bernardo (for those who want to live where it’s half a notch cooler than Hell):
New listings: 77
Ave. list: $1,469,778
Med. list: $1,225,000
Sold: 47
Ave. sold: $1,176,676
Med. Sold: $850,000
Sold/List-price: 95.54%
Anyway, it doesn’t matter what houses are listed for if they don’t sell.
““‘The underlying problem, of course, is that people are reneging on their mortgages, but that has set off a house of cards,’ ”
Painfully mixed metaphor alert!
I hate mixed metaphor. They refroogle my brain, big time.
(how was that, Thomas? A satisfactory use of your neologism?)
Refroogle.com = Microsoft office live?
Refroogle.com.cn
域名未被使用有以下几种情况:
您所访问的域名未注册。
您所访问的域名未设置地址解析。
(Translation, This domain name is not in use)
Translation>>>
Website domain name not used can have following reasons:
Domain name is not registered.
The URL link is broken.
Translation:
The renegers have greased the skids on this veritable Pandora’s Box of matchsticks, and so the jury’s still out as to the final score.
interpretation:
If your gonna be in the big game, you have gotta have some skin in the game, not only ARM’s, but also your good old noggin.
YOU are scarey good.
And it all happened when we were asleep, on a dark and stormy night.
The Panic of 2007
For an excellent description of how we got into this situation. Note-This requires getting the weekly newletter via email which really isn’t that painful.
http://www.2000wave.com/gateway.asp
If you don’t want to subscribe he says the following:
“Where Do We Go From Here? Hedge Funds to the Rescue!”
1. Hedge funds will go through the rubble, buy (at a discount) the various instruments Residential Mortgage Backed Security (RMBS) or Commercial Mortgage Backed Security (CMBS) or a Collateralized Loan Obligation (CLO) and Collateralized Debt Obligation (CDO).
2. Second, the rating agencies need to restore their credibility. Warren Buffett’s Berkshire Hathaway owns about 19% of Moody’s. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done. The Panic of 1907 was solved by the credibility of one man, J. P. Morgan, who stepped in to provide liquidity.
3. The SEC has announced that they will allow mortgage lenders to work out resetting mortgages with borrowers in cases where there is an obvious default about to happen. In many cases, that will mean extending the lower coupon rate another year. That may just put off the problem, but it will keep a home off the market and allow for a more orderly solution”
Folks, I’m not sure if this will all work out this way, but at least it seems to be a rational course of action in the future. Does this seem plausible?
Lip
“The SEC has announced that they will allow mortgage lenders to work out resetting mortgages with borrowers in cases where there is an obvious default about to happen. In many cases, that will mean extending the lower coupon rate another year.”
This assumes that the FB’s will WANT to stay in their homes and continue making mortgage payments on a house that is 10%, 20%, 30% less than what they paid for it. What’s the incentive? If these folks have no skin in the game, I think these are the folks who will choose foreclosure.
That, and the FBs were getting in trouble even with their teaser rates. The only way extending their low rates would do any good is if they used the opportunity to build equity - anyone want to bet on that happening?
And, how does the borrower work with the ultimate lender after the mortgage has been sliced and diced into so many parts? Who is the ultimate lender?
i dunno.. Buffet is a fine businessman and, afaik, credible, but i don’t like his politics lately.
If enough solid data is available to rate something accurately, a “Buffet” isn’t needed. While if the data is insufficient, Buffet’s personal opinion could add certain prejudices into the rating, imo.
In any case, ratings must be more accurate than they have been. But attaching a celebrity name to them, and hoping this will make everything more believable, is not my idea of sound fundamentals.
This reminds me of the scene in a movie “It’s a Wonderful Life” when there was a mob waiting at George’s Savings and Loan waiting to withdraw their deposits.
“I don’t trust the FDIC insurance. The Federal Reserve seems to me, at least, in a slightly shaky gray area,” Shinkle said. “I know a little about what happened in the 1930s [market crash]. It smells like it could be the same.”
“Shinkle said he still was not sure where he would put his money, but said he was thinking of buying gold.”
Mainstream press articles covering people standing in line at a major bank to withdraw all thier money can’t be a good thing. Quotes like the one’s above must have bankers shaking in their shoes.
I love how Countrywide says that their banking assets won’t be affected by the operations of the parent (mortgage) company. Gee, I wonder where all the bank deposits are invested?
Mattress, anyone?
in Netherlands (and probably most of Europe) the US troubles are making the housing bubble even worse; there is no change at all in crazy lending, and mortgage rates are declining thanks to the extra free money from the ECB (and the perception that whatever happens, big speculators will be bailed out by the ECB). One well-known easy money company is advertising 1% lower mortgage rates today.
Also, it seems that the EU newspapers are now into the blame game, where all the current subprime/stockmarket problems are the result of some devious US bankers and their friends from the ratings companies, who tricked EU investors into buying their worthless paper. Such a thing could never happen in Europe! We have a very sound housing market that is strictly based on fundamentals, without speculation and with very responsible lending conditions and only honest appraisers. My own papers explains that Dutch RE prices have been climbing for nearly 10% yoy over the last 15 years (actually more than 15% yoy) so declining prices is impossible in Netherlands - and even if lending was a bit irresponsible there is no way that Dutch homeowners could get into similar trouble.
Officially the Netherlands doesn’t have subprime, but more than 50% of current mortgages are I/O and many of them are also 100/110% financed at rock-bottom rates. All the other forms of lying and cheating (no-doc, inflated incomes, piggyback loans, on-demand appraisals) are extremely popular here as well …
http://en.wikipedia.org/wiki/Bizarro_World
“In one episode, for example, a salesman is doing a brisk trade selling Bizarro bonds: “Guaranteed to lose money for you”
“Also, it seems that the EU newspapers are now into the blame game, where all the current subprime/stockmarket problems are the result of some devious US bankers and their friends from the ratings companies, who tricked EU investors into buying their worthless paper. Such a thing could never happen in Europe!”
LOL! Of course, England is where all the shenanigans originate. Having said that, however, it wouldn’t hurt my feelings if EU investors called for devious US bankers and their friends at the ratings agencies to be extradited to the Hague. I have long warned my Congress critters that if we don’t clean up our own house here in the US, someone else will and that renditions can go both ways.
So the plug got pulled on funny-loans in the US because the secondary market evaporated. Who is buying the funny-loans in the Netherlands? (ie, who are the bag holders?)
I would guess that is the quasi-government banks.
And I thought it was just we Americans who were greedy.
Seems many Europeans can’t get enough of a good thing either.
And spend themselves into oblivion in order to get it.
When I was in London in November visiting my friend I couldn’t believe how many people were shopping. I was there during the thanksgiving week and the places were filled during when people should be working. It really blew me away at how much money is in that place. My friend is an investment banker and going to places those guys hang out at is very impressive. But everyone is just spending like its water. Thankfully I was working a lot of overtime and doubletime before this trip because the exchange rate is just crazy for people with US$ to just buy a starbucks coffee.
“My topic for discussion would be how fellow HBBers see the decline in housing prices over the next year in light of recent credit market developments?”
In Florida, one of the most, if not THE most bubbly state, I expect to see housing price declines be “2 Fast 2 Furious”. Once banks realize the gig is up (and I suspect after Countrywide’s kerfluffle, the light bulb moment is not far off) they will liquidate their holdings fast, before any potential buyers run out of money. I’ve got cash to pay for a 2/1 block home and I’m ready, but at a rock bottom price. (Under $50,000) Someone will take that money, paltry as the sum might be, figuring just take what cash you can get and stop holding out for $100,000 that probably will never come at this point.
Palmetto — an agent I know who works the Melbourne area told me that a 1/1 REO condo over there just sold for slightly less than half the original list price (which itself was slightly less than the last sale price in 2005).
Observation: We are still in a period where people, for the most part, know that house prices have “softened”, but they are not fearful that prices will go down much in their own areas. People looking to buy right now are a bit worried, as loan programs disappear, and jumbo rates go up. People looking to sell, for the most part, are thinking that they will “just wait it out”.
For those that think that prices will crash soon, I say “I don’t think so”. I think to see prices drop and attitudes to change, you need to see the banks and investors stop bleeding money holding on to REOs, and start pricing them to sell. Also, if/when we hit a consumer pullback led recession, that would be a catalyst as well.
Until then, I don’t expect to see prices “crashing”, even with the smaller supply of qualified borrowers. It will be a slow, steady grind down as long as people, banks, and investors think “I’m not dropping prices, I’ll just hold on a little more”.
yes, good points…
I see a total duality right now in pricing in Ann Arbor MI, and it seems driven by this difference alone–Pfizer pulled out, taking 2400 jobs with them. BUT they offered as incentive to those who’d agree to move a max 100K (a lot in this market) loss-on-sale clause. So, especially in this one part of town closest to the labs, lots of homes have gone on the market, and the realtors could sell, get their commissions and have everybody “win”, by reducing prices. So far it seems they’ve been reluctant to reduce all the way to 20% off what non-pfizer comps might want to get for the same kinda place, but when they do *that’s* when they get the sale. So, maybe more will, especially as pfizer wants to see more of those places sold. It also serves the purpose of improving sales figures and even mean prices in a town where things have already been declining a while (with the auto industry and such), and so the realtwhores can ramp up their rhetoric to get people like my hubby dammit all freaked out again…better buy now before it’s too late!, sigh…and there are signs that the more public-speaker-y among them are (oh, look, sales are up…and there was an article in the news touting ’sales are up in July’, for the first time in 2 years or something, and mentions at the end that prices aren’t though…but quotes realtors saying this must mean we’re past the bottom! did you hear that shel’s hubby?! luckily he doesn’t look at the papers lol).
The REO-held props hold on and hold on, and are only now, what the pfizer-lowered comps, starting to really lower much themselves.
But the people who aren’t getting the loss-on-sales deal and don’t want to lose-on-sale aren’t lowering. Only now, and just a little, are the people who have paid their homes off years ago starting to price a little below what comps are asking, and probably only now that realtors can’t lie quite so much anymore, and are getting increasingly desperate for any sale, even one that gives them a couple bucks less than they too have been hoping to ‘hold out’ for. They have been recommending still of course to anyone who doesn’t *need* to sell now, to hold on, especially given the influx of pfizer homes.
and so there is my combined-comment and market report lol.
cheers all!
I concur with your observation. The NAR expectation of modest single digit price declines is holding so far. For the world outside this blog, that’s good enough for them. They’re thinking summer showers but are facing a hurricane.
I disagree - In Madison homes in the 350-800 range are down 5-20% across the board. This is just the asking price. This is just in the last few months. Very little has sold over the last 10months. If it’s bad here, in a community with high tech a university and the state capitol. I can only imagine how bad it is in places supported by manufacturing tourism ect. I don’t believe anyone on TV. Follow the listings and follow up on what property sells for and you will realize how bad it is already.
We are also starting to get some significant listing price cuts here in Pullman, WA. School starts on Monday and the selling season is over. Now the 120 homeowners still listing on the MLS are starting to feel a bit nervous about holding over until next year.
Our Realtors are still largely in denial (prices have never dropped in Pullman, Schweitzer Engineering is hiring, the university makes us special, etc…) but the simple fact is that there are 120 homes listed compared to about 25 last year at this time.
Here’s a glimpse @ Argentina, as their bank runs grew in mass, just before hyper-inflation made their Pesos worth 2/3rds less, overnight…
from wiki
“This entire crisis came to a head on November 29, 2001, when Argentines took to banks and financial institutions to withdraw millions of pesos and dollars from their accounts. Had the withdrawal continued, Argentina’s entire banking system would have collapsed.”
“The unrest started when Economy Minister Domingo Cavallo, introduced restrictions to the withdrawal of cash from bank deposits (see corralito), intending to stop the draining of deposits that had been taking place throughout 2001 and had reached the point where 25% of all the money in the banks had been withdrawn. These measures were aimed at controlling the banking crisis for a period of 90 days, until the exchange of Argentina’s public debt could be completed.”
“Although people could still use their money via credit cards, checks and other forms of non-cash payments, the enforcement of these measures caused delays and problems for the general population and especially for businesses. Massive queues at every bank and growing reports of political crisis contributed to inflame Argentina’s political scenario.”
http://en.wikipedia.org/wiki/December_2001_riots_(Argentina)
” “Yossi Notik, a broker for the Manhattan Mortgage Company, had a client who was trying to buy a $1 million Upper East Side co-op. His client, who makes nearly $500,000 a year with a credit score in the 600s, wanted to take out a mortgage for about $850,000.”
“But four days before the scheduled closing last week, the bank changed its mind and said it would not do the loan at all. Mr. Notik found his client an $800,000 mortgage with another bank. But the change forced her to delay the closing, put down more money and pay the seller’s expenses incurred by the delay.”
“‘She deliberated walking away from her $100,000 down payment due to the tremendous amount of stress,’ Mr. Notik said.” ”
So, the bank who wouldn’t do the loan at all was right! If she contemplated walking away from her 100K “downpayment” (?…who walks away from a downpayment? how can you walk away from a downpayment? are they messing with us? did she put up 100K in earnest money?! maybe it’s only people with credit scores “in the 600s”–a big range admittedly!–who are willing to just walk away from so much money lol?), then why should she be trusted to not walk away from the downpayment of 150K and default on the mortgage? I mean, buying furniture can be stressful too, learning that your co-op is worth less than you bought it for can be even more stressful, etc.
Good move, first bank!
I still hold firm my opinion that housing prices won’t bottom until at least 2012, in light of yesterday’s rate cut.
This is a real estate depression that will effect FBs mostly. I think renters who saved in diverse investments or have good job skills have absolutely nothing to worry about through 2012.
Bill — presumably, then, you think that the discount rate cut will result in a dropback in mortgage rates from the most recent upticks, a reversal of the Dracula effect on jumbo mortgages and such a mitigation of the amount of upward re-sets of ARMs as to allow the FBS to remain in their homes. I’m not here to say you’re wrong, but man, there is a whole lot of supposition that has to go into believing this market will be saved from an absolute rout well sooner than 2010 or 2011.
Chip,
Again, I think Real Estate won’t bottom until at least 2012. I think there will still be good jobs (at least for software engineers, my own job universe). But wages are held in check from international competition. I doubt wages will catch up to affordability of houses to be able to allow Joe Schmoe to do the traditional 20% down payment and 30 year mortgage for most houses across the national. More likely, house prices will continue to fall 6% or so per year for the next 5 years while wages go up 1% to 3%. In addtion, there are many people who have a lot of money in conservative investments as we’ve seen on this blog, but were turned down for loans due to tighter lending practices. Those tighter practices are not going to be fly-by-night.
To make myself clear, I do not think this market (Real Estate) will be saved from a gradual route - a 5 year leak.
Alas. I was really hoping for quick and dirty.
Let me get this straight. According to Bill in Phoenix, everything
will be peachy for a guy named Bill who lives in Phoenix, just because he’s made all the best choices in his career and finances and will weather whatever storm may come as a result of the housing market melting down.
Hey Bill, what the fk are you smoking? Is there an anti-meth out there in that armpit city on the surface of hell that makes one immune to paranoia? You certainly seem to have this “Life” thing dialed. How do you do it? Maybe you should be on Oprah.
Where did that flame come from amoney? I didn’t get any of that from Bill’s post. You may not agree with what he is forecasting, but by pitching a personal attack at him you are waving the Troll flag.
Thank you oc-ed. On the contrary, I’ve made a lot of mistakes in my 48 years, but rarely do I repeat the same mistake. For instance, I bought real estate in 1990 in California, one year over the peak of that bubble. Of course, after selling for a 20% loss in 1996 I have been a renter.
There, now I am imperfect. We don’t want anyone to be perfect - no John Galts and no Howard Roarks for anti-individual USA - happy now amoney?
“Mr. Kantrowitz said he had a client who was trying to buy a $3.6 million Upper East Side condominium with a $3.3 million mortgage. That would mean the buyer borrowed about 92 percent of the value of the home. The buyer had a strong credit score and had been pre-approved for the loan by a major bank. But last week that bank said it would lend only $3 million, or about 83 percent.”
Can’t relate. Need to move that decimel point.
A person buying a $3.6 million condo should be able to put down at least 20%
…how fellow HBBers see the decline in housing prices over the next year in light of recent credit market developments?
No change in my outlook whatsoever, since we all saw this coming (and discussed it on HBB, HBB2 & here) years ago.
That said, the details on how it’s actually unfolding are utterly fascinating to behold.
I’m posting this late ,IMHO I still think the market is going to go down faster now . It was all a matter of the crazy lending drying up . The whole RE market was running on the crazy low down liar loan lending and speculation purchases made up to much of the market .
After the REIC got the market use to low down liar loans for years now ,all of a sudden in the course of only a few months the lenders are back to standards in lending . The tight money market will again cut down the buying pool of qualified buyers.Not good when you have such huge inventory of homes that need to be sold by sellers that have no holding power .Add to that the re-set of adjustables ,while these borrowers can’t refinance in a tight money market and its spells out a crashing real estate market . The handwriting is just on the wall .The lenders can’t go back to this crazy lending so there is no way to get the party going again even if you get rate cuts .
So , I think the RE market will go down fast and brutal going forward from now unless some bail-out comes along that slows it down .
I agree with the comment that home prices will continue to decline until 2012 and beyond. Never before have we seen such a Ponzi scheme in real estate. Historically, bankers have had a keen interest in the borrowers ability pay off the mortgage. And they lent money accordingly (low risk). This time around the people loaning money for homes have little or no interest in the borrower’s ability pay off the mortgage. Why? Because they dumped all the junk mortgages and risk on Wall Street investors. Once the junk mortgages are originated the loans are sold and all the risk is somebody else’s problem.If the people loaning the money were responsible the loans they issued this never would of happened. These lending practices started under the Clinton adminstration and mushroomed under George W. - What a joke that Democrats will come the rescue in 2008! Basically, the Clinton adminstration allowed this problem to be created and the Bush adminstration allowed the situation to worsen. These lending practices never should been allowed for reasons we are now coming to understand. People need to look at the root of this problem and how it got started.
Here’s a interesting real estate case about the mind of the home seller…my cousin and her husband bought a house in MA for $160k in 1998. In 2003 they moved out and listed it for $360k. They easily could sold it for $260k+, in 2003, walked away with a tidy $100k+ profit. But that just wasn’t good enough! Instead they got greedy and stupid. They came down to only $315k. The house is still for sale and has been on the market for 4 years.
What is the outlook for this property? It’s called a declining asset. Timing is everything in real estate. They paid $160K in 1998, listed it for $360 in 2003. Once they moved out in 2003, they still had to pay the $3000 property taxes in a house they don’t live in. So by now, in 2007, a $160 investement has turned into a $172k investment. If prices correct to 1998 (or below) levels and each year they continue to pay the property taxes, affectively, they have turned a huge profit into a loss! After paying $15k in property taxes on an empty house, there investment rises to $172k in 2008.
Here is the reason why foreclosures/declining prices this time around will be entirely different than they were in the past…
The most important aspect of the old bankruptcy code was the “automatic stay” provision. This allowed consumers to file for bankruptcy at anytime during the creditor’s collection process putting an immediate stop to all contact and collection activities from the creditor. The new 2005 law requires that a debtor receive credit counseling from an approved non-profit credit counseling agency for 180 days prior to filing Chapter 7 or Chapter 13 bankruptcy.
While this may sound benevolent, a much closer look at the practical effect of this provision reveals the crafty peeling of the debtor’s rights. The 180 day requirement is to provide the credit counseling agency the opportunity to work out payment plans with creditors. However, during this same period of time the creditor is not restrained from collection efforts. For example, Margaret is a homeowner in Jacksonville, Florida and is six months behind on her mortgage. As a rule, credit counseling agencies only work with credit card companies and have little or no training with dealing with mortgage companies.
After receiving foreclosure papers, Margaret goes to see her attorney to file for bankruptcy and is told that she must first seek credit counseling before filing for bankruptcy protection. Meanwhile, the foreclosure proceeds on schedule and a sale date is set 120 days later. However, Margaret still has not completed her 180 day requirement. What will happen to Margaret’s home? That’s right! The home will be sold and she cannot stop the sale by filing bankruptcy.
Question? If a borrower buys a house for $100k, prices decline, the house gets foreclosed and sold for $75k, the borrower rents an apartment and files for bankrupcy. Can a judge order the borrower to pay a percentage of the $25k oustanding debt or will it be 100% forgiven? Who will absorb the loss? I remember GW saying while people may not be able to pay off 100% of their debts, they can afford to pay back a small percentage.
Imagine renting and getting dragged into court for a housing loss debt? Assume the judge orders you to pay 10%. That’s $2500. So you are renting an apartment and paying off the $2500. Kinda makes it a little hard to save for a down payment on another home…