Here Comes The Bad News – Or Good, If You’re A Buyer
The Wall Street Journal reports from California. “As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners, those who can afford to pay their mortgages but have decided not to, are starting to walk away from their homes.”
“Sgt. First Class Nicklaus Skaggs bought his home in April 2005 shortly after returning to California from a one-year tour of duty in Baghdad. The $455,000 three-bedroom home he and his wife purchased in Vacaville, about one hour northeast of San Francisco, is worth an estimated $285,000 today, well below the $453,000 he owes on his mortgage.”
“The monthly mortgage payment, which jumped after its interest rate increased, is now $4,000, up from $2,980 when he bought the house.”
“He can’t sell his home, since there are few buyers, and he can’t refinance because lenders require a large down payment he doesn’t have. Now, the 18-year Army veteran has decided to walk away from his mortgage. He hopes in a few years lenders see his decision as a unique situation created by the housing meltdown.”
“‘I don’t think that house is going to recover in value any time soon,’ said the 40-year-old. ‘I’d just be throwing the money away.’”
“‘It may not be a big thing yet, and hopefully it won’t be,’ says David Berson, chief economist for mortgage insurer PMI Mortgage Group Inc. But if it turns out to be a significant trend, he says, it means that ‘delinquencies and defaults could be higher than the industry is estimating.’”
The New York Times. “Raymond Zulueta went into default on his mortgage last year. In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford.”
“Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. ‘I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ Mrs. Newhouse said.”
“‘You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,’ she said. ‘And sometimes the bank people who call these consumers aren’t really nice.’”
“‘I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,’ Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.”
“‘There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,’ said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.”
“For Raymond Zulueta, the decision to go into foreclosure brought him peace of mind. Mr. Zulueta said he felt he had let down the lender, himself, and his family.”
“‘But you got to move on,’ he said. ‘I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.’”
The Mercury News. “Doug Meek, a middle school teacher who lives in Walnut Creek, is looking for a home for his 62-year-old mother. Meek said that he was a critic of the housing boom and was sure the market would eventually subside, something he told his family prior to 2004.”
“‘My wife and I just kept saving money and waited for this thing to really get crushed,’ he said. ‘I kept feeling pressure. I had three kids in one room. I had no idea the market would go down this much.’”
“He and his wife bought in January 2007, when the market was just starting to slow, saying he didn’t time the market correctly, but he hopes his mother and his brother, who was also looking to buy, will.”
“He found a town home in Concord and made an offer of about $200,000 but hasn’t heard from the owner yet. Meek feels a little vindicated though. A few years ago, the ’same little condo’ was twice the price, he said.”
“People are only concerned about the right time to buy when values may go down, said Stephen Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy. ‘Previously, there was no timing the market because the price was always going to be higher,’ he said.”
“Levy said that prices are still outstripping wages, a sign of an overvalued market, and to expect additional correction for at least another year. But Levy said that buyers attempting to time the bottom of the market may be disappointed.”
“‘If people had timed the market a year ago, they would have blown that,’ he said.”
“Roger Stone had spent three months shopping for a home before signing a contract in February for a $465,400, 3,500-square-foot home in Tanglewood at Live Oak Ranch in Oakley.”
“‘In that three-month period, it continued to change, change, change,’ the 46-year-old landscaper and tree-cutter said. ‘I was actually in contract with another builder to buy another house, but by December the price had changed so much. They were not willing to renegotiate, so I canceled it and walked away.’”
“Christopher Thornberg, an economist and founder of Beacon Economics, said that timing the housing market is easier than the stock market. ‘These are markets that are very long; it’s not like stocks, where the price goes up or down erratically,’ he said. ‘Home prices don’t magically rise and fall. When prices haven’t gone down for six months, then you’re good to go.’”
“Thornberg said that in the short-term, the housing market will be going down, with factors such as inflation and recession only lengthening the process.”
“‘If you have the attitude that this is your dream house, and you’re willing to take the loss in order to secure this house that you may never have a chance at again, then by all means, buy it,’ he said. ‘But if you’re not that picky, then wait.’”
From Bloomberg. “When Quinn Cuthbertson looks around his new neighborhood in El Dorado Hills, California, he sees rows of empty homes and barren hillsides. A promised new school and a clubhouse haven’t materialized.”
“Cuthbertson paid $460,000 for a four-bedroom house in this northern California town. He now suspects his neighbor spent $45,000 less. Nearby, 87 of 98 Toll Brothers Inc. home sites are undeveloped.”
“Most of the community’s growth came in the late 1990s when the El Dorado County Board of Supervisors gave approval for construction of 11,598 homes as part of five development agreements, said Laura Gill, the county’s chief administrative officer.”
“Cuthbertson, who has two sons ages 4 and 6, plans to stay in the area, and says he can afford to wait for prices to recover. ‘We’ll wait to see what the neighborhood will be like,’ Cuthbertson said. ‘We know prices might be going down, but in five years we’ll be OK.’”
“Homebuilders can’t wait. They’re cutting prices even further than last year and some are courting real estate brokers and using auctions to get rid of homes. Pacific West Cos. said this month that it’s offering a ‘risk free’ price guarantee to buyers in its California communities, including El Dorado Hills. If a similar property in the same development sells for less than a homeowner paid, the company will refund the difference.”
“Brent Sease, who bought a five-bedroom home built by Miami- based Lennar in El Dorado Hills, said a park and school that were supposed to be constructed are at least two years from being completed. Across the street, red tags that say ‘Available’ are pasted on two houses.”
“‘That’s the thing I’m concerned about,’ said Sease, a software manager with three daughters. ‘It’s going to be a while before they put all that in, because they’re not selling homes.’”
The Sacramento Bee. “Reaction came fast, furious and from all directions after three bus tours roamed the area last Saturday touring foreclosed homes. So did offers to buy.”
“Some real estate agents cringed and wrote that touring these unfortunate properties reflects badly on their profession. Others in the business said the tours provided the media another chance to show the housing market in a negative light.”
“Most, however, could not have cared less about such perceptions. They called and sent e-mails to Home Front wondering how to get on the next bus.”
“As for negative perceptions of running buses up to properties where people lost their way financially, the agents have an answer to that.”
“One tour organizer, Bruce Durham of Keller Williams Realty in Elk Grove, said on Saturday that the agents aren’t the ones who moved the people out of their homes. Agents, he said, are marketing homes as they always do. This time the owners happen to be banks.”
“Meanwhile, there’s the Central Valley of California. Yes, here comes the bad news – or good, if you’re a buyer.”
“Twenty U.S. metro areas lead the nation’s downward race in home prices and seven have Highway 99 in common, says the Office of Federal Housing Enterprise Oversight. The nation’s top three metros for the severity of falling values in the fourth quarter of 2007: Merced, Modesto and Stockton.”
“All showed year-over-year sales price declines of 15 percent to 19 percent. Prices slipped 11 percent during the year in Sacramento and 10 percent in Yuba City. Fresno and Bakersfield were down 8 percent.”
The Press Democrat. “The restored Chauvet Hotel is returning to its roots as a destination for Wine Country travelers. Unable to sell the luxury condominiums it built within the century-old Glen Ellen landmark, an investment group has turned the condos into rentals for well-heeled vacationers.”
“The housing market’s sharp downturn left investors with little choice, said Christine Hansson, a managing partner for the ownership group. ‘This is a total fallback to keep the project out of foreclosure. They are going to be used as vacation rentals until the market improves and we can sell them,’ she said.”
“There was little demand for condominiums priced from $1.15 million to $1.37 million, even at nearly 2,000-square-feet each with three bedrooms, well-appointed kitchens and bathrooms, and a heated pool out back.”
“Prices were cut several times, reaching the $850,000 to $995,000 range. The owners called off an auction last year after few prospective bidders turned up. ‘The auction didn’t work; nothing worked,’ Hansson said. ‘We’re holding it until we can get to a better market.’”
“The five available condominiums have been taken off the market. Hansson and her husband own the sixth unit.”
“Larry Paul, a San Francisco architect and original managing partner with Hansson, and a handful of other investors no longer have an ownership interest, Paul and Hansson said.”
“‘I ran out of time and money. We couldn’t hang on for the next two or three years,’ Paul said. ‘Everybody, I think, will be losing money.’”
“Yet, Paul remains optimistic the vacation rental plan should work and the condominiums will someday sell. ‘I think we had a great project and they were worth what we were asking,’ he said. ‘We were a victim of bad timing and a bad market.’”
‘I don’t think that house is going to recover in value any time soon,’ said the 40-year-old. ‘I’d just be throwing the money away.’
While I did anticipate this trend a long time ago on this blog, I didn’t really come to that conclusion on my own. I was only recalling what became the prevalent feeling in the oil patch during the 80’s. People who were wealthy let houses and other property go back to the bank. And what was key was the attitude the quote above describes; when the borrower finally realizes there won’t be a rebound anytime soon, it doesn’t make sense to continue paying if there is an out.
So these guys in the REIC, Harvard, etc, can keep pretending that this is some new cultural trend, but it is really time-worn, financial reality setting in. After all, how old is the term ‘jingle mail’?
I think we need to look beyond the “just walk away” part and the ramifications of people abandoning legal contracts…
It’s a slippery slope from there, that leads to not following any laws.
How wrong does robbing a liquor store for $183 seem, after you’ve gyped the mortgage company for $183,000?
I disagree. It is perfectly legal to default on a loan. And when it happened in the 80’s, there wasn’t anarchy on the streets.
‘For Raymond Zulueta, the decision to go into foreclosure brought him peace of mind. Mr. Zulueta said he felt he had let down the lender, himself, and his family. ‘But you got to move on,’ he said. ‘I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.’
And I’ll let you in on the flip side that we may see; lenders also came to current owners and told them the house was worth less than the loan and accellerated it. We’ll see who is on the moral high horse if that occurs.
Anyway, this is a process that the lenders need to suffer through so they regain some discipline. IMO, a healthy, needed change.
Why not do the same for cars, computers, tv’s or any other depreciating asset? Why keep making payments once the value goes down?
People don’t. Then the repo man comes. And the bill collectors. It’s built into the costs of the business. We all pay more for TVs so deadbeats can have a plasma screen for 5 months.
However, mortgages are SPECIFICALLY loaned with the house as security. You promise to pay X amount OR give them the security. Walking away is in no way breaking a contract. It’s perfectly legal. And we’re gonna see a lot of it. And maybe the banks will remember why 20% down was required in the past.
Also, current house prices are predicated on the sales pitch that “house prices only go up”. That makes it especially distasteful to own a depreciating house.
Why keep making payments once the value goes down?
Because if the lender is smart, there is never a time where the money owed exceeds the value of the collateral (+ cost of collateral recovery.)
That small-but-fundamental item has been ignored in housing. Until now.
Of the three repo’s that I undertook in 15 years, two were walking away from being underwater. The third just ran out of the patience to sell in AZ summer. The fact of their walking away didn’t fill me with any kind of moral indignation. It was just business. I lost a little money on each of the two underwater, but I figured it was my own fault for lending too high LTV. One of the walkaways did pi$$ me off — not by walking away, but by dragging it out with phony promises to catch up. I was happy that I didn’t have to pay the price of legal foreclosure. All three deadbeats quit their claims.
I guess my point was if it’s smart business to walk away from a house because it’s a depreciating asset, why does the nature of the asset make any difference in making a business decision. Most other assets except cars are unsecured debts and not subject to repossession anyway.
“Zulueta said he felt he had let down the lender, himself, and his family. ‘But you got to move on,’ he said. ‘I know in a few years my credit’s going to be fine.”
Fool me once shame on you, fool me twice shame on me.
No good credit for 7 to 10 years. Banks are going back to the hardline they should have had during the bubble. Credit as we know it is going, going, GONE!
Well, isn’t the mortgage contract between the bank and the buyer very clear on exactly what will happen if the buyer does not pay? I’m sure the bank is well aware of the exact language in that contract - after all their lawyers are the ones who wrote it. Banks will simply have to enforce the various parts of the contracts that they wrote.
As for this:
“My house isn’t worth what I owe, why should I continue to make payments on it?”
This quote should be drummed into the head of every loan officer, bank manager, etc who has any control over who is lent money, and how much against any house from now to eternity.
How about requiring 20% down payments, to give people motivation to not walk away? That’s a great idea.
That’s certainly the kicker, especially for those who already had bad credit. For those folks, there really is not reason NOT to walk away.
It’s not going to matter in the mother of all housing bubbles…even some prime borrowers with 20 percent down payments who purchased at the peak will walk away. Who wants to continue you paying for something that has fallen over 50 percent in value (or more)?
Why not 100%? That would pretty much eliminate anyone from “walking away”
Indeed. This was the source of some friction between my lenders and myself over the past several years. The underwriting wasn’t just lax, it was absent. The marketing departments took over, pushing anything they could hold in their teeny minds for any length of time. Management was only too pleased to give them a green light and told underwriting that they, by God, WOULD let those loans go through.
One lender ceased doing background checks on car loans. They’re now getting cars back with bullet holes from police pursuits of the collateral. Another was making $5k to $10k personal, unsecured loans to pretty much anyone who came in. Once word of that got around, you can figure out what happened.
Now look. The lenders are bleeding out, and they want to blame economically rational borrowers? It’s the lenders’ own economic irrationality and focus on short term profits that lead to these crushing losses.
The losses are, BTW, far from over. A friend of mine called 80 (that’s right, eighty) foreclosures in *one day* last week, with several hundred in the entire week. He’s one of dozens of foreclosure attorneys in NOVA. There were over 350 eviction cases on the docket today in Fairfax. Anyone who tells you this is a bottom and a good time to buy is clearly selling something.
Underwriting just went through a phase of the Razzle Dazzle. What’s shocking is how it seems so contrary to our suit/vest/watch fob image of bankers, which I guess is very quaint. When underwriters start wearing Dockers, look out. Another pet peeve, totally OT. I think nurses should wear those little white hat dealios and uniforms. I’m sick of nurses wearing Care Bear sweats and t-shirts.
I think nurses should wear thongs, and spiked heels.
“It’s not going to matter in the mother of all housing bubbles…even some prime borrowers with 20 percent down payments who purchased at the peak will walk away. Who wants to continue you paying for something that has fallen over 50 percent in value (or more)?”
I think that you are correct. I have a relative who bought a new house in metro Phoenix for $350K in January 2004 with zero down. After some price drops from the peak for his model/subdivision, he sold it for $540K in April 2006. Alas, he bought another (smaller, cheaper) house before the first one closed. Both sales closed. The second house was also bought with zero down, but refinanced six months later with 20% down using some of his $165K or so post-commission bubble profits from the first place.
The second house was bought for $350K, which was a bit below peak prices. But identical model/subdivision REOs are listed in the $270s now and dropping. I think that he will eventually walk away, even though he sold just after the Phoenix price peak, downsized, and put 20% down on his current loan.
The mortgage contract stipulates that the buyer pays said mortgage or the lender will repossess the house. So, buyer defaults,and lender is free to take the house. Terms of the contract have been upheld and no law has been broken.
“Walk aways” will hasten the crash, force banks to face reality, and are a boon to those waiting for homes to return to affordability.
It is, after all, just business.
As I recall, the Dubya Admin changed the Debt Forgiveness law this year and borrowers don’t have to pay taxes for the difference anymore.
I know this will apply to short sell but not sure if this applies to foreclosure as well. Can someone with this knowledge share any insights on this?
If the housing market continues to slide, we will see more people following this trend and stick it to the lenders.
From what I understand, it only applies to short sales, but get this:
I recenlty learned of a little trick the banks are playing on FB. The bank tells the FB that it is willing to consider a short sale if the FB continues to make payments. But then, once the short offers start coming in, the bank just sits on them until the buyer disappears. This is just another way of milking several thousand extra dollars out of the FB before he/she can no longer come up with mortgage payments. Then the bank forecloses, which is better for it in many cases because it is insured against foreclosure, but not against short sales.
Business is war.
The correct response to We-Will-Consider-Short-Sale-If-You-Keep-Paying is: I will consider keeping this place in good condition by living here so that you can get a short sale deal done.
Insured. Not quite. there were very many 80/20 mortgages with no mi. those are the deep underwater loans now especially if the bank did the first and the second mortgage in house.
I’ll bet the banks regret all the 0% down 80/20 loans, which don’t have PMI. Oops, no insurance upon foreclosure, lenders eat dirt when “owner” walks, lenders eat dirt on a short sale.
How they did not see this fallout coming is beyond belief.
Speaking of PMI, that was what I wanted to know from my broker - where is PMI for those who were carrying it? He didn’t know either, so he asked the brokerage PoohBah, who said, “They are taking it one case at a time, trying to deny each on some basis. The line is out the door and around the globe, and even if they do pay - it’s just another arm of the lender that ends up with the property - and none of them want to play landlord…
So how about the rental market coming at us?! For those of us who can buy short sales or REOs, we have great options for 5-year fx/ARM after - and we can ‘lease to own’ from then on to all the poor folks who’ll have college age kids right about the time their credit becomes solvent again.
Won’t it be a great era when banks aren’t the only ones to set the rates? When we hold the notes, and if they walk, we get the property back to rent out again?
But then there’s Vallejo. Why on earth would you pay homeowner’s insurance if there wasn’t a fire department to douse you?
Also, in the “normal” times the bank makes money on a foreclosure. Sometimes there’s plenty of equity. Nobody accuses them of stealing, as it’s just business.
Totally disagree. In “normal” times, when there is equity involved in a foreclosure, the bank doesn’t win the foreclosure auction . . . an investor/buyer bids $1 over the bank bid and gets the property. The bank gets only what it is owed (which may include passing through legal fees). If there are no other bidders and they bank takes it back, most likely it’s because the mortgage amount exceeds the value. Banks make money on interest rate spreads and fees, NOT on foreclosing and selling real estate.
Concur.
A comment on the banks “stalling” deals, however. These foreclosures and loans in trouble have come so fast and furious that the banks are not sufficiently staffed to get the deals done. I think the stalling is more a lack of personnel than a concerted effort to screw borrowers. And if banks are losing money they are cutting jobs, so it’s unlikely that they will ever sufficiently staff for something like this.
Also not only are there losses incurred by taking foreclosures (and short sales), the banks would have to increase their loan loss provisions to cover the increasing foreclosures. That means they have lower profits. Also shareholders look down on loan losses, so then stock goes down. There’s no incentive for a bank to foreclose.
Interesting, Mr. D. I found a REO where it looks like the bank is owed about $450k (from what I can tell) and the house is listed in the mid-$600s. Not in an imploding market area (yet). Just curious on what might be happening in this case.
The $450,000 may just be a first trust deed. There may be another $100,000, held by the same bank, sitting behind it in second position.
The mortgage contract stipulates that the buyer pays said mortgage or the lender will repossess the house. So, buyer defaults,and lender is free to take the house. Terms of the contract have been upheld and no law has been broken.
Actually, laws WERE broken if the loan was issued based on false information in the loan application.
Health insurers will happily expend many man-hours combing through your application if you end up needing expensive surgery, looking for any excuse not to pay. It would be nice to see mortgage lenders doing the same with every “victim” who allows his house to go to foreclosure.
The banks directly affect the supply side of the money equation. They have control over asset prices. It is just as irresponsible to lend that amount of money as it is to default on the loan, and the lending “sin” happened first, and was a necessary precondition for the later default.
It’s a slippery slope from there, that leads to not following any laws.
How wrong does robbing a liquor store for $183 seem, after you’ve gyped the mortgage company for $183,000?
A very sane assessment indeed, Mr. Insane.
It’s called “efficient breach,” and it’s the foundation of Anglo-American contract law.
We don’t have debtor’s prisons, and we don’t throw people in jail for breaching contracts. We require them to pay the damages caused by their breach, and no more. Anything else would be inefficient.
I thought that renting instead of buying was “throwing my money away”…….I am very confused……
LOL !
Suddenly renting also seem to offer a “peace of mind” ! I thought while renting you always have to worry that your family will be on street of at the landlord’s whim.
Hmmm. The “intangibles” of buying a house are now intangible advantages of renting ? When a Realtor admits that, I will use that as a bottom signal.
I was just told this week that I was paying my landlord’s mortgage and it was a disadvantage to renting???
Unless you’re renting from an FB who’s not paying their mortgage.
Ben,
Truthfully I’m awed and amazed at your call of people voluntarily walking (running?) away from their mortgages, and the sense that it is actually beginning to happen.
I grew up in LA, The OC, and The Bay Area ™, all bastions of the real estate mindset. And even though I had an extensive bubble training living in SillyCon Valley during the tech bubble, my real estate religious indoctrination never allowed me to believe that people would willingly walk away from their house.
Silly me! It makes (economic) sense in hindsight…but the Real Estate Kool-Aid runs thick in our veins here in Cali, so it was hard to see.
Ditto. I know people who walked away in the last bust (1995), but from that I got the idea that it was only those who absolutely needed to sell due to relocation, death, divorce, etc. I found it hard to accept the idea that someone who could pay would walk away. Also, I remember when a couple of years ago someone tried to sell us a fund based on MBS, and when I asked what happened if real estate did not do well, he said the investment was very safe because it was a known fact that people hold on to their homes. I did not buy the product, in case anyone wondered, but I guess that stuck with me until I got to this blog.
Ben, I read today in the WSJ that Fannie or Freddie (forget which) is worried enough about this trend to start going after people for deficiency judgments. After all, this has the potential to crush bonds based on conforming loans given a 30% price decline. And some of the conforming loans are part of 80/20s, providing every incentive to walk.
Except that the big bubble states are non-recourse, which means lenders are SOL.
Expect to see the lenders sponsoring new laws to change that soon…
I doubt it. That was supposed to be incentive to prevent abusive lending. Then securitization came along …
In some of them (like CA), only if they didn’t refinance.
FB’s? Not refinance?
BWAH-HA-HAHHAHAHHAHAHHAAHH!!!
The original purchcase money loans are non-recourse.
The refis and HELOCs are typically not.
Michael J is doing the moon-walk-away.
“Billie Jean is not my lender…”
“She’s just a girl who thinks that I owe her dough…”
“But the POS is mine no mo’…”
“EEEEEEEHEEEEEEEE…”
That was f’ing hilarious!
Yo, was riding my dirt bike back up in there a few months ago and came round a corner in the trail eyeball-to-eyeball with a largish Black Panther. People assure me I must’ve been drinking, but this was not the case. I think the keepers of the zoo, disgruntled at having not been paid for awhile, maybe left a few cage doors open…
I hope the dirt stains hid the mud stains on the back of your pants.
Did it have a big ‘fro?
Banks sold put-options on homes and failed to prices them properly. An expensive lesson…
Does anybody know which ones are recourse versus non recourse states? Meaning where the bank can sue the (former) home owner for losses beyond just repossesing the home. I wasn’t able to find any info on that.
thanks.
They priced them properly, but they violated the independence axiom. The selling of the options caused the price of the asset to change.
First American Title has a website noting the existence of anti-deficiency statutes in AL, AZ, CA, CT, FL, ID, MN, NC, ND, TX, UT and WA. Elsewhere I have read that OR also has such a statute. The breadth of these anti-deficiency statutes is highly variable, but the AZ and CA statutes broadly cover all residential RE…except when you re-fi etc etc
Thanks for that info. CA, FL & AZ got the big bubbles covered. That could get expensive.
I guess they’ll nail their share of Californians anyway if Nevada isn’t covered by such a statute!
new group of homeowners, those who can afford to pay their mortgages but have decided not to, are starting to walk away from their homes.”
lets call them Buh-Buyers
“Buh-Buyers”!
Awesome!
HAA.
Love it !
For the “oldtimers” around here, remember a few years ago when it seemed like every day a new homebuyer would pop up and claim that even if there was a housing bubble and prices crashed, it didn’t matter because they could afford their new house and they wanted to paint their kid’s wall blue and they were happy with their house and blah blah blah blah…? Those guys always cracked me up.
Heads we win, tails the bank loses…
Hilarious! “buh-bye(rs)”
Cali, fla and ariz are non-recourse states? This is going to become a disaster of mythic proportions.
US negative equity
Published: February 29 2008 14:48 | Last updated: February 29 2008 19:38
Underwater loans are giving banks that sinking feeling. It turns out that second mortgages taken out when the US property market was booming are particularly painful for lenders when prices fall so fast that the house is worth less than the outstanding loan.
JPMorgan Chase has just provided a blunt assessment of its $95bn portfolio of second mortgages, also known as home equity loans. The extra disclosure revealed that about 10 per cent of it is secured against homes suffering the burden of negative equity. Loans caught in this trap are particularly toxic for the banks. They punch above their weight in contributing to credit losses – 60 per cent in JPMorgan Chase’s case – with loss rates three to four times those incurred on loans that are still just – but only just – in the money.
Negative equity
Once a home tips into negative equity, borrowers have less incentive to keep up on repayments. That is especially true if the property was not a primary residence, but a speculative punt. Meanwhile, the costs of foreclosure mean lenders have little incentive to try to recover any value from a house in this kind of death spiral. The loans become in effect unsecured.
http://www.ft.com/cms/s/1/5800dc6c-e6d5-11dc-b5c3-0000779fd2ac.html
If you have 20% of your own skin in the game, you won’t take such a cavalier attitude toward “walking away,” and will do so only when there is no other choice. What’s different this time is how many loans were granted with little to no downpayment. In this case, there’s nothing to lose by walking away, and everything to gain. We’ll see a LOT more of it this time.
“But Levy said that buyers attempting to time the bottom of the market may be disappointed”
If history is any indication, the “upswing” will be long and slow…plenty of YEARS to time you entry into the buying pool.
Myself, I’m a bit worried what the Option-ARM reset wave will do to prices in 2009-2011, so no real worries about missing the boat, jumping on the bandwagon, catching the train, getting with the program, getting off the fence, etc. etc. etc.
Additionally, Wells Fargo has just started requiring 15% down in severely distressed areas (in little places like LA and The OC), and I expect other lenders to follow.
Nope, I’m in no hurry.
Is there a link to this somewhere?
check in the bits bucket
http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf
page 47
Wells Fargo Tightens Mortgage Guidelines
http://biz.yahoo.com/bizj/080228/1597695.html?.v=1
“Wells’ new guidelines adjust the list of markets it considers soft, distressed or severely distressed. It has ratcheted down the maximum amount of loans it will make in relation to the value of a property, which means home buyers will need to put more money down. In markets considered severely distressed, for example, it will not make a loan for more than 75 percent of the value of the home.
Twenty counties in California, including Los Angeles County and Orange County, are on the severely distressed markets list.”
And, yes, formerlahomeowner is right, I had read it wrong…it’s now 25% down payment. WOW.
So WFC is inferring another 25% decline?
Until the cost of buying, all things considered, approaches the real costs of renting, I’m not worried about timing. Once we get to the point where buying is about the same cost as renting, I’ll look at the PITI/income ratios and figure out what I can afford and then shop within my price range. It isn’t that complicated. Speculators would have us believe that things will turn on a dime and we’ll all be crying the blues. If that happens (based on some factor that nobody has convincingly identified, at least as far as I can tell), so be it. I’m not going to buy into the same BS voodoo economics that started this mess in the first place in order to avoid some phantom housing rebound.
Bravo to you. Whoever thinks the market is suddenly going to take off again after this many mortgage writedowns is smoking something. There will never, ever, ever be no money down liar loans again. Well, at least until the next case of collective lending amnesia in about 20 years.
15% down? Oh my! what ever happend to 20% down?
Wells Fargo is requiring 25% down in distressed areas. A lot of those areas are in California.
Curiously, our most familiar example of a “turn on a dime” market (the stock exchange) is a market that requires 50% down. After what happened to stocks in 1929, when the margin requirement had been 10%, the regulators of THAT mkt learned to protect the market-makers just a little bit.
GSE’s too big to fail?
http://www.stlouisfed.org/news/speeches/2008/02_29_08.html
I am not saying this is true, only the drumbeats for a bailout are getting louder:
“An exception to this general statement is that, unfortunately, the GSEs probably can expect targeted aid.”
“I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector”
We absolutely have to have entities like Fannie and Freddie to provide liquidity in the secondary mortgage market, if conforming loans are to be made to people who are going to afford them. So yes, we need something like Fannie and Freddie.
The question is, should the federal government bail out Fannie and Freddie shareholders, bondholders, and executives? Or should it just create two new GSEs, minus the political clout and record of past shenanigans?
The federal government did it once, they can do it again. It can even sell them and remove the guarantee a few years down the road.
Anything else would represent the redistribution of income from poor people without wealth to rich people with wealth, and from younger generations to older. But that doesn’t mean it wouldn’t happen.
Why ?
Local banks used to do quite well loaning business and home loans and keeping them to maturity. The GSE if anything have simply acted as a loop for blowing bigger bubbles.
Some things food/housing/basic clothing don’t need to be big money making businesses. Whats wrong with our basic needs being met with very conservative low profit and stable business practices ?
“Local banks used to do quite well loaning business and home loans and keeping them to maturity. The GSE if anything have simply acted as a loop for blowing bigger bubbles.”
Banks are going to have capital that is so impared by the bust and recession that they will be in no position to hold loans on their books. And deposits aren’t what they used to be, since the invention of the money market mutual fund.
Yes, but since the GSEs have been so poorly used, they will be in the same boat as the banks. We just can’t trust Congress to be careful with this sort of thing.
I am not sure this won’t in fact happen. More of my NYC friends have been asking me how to get into hard-money lending. Of course there are entities much bigger than I, who would “help” my NYC friends, but my friends reason justifiably that these are just more scamming skimmers, and that they are better off trying to find direct contacts with retail borrowers.
Are you trying to tell us NYCBoy is going to become a hard-money lender?
So again experts are surprised. What is interesting is, any average man will refuse loaning 10K to a person who doesn’t have a steady job, often pays his electricity bills late and doesn’t have a responsible attitude towards money.
What is obvious to any person with a triple digit IQ, is somehow missed by the expensive computer models. They project that by combining many risky loans they eliminate risk.
Then comes a black swan event - “walk away” - for the models, which again was obvious to humans. If only these experts try to understand human emotions as much as their attempts to master statistics, they will not feel so blind sided. But again, it’s other peoples money, so they don’t care much anyways.
Hey, how come everybody doesn’t jump all over StuckinBA for talking about triple-digit IQs? Isn’t he an elitist? He’s being mean to peope with double-digit IQs.
This is like Lake Wobegon… we all assume we are above average, so aren’t personally offended.
The people with double-digit IQs are all trying to read the real estate investment blogs.
LOL. I live in the Bay Area. I am surrounded by people with triple digit IQ who also happen to be the most financially idiot crowd. In their elitist world they fail to realize (or accept) that all these smart, high salaried, dual income techies are neck deep in debt.
My opinion is that they’re not really that smart, they’re just highly specialized. Most of them can’t hold a conversation outside their field of employment.
Preach it!
I am forced to go to Silly Valley often (social not business) and these clowns are boring boring boring. I need alcohol IV to put up with them. Sigh.
About i.q.’s:
My sister’s i.q. is 6 points higher than mine…
Why does she “own” 3 houses now, and owes a million to the bank for 2 of the 3 houses, she doesn’t live in?
Firstly, I don’t believe in “IQ”.
Anyway, I don’t think highly-specific intelligence (think physicists or mathematicians) has any correlation with the practical world.
I’ve seen all combos (people who had both; people who had one and not the other; and people who had none.)
Your sister may “own” 3 houses, but can’t claim bragging rights for punditry on the HBB. Tell her to put that in her pipe and smoke it.
Black swan event. Cool. Sounds like a Brothers Grimm tale, in their darker, original telling.
A word to the wise: DON’T BUY CALIFORNIA HOMES UNTIL PRICES MAKE SENSE AGAIN. (Rest assured — they will!)
Guess I won’t be moving any time soon.
That would be an awesome billboard on the I-15.
“The owners called off an auction last year after few prospective bidders turned up. ‘The auction didn’t work; nothing worked,”
Lower the asking price. I guarantee you that will work. If it doesn’t, repeat.
They would rather pay the aligator for a few years. Once they no longer have any more meat to toss into the cess pool they created, they will be forced to capitulated and take their losses. It’s akin to be eaten alive by then.
“Your first loss is your best loss.” That saying is right up there with “Jingle Mail”.
I think capitulation will come sooner than a couple of years. Just as market forces drove the market up exponentially, the same thing will happen on the way down — the more severe the losses, the faster the prices will be driven down by banks liquidating for pennies on the dollar, and repeat.
‘We were a victim of bad timing and a bad market.’”
Is anyone not a victim of something these days? It’s never your own fault EVER!
I guess they’re to old to blame their parents…nah you’re never to old to use that old standby.
If they get divorced, they can blame each other. That’s what most people do.
“Yet, Paul remains optimistic the vacation rental plan should work and the condominiums will someday sell. ‘I think we had a great project and they were worth what we were asking,’ he said. ‘We were a victim of bad timing and a bad market.’”
Hmmm. I’m not a San Francisco architect and managing partner/investor person, but it seems to me that if ‘they were worth what we were asking’, you would have, you know, SOLD them. And thereby gotten what you were asking. ?
Vacation rental is a great idea …for the TENANT! This winter I have a reasonable 2BR oceanview unit on the Central Coast for $1400/mo including parking, furniture and all utilities, plus the ability to specify exactly what dates I want…and there would’ve been a dozen other choices nearby. I’m guessing the wintertime vacancy rate is 70% or more. Plenty of business on holiday weekends, which are few. Jul-Aug probably OK for owners too. Good luck, investors.
Yep, thanks a lot, suckers!!!
What’s the big deal about these “second homes”, “getaways”, what have you?
I’m perfectly happy to just pay for my vacation. I don’t want to deal with the problem at other times, and I can go to different places whenever I want.
I recall my parents buying into some cr@p scheme back in the late-80’s-early-90’s. We went there on vacation — wait for it — exactly once. I think they sold it at a loss.
I recently laughed in my dad’s face. I know, I am mean like that.
“This winter I have a reasonable 2BR oceanview unit on the Central Coast for $1400/mo including parking”
Let us know when you are visiting…maybe SLOBear, etc., and I can get together with you for some brew/wine/chocolate yoo-hoo.
Hey! Here’s a new sales motivation tactic. Maybe the used house salespeople ™ should try this.
http://www.sltrib.com/ci_8385103
That’s how sellers are starting to feel, I suspect.
“takin my time,
choosin my lines,
tryin to decide what to do…”
“Seems to me,
you don’t wanna talk about it,
seems to me,
you just turn your pretty head and
walk away”
Joe Walsh
The James Gang
that’s my favorite song of all time. Why isn’t it on Itunes?
OK now I’ll be humming this the rest of the day.
My brother and I used to have stereo wars until he started playing Joe Walsh.
Look for “20th Century Masters - The Millennium Collection: The Best of Joe Walsh”…it’s on that record, which should be on ITunes.
Also, I recommend almost everything on the “So What” album - but I’m biased, because I was on the production team. I still get chills when I listen to that record all these years later.
It’s on the Eagles Farewell tour too
txchick,
http://www.songza.com
Enjoy!
Thanks for reminding me
Tommy Bolin/James Gang Bang:
http://www.youtube.com/watch?v=A5ykcMFU3Do
Must Be Love & Alexis. Owwww.
‘We know prices might be going down, but in five years we’ll be OK.’
Five? No, I don’t think so. Maybe 10. Maybe.
“Five? No, I don’t think so. Maybe 10. Maybe.”
In 5, it’ll still be somewhere near the bottom. Recovery back to near where he purchased could be much longer than 10, possibly 20 or more. If this had been an ordinary increase tied to a normal economic expansion, 5 to as much as 10 years would be typical. This increase was not typical in any way, except when viewed in terms of a bubble. Better or more optimally located properties will recover in a generation, others will take longer, some will never return to peak bubble values.
I heard tulips NEVER recovered.
“I’d just be throwing the money away.”
H’mmm…
Not too long ago, wasn’t the common phrase…
“I’m not going to give my home away!”
not so long ago, only renters threw money away…
Interest only FB’ers. How stupid. Some with 10 year IO.
Exponentially stupid. No pity for them.
I wonder how many of those idiots HELOC’D to buy Coach bags and other worthy “investments”?
They can crash and burn.
http://youtube.com/watch?v=Eux_bzpJHiY
I say, “Let ‘em crash.”
il continue renting and throwing my money away personally
I wouldnt blame them ,just like we all got stuck on the internet bubble in 99. They are not stupid, maybe greedy.
Some of us read itulip.com and Fleckenstein’s warnings. The stock market was very good to me.
We didn’t all get stuck in the internet bubble in 99. Some did, some didn’t. And besides, residential housing is something that most people have had multigenerational exposure to, whereas stock trading was kinda new to the average Joe in the 90s. We should expect people to use common sense when buying a house.
There was a stockbubble.com back then too, and only a few listened. I was lucky enough to be one of them and sold out to start a business. I thank God every day for that bit of good fortune.
“Unable to sell the luxury condominiums it built within the century-old Glen Ellen landmark, an investment group has turned the condos into rentals for well-heeled vacationers.”
Having grown up in Glen Ellen, I can assure you the idea of $1million + condos there is ludicrous. It’s a sleepy little town with a few hundred residents, and very few restaurants/attractions other than the nearby wineries (none of which are of any use after 5pm) The nearest town of any interest (Sonoma) is a good 15-20 minutes away. Meanwhile, that same $1million + in Glen Ellen would could get you a (admittedly overvalued) house with some acreage a possibly even a pool…
The folks that dreamed up this brilliant scheme were delusional.
“The $455,000 three-bedroom home he and his wife purchased in Vacaville, about one hour northeast of San Francisco, is worth an estimated $285,000 today, well below the $453,000 he owes on his mortgage.” “He can’t sell his home, since there are few buyers….”
Question: Just how many buyers have there ever been, including the previous 10 year mania, willing to pay 453k for a house which is valued at 285k?
Actually, pretty much everybody who purchased a home in California in 2003, 2004, 2005, 2006 and 2007 was paying at least a 50 to 100 percent premium (if not much, much more) over the actual value of the home. Only they didn’t know it…
i gotta agree with that although you may be able to squeeze in 2002 and possibly…winter/spring 2008.
“Only they didn’t know it….”
That’s my point. They didn’t know it, because someone (appraiser, realtor) was telling them the going price, and that price was not an untruth. Prior sales backed up those wishing and selling prices. Ultimately, sure we now see, and by how much, people were overpaying for property. But even during the mania, I think it was a rare transaction where a buyer was willing to pay 59% more for a home than it’s appraised value. Why now then, in a declining market, would “more” buyers produce one willing to pay 453k for a house valued at 285k?
The erosion of buyers has been occurring over the last three years. Best case scenario for the dreamer-sellers and their agents, is more buyers would slowly drive prices higher…. incrementally…. pushing the price of the Skaggs’ house back to 453k over a period of time. But there is no one, and essentially never was anyone, who was willing to pay this much more for a home than it’s widely accepted value.
Hence, selling the Skaggs’ home for 453k today or tomorrow…. or next week is not influenced by low buyer volume. You’ll never get 453k.
Plus higher taxes and insurance premiums.
Bless you. We bought our current home in 2001 and I thought it was too much dough at the time, but I made too much dough on the house I sold, so I figured it was all equal. I keep reminding my husband that our house probably isn’t worth more than what we paid for it, just so he doesn’t get any crazy ideas.
What if Black-Scholes is Wrong?
http://www.portfolio.com/news-markets/national-news/portfolio/2008/02/19/Black-Scholes-Pricing-Model
Assumptions are a bitch. Especially when you’re geared 100-1. Random Walks and Efficient Markets only exist in Black Boxes.
I guess we just gotta get rid of all those pesky humans!
Tx,
Since in 1978, I have traded as if Black-Scholes is wrong. I still do.
It has the same built in assumption that permeates DCA investors. stocks and houses always go up. Which is not true.
I think it is funny that Mr. Nassim Nicholas Taleb tried to get their Nobel prizes removed.
I think that their final paragraph hits it on the head: “Could this be because the financial system was built on an idea that badly underestimates the risk of catastrophes—and so conspires with human nature to create them?”
All hedge funds go the same way, there is no magic out there. (Sorry Olympiagal, my Unicorn was used for a ritual sacrifice).
Black-Scholes is total and utter BS.
Forget the tails. They got the “vol” wrong all the time. Still do.
It was so much fun to pick them off around earnings season. Bit of a bummer once they figured it out. Lots and lots of fun while it lasted.
Most importantly, they haven’t figured out one key fact. I’ll even give it away for free. Central banks may “print” money but they can’t channel where it goes.
The problem with Black-Scholes is that you have to plug in an estimate of volatility. If volatility has been low, and you assume that in your estimates, and then volatility shoots up, everything you estimated is mispriced. You can only know actual volatility after the fact, but you have to guess at it to make the model work.
This is not a “problem”, as you so delicately put it. This is the crux of the matter.
If you get “vol” right to within 20% consistently, I will hire you on the spot. These people are making assumptions about “vol” down to the first decimal.
If that is not retarded, I don’t know what is.
Black-Scholes isn’t “wrong.” It’s a mathematical model of change over time under uncertain conditions - the same basic mathematical equation is used in heat transfer, for example.
What is “wrong” with it is the value for volatility that has to be plugged into the equation. One has to use historical data, or make a guess of some sort. For example, how much additional volatility should get added in when there is an earnings reporting period before the expiration date?
Data can be back-tested, of course, to determine whether options are (were) too cheap or too rich. According to information I have read, there is a tendency for options to be too rich - this was even true during the low volatility period of 2004-2006. It makes some sense that options would have a tendency to get priced on the sell side, since that’s where most of the pros and market-makers are, and retail generally has to be a price-taker.
But, models are just models - they all require assumptions and contain uncertainty, because TANSTAAFL.
It is wrong. It is biased in an unbiased market.
Now you’re just being flip, Hoz.
I apologize, I don’t mean to be flip. This argument has been on the floor of every exchange since April, 1978. There are better pricing tools available. Myron Scholes went under in LTCM, what more proof do you need to know that the equation is wrong?
If you run the program with 0% interest rate at strike for options or par for commodities, the bias is to the upside -calls are worth more than puts, July beans are worth less than Nov Beans. Since every long term trader knows that what takes three years of up, falls down in three weeks, it is not a surprise that with a built in bias the hedge funds tend to all end up in the same crap. Goldman Sachs traders were in the same boat, GS firm has a risk manager - she got rid of CDOs as soon as they were bought, the GS hedge funds did not have a risk manager.
Other things equal, calls should be worth more than puts because stock prices track, as a first cut, nominal GDP, which has an upside bias. The bias you’re talking about - where the B-S estimator fails as an unbiased estimate of the options market - comes about due to the different market volatilities on the downside and upside. I follow that, no problem. It’s why put prices tend to show higher B-S volatility values than calls.
If anything, your complaints would seem to indicate that it is unbiased in a biased market. I disasgree that there is a built-in assumption that prices go up. The assumption is that there is a random walk around a long-term trend line based on the implied time value of money.
If I understand you correctly, the shortcoming is that the model doesn’t accurately account for the fact that crashes tend to be more severe than up-moves. Whether that is the case or not, it doesn’t make the model “wrong.” That’s like discovering that people entering an elevator doesn’t exactly follow the Poisson distribution that has been widely-used to model it, and then announcing that the poisson distribution is wrong. It’s an absurd statement to a mathematician (just like the term “greed” is an absurd word to an economist).
Not being flip Paul,
I am really tired and thought this was settled over a decade ago.
“And he said: “when we say that providence is a cause per accidence, we define it no less by its being foreseen than by its occurring infrequently.” (…) Well, I said “ the question, which demands that providence be divided into what is per se and that which is accidental, only, is not adequate”.
Alexander of Aphrodisias, Quaestio 2.21
Avoiding faulty programs is not an accident.
OK, thanks for all the input, I understand where you are coming from and appreciate the info. What you are saying is that, as an estimator of fair option prices, B-S is neither an unbiased estimator nor is it the best estimator. I have no problem with that.
But, models are just models - they all require assumptions and contain uncertainty, because TANSTAAFL.
Most folks do not understand the above quote. (You are a engineer, scientist or mathematician by training?) They tend to look at such models as absolute laws, rather than investing the necessary time to understand the underlying assumptions.
And when the “laws” break down, they throw the baby out with the bath water and revert to unfalsifiable models. Numerous examples in the history of finance and bio come to mind.
“models are just models”
Every model has defined limitations, exceed those parameters and the model falls apart.
gee, I thought I was the only one who was thinking this. From the comments:
Posted: Feb 25 2008 7:41pm ET
This piece smacks of an editor dumbing it down so any moron could think he understood it. VAR modeling and “normal distributions” parted company forever in 1998. Only complacency and greed have driven the recent pricing fiascos, which are nothing even vaguely new. There is a key variable that must be fit into all such derivative pricing schemes: Trader and Executive Compensation. If they are rewarded for building models that misprice inventory, and get paid in cash, the models will misprice inventory. The ONLY reasons for the huge writedowns are: The creation of structured products nobody needed to create arbitrage profits for trading desks; The stupidity of the regulators and auditors; The complicity of the ratings agency whores; Senior management at the banks and I banks allowing the assets to balloon on the balance sheet to create phantom “profits”.
By MikeyBoy
Recommended by 5 Users
Report AbusePosted: Feb 25 2008 4:20pm ET
This is well understood territory. I pointed this out to some “important folk” once, and I was told I was “too negative”.
I responded in the time-honored way with my hand. I don’t think they liked it much.
My favorite article from March Portfolio
Would You Buy a Bridge From Warren Buffett?
Feb 12 2008
Jesse Eisinger
The famed investor is getting into municipal-bond insurance. Too bad the industry is a racket.
“…The reason the business can be so rewarding is that government bonds are intrinsically safe: Municipalities almost never default. From 1970 through 2006, only slightly more than 0.1 percent of all muni bonds went bad, according to a large Moody’s study. By comparison, corporate bonds in the same period had a 9.7 percent default rate. In other words, corporate bonds are 94 times as likely to fail as muni bonds are….
..The question is why there are two standards for ratings and why Connecticut towns and cities should be required to obtain bond insurance when the likelihood of default is virtually zero,” Blumenthal told me. “Is there conduct that violates the antitrust laws in terms of anticompetitive practices or collusion among rating agencies or the bond insurers?”
Investors in muni bonds like insurance because it lets them buy bonds based on their triple-A rating rather than having to pick and choose from an immense universe of offerings. “Bond insurance provides a way to commoditize the market rather than doing credit analysis and checking each credit,” explains UBS muni strategist Kathleen McNamara….”
I suspect it is only a matter of time before municipalities sue the rating agencies for collusion to defraud.
Risk (and the underlying stochastic process that drives it) is endogenous. The version of the Black-Scholes model with which I am familiar assumes the risk is an exogenous random walk. Black swans (and the mother-of-all black swans currently underway) are a bitch for spurious assumptions (e.g. exogenous risk).
“‘It may not be a big thing yet, and hopefully it won’t be,’ says David Berson, chief economist for mortgage insurer PMI Mortgage Group Inc. But if it turns out to be a significant trend, he says, it means that ‘delinquencies and defaults could be higher than the industry is estimating.’”
Who are the people doing the estimating in the industry anyway? If they didn’t see this coming, then I’d have to say they appear slightly incompetent.
“When Quinn Cuthbertson looks around his new neighborhood in El Dorado Hills, California, he sees rows of empty homes and barren hillsides.”
For some reason, that quote reminded me of what happened in my old “Sim City” days during freshman year of college. Those damn lots away from the city center that would briefly have a few run down houses then turn into the empty “R” block. Always ticked me off. Great game, much more fun than studying Physics 106.
We are truly in uncharted territory here, I wonder what these places in SoCal, Las vegas, Phoenix are going to look like in 5-10 years.
OK, you are *really* dating yourself, dude.
That was three Sim City versions ago.
“Levy said that prices are still outstripping wages, a sign of an overvalued market, and to expect additional correction for at least another year. But Levy said that buyers attempting to time the bottom of the market may be disappointed.”
“‘If people had timed the market a year ago, they would have blown that,’ he said.”
Does this guy just not know about the reset chart, or is he just not disclosing it because he knows it disproves his little crystall ball argument? Truthfully, I’m kind of glad that not everybody knows about it, just because I don’t wan’t everyone hopping in and driving up prices in 2010. But still.
And besides, if “prices outstripping wages” is an indicator that prices are too high, then shouldn’t we logically be able to use that alone as our timing mechanism?
“‘If you have the attitude that this is your dream house, and you’re willing to take the loss in order to secure this house that you may never have a chance at again, then by all means, buy it,’ he said. ‘But if you’re not that picky, then wait.’”
While Thornberg is on the right track, he makes a mistake here. If you’re picky, you should absolutely wait because there will be more (and better) stuff on the market later.
Hey, this is a step in the right direction. First it was genuinely a “sellers market” and then when that came crashing down they started calling it “buyers market” even though I’m a potential buyer and its clearly a stupid time to buy. I’m happy now they’re calling it a “picky buyers market”. Where picky == absoultely must have that cute house that I’ve walked buy and drooled over for the last fifteen years which is finally for sale, even if I lose $200k.
Maybe next they’ll call it an “impatient buyers market.”
How ’bout dumbass buyer’s market?
Sheesh…when are the folks in Austin going to get a clue about the housing bubble? Here are two headlines from today’s Austin Business Journal:
$120M condo project near Zilker Park OK’d
http://c.bizjournals.com/ct/c/23341208
…and then this one:
5,500 homes to spring up soon
http://austin.bizjournals.com/austin/highlights/2008/03/03/story4.html?ana=e_ph
Ben,
Phenomenal job man…really love this week’s articles.
Favorite quote of the week:
“‘The problem is the buyers feel that homes that are owner-occupied should be going for the same price as a foreclosure or a short sale,’ Funk said.”
Nice work!
Wilson
OT but I thought this was worth posting.
http://www.cnn.com/2008/US/02/29/gas.squeeze.irpt/index.html
Gas prices straining budgets.
Most readers said they were driving as little as possible, cutting back on shopping and eating out and other discretionary spending.
Travis Grim, of Dallas, Texas, said he moved so that he could be closer to work. “Now I’m in walking distance. I’m sure towns and businesses will see a surge as people leave the suburbs for relief,” he wrote. Other readers said they changed jobs, or sold their homes so they could have a shorter commute.
Many readers said they traded their trucks and SUVs for more fuel efficient vehicles. Christine J., of St. Louis, Missouri, said she was also considering a swap.
“The way prices are increasing again I may have to sell my Kia Spectra (again small car) for a scooter,” she said.
James Downhour of Cartersville, Illinois
As with everyone else, I have had to cut back on entertainment, travel and food. An interesting trend that I have seen at work (I work for a pizza shop): When I started working there five years ago, no one ever ordered a medium pizza, it was always a large. Over the last 6 months to a year, however, not only have we begun to have fewer customers, but many of our customers have been forced to settle for a medium instead of the large.
At least a third to half of our orders are now for mediums. A family of four has to struggle to make a meal out of a medium pizza. What happens when the economy gets worse? Do they cut back to the small pizza (you can’t feed a family of four with a small), or do they stop purchasing all together?
Jesus Cepero of Andover, New Jersey
I’m a Realtor and I’m suffering from the Real Estate disaster. How can I drive customers around to show properties with the gas prices the way they are. I’m being hit from all sides with the economic slowdown and higher prices due to the oil price increases.
Marcia Mason Reklaw, Texas
We don’t take vacations, we use the most economical car and combine all errands, have parked the pickup, shop almost entirely by Internet for home delivery, do not go out for entertainment anywhere, including sports and avocations, not even to visit family, have turned the thermostat down in the winter and up in the summer. We are cocooning.
Marcelina Malave of Rahway, New Jersey
Since the spike of the oil prices, I find myself more home often and spending less time enjoying myself with family and friends. I have a long commute as it is and adding more miles is more than I can afford because you need to drive everywhere in my area. It’s definitely an impact on my love life since I am no longer able to see my significant other as often. Everything I do now revolves around “Can I go away for the weekend? I need to budget myself cash for gas” I don’t feel it should have to be that way.
I love the ‘pizza’ thing. If fat Americans are cutting back on pizza, it’s worse than I could have imagined.
Must be awful to have to cut back on pizza. (I rarely eat the stuff — too expensive and it sits like a rock in my digestive system.)
Pizza - can buy frozen or make at home. Most frozen rivals the quality and flavor of takout at chains.
” I need to budget myself cash for gas” I don’t feel it should have to be that way.”
You have got to be kidding!! Feelings have no place here, get a second job, update your education and place effort on doing not on feelings.
I thought it was funny that she refered to her live-out boyfriend as a “significant other”. When you have a ring, get back to us.
I dunno about that one. Some of us like our personal space.
In any case, formality is overrated. I don’t think papers or rings make one any more committed. Either you are or you aren’t, and ain’t nothin’ gonna change that one.
As I posted elsewhere on this blog:
Today’s WSJ (page A3) has an article that states: “Crude inventories in the U.S. are swelling while gasoline stocks are at 14-year highs”.
Also, the article quotes a senior OPEC member who says: “The feeling right now that the price is very high, but not because of fundamentals.” He estimates that at least a third of the price run-up over the last year is due to what he calls “pure froth” - basically, speculative flows of money into the oil market.
And that is where I am at. All the sudden in the last month we are out of wheat. I call bullshit on that. After the wave of slush money started chasing the wheat up, then you had all the know it all analyst saying the usual…China is buying up all the wheat. Yea right, all of the sudden this month they bought up all the wheat. Yea, whats next, the hedgys start the banana rush and next we will have the expert banana analyst claiming china is buying up all the bananas.
You are correct that the speculative money is flooding commodities.
However, I hedged my bet. I bought 9 lbs of fancy-@ss dried pasta out here before they figure it out. They looked at me funny though.
That’s funny. A while back, I posted about a dream I had where my husband gave me to fancy containers of fancy-ass pasta. When I read the label, it was “popcorn flavored”.
To = Two. Sorry. It was important that I got 2, because that signified that houses would be 2 for 1 later. It was a pretty funny dream.
I suddenly realized how pretentious this sounds so before anyone gets all over my case, I would like to point out that it cost $1.25/lb.
This is an ol’ fashioned ol’ school Italian pasta place. Bronze die casts, slow extrusion, air drying, the whole nine yards.
They are well deserving of patronage (not that they need it.) I would happily pay 5 times the price.
Was Neil in the dream?
Time for a commoditiesbubble.com website. how is this market any different than the stock bubble of 2000 and the former housing bubble?
Yep, the money flows keep getting around. Not a whole lot of other places left.
Problem with commodity bubble? Gonna tank the motherfuckin’ crap out of both the economy and the housing bubble. Households only have finite resources monthly.
My wife at the bank is receiving far more interest in people wanting gold. Today, someone came in asking if they could convert their dollars to gold at the bank. This, and CALPERS decision to invest in PMs, is the beginning of the end. When people don’t even know that banks no longer exchange cash for gold, and they want to do it simply because they see negatives for the stock market and positives for gold, a bubble is forming. Anybody’s guess how long it lasts? Probably awhile at this point. But, the PM bull market is definitely arousing interest from common people.
http://www.avpress.com/n/29/0229_s10.hts
“Eleven city employees lost their jobs Thursday in the city’s first layoffs caused by a revenue downturn since 1997, at the low point of the Antelope Valley’s last housing slump.”
Also, here’s an exchange between myself and a REIC shill reporter regarding a story yesterday on a presentation by REIC shill economist regarding the AVs real estate and economic outlook.
Mr. Skeen,
Would it be too much to ask to have another opinion in this story besides that of the paid shill for the used house salespeople?
This story seems to state, “things are really bad, but they can’t get much worse”.
I disagree, with rents for single family houses averaging about half what it would cost to buy the same property this correction has a long, long way to go still. Traditionally houses sell for 100-120 times the monthly rent. For an average home in Palmdale that can get $1500/month in rent that would put long term valuation at $150K-$180K. From this simple calculation it can be seen that home prices could fall as much as another 50%.
It is irresponsible to print an opinion of “the bottom” without counter point. There are people who will read that article and decide, “it’s a great time to buy”. That’s exactly what the NAR by way of Mr. Kleinhentz is hoping for. Please give a thought to a hypothetical young couple starting out who might decide today to buy a home based on your article and others like it. If they wait 2 more years, renting a home and savings a substantial downpayment, they will be much better of in the long run.
If you ever are in need of a contrarian opinion in economic matters I’d be happy to help you out by providing timely quotes for some very educated, knowledgeable experts.
Best regards,
(dude’s real name)
His reply:
Hi,
Our paper has run, and will continue to run, multiple points of view in regards to the economic situation and the housing market. In fact, we’ll have more opinions on the economy coming out of tomorrow’s outlook conference.
Mr. Kleinhenz’s point was that if you are planning to be in a house for a number of years, then yes, it is a good time to buy. The comment was made to those people looking to put down roots, not short-term investors.
Having seen the housing cycles of this valley for 20 years (and talking with those who have seen them going back more than 50 years), I can tell you its a bit foolhardy to try to time the market. Your hypothetical young couple should be cautious, do their research and focus on the long term.
Jim Skeen
My rebuttal:
Mr. Skeen,
It has nothing to do with timing the market. I’ve also been in the valley nearly 20 years. If we were to put an equivalent date in the early 90s downturn with this one, where do you think we’d fall? I’d say about ’92-93. Where was the bottom? Not until 1996.
So by your theory of long term vs. investment you would have a young couple plunk down 20% and then hope that in the next 3 years neither one of them will get laid off?
You didn’t even address the fact that rents are far cheaper than mortgage payments at this point. You can’t even say that a mortgage payment at least gains you equity in our example because the first years of a mortgage pay little or nothing to principle and with house prices falling and likely to continue to fall at least until foreclosures start to dissipate every home owner is gaining “negative equity”. With each succeeding month and additional cadre of homeowners goes underwater. By my numbers that’s currently back to mid 2004.
I’ll agree with you that a person who can afford to buy now and can keep a job for the next ten years without problems will probably at least come out even in the end, but why take that risk?
I can tell you that I we were that young couple in ’91 who bought because everyone was telling us, “It’s a great time to buy”. The succeeding years were painful and difficult and if we’d waited a few more years we would have accelerated our prosperity considerably. Now is not a good time to buy for most people.
Thank you for your reply, I appreciate the time you took to respond.
(dude’s first name)
I think after that he took his ball and went home.
Good, dude. You should have mentioned that Mr. Skeen insists that you stop timing the market, yet he himself is timing the market when he states that now is a good time to buy. I know it’s too late now, but next time …
Also, Mr. Skeen should take care to follow the basic tenets of journalism, which state (among other things) that the journalist is not there to report his opinion. He is there to report the facts.
“Sgt. First Class Nicklaus Skaggs bought his home in April 2005….The $455,000 three-bedroom home….is worth….well below the $453,000 he owes on his mortgage.”
Wow. Paid only $2k of principal in 3 yrs. Couldn’t see that foreclosure coming…
Yeah if an SFC can afford a 480k house, I am reenlisting, where do I sign? Whaddaya mean I’m too old? Why I oughta…
Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University
Its ironic these Ivy league clowns are studying the Housing Centers
for Joint studies.
Don’t Bogard the information man, pass it on…
EXACTLY,its cheaper to rent,and they are all walking away,because as was said earlier none of these buyers were using their own money,they were renters disguised as buyers…this market has a long way TO GO BEFORE IT HITS BOTTOM.House prices must get in line with wages,economics will force this to happen…..
I realize its not California, but these are coming 10X a day now.
I am trying to find out how many they axed, I have heard 70+
North American Properties Inc.
Atlanta, GA
The slumping housing market is starting to take its toll on retail development. North American Properties Inc., which built Camp Creek MarketPlace in East Point, Brookwood MarketPlace in Forsyth County, and other suburban retail centers, has cut its staff to 11 core people. The cuts were across the board. North American would not discuss the reasons for the cutbacks, but retail developers and brokers said the nation’s credit crunch, slowing housing market and sluggish retail sales are all contributing to a slowdown in new development.
Atlanta Business Chronicle - February 25, 2008