What Caused This Housing Crash Was Overpriced Housing
Some housing bubble news from Wall Street and Washington. “Existing-home sales fell in August when mortgage availability problems were peaking, according to the National Association of Realtors. Total existing-home sales…are 12.8 percent below the 6.31 million-unit pace in August 2006. Lawrence Yun, NAR senior economist, expected the decline.”
“‘The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales, with many buyers having to search for other financing when loan commitments fell through,’ he said. ‘Lower sales contributed to a buildup of unsold inventory.’”
“‘The abundant choice of homes is permitting buyers to better negotiate price and terms,’ said NAR President Pat V. Combs. ‘Price gains in the Northeast and Midwest were largely offset by a decline in the West, while the median existing-home price in the South was down slightly, demonstrating that all real estate is local.’”
“Regionally, existing-home sales in the Northeast 5.7 percent below a year ago Existing-home sales in the South are 12.7 percent lower than August 2006.Existing-home sales in the Midwest are 10.5 percent below a year ago. Existing-home sales in the West are 21.7 percent below August 2006.”
The Associated Press. “The fall in sales pushed the inventory of unsold homes to a record 4.58 million in August. That means it would take 10 months to exhaust the inventory of homes on the market at the August sales pace, also a record figure.”
“‘Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,’ Yun said.”
“However, other private economists are forecasting that sales of both existing and new homes will not stabilize until mid-2008 because they believe it will take that long for prices to fall far enough to reduce the large number of unsold homes.”
From Bloomberg. “Home prices in 20 U.S. metropolitan areas fell the most on record in July. Values dropped 3.9 percent in the 12 months through July, steeper than the 3.4 percent decrease in June, according to the S&P/Case-Shiller home-price index.”
“The index declined in January for the first time since the group started the measure in 2001, and has receded every month since then.”
“‘The decline in home prices clearly continued into the summer months,’ said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in a statement.”
“The housing slump ‘doesn’t seem like it will go away any time soon,’ said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. ‘As far as consumers go, this is another sort of pall over’ their ability to borrow against the value of their homes, he said.”
From MarketWatch. “Lennar Corp., one the nation’s largest home builders, said it posted a loss for its fiscal third quarter as falling prices and mortgage-market turmoil continued to weigh on the housing market.”
“‘It is already well documented that the housing market has continued to deteriorate throughout our third quarter,’ said CEO Stuart Miller in the earnings release. ‘Heavy discounting by builders, and now the existing home market as well, has continued to drive pricing downward.’”
“For the quarter ended Aug. 31, Miami-based Lennar said it swung to a loss of $513.9 million. Total revenue fell 44% to $2.34 billion as the company delivered 41% fewer homes and the average selling price decreased 6% from the previous year, driven mainly by higher incentives to attract nervous buyers.”
“Lennar said incentives averaged $46,000 per home in the latest quarter, up from $35,900 a year earlier. New orders fell 48% to 5,804 homes.”
“The company said it saw a home-building operating loss of $787.7 million, including a large $847.5 million charge related to valuation adjustments and write-offs of option deposits.”
The Street.com. “Lennar CEO Miller said the company has responded by continuing to adjust pricing to meet current market conditions in order to keep inventories low. ‘The net effect has been a continued deterioration of our net margin and accordingly, higher impairments to our inventory,’ he said.”
“The company has reduced it workforce to date by approximately 35% and expects continued reductions in the fourth quarter.”
“Lennar’s aggressive price cutting is on display in Port St. Lucie, Fla., where the company is offering discounts to move townhomes at its Newport Isles development.”
“Florida realtor Mike Morgan says Lennar is offering a 2,200-square-foot townhome for a listed price of $215,000. However, he says a Lennar salesperson said an offer of $195,000 might be accepted.”
“The value of the Lennar’s backlog, or homes under contract and not yet sold, slumped 60 percent to $2.2 billion from a year earlier. Lennar’s cancellation rate was 32 percent, up from 29 percent in the second quarter.”
“Lennar’s charges included $242.5 million in write offs of options on land it doesn’t plan to buy, $114.6 million in writedowns on property, and a $138.7 million charge on investments in entities it doesn’t include in its operations.”
“The company’s gross margin on home sales excluding land valuation writedowns was 14 percent, compared with 19.5 percent last year.”
“‘People are going to be loath to put their hard-earned money down with the prospect of it evaporating in a relatively short period of time through continued falling home prices,’ said Robert Stevenson, an analyst at Morgan Stanley.”
“Shares of Standard Pacific Corp. sank at the opening bell Tuesday after the homebuilder eliminated its dividend and arranged to borrow $100 million, stirring fears that the company needs the money.”
“As a homebuilder, Standard Pacific forms various partnerships to buy land, build homes on it and sell them. In some cases, the partnerships borrow money using the land as collateral, and Standard Pacific is obligated to repay the lender if the land loses too much value.”
The International Business Times. “Lenders did little to help subprime borrowers with adjustable-rate mortgages stay in their homes, even as it became clear many homeowners would struggle to keep up with their payments, a study shows.”
“Moody’s Investors Service said banks eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset higher in January, April and July.”
“It said that ‘only recently’ have servicers begun to modify more loans to help homeowners avoid foreclosures, ‘despite much industry dialogue and heavy press attention’ on the problem.”
“The credit rating agency said it based its study on 16 servicers that handle $950 billion of subprime mortgages.”
“Moody’s said that while some servicers actively reach out through phone calls to borrowers who may face resets, a majority still relies on more ‘passive’ letter-writing.”
“‘These trends can be a cause for some concern,’ said Nicholas Weill, Moody’s chief credit officer in structured finance, in a statement. ‘The number of future loan modifications by subprime servicers on loans facing reset may be lower than needed to mitigate losses meaningfully.’”
“Moody’s did not name the servicers it evaluated, but said its study covered 80 percent of the subprime servicing market. This suggests that many big servicers were included.”
“Americans may be disappointed that the Federal Reserve’s interest rate cut won’t translate into lower monthly mortgage payments and a revival of the housing market.”
“‘Mortgage rates won’t stimulate demand,’ said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. ‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
“Investors concerned about inflation following the Fed’s half-point interest rate cut have driven up the yield of 10-year Treasury notes by 23 basis points, or 0.23 of a percentage point, to 4.7 percent. The increase has dashed hopes that lower home-loan costs might entice more Americans to overcome their fear of falling prices and buy homes.”
“Total mortgage originations fell 8.8 percent in the second quarter to $730 billion from a year earlier, according to Inside Mortgage Finance. The number of subprime mortgages fell 66 percent to $56 billion, according to the newsletter.”
“Mortgage originations may drop to $460 billion in the fourth quarter, down 36 percent from a year earlier, according to the Mortgage Bankers Association.”
“Tighter lending guidelines are the biggest challenge facing borrowers, not mortgage rates, said mortgage marketing consultant Scott Tucker. ‘To paraphrase Will Rogers, the banks are not concerned about the return on their money, they’re concerned about the return of their money,’ Tucker said.”
‘The company’s gross margin on home sales excluding land valuation writedowns was 14 percent, compared with 19.5 percent last year.’
What is causing much of these losses are write downs. The gross margins are still acceptable. And as has been pointed out here before, given their large debts, these guys will chase that margin down to zero.
The gross margins really aren’t acceptable. And they really won’t be acceptable when they get below 10%. Unacceptable margins and low sales volume when combined with large debt equals BK for homebuilders.
sunk vs. marginal cost. Many of their costs are sunk (land, equipment, existing building leases, etc…) so that on the margin they are still profitable. If that weren’t the case, they wouldn’t be building. I agree with Ben, they will build until the marginal cost shrinks to zero.
The resulting overhang will ultimately become the perfect affordable housing solution.
They are already building where their marginal cost is zero if they are optimized. Marginal cost is rising, and the builders will continue until they cannot cover their average variable costs, at which time they will cease operations.
Wouldn’t bother me one bit either. There’s enough hillsides covered with bland, monotonous housing.
“these guys will chase that margin down to zero. ”
To below zero, if they have the cash to cover it, if that is what it takes to get money in to survive. An unsold house is a margin of -100%.
“these guys will chase that margin down to zero.”
Everything is going exactly according to plan. Land options are being cancelled. The price of land is falling like crazy. Homebuilders cutting prices like crazy and they still appear to have lots of margin to play with. The price of a new home is going to fall like a stone and drive the price of the existing homes down as well. I figure we will see 1998 prices before this is all done, IN NOMINAL TERMS. *nods
I punched up some US census data and inflation data over the weekend and compared the two… after a major run up say in 1971 1981 and 1991 we saw a take back of nearly 70% of the prior years gains. The bottom does indeed settle back to inflation adjusted prices.
That is why the Fed wants to ramp up inflation. Too bad they will end up causing more foreclosures
According to 7% / year (real inflation), prices are where they should be (read 40% drop in dollar is 90% gain in housing). The problem is wages fell in real terms and held flat in nominal terms. One could say that mortgage debt caused the inflation and devaluing of the dollar, but the unwinding of this bubble will not undo the inflation of other goods and services. The world is losing faith in the dollar which will result in even more inflation (lower dollar demand). As a result food, gas, clothing, and everything else will require a larger percentage of the median income than in the past.
Bottom line is that housing will continue to fall faster than the dollar. So don’t expect prices to revert to CPI adjusted ranges, but to fall well below the artificial CPI “price”.
Housing demand will continue to fall because this crash will wipe out the credit of the majority of potential home buyers (those moving up).
Actually, prices have a much tighter relation to household income. Household income rose much faster than inflation in the 70s as 2-income went from rare to common, and slightly faster than inflation in the 80s and 90s as 2-income went form common to VERY common.
1998 prices? In many areas, we’ll see prices well below that, probably some back to the 1980s. Repeat after me: “unbuildable Florida swamp land is worthless”.
Back in the day it was possible to get farmland in the country for $500/acre. Sounds about right.
Today you can buy Tokyo real estate at 1970’s prices. But they have so much more land over there, right?
About existing home sales:
Most of these offers were made in July / early August. This was before the effects of the credi crunch. The homes were approved under the salad days standards.
Under the much tighter regulations, I expect home sales to be even more lousy.
I think that you’re right on the money. Worse for the broader economy, the REALLY bad news on August and September housing prices will come in November. The negative wealth effect that generates will kill Christmas season for retailers and that’s when things get really ugly. In terms of YoY same store numbers, this Christmas will be the worst since 1991. IIRC, sales dropped around 3.5%, which we will almost certainly match and very possibly exceed.
Ahh, however the Canadians are coming over and buying. According to the MSBC know alls,
this may save the Christmas season for retailers.
““Americans may be disappointed that the Federal Reserve’s interest rate cut won’t translate into lower monthly mortgage payments and a revival of the housing market.”
“‘Mortgage rates won’t stimulate demand,’ said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. ‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
Someone is telling it like it is. Maybe the next step is just how much overpriced have home been ? my own 2 cents is 100% in California requiring 50% or more decline.
Definately refreshing, but far too late in coming. Not until the housing market is completely decimated will the majority be saying that prices got far too high.
I was just going to post this. I think they would be more disappointed to know what it is doing to their spending power and the dollar itself…
“‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
Not quite right. What caused this housing crash was the Fed’s low interest rates which led to still-okay mortgages which led to false demand which led to overpriced housing which led to toxic time-bomb mortgages which led to housing prices so super-inflated that even toxic time-bomb mortgages couldn’t cover the price, which led to decrease in real demand which led to an oversupply of unbought houses which led to a full stop in YOY appreciation which led to existing appreciation-dependent time bomb mortgages blowing up which led MBS buyers to finally look at what they were buying and baulk, which led to lenders to suddenly need cash they didn’t have and THAT led to the housing crash.
But it all started with the Fed.
Wow, spot on Oxide. In one paragraph you neatly summed up what we have all spent hundreds of thousands of kilobytes wailing and gnashing our teeth over.
Don’t forget to mention those damn “Flip” shows and other stupid shows fawning over how real estate will make you sooooo rich for no money down… That was in the middle of the chain of events you mentioned and can be mentioned as MSM propaganda inflating the appetite for granite countertops and big profits…just my $.02
That’s the greatest thing I’ve ever read - that should be put on a press release and sent out to all news organizations.
Oh Domino…
Subprime Panic Freezes $40 Billion of Canadian Commercial Paper
Sept. 25 (Bloomberg) — On Baffin Island in the Arctic Circle, Baffinland Iron Mines Corp. almost missed its window to ship provisions to workers before winter arrives. The delay came not from the weather, but from a sudden freeze in the market for short-term debt 2,000 miles south in Toronto.
Baffinland ran short of funds to pay for food, fuel and drilling equipment after investing in commercial paper that borrowers couldn’t repay. Without the money, the company had to arrange an emergency line of credit before shipping lanes froze over.
“We have 200 people to keep alive,” Chief Executive Officer Gordon McCreary said in an interview in Toronto. “Our lifeline to getting critical materials to the north” was the C$43.8 million ($43.8 million) invested in commercial paper, he said.
http://tinyurl.com/2pw5ty
This company actually approved a business plan that would make the lives of 200 employees contingent on an investment return? So if the workers die, does the company have liability, or do they just write it off as a loss to the life insurance company?
Well, it’s not so dire. They’d probably end up having to airlift supplies later at huge expense and/or fly a good fraction of the workers back south. Nobody would die except (1) the accountants when they get heart attacks from the cost, and (2) the shareholders when they likewise get heart attacks after seeing the huge productivity losses that result when half the staff has been evacuated.
Back when they were building the transcontinental railroad, when cash was tight it was not unheard of for there to be an “accidental” cave-in right before payday. The workers were mostly Chinese immigrants, so they were considered an acceptable loss.
This really gets me. Any more you’d think major corporations would have plenty of cash to pay for stuff, but just like J6P they’re in debt up to their ears and are dependant on debt to fund day to day operations. Oh yeah, this economy is toast.
I couldn’t agree more! I sometimes wonder if we are the only people (that we know, except my gram) who has a savings account.
With that being said, how do the execs make so much damn money?! Who is paying them if the company is broke?
You still think we live in a meritocracy?
“‘People are going to be loath to put their hard-earned money down with the prospect of it evaporating in a relatively short period of time through continued falling home prices,’ said Robert Stevenson, an analyst at Morgan Stanley.”
What’s worse, the risk of catching a falling knife is increasing as price declines are accelerating. For example, the median SFR list price in my zip code (SD 92127) is off by $71,000 over about two weeks time (down from $1,300,000 to $1,229,000 = 5.5% down the tubes in two weeks!). I wonder how long it will be until the MSM catches on to the acceleration?
It seems like the frequency of the “falling house prices” story is accelerating in the MSM. This is just my impression - I wonder if anyone tracks numbers on this sort of thing, like groups used to track the numbers of (fictional) murders on TV, or uses of keywords in televised political commentary?
This is one of the greatest stories only recently told:
REAL ESTATE PRICES SOMETIMES GO DOWN!
I conducted a search on LexisNexis Academic, as follows –
Select Sources: News, most recent 90 days (English, Full Text)
Search Terms: home “price declines”
Here are the counts of news articles by week since 5/23/07:
5/23-5/29 0
5/30-6/5 0
6/6-6/12 0
6/13-6/19 0
6/20-6/26 0
6/27-7/3 46
7/4-7/10 34
7/11-7/17 50
7/18-7/24 92
7/25-7/31 111
8/1-8/7 52
8/8-8/14 39
8/15-8/21 104
8/22-8/28 111
8/29-9/4 99
9/5-9/11 69
9/12-9/18 72
This looks to me like the profile of an information cascade playing out.
Let’s take bets on the maximum that will be reached (probably coincedent with the bottom). I say 555.
Very telling P’Bear, that is since I don’t like MSM, but not really surprising. OT: Did a case study for LN in 98…worked with a cool group of people on customer service. Smiling at the fond memories.
Professor, wow, thanks for that. Good work!
Roughly, it seems like the jumps in coverage corresponded with subprime-related downturns on Wall St, doesn’t it? Hopefully the “prices are too high” message will eventually eclipse the “it’s difficult to borrow money” message.
For example, the median SFR list price in my zip code (SD 92127) is off by $71,000 over about two weeks time (down from $1,300,000 to $1,229,000 = 5.5% down the tubes in two weeks!)
Most people on this board know that median prices are useless. Now you post regarding median “list” price in a high priced (low sales?) area. I could be wrong, but are you suggesting you live in a high priced area?
“Shares of Standard Pacific Corp. sank at the opening bell Tuesday after the homebuilder eliminated its dividend and arranged to borrow $100 million, stirring fears that the company needs the money.”
You think? Gee, I borrow money I don’t need all of the time!
anyone have prices on those land sales ?
test
Passed the test with flying colors, Ben!
‘Price gains in the Northeast and Midwest were largely offset by a decline in the West, while the median existing-home price in the South was down slightly, demonstrating that all real estate is local.’
CLICK!
So in six months, when the Northeast and Midwest start reporting price declines, will it be safe to conclude that the housing bubble was a nationwide phenomenon?
Moreover, all that it demonstrates is that all real estate pricing is statistical. And with a little math education, NAR might realize that there is more than one reason for statistical variation.
Naw, they’ll spin it as a weather related phenomena.
The NAR shills are still at here in Mazzholeland.
ABC affliate evening news interviewed one real estate broker and head of Mazz NAR who insisted the market had turned with inventory down and sales volume for August ‘07 surpassing Aug. ‘06, and (this is the killer), sellers are again receiving MULTIPLE OFFERS from purchasers with many final prices now going above initial list. People had better act NOW!
It’s the big fall push.
“Tell the people lies long enough, and soon they will believe them to be the truth…”-Joe Gobbels.
Ben, I have sent you a modest payment through paypal to kick the spammers out. Keep up the good work, this blog is one of the best ones out on the internet on housing, I have learned more here than on any website or news channel.
Ditto. Support Ben guys! He deserves to eat.
Neil
One way to kick spammers out is to require all posters to type in what they see in an image. Like for example you could require people to enter the number 1234567 which has been scrambled to make it machine unreadable but which could be read by real people. A combination of twisted numbers, letters should do the trick.
I see zombies coming through the fog. No wait they are FB’s. Everyone run for your life.
Ha!
What are you guys gonna give out for Halloween? I was thinking Ghirradeli (sp?) chocolate squares. I just want to show up all the FBs who will be providing CostCo hard candies this year.
“‘People are going to be loath to put their hard-earned money down with the prospect of it evaporating in a relatively short period of time through continued falling home prices,’ said Robert Stevenson, an analyst at Morgan Stanley.”
“Everybody, soon or late, sits down to a banquet of consequences.”
Robert Louis Stevenson
Exactly. And 14% is still a HUGE profit margin –many industries (farming, restaurants, groceries, retail, etc.) routinely manage on far less. We haven’t even begin to see the *real* discounts. The margin can even go negative for brief periods, like it did during the mid-1990s, as a homebuilder that does not build homes is like a shark that doesn’t swim –they have to keep moving product to stay in business.
In a capital intensive industry (like home building where sales are very lumpy) 14% has to cover the cost of financing their inventory, this isn’t as large a cost in retail (still there but a smaller portion of the sales price) so margins are lower.
14% is the gross margin, not net margin. For restaurants/retail, the gross margin is usually ~30%.
test
Writing down the land allows them to post a gross margin. The GAAP for the homes carry value (and subsequent cost of sales) would be lower of cost or market less a normal profit margin.
DING DING!!! We have a winner!
They are simply gaming the system. With these “write-downs”. They are losing money selling homes, because their TRUE gross margins are at or near zero.
If these write-downs were included COGS section of the I/S then we would know the true story. This is just like CSCO writing down all their crap vendor .com financing and then claim margins were holding up.
These write downs have to show up SOMEWHERE on the financial statement, don’t they???
I mean I/S.
On the I/S yes, however, after the section that would have an impact on gross margins.
You guys make a good point. Correct me if I’m wrong. By writing down BS land inventory value, they are able to show lower COGS and an operating profit.
IOWs, without the write-downs, unit contribution margins are negative. With the write-downs, unit contribution margins are magically positive.
Magically!
LMAO! They’ve been doing this for some time. So, the write-down contributes largely and determines the margin. You guys are good. ROTFLMAO!
If gross margins are positive and you still go bankrupt, what’s the difference??
The timing of the bankruptcy. You forestall bankruptcy. Without blinking, you can look creditors in the eye and point to margins.
This is not aimed at you…are creditors really that dumb??
Oh, I see the “forestall.” Which doesn’t “stop” the BK necessarily.
You’re right Blano. It shouldn’t matter. The gross margin number is used to confuse readers. Here is a snippet from Lennar’s press release; pay attention to the last sentence:
Gross margins on home sales excluding FAS 144 valuation adjustments were $304.1 million, or 14.0%, in the third quarter of 2007, compared to $761.2 million, or 19.5%, in 2006. Gross margin percentage on home sales decreased compared to last year in all of the Company’s homebuilding segments primarily due to higher sales incentives offered to homebuyers. Gross margins on home sales were $1.0 million in the third quarter of 2007, which included $303.1 million of FAS 144 valuation adjustments, compared to gross margins on home sales of $729.2 million, or 18.7%, in the third quarter of 2006, which included $32.0 million of FAS 144 valuation adjustments. Gross margins on home sales excluding FAS 144 valuation adjustments is a non-GAAP financial measure disclosed by certain of the Company’s competitors and has been presented because the Company finds it useful in evaluating its performance and believes that it helps readers of the Company’s financial statements compare its operations with those of its competitors.
http://tinyurl.com/2zgp9o
“‘Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,’ Yun said.”
I hate to break it to you Yun, but without subprime-kamikaze lenders, this is normal. The market is normalizing.
But without FUD, at these prices, there wouldn’t be any sales. Hence why the recovery will always be only a season or two away per the NAR.
But buyers have caught on (at least the few left who quality).
Go to an open house. Now assuming another ‘buyer’ shows up, see their attitude. It is night and day for 6 months ago.
Got popcorn?
Neil
Yes - from now on people will actually have to state their income on a loan application and be able to prove that they can reasonably afford a house.
“Once we get through these disruptions …”
In late fall of 2010, Yun?
I hate to break it to you Yun, but without subprime-kamikaze lenders, this is normal. The market is normalizing.
-mrktMaven FL
But without FUD, at these prices, there wouldn’t be any sales. Hence why the recovery will always be only a season or two away per the NAR.
-Neil
This is one of the aspects of this whole mess I find so fascinating. For 2, 2-1/2 years, the market went pig-ass, out-of-control wild and these guys got it stuck in their heads that it should always be that way.
“It’s different this time”
And now that it’s not being any different than it was before (boom-bust) they continue to twist things around in an effort to convince (themselves?) that pig-ass, out-of-control is somehow normal
I am truly entertained.
(I am Lavi Dave and I am not a spammer and I approve of this message™)
Could one call it a puffy inventory, Combs?
“‘The abundant choice of homes is permitting buyers to better negotiate price and terms,’ said NAR President Pat V. Combs.
This part of the original post bopped me over the head:
“The housing slump ‘doesn’t seem like it will go away any time soon,’ said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. ‘As far as consumers go, this is another sort of pall over’ their ability to borrow against the value of their homes, he said.”
I can recall a time when borrowing against one’s home was done as a last resort. And the borrowers tended to keep quiet about it.
OT a bit, but another day, another round of going nowhere in the Wolverine State:
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/AUTO01/709250380&theme=Autos-UAW-talks
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/POLITICS/709250379&theme=Metro-State-Budget
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/UPDATE/709250408/1396
Best to you Blano…hope this is a short walkout for all concerned.
It’s interesting I guess if nothing else. I’m just riding things out around here ’til my youngest graduates, then I’ll look for greener pastures. Never was in to cars.
150 years ago, simply having a mortgage was a last resort, as opposed to paying cash for a home (or building your own with what you’d already purchased or owned). Debt for even large purchases used to be reserved as a luxury for the extremely wealthy. Now it’s perceived as an inalienable right.
Can you imagine?? “We hold these truths to be self-evident…that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of inescapable consumer debt.”
Yeah most people don’t realize that. Also I remember reading somewhere that early mortgages (1800s / early 1900s?) were only 7 years - not 15 or 30 (or 50 or infinite).
I’ve read they were 5 yr ARMs with balloon pmts at the end. As a result, people refinanced very much like they are expected to do now. There was a massive credit crunch, however. People could not refinance. FHA was created as a result.
Packman,
I believe it.
Of course to be fair we’re talking apples to oranges. Homes today have a lot of stuff that they didn’t have 150 years ago, thus some of today’s higher prices are justified (you know, stuff like electricity, A/C, appliances, etc.). Come to think of it, many of those older homes would be considered unfit for habitation by today’s standards. Still no reason not to save up and pay cash for a modest home though.
Devildog, on the one hand, you’re right. But on the other hand, I’m guessing people spent a larger percentage of their income on the bare essentials. They weren’t borrowing for crazy overpriced toys as they are now. But now I’m getting way out of my element.
“I can recall a time when borrowing against one’s home was done as a last resort. And the borrowers tended to keep quiet about it.”
Ditto. Even when I was younger (I’m 36 now) this was the case. One of our neighbors *gossip* had to take out a *whisper* second mortgage *gasp* to put his daughter through a hoity-toity private college. And when I was growing up, one of my friends was “poor.” She qualified for Reduced Lunch at school and lived in a *gasp* DUPLEX! And this wasn’t a rich town either. We were all working class — autoworkers and mechanics and teachers and such.
“‘Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,’ Yun said.”
That would be late fall of 2008. Prices have a long way to fall in Florida until they become affordable to the consumer.
Mr Bear beat me to the post. Housing deflation can be a long and drawn out process. I think it will be several years…
what is a fair price to pay for a new built home in florida these days?
we are considering building one in sebastian and think it’s a great deal, can’t imagine it being less expensive…maybe we’re wrong.
no mc mansions for us, just a liveable home…jeez rents are as expensive here as buying one! and at least we will have equilty and not just throwing it away as we’ve been doing that for years now.
i can only assume that the market will stabilize at some point and flippers will be non existent (can’t wait)
i mean a home in sunrise florida should not be 325k but i can’t imagine it going down to 100k…245k seems normal, maybe a bit less depending on what it has to offer.
Go to building-cost.net. Plug in your square footage and house characterisitics and you’ll a rough idea of what the actual construction should cost. Even then it’s a little inflated because they are using 2006(?) material and labor costs. Then you have to add in the cost of land, which is anybody’s guess.
$245K still sounds high.
There are many more capable ones here to advise you. If you are able to wait even 3 months or longer, wait. You may be able to negotiate a lower rent–the inventory is high (I’m not sure about your particular location, but it’s true for most of FL).
Come on board…I’m sure many of you can do a better job of it than I.
Best,
Leigh
what is a fair price to pay for a new built home in florida these days?
I would not pay much over $110 per sq ft. Material costs are dropping and labor costs will soon follow as the demand continues to drop.
“‘Once we get through these disruptions, we’ll get a better sense of where the actual market is in late fall as conditions begin to normalize,’ Yun said.”
Market normalization prediction du jour. Let me see, is that late Fall 2007 or late Fall 2011? My guess is this market will not bottom for several years.
“‘People are going to be loath to put their hard-earned money down with the prospect of it evaporating in a relatively short period of time through continued falling home prices,’ said Robert Stevenson, an analyst at Morgan Stanley.”
i totally agree with this statement. so who is still buying these homes? all those people who have bought homes the last two years are going to give them back to the bank. dont you guys think this situation is going to get worse before it gets better? and if so, why are there so many economists saying things are going to get better?
Today’s buyers? - Well, sSix decades of relative postwar stability have simply made it impossible for them to consider any scenario besides what they’ve personally lived through.
As for the economists - they issue rosy forecasts for the same reason a waitress compliments an ugly customer - to make more money.
Talked to my architect this week. He says a lot of his contractor friends, construction workers and others in the business are out of work (he lives in the OC). Would be a good time to remodel, he says, because so many are hungry for work. Wonder why this doesn’t show up (yet) in the employment figures?
Maybe they work under the table (not counted in the official stats). There is a large *ahem* demographic here in SCAL that is currently suffering high unemployment but never gets counted.
Those people have real problems, because it’s not like they have other skills, or assets even, to fall back on. Maybe they’ll go back home? Turn to crime? Get restaurant jobs? Who knows.
One of the “high end custom” builders in our town (they all claim to be) worked as a policeman during the last downturn in the early 90’s. Then the economy went south and he was laid off by the city. A lot of these guys have seen the boom bust cycle before.
In Texas, most home improvement contract companies are composed of 1) a red neck that meets with the customers and secures the work and 2) several skilled Mexican workers who actually do the work. These workers will do anything they can to avoid government detection (including answering an employment survey over the phone). So, on the surface it appears that the housing bubble collapse is not affecting the economy until you go to the local Fiesta supermarket and notice the place is half empty on a Saturday afternoon.
would you trust those hungry workers? i need alot of work done on my home but i am scared to get scammed out of my money.
self employed
The government unemployment statistics are based off a software model, not real numbers. Probably programed by the same shmucks who programmed the realestate risk models thinking property can only go up in value.
or the Fed which says we have only about 2% inflation in the economy
I’m a SoCal remodel contractor and I’ve taken an absolute beating over the last year. You wouldn’t believe some of the pain out there. I get calls all the time from guys starving for work, probably on the brink of commiting crime to survive. Most of the construction guys I know who lived it up during the boom years are totally screwed. The funny thing is, most of the illegal workers I’ve ran across have been fairly prudent with their money. They work their asses off, live frugal lifestyles and send half their cash earnings back to their families in Mexico. These guys are tougher than nails. They’ll survive. The issue whether they should be here in the first place is a whole ‘nother matter.
ok why am i having trouble posting? i am not a spammer! i dont even know what one is!
It is the server, under pressure from incoming spam. BTW, we are going to limit the number of posts from any individual computer in 30 seconds in order to fight this stuff off.
It seems to me that housing deflation will meet rampant inflation somewhere in the middle. I’m up for my yearly review at my job so I intend to ask for a 100% raise so that I can afford to live.
testing
OT a bit, but another day of going nowhere in the Wolverine State…..
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/AUTO01/709250380&theme=Autos-UAW-talks
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/POLITICS/709250379&theme=Metro-State-Budget
http://www.detnews.com/apps/pbcs.dll/article?AID=/20070925/UPDATE/709250408
Just so happens that this very same story is the lead in my alma-paper:
http://www.michigandaily.com/
What’s bopping Slim over the head (which is really starting to ache after all this bopping) are the comments that follow. They include such gems as, “There is a reason why job security is at the top of demands. Maybe if GM and other domestic automakers were able to build quality automobiles rather than the sh–boxes they currently churn out, then they could possibly compete with Toyota and Honda.”
Back in my U-M student days, very few people criticized the domestic automakers. It was kind of like saying bad things about God.
If you ever get bored down there and don’t already, read the online Freep forums whenever an auto-related article pops up. I’d say the criticisms outweigh the compliments, and many times by a large margin.
Agreed, Blano. We lost 35% on our house in Indian Village (a listed historic neighborhood - prices never decline there). This was in 2004, at the height of the housing boom. Sorry, but Michigan is sunk. It’s suffered from lack of leadership year after year.
Ouch!!! Sorry to hear that.
The Village is nice. We lived in a house on Seminole before we were married in the late ’70’s. Nice arrangement - we only had to pay the utilities and take care of the only permanent resident - a dog. Some of those houses are craftsman masterpieces.
Very strange media today. MSNBC interviewed Barbara Corcoran on the new NAR numbers. She said this current slump is very different than the mid 1980s, since the mid- 80’s sellers were “largely investors,” compared to the current slump, where “95%” of the sellers are those living in their homes. Huh??! Where is she getting this data, since we’re hearing of all the flippers in Miami, Vegas, etc., etc.?
I wish she’d just go write romance novels about the couple that bought a house and lived happily ever after, until they get foreclosed on…
And then she went off to dance in the Detroit strip bars…
You don’t know how much I had read this earlier… what a set up line…
Neil
She got the data off the mortgage applications, on which lies were told as a matter of course.
She also blamed the housing mess on lack of leadership.
I agree!
Have the latest NAR puppet announce that:
1) The biggest bubble in history has popped
2) Sellers are delusional
3) If they don’t lower their prices, they’re totally screwed
4) and by the way, our new commission is 3%
Unfortunately, that Sandy Duncan looking, horse-mouthed wind bag is probably alluding to a bailout.
Corcoran (of the Corcoran group) is so funny…she also says that part of the slump is “fiction” because of “underappraisals” coming back, “because the banks are so scared.”
Methinks Babs has problems with non-fiction…
“Would be a good time to remodel, he says, because so many are hungry for work.”
I’ve got a lot of work in the pipeline here in Brooklyn. I’m waiting for a time when they need me more than I need them. Next year, or 2009?
O/T: I just got back from a 5 mile walk checking out some of the neighborhoods. I moved to Salinas in late summer of ‘04. At that time houses were selling in less than 5 days and had multi-offers thanks to RE pushers. Rentals that had 3 or more bedrooms were usually rented within hours to days after the listing went up. So what has changed? Today I saw my first Action sign tacked to a garage door; a RE sign with foreclosure affixed to its top; 4 rental signs for houses at least 3000 sq.ft. Most of the RE signs were from small RE offices that I haven’t seen before. Of the major RE offices, I saw 6 for Coldwell/B, 4 for ERA, 1 for Century 21, 1 for Prudential, 2 Remax; at least an equal number of FSBO. When I went by a local stripmall, 4 units were vacant and they are adding to the mall just down the block. I saw a some nice brown yards growing weeds, and some vacant houses with RE signs that are most likely REO property. What amazed me was that all of this housing was in an area that older (10yrs).
Cha-ching…that’s the ATM sucking the doorbell off the front door…chuckles.
Many of us here foresaw this crash, and now people like Yun are running around blabbing like they just discovered the cure for AIDS.
Half A Billion Dollars, $hot to Hell
“For the quarter ended Aug. 31, Miami-based Lennar said it swung to a loss of $513.9 million. Total revenue fell 44% to $2.34 billion as the company delivered 41% fewer homes and the average selling price decreased 6% from the previous year, driven mainly by higher incentives to attract nervous buyers.”
No, that’s 1/2 a billion dollars shot directly our way, Lad. Money in our pockets.
I have a friend here in Yuma, AZ who is considering buying her first home (and yes I have tried to warn her). She has about $3000 in savings, makes mid to high 40’s, the real estate agent is showing her unremarkable resell homes and condos at $160,000 (still too high for this desert town- thanks to the San Diego speculators) and mortgage lenders are offering her interest only loans. Still insanity. I’m shaking my head.
Only $3,000 in savings. And she wants to buy a house?
Tell her no. Not this year, not next year.
Make sure she doesn’t buy a Hall house - lots of foundation issues. There were major price run ups in Yuma the last few years. I personally know of tons of instances where California “investors” purchased whole blocks of houses. Prices went from mid $50k to $200k for comparable houses in just 5 years. Way overpriced. I escaped, if you value your friend at all hold an intervention or do whatever you need to do to keep her from buying. Yuma is the last place on earth I’d want to be priced in forever at.
Don’t worry. Even the i/o lenders are requiring down payments now. 10% of $160,000 is $16,000, but your friend only has $3,000. So long as the Bank of M&D doesn’t kick in, she should be saved by default.
Writedown example:
Before writedown-
Sales Price $100k
COGS 99k
Gross MArgin 1%
After writedown:
Sale Price $100k
COGS 80k
Gross Margin 20%
On the I/S After writedown
Sales $100k
COGS 80k
Gross Margin 20k
Other Expense:
Land write down 19K
Net income 1k
That’s the point I’m trying to make….bottom line is what matters. A company can survive small gross profits forever, but if that bottom line stays red too long, they’re a goner.
If the land is almost paid for the writeoff will not negatively impact cash flow and might keep-em afloat a little longer. (although the redink probably blows all their debt covenants).
I think someone said this here, they need to keep building and lose a lot or stop and lose it all.
“Existing-home sales fell in August when mortgage availability problems were peaking, according to the National Association of Realtors.”
“Peaking.” Hilarious. Goebbels and Orwell could have taken lessons from these clowns.
‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
So, is BB himself impotent? Must make his wife disappointed? How can we help BB? Maybe Mr. Magoo has the answer? Or did he get a little too feeble in his old age? LOL
May I suggest $ialis for your underperformance problem?
“‘Mortgage rates won’t stimulate demand,’ said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. ‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
‘The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.’”
So, is BB himself impotent? Must make his wife disappointed? How can we help BB? Maybe Mr. Magoo has the answer? Or did he get a little too feeble in his old age? LOL
test
The other 99% are so screwed…
“Moody’s Investors Service said banks eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset higher in January, April and July.”
the banks are not concerned about the return on their money, they’re concerned about the return of their money!! No $h*t!!!
aggrrr. Perhaps, just perhaps the banks should have thought of that tiny little item BEFORE giving their money away to FBs!!
Oh the insanity…ya just can’t make this stuff up.
I’m an old fart who isn’t that computer savvy. Can someone tell me how “spammers” can screw up a website like this and who those “spammers” are? Thanks.
I think spammers are people with computers that sit there and send advertisements to the blog at such a high rate that the server’s spool gets clogged.
I also suspect that some of the home builders, mortgage lenders, RE brokers, etc. may be attacking the blog on purpose. It would be cool if we could figure out who’s doing it, then we could post the results here and let the HBBers hack away at THEIR respective websites.
actually, the spammer is Ben Bernanke. sittiing at his desk, bottle of wine in one hand, repeatedly punching the enter key on his computer with the other hand and muttering over and over “how did i get my a.. into this mess”?
Builders had a good thing going, selling to investors right off the bat, putting up sold flags on the site plans and creating a pent up demand. They sought a frenzy atmostphere they got it , thus rasing prices every other week became a norm and looking the other way when loan papers showed little or no down.
The really good buyers paid a high price for the flippers and builders who early had a good thing going then the bottomn fell out, now the builders are in competiton with the investors and the in bed together is now a cut throat who will slash prices first to get this inventory down.
I don’t feel sorry for either one, they both played high stakes poker a few won and got out of the game early but for most they are stuck now and we the public are suppose to feel sorry for the home builders, the same people who use to tell you , stand in back of the line, keep your mouth shut, pay the going rate or more and we “may sell you a home?”
Builders had a good thing going, selling to investors right off the bat, putting up sold flags on the site plans and creating a pent up demand. They sought a frenzy atmostphere they got it , thus rasing prices every other week became a norm and looking the other way when loan papers showed little or no down.
The really good buyers paid a high price for the flippers and builders who early had a good thing going then the bottomn fell out, now the builders are in competiton with the investors and the in bed together is now a cut throat who will slash prices first to get this inventory down.
I don’t feel sorry for either one, they both played high stakes poker a few won and got out of the game early but for most they are stuck now and we the public are suppose to feel sorry for the home builders, the same people who use to tell you , stand in back of the line, keep your mouth shut, pay the going rate or more and we “may sell you a home?”
Witnessed a “midnight move” right here in Carmel Vally area of San Diego! Came home and neighbors were throwing all their junk in a pickup (no boxes or anything). I told my wife they must be in foreclosure, and sure enough turn out to be the case. A few weeks later there’s cleaning people hauling out bags of garbage.
Yes, when you look at the window past midnight and the lights are on and the truck parked backwards in the driveway the get out of Dodge has begun?
uhoh. Something spooky is going on across the street from me. We rented in a 95% mid-incomed owned subdivision. (It’s very nice, on very temporary terms).
Shook hands with the neighbors, meet and greet. Nice people.
I started to notice (I see through rose color glasses, BTW, and don’t mind other’s business) the cars across have disappeared.
Vacation? Who cares. Days go by and no lights…is my neighbor ok?
Different vehicles park in driveway talk on cell phone…ok, maybe friends keeping an eye on the place?
No kids on bikes? Family emergency? Mind you, I’m not one to just bustle on over and invade someone’s privacy.
Drum roll……..they’re gone. Foreclosure. So sad.
Our welcome to the neighborhood…(nice enough) oh, those renters!
YOU JUST CAN’T MAKE THIS STUFF UP!!!
No pigs left in the foreclosed housese there in Carmel to trash and destroy it? No unwanted dogs left to trash the house? Or cats, or some other animals? They just left quietly? Oh, the inhumanity. Just a midnight move.
A little anecdotal evidence coming from Ladera Ranch, CA (Orange County). A family friend is an OC Sheriff and he was recounting how their doing between 7 and 10 forced evictions per week now in Ladera Ranch. He also indicated thi is happening in Dove Canyon and Robinson Ranch. Keep in mind these are high-end home areas.
Even OC’s not immune to the laws of stress economics.
Please try and gauge for us, how your family friend, feels about being the guy that gives ordinary joes and jills, their walking papers…
As opposed to usual cops and robbers stuff
Appreciate some feedback~
Home equity loan line of credit
HELL O/C
“Even OC’s not immune to the laws of stress economics.”
The more this goes on, it seems like higher end areas are especially NOT immune. The concept of “people stretching to get into homes they can’t afford” is probably more prevalent in the higher end areas due to people’s mad desire to create the illusion that they, too, are wealthy.
“Us? Yeah, we have a million dollar home.”
It isn’t that they were up to their ears in debt. They had $40 billion liquid assets. Instead of putting them in the bank at 1% over inflation, they loaded it out in the commercial paper market, normally seen as safe as a bank, for 1-2% extra rate of return. 1% of $40 billion is $40 million extra profit.
The problem was, they didn’t get paid back. The money market probably put it into CDO and MBS they couldn’t sell, and without more money coming in… crunch.
And you can bet that if/when they do get paid back, they won’t be loaning it out again.
This mortgage disaster is going to hurt SOOOO many companies that no one would normally expect to have MBS/CDO exposure, because ALMOST ALL companies have money market exposure and money markets have MBS/CDO exposure.
When??
Anybody have a reference/data source for historical land values by location?
While, no real housing bubble in Western Pennsylvania, people are still hurting. Many people still tried to squeeze into houses that would be a stretch with the relatively low incomes in the area. They often forget that along with the mortgage payment comes taxes, insurance, maintenance and the new furniture that the wife wants to buy in order to make the house impressive to her friends. Luckily Lowes was offering 6 months no payment as long as you charged over 299., so the new appliances didn’t really cost anything. And as luck would have it the furniture store was offering 12 months with no interest and no payment. They’ll just pay all of that and the $1,800 Big flat screen TV with no interest no payments(Circuit City) with the tax return. Add it all up, and just like so many other places, people here are hurting, some hurting really, really badly.
I use the measuring stick of toys in yards with for sale signs as an indicator, and it indicates that people are looking to raise some cash.
Lots of ATVs, Motorcycles, scooters and vehicles up for sale, and has been increasing since the summer.
People can carry on for a while living on credit to help suppliment their stagnant paychecks, but eventually something has got to give. Either massive bankruptcies or a drastic slowdown in consumer spending, while people actually live within their means and paydown their debts.
Please try and gauge for us, how your family friend, feels about being the guy that gives ordinary joes and jills, their walking papers…
——————————————————————————
Very painful…but a legal requirement once a foreclosure consumates. What makes this even more uncomfortable is that this is the first time in recent OC history where he’s seeing this level of forced evictions.
Thanks~ appreciate it..
How does and average foreclosee act, when their number is up and the sheriff is at the door?
“Total existing-home sales…are 12.8 percent below the 6.31 million-unit pace in August 2006. Lawrence Yun, NAR senior economist, expected the decline.””
As we say in Linux-land, go fsck yourself Mr. Yun. And Take that assclown Lierah with you too.
Now that the foreclosures are rocketing, the game is truly over for the Housing Bubble. Once the mindset has shifted from “an easy way to make money” to “an easy way to lose everything” real estate will no longer be the Bubble investment of choice.
Barring a total economic meltdown - which is certainly at a non-zero chance at this point - maybe we Bubble Watchers will be able to get a decent house at a decent price in a few years.