A Correction Process To Revive Affordability
Some housing bubble news from Wall Street and Washington. Reuters, “State Street Corp said on Thursday it will take a $279 million fourth-quarter charge after making bad bets on subprime mortgages and other debt, and said it replaced its investment management chief. The company is the world’s largest money manager for institutions, with about $2 trillion of assets under management as of September 30.”
“It is also one of the world’s largest providers of custody services for institutional investors, overseeing $15.1 trillion of assets.”
From Bloomberg. “State Street had $8.2 billion…in securities backed by mortgages made to the riskiest borrowers, down from $13.9 billion as of June 30.”
“State Street faces at least three lawsuits filed by clients who accused the firm of breaching its fiduciary responsibilities as a fund manager. Each claims that investment strategies sold as low risk led to substantial losses because of investments in mortgage-backed securities.”
Dow Jones Newswires. “State Street set up a $600m reserve to cope with legal and other costs it faces after the credit crisis.”
“In October, US life insurer Prudential Retirement Insurance and Annuity Company sued State Street, claiming it acted deceptively and imprudently when two of its bond funds declined by as much as 25% in July and August as a result of investments in mortgage securities.”
“National City Corp, one of the 10 largest U.S. banks, said on Wednesday it will cut its common stock dividend 49 percent and eliminate 900 jobs as it stops offering mortgages through brokers.”
“‘It plans to keep making home loans, emphasizing mortgages considered less likely to go into default, but expects loan volume to fall by more than half in 2008. National City expects to make about $15 billion to $20 billion of mortgage loans in 2008. That compares with about $43.9 billion for the first 11 months of 2007.”
“Pressure in the housing market is not going to abate any time soon,’ including in 2008, CEO Peter Raskind said in an interview. He said the changes will help the bank ‘navigate through a very difficult period for the entire industry, and beyond.’”
“National City is still reeling from the U.S. housing slump a year after selling its subprime mortgage unit to Merrill Lynch & Co. A third of the bank’s branches are in Ohio and Michigan, two of the states with the highest foreclosure rates.”
“The housing market ‘requires aggressive steps to overcome the near-term challenges,’ Raskind said in a statement today. ‘It is clear that origination volumes will be lower going forward, and we are configuring our mortgage business to operate profitably.’”
The Boston Globe. “Springfield…is one of those investors that got clobbered in its portfolio by owning securities backed by home loans.”
“Springfield bought investment securities that had been rated AAA and worth nearly $14 million in the middle of last year. Those same investments have plunged in value to just $1.2 million now. No one thinks they deserve an AAA rating any more.”
“In the global financial marketplace, an investor losing $12 million or $13 million during such a wild period doesn’t amount to a hill of beans. For a city that has stepped back from financial disaster in just the last few years, it’s a very big deal.”
“Thanks to aggressive collections and cost-cutting, Springfield has managed to generate surpluses in the last two years. That surplus was about $17 million two years ago and $30 million in the most recent year, so it hurts when $12 million goes up in smoke.”
“Springfield purchased CDOs, or collateralized debt obligations, securities backed mainly by mortgages, from Merrill Lynch as a way to put its available cash to work. City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren’t legally allowed to own for reasons of safety and liquidity.”
“‘We take very seriously the financial cost and the breach of public interest,’ said Chris Gabrielli, the chairman of Springfield’s Finance Control Board. ‘Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn’t have to settle for less than getting the money back.’”
“The rating agencies, which caused so much of the subprime pain with their indiscriminate blessings, seem to be skating past responsibility.”
“Issuance in the U.S. asset-backed market plummeted 30 percent this year as subprime mortgage loan origination declined in a deteriorating housing market and investors fled the risky securities.”
“The dollar total of ABS securities fell to $863.6 billion in 2007 from $1.249 trillion sold in 2006, Thomson Financial said on Monday. The overall decline in issuance was led by a sharp 61.9 percent drop in the home equity segment, also referred to as subprime mortgages.”
“‘2007 will be a year to remember with the subprime mortgage market falling off the cliff, contagion spreading to every market and volatility at all-time highs,’ said Deustche Bank in a recent report.”
“Commercial paper backed by mortgages, credit-card loans and other assets rose $26.3 billion to a seasonally adjusted $773.8 billion for the week ended Jan. 2, the Federal Reserve in Washington said today.”
“‘The market’s in a process of healing,’ said Neal Neilinger, managing director and co-founder at NSM Capital Management LLC. ‘The weakest are going to fall and the strongest are going to survive.’”
“The rise in asset-backed commercial paper, which matures in 270 days or less, snapped a retreat of $447.6 billion, or 37 percent, that began after the market reached a peak on Aug. 8 of $1.2 trillion.”
“The contraction resulted from a ‘disappearance of the ’shadow’ banking system that had allowed banks to securitize their mortgage loans and move assets off their balance sheets,’ David Rosenberg, chief economist at Merrill Lynch & Co. in New York, said yesterday in a research report.”
From Builder Online. “The National Association of Homebuilders is forecasting that the housing market could reach bottom by the second quarter of 2008, with a ‘pretty good expansion’ occurring once again in 2009.”
“David Seiders, NAHB’s Chief Economist, sees new home sales bottoming out in the first quarter of 2008. He noted that recent price declines, which he labeled a ‘correction process,’ are helping to ‘revive affordability.’”
The Philadelphia Inquirer. “Orleans Homebuilders Inc. today said it recorded a $55 million pretax charge on the sale of about 1,400 building lots, mostly in Florida, Illinois and Arizona, in nine separate deals for $32 million.”
“Most of the land sold in the nine deals was raw or partially developed, with the exception of the property in Arizona, which involved work-in-progress houses. ‘We generally sold lots and land in weaker-performing communities,’ Jeffrey P. Orleans, the company’s CEO said in a news release.”
The Washington Post. “The homeownership rate was approaching 70 percent in 2005, up from 64 percent in 1990. A good cause shielded bad practices. (C)omplacency lulled ordinary Americans into paying ever-rising home prices. Something so embedded in the national psyche must be okay.”
“By 2005, the average newly built U.S. home measured 2,434 square feet, and there were many that were double, triple or quadruple that.”
“‘We’re not selling shelter,” says the president of Toll Brothers, a builder of upscale homes. ‘We’re selling extreme-ego, look-at-me types of homes.’”
“In 2000, Toll Brothers’ most popular home was 3,200 square feet; by 2005, it had grown 50 percent, to 4,800 square feet. ‘Buying a bigger house isn’t an investment,’ warned Wall Street Journal columnist Jonathan Clements. It’s ‘a lifestyle choice — and it comes with a brutally large price tag.’”
“Sociologically, the ‘housing bubble’ resembles the preceding ‘tech bubble.’ When people paid astronomical prices for profitless dot-com stocks, they doubtlessly reassured themselves that they were investing in the very essence of America — the pioneering spirit, the ability to harness new technologies.”
“Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American dream? It was easy.”
The Wall Street Journal. “U.S. house prices ‘likely would have to fall considerably’ to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.”
“The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.”
“Starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818.”
“The rent/price ratio is about a third below its long-term average…The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.”
“The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed.”
“Mr. Davis said…’To justify current price levels, you need rapid growth in rents.’ But it’s hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it’s possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out.”
“Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. ‘When a downturn begins, it will last for a while.’”
‘The company is the world’s largest money manager for institutions, with about $2 trillion of assets under management as of September 30.’
‘It is also one of the world’s largest providers of custody services for institutional investors, overseeing $15.1 trillion of assets.’
If they set aside $600 million just for legal fees, it makes one wonder how much was lost.
We’ve seen the START of the writeoffs of the mortgage-backed securities the financial firms RETAINED. They’re just playing the national average for disclosing the losses among those who bought the bulk of the securities.
Or is that taps?
“State Street Corp said on Thursday it will take a $279 million fourth-quarter charge after making bad bets on subprime mortgages and other debt, and said it replaced its investment management chief. The company is the world’s largest money manager for institutions, with about $2 trillion of assets under management as of September 30.”
“It is also one of the world’s largest providers of custody services for institutional investors, overseeing $15.1 trillion of assets.”
Could someone answer me this, I get the impression that the $279 million loss is just on State Street Corp’s own assets and not on the trillions of dollars of assets that it manages. The reason being is that the company itself is not worth trillions, it just manages trillions so the question is how big a loss has its customers taken so far. Or is that what all the lawsuits will determine and why they need $600 million in reserves just to handle the legal costs.
This is especially true if State Street Corp gave the same advice to its customers as it took for itself, their customers could lose billions and billions. I wonder if $600 million will be enough???
Doesn’t State Street have something to do with Wells Fargo funds? I thought I saw their name on the paperwork.
Orwells Fargo?
Rosebud?
Arrgh, just saw Orwell, thought it said Orson. Must open those eyelids more.
Eh they’re the custodian of same..the custodian is in the toilet - great!
Food for thought….these aholes caught up in the subprime meltdown are probably also in charge of the safekeeping of 401K retirement money. As the crooks in the 3 piece suits hardly ever go to jail they will probably use the 401k money to help pay for their golden parachutes as they sail off into the sunset.
Hey good buddy, Neil, got fraud…err popcorn?
rents in my hood 22151 haven’t gone up 20% in this time frame- and the average military rank 05 live here for free and can hop an express bus to the Pentagon
“Starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818.”
Yeah, here on the ground in the Central Valley, you can rent almost any house you want for a 1000 bucks, and there are many very liveable ones at $800 to 900. PITI for a comp. house is still over $2000 - a looong way to go in Merced.
here on the ground in the Central Valley, you can rent almost any house you want for a 1000 bucks, and there are many very liveable ones at $800 to 900.
Certainly depends on what one deems “livable”. Yes we can find sub $1000 rentals and hate every minute we’d live there. I see rentals on very busy intersections and wonder who in their right mind would ever want to live there but alas someone does.
90501… my rent went up by 2.2% a year since 2000
I also found a lot of stuff available in better areas dropping a bit
“Commercial paper backed by mortgages, credit-card loans and other assets rose $26.3 billion to a seasonally adjusted $773.8 billion…”
Seasonally adjusted aka heavily manipulated.
Rents up 4% a year? I currently rent and in my 37 years of existence I have never had a rent increase from one year to the next. To be fair, however, I did have to begin paying heat after one really bad winter back in 2000/2001, but that was due to an increase in the price of natural gas.
I have never had rent go up on me, either.
Landlords typically increase the rents between tenants here. My rent only went up after I moved and compared what I had to pay in rent versus the previous renter.
It’s been a regular occurrence for me in SoCal. Westside/beach rents have increased pretty dramatically in the past few years. I was sharing a nice 2 bed condo with a great view in Hermosa Beach for around $1500/mo in 2004, now you can’t touch something like that for less than $2200 or so.
In New York, tenant hell, rent increases are more or less assured except in busts, when rents can fall if you are willing to move. You don’t have new supply creaming off those willing and able to pay more, and devaluing existing units for tenants who remain in place.
We’ve go 2 million existing rental units, and unsubsidized apartment construction is almost non-existent. All condos.
The inevitable result of rent control.
I’ve been in the same apartment for 12 years in Pasadena and have had 3 rent increases over that period, paying 80% more than in 1996. And the quality of the building maintenance and tenants have worsened considerably. Where do you live where rents don’t fluctuate?
Formerly Upstate, now DC Metro where I have not had an increase in 3 years. But, the rent in DC Metro is so absurdly high that I cannot imagine how they can even think of raising it.
I never had a rent increase in my 15+ years in Texas, but since moving to DC a year ago, my landlord raised my rent by 5%….but considering that I’m only paying $735/mo for a nice place in Arlington, I’m not complaining.
My rent has gone from $750 to $800 in 5 years. The same place the landlady just had appraised, she was looking to get $250K on paper for it. LOL I hope she doesn’t try to jack up the rent, there is an oversupply of year round (live at the beach) rentals available.
9 years in a really cool apartment (1993-2002) - no rent increase - in an otherwise heated market, rental-wise. Owner had a five-unit building, lived nearby, and liked his long-timers (3 of the five units had people who lived there about as long — the 2 ground floor units - one of them a studio - turned over every couple years.
Nice guy, and a great living situation. Finally bit the bullet and bought in 2002, and it’s worked out well - but I miss that old gem of an apartment.
Landlord had owned building for a long time - and bought it in the 80’s at a really good price.
Had a rental increase 2 out of 4 years at my old scumbag large apt complex. Started out nice but then over time the decent people had enough of the illegals cramming into units with the 5am horn honking van parades picking up workers, so they all left. You’d see moving turcks every weekend filled with move-outs, then private pickups filled with personal items from people too poor to afford a uhaul moving in. You knew it got bad when new arrivals came with black hefty bags in trunks & back seats !
I stuck it out as long as possible in the interest of financial security, and laughed heartily at the rent increase notices titled ” To continue to provide world class service, we need to increase the rent …”
I am positive that I was the last white family to leave that complex. In fact, when I took my young uns for a stroll, just to get out of the shoebox, all the hispanic & homeboys would stop n stare at us caucasions. I kid you not.
( so, am I a bitter ex-renter? Oh HELL YEAH !! In fact, bitter doesn’t begin to describe my anger. The real estate/banking industry can forever go to hell for what they made the average citizen endure over their unwarranted, unbridled greed. )
ok ok rant off - for now, since I’m low on blood pressure meds.
Hear, hear, Aquis! Same thing happened to us. Our nice little apt started nice, but 2 years later with the rent increases, you could see the riffraff moving in with everyone and their uncle.
Why?
Because it was the only way anyone could afford the ginormous rents. Also, noticed that tenants were getting a little louder and didn’t care if their pets crapped everywhere. They weren’t going to pick up after them. Amazingly this is in Rancho Santa Margarita. Not that we are different here. Just noting how entropy works and that everything heads down the drain eventually. However, we found something a little smaller, but nicer area and less rent.
It is amazing the greed of these people/places. Our apt complex just HAD TO RESURFACE the entire lot. You bet that got rolled into the rent increases. It was stuff like that that drove me crazy.
We had a $400 deposit and when we left they took $250 for cleaning. Not bad. At least when we left after 2 years they didn’t have to rip out all the carpet and bill the nect poor sucke, er, I mean tenant. On the other hand, it has been 6 weeks since we left and still no refund for the $150. Crickey, with the dough this place rolls in you’d think that a check that small wouldn’t even be missed.
Been there, had that done. Basically a scam where the apt. manager gets to skim the ‘cleaning deposit’. In a former life, we had cleaned the apartment when we leave far better than going in - carpet good, paint good, no holes - and the sweet old grandma of a manager turned into a hard azzed bitch. Refused to return the deposit.
Years later a group of tenants approached the local police fraud unit and they ran a sting. She ended up with 18 months is the can and major fines. Justice I guess.
OC DAN;
This is exactly what small claims court is for. Landlords usually have 30days or less (state law) to return the deposit with an itemized bill. Once they pass that the tenant can sue for the FULL deposit back and in some states DOUBLE as a penalty to the landlord for trying to stiff you.
Yes that $250 cleaning deposit is your money not theirs.
Once upon a time, a friend of my sister’s was charged for painting an apartment she’d lived in for a year. Apparently the young woman had hung some pictures (yes, pictures!) on the walls and there were a few tiny nail holes. I drafted a letter for her, demanding that the landlord return the entire amount of the security deposit immediately, as the nail holes were reasonable wear and tear. Further, we informed them, if they did not return the security deposit within two weeks, we would take the landlord (a corporation) to small claims court for both the amount of the deposit and the treble damages for malicious withholding of the deposit (allowed in California at that time).
Very nearly by return mail came the deposit plus an amount equal to the treble damages. I knew I wrote good letters, but not THAT good. We finally concluded that the management of the complex did that to all of the tenants, and were afraid that she would sue them for the treble damages even if she received her deposit back. They didn’t want their illegal practice to come to the attention of the legal system.
I get the same reaction from my neighbors in Corona. My wife gets a good laugh (she is Mexican) at how bad I get stared at because I am white. I actually had a person say that he didn’t know white folk lived in this complex, like I devalue the complex!
My wife got into an argument over the phone with management (www.equityapartments.com) over them not notifying us about a serial rapist that had struck in our complex three times and across the street. They said that it’s the police & newspapers that should be notifying us. She was ready to explode over it, so, she went down to the office to ask for the manager who she spoke to and the lady comes out and acts stunned. The manager makes some remark that she didn’t know that she was Mexican (my wife sounds very white I guess). Can you say reverse racism?!
That is what happened in Virginia Beach - rent almost doubled in 7 years and the people upstairs had 6 to 10 people living there in the summer and told the landlord there were only two - the rents got so high and wages were so low you had to have 6 people living there. The tenants were making money renting out the apartment to foreigners (students) here for the summer. It was always noisy all hours of the night with people on multiple work schedules.
I have been in the same rental for three years now. We pay a week early. No increase so far. In fact, my landlord sent us a $200 gift card at Christmas. Maybe she is trying to soften us up for an increase.
hey joe6P
$200 gift card from yer landlord??! Wow that is just incredible. As a former long-time renter, (single, highly mobile dude) I’ve NEVER heard of that. Heck, I counted myself lucky just to get a timely response to repairs without a lot of stalling or attitude.
You, my friend, have indeed found the rarest of the rare: a caring, appreciative landlord that shows it in cash. (ok, gift card, close enough)
You think I am kidding, huh?
I pay my rent a week early too. My landlord gave me a deer he shot on the back 40, dressed out and hung in the barn. Not the same as gift cash, but very much appreciated!
Kidding? No, not at all. I’m just astounded by your landlords good business behavior. It’s definately not that common. Sounds like you deserve it also, with your early payments. rock on !
Perhaps it was re-gifted. The landlord got a card that is only usable at one of those establishments frequented by the proles, and wouldn’t dare shop there themselves.
Kidding of course.
We have commercial and residential property that is leased and rented out at a lower than comp rate. We screen our tenants
carefully and they all take care of the places as if they owned them. They all appreciate the low rents enough to take pride in being there. Works for us. Last time we screened a prospective tenant was in ‘01
I have never had rent go up on me, either.
Moved into the apartment complex where I lived until recently in 1991, rent at that time was $527/mo. FF to when I left, where the rent was a little over $900/mo. Yearly increases were not a given, although the first three years saw increases. San Jose has a rent control ordinance in effect for older complexes like the one where I lived, so increases could not exceed 8% in a 12 month period.
Place was already a shithole when I first moved there (couldn’t beat that cheap rent), but a new management outfit that came on the scene a couple of years after I arrived started to slowly clean up the place and send the riffraff packing. Manager that was coordinating everything decides to take the plunge and buy a home in the Stockton area in ‘98 or ‘99 (can’t remember) and leaves to manage apartments out there and immediately our complex begins a long downhill slide, with a succession of not-very-competent/inexperienced managers brought in who seemed to be unwilling/unable to exercise choice over whom to grant tenancy or to deal with problem tenants. So now, the complex has a large number of Latino immigrant “families”, along with a sprinkling of gang-banger wannabes, with the occasional decent tenant here and there. The result of all this is that the unmarked parking lot would fill up with cars very quickly toward the dinner hour whereas before, there were always empty spots available well into the night for tenants doing shift work. Parking permits were required, but seldom was there any enforcement, and a fair amount of cars taking up unassigned/unmarked spaces had no business being parked in the lot, and at the end were rarely ever towed away. The balconies/patios were routinely used as storage areas, and there were a number of them that had a bunch of things piled up in them, which was incidentally against the apartment rules. Over time there was also an increase in the amount of garbage strewn about, and the brain-dead tenants routinely piled up garbage on the ground near the dumpster closest to their unit, instead of checking the five other dumpsters sprinkled about the complex for one less full in which to deposit their crap. There had also been a noticeable increase in the amount of kids running around, typically unsupervised, which resulted in a lot of high-volume screaming and yelling coming in through the open window in the afternoon during the warmer months, soccer balls occasionally being kicked around in the parking lot (with the inevitable impact and bounce off whatever car happened to be in the way of the ball’s trajectory), and unbelievably, kids climbing on top of cars, as evidenced by a few cars having shoe/footprint marks on their hoods/roofs/trunks. The last manager’s response to these developments? Creating a whiner’s laundry list and taping a copy to each tenant’s door, but never following up by warning any of the egregious offenders or sending any of the guilty parties packing. Absolutely pathetic.
Here’s the funny part - recently the complex was acquired by some outfit in Irvine and they applied for some sort of tax credit in order to get money to renovate the buildings and units. Apparently, one of the conditions for applications of this tax credit is that the units are to go to low income folk (within some limit), and anyone living there now that exceeds the limit will be pressured to move out. Yes, the same sort of low income idiots that live there now that helped send the quality of life there into the gutter are the ones that they’re going to cater to. Sheesh.
I had rent go up $50 a year for three years in a row and twice before that in a 7 year period went from $525 to $725 and moved on the last increase - the guys upstairs had card games with a dozen or so from midnight to 6 am - this was while Virginia Beach home prices were doubling from 1997 to 2004
My rent has gone up about 7% from early 2004 to today, which based on where I live (a 10 minute walk to work through a “small town main street” type area), as compared to the cost of ownership of the same house, I still consider a bargain.
Now, if he tries to push up rents on me too much more, I may just go home shopping (for rent, of course)…
I will start to get worried about rent increases once my landlord talks about taking away our free recreation club membership and illegal immigrant lawn care service.
You’ve never been a tenant of a friend of mine. He uses the “slowly heat the water to boil the frog” approach and raises the rent $5 every so often. He never seems to have tenant issues. He screens right and he treats them right, but he always slowly raises rents.
In the Denver area in the 90’s rents went up quite a lot, so did house prices.
Since 1997 I have never had a rent increase that was more than $10/month (and that in itself was rare) except in 2 cases. The first when I moved from a 1 bedroom to a 2 bedroom apartment. The second when I moved to a more expensive area.
More importantly, looking at rent as a percentage of income, for me it has dropped like a rock.
First apartment that I ever rented which was 10 years ago required a deposit. Since then I’ve moved 4 times upgrading or chasing jobs elsewhere. I’ve had about 50/50 chance of rent increases at small amounts under 5%. Also, I’ll know it’s a good time to buy when apartments start requiring deposits as paying a deposit is truly like throwing money down the toilet because you will never see it again.
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Price, longer term, is determined by supply and demand and not some made up formula of affordability. What gasoline price is “affordable?” What computer price is “affordable?” (I paid $8,000+ for PC with monitor and now I have 10 times better for $800; I could afford both).
The promoters will keep talking nonsense. Prices will keep coming down until the excess inventory is cleared and they might stay down because people would be afraid of further price drops. Recession and depression will create their own excess inventory as people double, triple and quadruple up.
If there is a depression during 2008-10, as I think there will be, the rents will fall 20-40% and the prices will fall below 100 times the monthly rent. That would be affordable for most.
Jas
If there is a depression during 2008-10, as I think there will be
We are a long ways away from a depression and the data clearly shows we are headed for a mild recesion.
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If 9-12 months are long ways away then we agree.
Just look at how many sectors are suffering, or are weakening. As soon as the total household debt (most of which is the mortgage debt) starts to decline, primarily due to mortgage defaults, the economy would be in depression. Household debt growth below 5.5%, YoY, has led to a recession since 1950. It is all about how the mortgage debt situation play out.
Jas
Data please.
People are stretched beyond their hopes of ever getting out of debt.
Conumers make up 70-72% of the economy and how much of that is on debt?
State and local goobermints are already screaming about tax receipts and the need to cut everything inc. the kitchen sink. I.e. CA is already showing a 14, yes Virginia, a 14 billion dollar deficit. Crickey, this pyramid sheme can’t keep going on.
Investment banks have already written off nearly 100 billion bucks and more than 100 mortgage lenders have gone belly up in 16 months.
Housing in the crapper. Unemployment meaningless since most jobs pay 10-15/hour if lucky!
Mild recession. My foot!
How can it be a recession when posters regularly mention their 100k, 200k incomes? Everyone I know, in spoiled California, makes less than 100k. I must hang with the wrong crowd…
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My son, an accountant with 10 years experience (in SoCal), makes $140K in salary and bonus. And he rents! He saves (despite alimony and child support payments) and has pretty good liquid networth.
Most of his clients (small businesses, developers, etc.) are now hurting. I am sure that they were doing gangbusters in 2005 and not too bad in 2006.
We have three Americas (and Californias) – those doing well, those doing OK, and those hurting financially. The last category is growing by the day.
Jas
Talking about people stretched beyond their hopes.
According to the American Bankruptcy Institute, bankrutpcies jumped 40% in 2007:
http://money.cnn.com/2008/01/03/news/economy/consumer_bankruptcy/index.htm?postversion=2008010312
Don’t panic it’s all contained. The economy is safe and the fundamentals are solid. The consumer is in a buoyant mood and is spending money like a drunken sailor. Ahhhhhhhhhhhhhhh.
“We are a long ways away from a depression and the data clearly shows we are headed for a mild recesion.”
Fuzzy,
I agree that the data being served to us by the media doesn’t indicate anything to be overly concerned about. What alarms some (like me) are the rumblings of mega trends that are on collision course. The one of particular concern is the biggest friggin credit expansion orgy in history, which appears to have started to reverse.
Take care that you are not asleep on the tracks, in case there is a train coming like none we have ever seen.
100 times rent = historical price
at least for 100 years or so
lower the interest rates, higher the multiple
greater the costs (insurance, taxes, maintenance, quality of renters), lower the multiple
Socal insurance is high, tax is high, maintenance low, quality of renters extremely low so I’d give it a multiple of around 80X or so.
Not in Santa Clara County for the last 15 years. In 1992 I rented a sfh for $1800, it was worth about $350k. 194x rent. Now it would rent for around $2500, sell for around $900k maybe $1m. 360x rent. So prices should fall and significantly, but not to $250k (100x rent). Pretty bearish to say we’ll see mid-80s prices.
Now it would rent for around $2500, sell for around $900k maybe $1m. 360x rent. So prices should fall and significantly, but not to $250k (100x rent). Pretty bearish to say we’ll see mid-80s prices.
What makes you think that when the housing prices fall that you would still be able to collect a $2500 rent? I would expect that some of those renters will be relocating out of state or losing a high paid job. Only time will tell but this is going to be bigger and faster then anyone of us can imagine.
My rule of thumb: in bubble collapses, add 20% on the downside for overshooting.
3 to 4 or 4.5 times median income is where the bottom is would be my guess for Santa Clara County.
flatff, I also think of 100x as the “normal” price/rent ratio. The people who wrote the study described in Ben’s post appear to think 240x is normal. They are saying home prices (at $282K) need only a 15% decline (to $240K) to come into balance with rents (starting at $818/mo and rising over 5 years to $996/mo). This is nuts. Prices will come down a lot more than 15%, or I’m a monkey’s uncle. I’m not likely to be a monkey’s uncle: wrong gender AND wrong species.
…Recession and depression will create their own excess inventory as people double, triple and quadruple up…
No doubt a begining of a trend.
I live in Irvine (Ca, 92604) and am constantly amazed
at how many supposedly wealthy households
rent out rooms to make ends meet.
I will estimate that at least 1 in 25 households have
a paying ‘roommate’ in my area.
It is one of those statistics that I don’t think you
can measure without using your own eyes.
How do I know this? I have helped many a friend
move into a rented room, had a girlfriend who
rented out rooms (in very expensive Corona
Del Mar near Newport Beach no less) and
had a couple of girl roommates who
moved in next door.
In fact, it has become such an issue, that my
association, (Woodbridge) has started formal
queries into how to control this issue.
(Because of increased demands on infrastructure
such as parking, police, etc..)
‘It is also one of the world’s largest providers of custody services for institutional investors … ‘
Whenever I see/hear the word ” custody “, it’s usually not associated with finance.
Rents keep on going up here in Maryland (along with taxes, crime, and everything else), but rent is still far, FAR cheaper than buying even the crummiest condo unit, so it is still a deal.
I’m going to stroll through the rental office of my complex to let them know they are welcome to make a better offer (better than the 6% increase they are asking for) as I go look for a new apartment. I’m sick of the ridiculous price increases.
Pondering, do you recommend any particular resources for looking here in MD? Since I insist on being walking distance to the Metro I’m thinking of just walking in circles around my targeted Metro stops (Rockville, Twinbrook and White Flint), but I’d love to here about other approaches if you (or anyone else) has ideas. Craig’s list doesn’t seem to be all that useful. Apartment.com also les than stellar.
Now I’m thinking you must live in the same complex as me! I posted on the bits bucket about our rent increase.
We are planning on taking the pavement pounding approach as well.
Email me if you like: hazeltree
at
gmail
I’ll email you from home. Can’t use outside email at work. They are worried about us downloading viruses I think.
I’m near Twinbrook and close to the Whole Foods (which is moving, by the way). I was in no mood to fight last year, but this year I am. Just because I get a pay raise, doesn’t mean the landlord gets to confiscate the whole thing.
All the little Apartment finder books at the Metro stops are pretty good. Most of them have tables of all the apartment complexes with actual going rents in them.
Aren’t there some re-partments in that area by now? I saw nothing but cranes 3 years ago.
10 or more buildings have gone up in the area. None of the condos are selling anymore unless they have slashed original prices by 2/3’s or more and I would have heard about that. But they aren’t advertising as rentals. It’s different here, don’t you know.
I’ve always done better by “walking around” my targeted area than looking at ads. The apartment magazines you pick up for free in the stores are especially worthless unless you want a spiffy new place. Craigslist is polluted with spam from the pros and overpriced dream rents from FB’s. There can be some gems, but few and far between.
My preference is to drive around, spiralling out from where I think I want to be, in the evening rush hour to see the traffic patterns. When I see a sign for promising place, I walk around. Then I (might) call them the next day. If I’m still interested.
I’ve also had some good luck from local newspaper ads, but luck is the key word there. At least 90% of them, I don’t even get out of the car once I get there.
Best results? Recommendations from friends who spotted a vacancy in their own complex. Worst results? Letting a “rental agent” show me around.
I think neighborhood-shopping on foot or bike is the way to go in Chicago, too. Most of the ads I see these days on Craigslist or in the Reader (our free weekly) are placed by agencies or condo owners who don’t want to “give away” their units in a falling market.
In contrast, I expect to see plenty of For Rent signs in the owner-occupied graystones around me once the weather warms up.
I am beginning to believe that the reason other posters are seeing rent increases is because they are renting from complexes and the like. I have always rented flats in apartment houses (with at most 4 apartments), townhouses or single family homes. Forget complexes and management companies, individual owners are the way to go- and you usually get a much better place.
We’re renting from a complex and just got our renewal notice. No increase.
MD just have the biggest tax increase in history. Next item on agenda, add slots. Oh, dont forget the free healthcare to illegals and lazy low-lifes.
Make sure to come down to Virginia to buy your cigarettes!
Just remember, the limit for bringing cigs back to Maryland is something crazy like 3 packs. Not cartons. Packs.
Technically speaking, wouldn’t George Washington necessarily have to have passed the largest tax increase in our country’s history? Before the Constitution, no one paid any taxes to a Federal Government, so with dollar ONE that’s a increase of 1/0, or undefined.
cute, C’DOG. maybe qt meant in nominal dollar terms?
OK, let’s say “biggest tax increase in our lifetimes”… so far.
“U.S. house prices ‘likely would have to fall considerably’ to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.”
The home price to rent is much like the P/E is with stocks. In the Florida market, there is a huge gap between rents and prices of homes whereas renting is currently more affordable. There is only one way for home prices to go and that is down. Therefore, Seiders predictions that new home prices will bottom out in the first quater of 2008 is just plain nonsense when you look at the real numbers. Seiders must get his data from the NAR.
I’ve learned to take an economist’s prediction and add 5 years. So, if he says the bottom will be in 2008, it will probably be in 2013.
So, if he says the bottom will be in 2008, it will probably be in 2013.
Well put! These guys have a history of missing their predictions.
Beyond that, they’re basically just worthless. How can we have a bottom in 2008 or 2009 or 2010 when ARM resets don’t peak until 2011? Based on that fact alone, we can’t POSSIBLY have a bottom until at least 2012.
…unless those folks refinance.
But haven’t they predicted 9 of the last 5 recessions?
These economists are nothing but paid shills. A friend of mine once said that an economist predicting a depression is as rare as a turkey voting for Thanksgiving.
Fed to Investors : Substantial cuts ahead
Fed to Savers : Screw you!
What else is new.
Saving is so 1950ish.
Red is the new black.
I think the plan is to let inflation rise enough to pressure rents and incomes upward. Prices will fall but not as far as some think. Inflation will take care of the rest.
The division between inflation (rents, wages) and nominal declines depends on how many people are forced to sell at lower prices in the short run. More sales, a faster (nominal price) decline followed by a return to normal increases.
Looking at the inventory numbers, you wonder how much of that inventory is real — that is for sale at a conceivable price? Some of it may be 2016 inventory in reality, not 2008 inventory.
pressure rents and incomes upward.
Oh sure let’s all go to Applebees and drop $25 for a tuna melt and diet coke.
“State Street had $8.2 billion…in securities backed by mortgages made to the riskiest borrowers, down from $13.9 billion as of June 30.”
$13.9 bn - $8.2 bn = $5.7 bn.
Where did that $5.7 bn go?
My guess: Off to money heaven.
We are gathered here, in honor of the recently departed.
Thats made me laugh. Something tells me after the lawsuits they will not be laughing.
‘We generally sold lots and land in weaker-performing communities,’
There’s that word again! Exactly what is performing, the land itself or the voodoo magic of hallucination loans?
MER as well as others stole money from the politcal class–that is like stealing from the mob. You don’t steal from the guys (and gals) that make the rules. The ratings agencies and I banks are going to find out they are not that big. They could get killed from this. Even if they win the lawsuits, they will likely find future laws a little less to their liking.
They bullshitted America…
Nah, America let itself be bullsh*tted
I think the grammatically correct word is bullSHAT.
Watch out for that bank of icebergs…
“Pressure in the housing market is not going to abate any time soon,’ including in 2008, CEO Peter Raskind said in an interview. He said the changes will help the bank ‘navigate through a very difficult period for the entire industry, and beyond.’”
to infinity! and beyond!
“The National Association of Homebuilders is forecasting that the housing market could reach bottom by the second quarter of 2008, with a ‘pretty good expansion’ occurring once again in 2009.”
So who is going to buy up all that extra inventory between now and then? NAHB members?
I guess if nobody builds any houses at all in 2Q 08, the few that would be built in 09 would represent a “pretty good expansion”
–
Interest Rates & Affordability
For how long have we heard “interest rates are low,” or “rates are low but they wouldn’t stay low,” to induce people to buy a home, or to refinance, NOW?
Interest rate in Japan have been very very low and yet the RE prices fell for some 18 years.
After the supply-demand, the incomes are far more important than the interest rates in determining the home prices. High-end homes in Silly.con Valley and condos in Manhattan are perfect examples.
Jas
“Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American dream? It was easy.”
In a world of Peter Pans that never had anything pan out, all they had to do was sign the loan docs, and they could be somebody.
wow a 30 pound vulture in the yard across the street- might be a bad sign for recovery this year
“A jump in ATM fraud led Citibank to slash the maximum amount of cash available to customers from their accounts - a security move greeted warily Wednesday by its patrons.”
“The new cap on cash kicked out by the company’s ATMs began in mid-December after what Citibank called “isolated fraudulent activity” around the city.”
http://www.nydailynews.com/money/2008/01/03/2008-01-03_citibank_limits_atm_cash_in_city-2.html
Gotta love the “jump in ATM fraud” that happened all of the sudden, in mid-December…
Nudge, Nudge, Wink, Wink
“isolated fraudulent activity”
Might better describe the inner workings of many a financial institution, nowadays.
They should limit HELOCS too, then.
I have a citibank account and went online to xfer some cash…a popup notice that I had to agree to the new terms of said daily xfer limit is now $2000.
that would piss me off
i have not had any such thing with fiedelity or north fork bank aka capital one lately, but i would be really pissed off
$2000!!!! You’re kidding right?
We’re talking transfers - as in between accounts, right?
Sorry, but I can’t believe they would do that. That would be pure suicide - Citi isn’t that stupid.
I wish I had saved a pdf of the page when I accepted the change to the agreement. I just went to their FAQ page and tried to get the info on transfer limits for accounts and got:
“We’re sorry, but we cannot complete your request at this time” …figures, right?
It could have been for between accounts only but I cannot say for sure. Can anyone else with a CITI acct comment on this transfer limit issue? Thx!
OK packman - just checked through my own account by trying to set up a transfer. Internal transfer limits has no limit (just on transaction number max=6 per month). To do an external transfer there is a $2000 daily limit!!!
If I had an account there, by close of business today it would be closed. With them having financial troubles I would be very wary of things like this…as a matter of fact it seems a good time to start exploring small local banks.
Today’s law enforcement–punish the innocent.
The article implies that before this took place - one could withdraw an unlimited amount of cash via an ATM (up to the account balance of course). Is that true? There used to generally be a daily limit, like about $300 or so - was that not true anymore? Wow I hadn’t realized.
The WSJ article cited at the top of this page shows that annual rent was 5% of price until 1995. My math tells me that this means that the price is 240x monthly rent.
So where does this 100x rule of thumb come from? I can see that as a landlord it’s better to pay 100x than 240x, but it seems that this was not the case even in the past.
I paid 120x for my SFH in 1990 13 miles S of recession free DC
now 225x after coming down 15% from peak
pre hud-fnm- etc 100x would be right
Just a guess, but if in the WSJ article they use “average rent” to mean “average over houses that are rented” (not “rent on an average house”), it could skew the numbers if rental property tends to the lower end of the market. I understand 100x to be a same-property rule of thumb.
There is definitely something fishy about their use of a ratio of averages. I am not a macroeconomist, so perhaps I am missing something important about their logic, but it seems as though one should use a measure of central tendency for the ratio of rent to price on comparable housing. Otherwise the ratio is severely skewed down by the fact that the average rental is a dump and the average SFR is a palatial McMansion.
Mr. Price Doubt Forever,
I’ll bet you are right. They probably took average rent of all rented properties, and rental properties may be the lower endof the market.
thanks for the idea.
The 5% value seems high to me as well. That’d mean the equivalent of a $900 per month one bedroom in Chicago would be $216,000.
While there are certainly many people who’ve paid that much for a one bedroom in my neck of the woods, that doesn’t mean it’s a good price.
In 1972 I bought a house for 90x monthly rent. In 1994 I bought a condo for 120x monthly rent. In 2004 (yup) I bought a house (since sold) for 180x monthly rent. No way is 240x “normal.”
“The WSJ article cited at the top of this page shows that annual rent was 5% of price until 1995. My math tells me that this means that the price is 240x monthly rent.”
I don’t believe it, not if it is apples and apples. 5% wouldn’t begin to cover the operating cost. The mortgage interest rate was higher than 5%.
During the years 1994-1997 in LA, I rented a house for about 120X rent (West Hills).
In 1998, I purchased a house for about 120X rent (San Diego County).
Their numbers are definitely off.
“The rating agencies, which caused so much of the subprime pain with their indiscriminate blessings, seem to be skating past responsibility.”
I saw em’ skating over @ the Arthur Anderson memorial rink.
“The homeownership rate was approaching 70 percent in 2005, up from 64 percent in 1990. A good cause shielded bad practices. (C)omplacency lulled ordinary Americans into paying ever-rising home prices. Something so embedded in the national psyche must be okay.”
Renting versus owning is a lifestyle choice, which is affected by both prices and personal preferences. Since when did renting become a ‘bad cause’?
De gustibus non est disputandum. Long live freedom to choose in America! Long live Milton Friedman’s ideas!!!
“Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American dream? It was easy.”
And ever so hard to avoid.
“City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren’t legally allowed to own for reasons of safety and liquidity.”
“‘We take very seriously the financial cost and the breach of public interest,’ said Chris Gabrielli, the chairman of Springfield’s Finance Control Board. ‘Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn’t have to settle for less than getting the money back.’”
How can you have it both ways. If things would have kept appreciating no one would be complaining, but now that they got caught with their hand in the cookie jar they are evoking the “aren’t legally allowed to own for reasons of safety and liquidity” clause. They can eat it and go to jail with the rest of the bunch.
Exactly. The one to be held accountable is the city bureaucrat who bought the stuff to begin with.
Speaking of landlords, my last one was a 26-year old bit## whom Daddy gave her 4 houses (all duplexes, so 8 units) that are paid off and worth approx. $2 mil. Daddy is a real estate investor who owns pretty much everything in McKinleyville (just north of Eureka, CA); actually it was his daddy who did all the “investing,” he just inherited it all. This recent downturn is starting to hit him, as he can’t sell his primary residence for the asking price [Humboldt county tax records show he paid $239,000 for it in 1997 and was asking $975,000 for it last year]. He has since dropped the price about $150K, but it probably shouldn’t cost more than $300K. After all, this is redneck, pot-smokin’ Humboldt county.
Anyway, the landlord wouldn’t fix the heater (a necessity up here) as it was making weird noises that would often wake me up at night. We left on pretty bad terms but the good news is my new rent is $150/month lower.
Congrats on the lower rent!
“Springfield bought investment securities that had been rated AAA and worth nearly $14 million in the middle of last year. Those same investments have plunged in value to just $1.2 million now.”
Wonder how many other municipalities have taken a 90+% hit or something similar.
I’m wondering about my municipality. Orange County was apparently snorting its own supply. How about NYC?
Math reality check on the 100x rent vs. 240x rent.
If I buy a home, put 20% down, and pay 7% interest on the rest, assume an opportunity cost of 10% on my down payment and add 2% per annum for property taxes, etc. (I live in CA, so prop taxes start at ~1% and only go up slowly), my annual cost of ownership, before the tax deduction effect is 9.6% per annum of the cost of the home, or .8% per month. This is 125x monthly cost equivalent in rent terms.
Tax effected, for highest tax bracket folks, this .8% becomes ~.56% per month or so (I assumed 30% savings off the whole for simplicity). This equates to (on an after-tax basis), ~180x.
In low income/low priced areas, fewer people get the benefit of the deduction (lower tax bracket, standard deduction gets in the way), so they are closer to 125x at the point of indifference. In higher income areas, the indifference point rises to closer to 180x, since by and large, that deduction means more.
For reference:
At 100x, the rental cost is 1% per month (owning the house at this price is cheaper by ~20-40% depending on how much money you make, the price, in a perfect market should rise to something higher)
At 240x, the rental cost is .42% per month (owning a house at this price is more expensive by 33%-90%, the price should fall)
Of course, interest rates come into play into all this analysis, which can’t be ignored. If interest rates rise, the point of indifference should fall from the levels noted above (and vice-versa…).
Given my tax bracket, and the lack of supply in the neighborhoods in which I would like to live, with interest rates where they are, as long as I can find a house that I’m comfortable living in for 10-15 years, with the right piece of land, I’m a buyer far before prices fall to 100x rents. At 180x rents, I’m a very serious shopper.
From where I sit though, it means that prices need to fall by 30-50% on the mid-Peninsula in the SF Bay Area. So I have some time to let things get a bit more sane, and it’s possible that I’ll be a renter for years and years to come.
Throw stones if you must, but I think that if interest rates are still in the 6-8% range for mortgages, we will have WAAAAAYYYY overshot the bottom if we get to an average of 100x monthly rents.
Two things:
- You didn’t account for maintenance and utilities costs that the buyer has to pay, but the renter doesn’t.
- You didn’t account for mortgage interest reduction falling over time, due to paydown.
Renters pay utility costs (at least in all my experience).
Pick a number for maintenance costs. I have 1% per annum for all things other than taxes and insurance. On a $1MM home, this is $10k per year for maintenance/upkeep/insurance. Perhaps not enough in total, but not $0.
A point I thought about on the interest deduction. I assumed 35% on the 80% that was debt, in CA I could have assumed 45%. I also didn’t include the increase in tax rate that I expect as I try to pay for boomers. I also considered the fact that with the interest deduction, if you have the discipline, NOT paying off your loan is a very tax efficient way to leverage.
I also didn’t take into account the decrease in your payment once the debt has been fully repaid, or refinanced (with no cash out).
I think my last post got lost, so I apologize in advance if this is duplicate.
1. Maintenance and utilities. As the renter of a home, I pay utilities (including gardener/garbage/water). I left 1% per annum for insurance/maintenance. This could be a bit short, but with a $1MM home, this is about $10k, so I’ve left something. Perhaps I should make it 3%, which would allow probably close to $2k per month maintenance, which is overshooting, IMHO. This would take the indifference point to 113x pre-tax, and 160x after tax.
2. I also didn’t necessarily fully account for the tax deduction, or account for the likelihood of higher tax rates (increasing the benefit), or the elimination of a mortgage payment altogether with the repayment of the loan over time, or the reduction of mortgage payment of a refi with no cash out after some of the loan has been repaid, or appreciation over long periods of time–I assumed 0% price appreciation from the point where I buy forever thereafter.
“If I buy a home, put 20% down, and pay 7% interest on the rest,…”
You miss the opportunity cost of putting 20% down on a declining value asset.
I’m not buying today…are you saying that home prices are going to fall to $0?
My analysis is to determine what a reasonable indifference point would be between renting and buying (ie. a price level where a rational market would give a stable asset price).
You also missed the lost rent when you have “down time” between tenants.
But I’m not looking at this from the perspective of an investor, I’m looking at it from the perspective of a owner/user. I will always either be paying a) rent or b) a mortgage payment. I don’t plan on being homeless.
Mr Rental Watch,
I agree with your main points. Waiting for 100x in San Mateo - Santa Clara county will be a long wait seeing how it’s been above 190 for the last 15 years.
Another thing to think about regarding affordability - the median family income in the US is $48k in 2006. In Santa Clara County it is $82k. Non-housing stuff (food, clothes, cars, etc) cost somewhat more in Santa Clara, maybe 10-15% more.
So, if the $48k family is spending 33% on housing, that leaves $32k for everything else. That $32k becomes $35k in Santa Clara. $82k - $35k = $47k that could be spent by the median family on housing. Not necessarily smart but possible.
In my case, my income has doubled in the last 10 years, but my expenses have not. I still drive a car that costs mid 20k, spend less on food (in real, not nominal $), etc. I could put that difference entirely towards housing.
So the 28-33% rule of thumb can be extended upwards if someone chooses to do so, which probably explains part of the reason why rent vs price is higher here than elsewhere.
Mr Rental Watch,
the other thing to remember is that you view ownership as a plus, since you want to stay put for >10 years. So do I. so I’m willing to pay for that privilege.
Many people don’t share this; renting is way more flexible, you can pick up and move whenever you want, or get a better job, or whatever. For those folks, buying only makes sense at
I agree with your points. I’m trying to keep the discipline of keeping my house payment at or below that 25-30% mark–it’ll leave me more to save for retirement–leaving me more options to go pretty much anywhere else cheaper.
My roots are pretty firmly planted with my job and my wife’s job. I’m looking at the rent vs. own from the perspective of guaranteed monthly savings by renting vs. speculative profit if you own and prices go up. To get to the baseline, you need to see where that magic point would be if you assume price stability (with the understanding of course that home prices falling will not stop on a dime).
I expect the speculators are going to be disappointed for a while, but as long as I can save 2x my rent each month simply by not buying, I’m building a war-chest for buying a home later–and that’s just the delta by not owning (my savings are greater than that since I’m living below my means currently).
Eventually I’d like to own, and would be willing to pay some premium to do so (perhaps a 10-15% per month premium for the right place), but not a 200% per month premium. My partners joke that maybe I’ll never own. They might be right, but for now I’m hoping that patience will pay off.
Two points:
1) it might well make sense for you personally to purchase above 100x rents. 100x rents is generally the smart investor purchase point, but this takes into account 10% of gross rental income for property management. For an owner occupier, sans management costs, 120x makes more sense. But if there aren’t good homes for rent in your neighborhood of interest you can certainly pay more to purchase.
2) as this market collapses, we will eventually reach a point where NO ONE but investors are buying. And these serious investors will set the bottom at or below 100x.
3) Don’t be too sure there won’t be rental and foreclosure homes on the market in your targeted neighborhood. We are just starting to see this in WA, desperate owners in ALL neighborhoods and price ranges. There will be some crazy deals out there before this is all done.
4) We started emailing FB’s with vacant homes lingering on the market for most of the past year, offering to rent. To our surprise, most are eager to negotiate and we really have our pick of some very nice homes. They are generally too big for us, but for a couple of years we can live with that down side.
Thanks for the thoughts. I agree with the overshooting, and I’m actually in the minority around here believing that there will be foreclosures in the best neighborhoods. I saw a potential short sale in Atherton the other day for perspective (the elite of the elite neighborhoods on the mid-peninsula). This will get to be more and more common over time, but West Menlo Park/Atherton still appear strong (although I’m beginning to see some very nice homes listed for rent–they mustn’t have been able to sell them at their wishing prices…).
I would be very surprised if the bottom became 100x on the mid-peninsula (where I’m looking). There simply isn’t enough supply to get there. I would not be surprised at all if we get there in Vegas/Sacramento/Phoenix/Miami, or other places where the inventories cannot possibly be absorbed by owner occupants.
I was mainly commenting on what makes logical sense as a general price point vs. rents as a long term average. In some places (with lots of land), it seems logical that the number would be at that 110-120x range. In places with higher incomes and less land, the logical number seems to be in that 160-180x range.
P.S. Not to nit, but that’s 4 points
Thanks for the comments Mr Groundhogday. and thanks for not calling me a troll even though I’m not that pessimistic! You’ve given me some food for thought.
It’s tough timing the bay area. Really depends on employment. Buy when the Layoff Fairy visits town.
They’re not making SFH neighborhoods here any more, and thanks to Prop-13 everyone who bought 1950-2000 and didn’t cash-out refi is sitting on easy net rental income.
I see prices DRIFTING down 3% a year, until they get within 20% of rents. Right now a decent 1BD condo is listed for $400K, which comes out to $1850 in effective rent after all adjustments.
My 1B apartment rent is $1500 right now, so $350,000 ($1650 effective rent) is an easy buy. I’m holding out for a 2B though, which are still above $500k ATM. $450K for a 2B is a fair price ($2050 rent equiv) when compared to apartment rents so there’s only about a 10% downside left in this market.
Interesting discussion, but BOTH house prices and rents will be determined by replacement costs over the long run. Note that both prices and rents are now falling sharply in the overbuilt areas.
Prices in line with those around 2000 plus cummulative inflation (now about 25%) are a reasonable new bottom, although some overshooting may be necessary. It will take a long time to get there–3-5 years and you needn’t worry about missing the bottom.
But a normal rent-price relationship at well over 100% will likely reestablish itself eventually, making “investment” in single family houses a losing propostion again — on average.
Anybody who thinks houses are not a depreciatiing asset has not kept track of their “maintenence” costs–from faucet washers to new roofs and heating systems. I use 2% of value on a “mature” (20yr+) house and feel it may be still be too low.
Add to this insurance, taxes and your opportunity cost of capital and you find carrying costs on this “investment” well above 10% a year. Invest in land or multifamily housing if you want to be a real estate “investor”. Buy a single family house if you want a stable environment to raise a family. Don’t confuse the two. That there are still “investors” out there shows how far from the bottom we still are.
Will
The maintenance %age will be lower in Silicon Valley than in other places, because much of the value is the land, not the actual structure. e.g. the median home of $750k doesn’t require $15k of maintenance per year. A 3/2 in TX (lets say) maybe requires 3k per year, so the same structure should be about the same here. Maybe less due to less extreme weather. Maybe more due to higher labor costs.
The State Street legal liabilities and the Springfield article as well as the festivities in Florida with Lehman Bros. are a good indication of more losses to come from the institutions that peddled this stuff to end customers. Not only will the institutions continue take the hit for the toxic waste still in their cupboard, the lawsuits from angry and powerful clients will introduce yet another liability.