‘Just Another Day In The San Diego Real Estate Circus’
The Voice of San Diego has this update on that housing bubble. “Home buyers in San Diego had 19,238 homes to choose from yesterday. And for a brief time over the weekend, San Diego had more homes listed for sale than ever before. San Diego has seen its inventory level increase 27 percent since the beginning of the year, increasing supply and leading to fears that prices could drop.”
“Realtors say everything’s going fine, if a bit slower than the last few years, while some local homeowners say it’s time to get out before prices go down. It’s just another day in the San Diego real estate circus.”
“On Jan. 1, there were 13,916 homes up for grabs. That number rocketed up by about 100 homes a day throughout January and has been rising at a steady rate through early spring to reach its current level. ‘I think the market is in serious trouble, in San Diego and in many other places as well,’ said (economist) Edward E. Leamer. ‘It’s not a sure thing. Something could jump in and save it, but we don’t see anything on the horizon, nationally or locally, that will turn these markets around.’”
“Darren Fulhorst bought his five bedroom, three-bathroom home in La Jolla in Jan. 2005 and he put it on the market one week ago. Fulhorst said he isn’t desperate to sell, but he nevertheless put his home on the market for $100,000 to $200,000 less than comparable properties.”
“‘I’m not accepting anything lower,’ Fulhorst said. ‘I’m listing it for six weeks, at the peak sales time, at an excellent price, and if it doesn’t sell, I’m holding onto it.’”
“Peter Chinloy of San Diego State University, said there are plenty of people in the same boat as Fulhorst. He said the reason the high inventory levels haven’t translated into substantial price decreases is that sellers are not yet willing to let go of the equity they have built up in their property. ‘What you have is a large number of people who are sort of sticking it out there and hoping that some accident will happen, that someone will offer them a high price for it, but they’re not sufficiently distressed that they’ll take the low offers that come along,’ Chinloy said.”
“Eventually, barring a large rebound in sales activity, prices are going to have to come down eventually, Leamer said. ‘It’s not until the sellers look around their neighborhoods and see all these other homes for sale and say ‘I’ve got to get ahead of this,’ that they start cutting prices,’ he said.”
“Typically, it takes a while for high inventory levels to translate into price decreases, Leamer said. He said sellers typically stay optimistic for about a year before they start to get cold feet.”
“With nearly 20,000 homes on the market in the county, all the analysts know something has to give. Whether disappointed sellers pull their homes off the market until things calm down, or relent on prices and give up some of the gains of the past few years, remains to be seen.”
As a potential first time buyer in the next couple years, it’s great to be at ground zero.
I feel a little sorry for homeowners that are over-leveraged…, but all in all, I think this is very good for the general population.
It might take more than a couple of years though. I’m in the same situation you are and although I take comfort in knowing that my stance on housing (bearish) is correct, I also don’t have any misconceptions about how long it could take before it’s safe to buy again.
I’m putting this together for my blog. The executive summary is that during my commutes, I have intentionally evesdropped on my fellow commuters, and noted the subject matter of their conversations.
Over half of the conversations were about real estate (either as RE “professionals” or how they were investors, or how much their homes are worth, or how they are remodeling, or how they have second homes, or how they just moved from California.
I have also engaged some in conversation about real estate (not counted in my survey). 5% believe there will be a significant correction (>25%), 10% believe the market will only correct 10-15%, and the remaining 85% believe there will be no significant correction, if any at all.
The point of this is:
You don’t buy when the majority of adult conversation is about real estate, with 85% of that catagorized as unqualified bullish. You buy when the majority of adult conversation is about real estate, with the bulk of that being about what an idiot you would be to buy real estate.
Think gold and silver in 1999-2000.
The people that “buy the dip” (at 10-15% correction) will be decapitated. This market is going down better than 50%, and more likely 75%.
Couldn’t agree more. Once one hears cab drivers, gardeners and shoe shine boys talking up their gains in the market, the smart money thinks: ‘It’s time to cash in my chips.’
For your blog: in 30 years in finance, whether the Bonds, stocks, grains lumber or whatever - the maxim I used to evaluate my risk was and is “The market will do whatever causes the greatest amount of pain to the most amount of people”.
I am a bear as well, but 50-75% drops are out of the question because so many rich folks own property including those that have real influence on the politicians, etc.
This thing will go down at most about 25-30% so that no one important takes a real beating.
Keep in mind, it is all about the guys up there, not about you, me, or the average joe.
Besides, in my neighborhood, I have already calculated, once prices adjust about 20-25% from today, Im jumping right in because as an investor, break even is good enough for me, then I will sit on a 5-7% annual rent increase for the rest.
Furthermore, rents have been flat for a while, but during the last 1 year in my neighborhood in So CA, rents have begun to jump about 15-20%.
I know of many investors like myself, how will also jump in at break even in good neighborhoods, therefore, 50-75% drop means about 30-40% montly positive cash flow based on my calculations, which is too sweet to pass and demand will go crazy for such investments.
There is a substantial danger in buying before the bottom. Your expectation of buying at a break even price may not workout.
One matter that will affect rental rates is the cost of the property. If one buys a rental property for 20% of its peak, the rents can be substantially lowered to draw renters from competitive rentals. If you buy before the bottom, you may face competitive rentals well below yours causing you to either drop yours or lose tenants.
Will we see prices down 80%? I believe we will see them down at least that amount. Remember the 30’s. Real estate dropped 90% then and took many years to return to its peak prices.
I don’t think wealthy people are the ones who are going to keep prices up. I think you will see so many marginal owners squeezed out of their homes that prices will plummet. Wealthy buyers won’t appear until the bottom, IMO.
Why do you believe rents will go up 5-7% a year? Doens’t inflation run 2-3%?
Dawnal is right. In the 90’s SD real estate was so low, you could buy REOs from the bank at 20% of previous prices. This time will be much worse. This I read on a SD housing bubble blog, http://www.piggington.com, where an appraiser recounted his experience working for an REO department for a major lender in the 90s. He said that some folks make the mistake of buying too soon. Nick818, you might be such a fella…
My family has been investing in So CA for the last 30 years and we have been through many cyclers, again I am on your side, but your guys are being unrealisting. So I will reply to each and every question now:
There is a substantial danger in buying before the bottom. Your expectation of buying at a break even price may not workout.
Many people are chicken littles, a.k.a lifetime renters, so even as prices go down, the will not buy since they will fear more drops. So as an investor, you pick a number which make sense usually break even or 0-5% cash flow, then once than number is reached you jump in, no questions asked. Furthermore, at that stage more people are renters than owners out of fear RE, thus increased rental demand.
I don’t think wealthy people are the ones who are going to keep prices up. I think you will see so many marginal owners squeezed out of their homes that prices will plummet. Wealthy buyers won’t appear until the bottom, IMO.
Not all wealthy people are smart, thus there are a few who have big stake in this RE market, thus the pressure on politcians, etc. Secondly, if they let such drops, foreigners will buy us out.
Why do you believe rents will go up 5-7% a year? Doens’t inflation run 2-3%?
For the same reasons why real estate will go down, once RE is not seen as a attractive tool, people will exit thus more deman in rents. For the last few years, demand in rent had gone down, thus appreciation as well, but with the slowdown in RE, both demand and appreciation will outpace inflation.
Again guys, what your guys are expecting is unrealistic, and will not happen, because I know of 10 people right now who have upmost of 5-7M credit line waiting for the coming drop, and this is only in my hometown, and these guys are going to buy at break even just like me.
What if rents deflate as well due to massive unemployment? You are assuming stable too rising rentals.
There is risk of a meltdown here.
They won’t have that credit line though if things begin declining. Oh, and spare me the crap about foreign buyers.
Close tag
How can politicians stop an RE collapse?
Can they pass a law which prevents people from paying too little?
Are they going to be the buyer of last resort, thus putting in an artificial bottom?
Just how can politicians liquify this bubble?
How many wealthy people were up to their eyeballs in the NAZ in ‘00? It went from 5100 to 800.
This thing will go down at most about 25-30% so that no one important takes a real beating.
If they’re too big to fail then they might get bailed out afterward, but prices can drop further than 30% and politicians won’t be able to stop this thing once it starts crashing.
“Again guys, what your guys are expecting is unrealistic, and will not happen, because I know of 10 people right now who have upmost of 5-7M credit line waiting for the coming drop, and this is only in my hometown, and these guys are going to buy at break even just like me. ”
That’s called a dead cat bounce on Wall St as those without patience jump back in too early. You will be competing with investors that have a much lower basis. Rents will drop as deflation hits the housing sector…
“They won’t have that credit line though if things begin declining. Oh, and spare me the crap about foreign buyers.”
I am trying to help you guys, as to your credit line, what they have cannot go down, it is like a HELOC but bigger. Secondly, you guys are underestimating foreigners, all it takes is a trip to CHINA, which I had the opportunity to do, and man there is a lot of money there. So if you wont buy at 25% decline, trust me there are thousands of chinese millionaires which are waiting for such an opportunity. So if you wish to buy all the way at the bottom, good luck, I do not take risks timing markets, I just go in when number make sense and make money. Again everyone has their strategies, this has been mine and has actually worked out pretty well for my family in the last 30 years. As for rents, it never goes down in the long run, what you guys saw in the last 5 years was a unique situation which will stop soon.
“This thing will go down at most about 25-30% so that no one important takes a real beating.”
All I heard from SD was it only goes down 10% and that was after a recession. Thats a hell of a turn around story now.
I agree with Nick 818, but I’m going to wait for positive cash flow, not just break even. 8 times gross would work for me.
10 x gross has always been the magic number for me
What do you mean by FOREIGN buyers? How about 3 families and 6 dogs and a donkey from Tiajuana going in together to buy a house.
“Again guys, what your guys are expecting is unrealistic, and will not happen…”
Who the hell are ‘my guys?’
LOL at this whole string. Nick sounds like the classic wannabe RE “mogul” and LAinvestor girl is a chapter 7 debtor just waiting to happen. Maybe the two of them can get together and have a kid. Call it Faux Tudor.
I believe in a correction, but saying a 75% drop is just silly. At that point in time, it would cost roughly twice as much to rent as to buy, even in some of the most overheated markets, if you expect a drop of 75% in a non-Vegas/San Diego/Florida market, I think you’ll be waiting for a long time. And I doubt we get there in Vegas, San Diego, or Florida.
I simply cannot see how home prices will drop 75% on a large scale.
30% isn’t out of the question on a large scale .
I don’t think it will be long before you will see how it happens. By the end of 2007 housing prices will be down at least 50% in my opinion. Prices will drop from there over the next year or two. We should see the bottom by 2009.
I think that if you are expecting down 50% in 18 months, you are truly underestimating the downward stickiness of home prices when in the hands of consumers. This is mainly due to the aversion of “selling at a loss”, even when writing checks every month.
With REOs, the supply was in the hands of banks, who just wanted to be rid of it. Some housing may get into the hands of banks, but that flow will be a relative trickle compared to the early nineties, when spec construction drove supply to ridiculous levels. Today, there is lots of spec construction, but a significant number of the homes have made it into the hands of consumers who are going to try to hold on.
Will there be a significant drop in the near term? Yes. Will it be 50% in 18 months? Perhaps some product types in some places, but not widespread.
It will take years to sort out (5-10), IMHO. I expect home prices to drop quickly in the next year or two (20-30% in most markets), and then generally be flat for quite some time. Inflation adjusted, these are price decreases, but nominally, home prices will be flat after the first drop, IMHO.
Yesterday: prices never drop
Today: prices never drop that much
nick818, *IF* IR go up to 8%, the house I rent would have to drop in “value” about 50% for the rent/cost to own to be about even. I agree that is the time to buy. IMHO trying to time the bottom is as bad as timming the top. I just want a house at a fair price.
Who said anything about rents staying at current levels?
Rents can still fall, although they will not fall nearly as much as RE ownership.
regarding price to rent: I remember reading that in the Great Depression, rental buildings sold for 2-4 times yearly rent. The usual cashflow calculations obviously don’t apply in such conditions.
to Rental Watch and others regarding potential drop:
The Netherlands had a mini-boom in the seventies with around 100% price increase in five years. Around 1979 a minus 40% crash within 1.5 years erased most of the gains (and inflation did the rest). There was no clear cause for this crash, it just happened, ‘the bottom fell out’.
The current RE boom in the Netherlands is already some 15 years old and price gains for individual homes over this period are 500-1000%. We would need a minus 85% correction just to get back to the historic trendline.
We are clearly in uncharted territory, and the same goes for most of the anglo-saxon housing world.
What happened to rents during the period during and after prices fell in the 70’s?
“I believe in a correction, but saying a 75% drop is just silly. At that point in time, it would cost roughly twice as much to rent as to buy…”
Someone already mentioned this above, but, you expect rents to stay flat or increase when (potentially) one in ten Americans are unemployed?
One in ten Americans are unemployed now. Try three in ten, with the remaining 7 getting no bonuses, raises or overtime.
Yup, at least 50%, to revert to the mean and overcorrect a bit.
Also, the Voice article was not balanced on the economy. SD’s economy is utterly dependent on us selling houses to each other. Realtors, brokers, appraisers, contractors, retailers (think mortgage equity withdrawal) have been the major contributor to job growth in San Diego in the last few years. Once RE slows, the whole thing is going down. At least, I sold my house and I’m a proud renter. In Dr. Laura style talk, “I’m the proud occupant of a San Diego rental.”
I agree…the over correction will inversely correspond with “irrational over-exuberation”…just like the housing market popped up too high, too fast, the other way will be just as dramatic.
In addition, as others have pointed out, this is the first housing cycle (bubble?) where the market information is disseminated so quickly and widely by means of the Internet. We’ve all become quite accustomed to getting financial information from markets throughout the country almost immediately. Within minutes of the data release by the NAR this morning it had been noted on every major portal (Yahoo news, etc.). The information feedback loop for residential real estate is increasingly approaching the speed traditionally found in markets for other types of assets.
to Bob the Banker:
you are overestimating the importance of the internet. The EU housing bubble has been topping for at least some 5 years already, and we do have internet here as well. Except for the speculators the situation is worse here; watching the EU bubble is more boring than watching paint dry.
To put things into perspective: when the Dutch tulip mania of 1635 ended, prices for tulip bulbs collapsed 90% within the first week. That was when news still travelled by foot, horse or pigeon (and the news that burst the bubble came all the way from Paris). I don’t think the internet is relevant for the speed of the collapse, the only relevant factor is mass psychology.
You are missing an important point - The internet will not only make information available from many sources, it will also act to counter the influence of the RE complex, which seemed to exert a lot of influence on media sources. Leveling the field and forcing the media to act responsibly…
I see 50%-60% declines as a sh*tload of defaults hit the lenders’ books… in late 2007 and through 2008…
>>>> I also don’t have any misconceptions about how long it could take before it’s safe to buy again.
You are absolutely correct. Aside from the fact that San Diego home prices are completely out of historic balance with incomes and rents, there are other macroeconomic factors that will come into play as well.
San Diego home prices may only fall by 10 to 20% … or they may fall by 40 to 50% (or more) before they find a new price equilibrium that is sustainable vis-a-vis incomes and rents.
With global economics connecting everything to everything else, any one country or any one Central Bank has far less control today over governing it’s own destiny than it ever had in the past.
yes, and because of that I don’t see a serious RE collapse in the US as long as the ECB and BOJ are still pumping money at full speed - like they are doing now.
That money doesn’t end up in the hands of desperate flippers in the US. It will end up in commodities, causing massive inflation, making the cost of living rise and squeezing homeowners even harder (food, energy, etc. but not wages). Eventually the pain will be too much and it will be game over. That point is different for different people, but it is already happening. Saw a sign today on the way to work in Rancho Bernardo, House for Sale, and in ink - “must sell”.
good point, but I’m not sure if it is correct in the near future.
It is clear that authorities in Europe try to expand the bubble and they do a good job of that. The current ‘hot areas’ for EU speculators are already mostly outside the EU borders.
If home values in the US tank and Trichet keeps inflating, I’m sure many EU citizens will start buying ‘investment homes’ in the US with the huge equity gains from their European investments.
If ‘normal’ EU people buy apartments in countries like Turkey or Hungary, sometimes by the dozen and often without ever seeing them, they can also start buying up homes in the US - especially in states like Florida which already have some experience with foreign purchasers.
We already read the stories on this blog about Brits buying condos in Florida. They’re on their way to losses unless they hold for many years, due to being in the company of desperate flippers who are going to get out at much lower prices. Word will spread back to the other side of the pond, and all those supposed rich EU residents will stay home. Probably won’t even be able to vacation here with fuel prices rising like mad. Europe can’t inflate forever either, gold and other commodities will tie their hands. Game over for all these globalist pigs.
Easy money still can’t address affordability, which is why the U.S. bubble has essentially topped (if not popped). Furthermore, once the psychology changes, no amount of easy money will make a difference.
Agreed,
However, we take many things for granted such as low interest rates. (6.5%) What if interest rates went to 10%?
“Never!” they say.
Oh, really? When was the last time we saw 10% mortgage rates? We almost hit it in ‘94 (9.5% in Dec), but last actual recording was June ‘91 and a whole lot before that. Has the world fundamentally changed since then? If investors catch a whiff of 7% inflation, we could easily see 10% interest rates and that totally changes the rent/buy equation. With transportation costs going as they are, PPI is going to make a big move soon.
Could prices go down 75% as some say? Not likely, but still possible. Incomes are getting squeezed, and no inflation does not necessarily need to follow incomes in the short run. They can be completely out of whack for a few years. Considering the state of global wage arbitrage, we might even see declining wages for some time to come. (this once again assumes the status quo). Either way, twin deficits ties our hands when push comes to shove.
One additional note, the real kicker is the “third deficit” of consumer spending. This means we have absolutely no power in global economics - if investors demand higher rates we are completely at their mercy because there is no domestic source of money that can compensate for easy al that will not induce at least as much pain as the alternative. Therefore, we are at the mercy of the ChiComms until we change one of the triple deficits. (Buy war bonds anyone?)
Oh, and if the US housing market turns sour in the eyes of the WORLD, our T-notes, bills, bonds, might just start to look a little less attractive to foreign govs…
‘…all in all, I think this is very good for the general population.’ With all due respect, I think you have it backwards. For the intelligent person, this presents an opportunity to pick up a home at an appropriate price. In other words, at the micro level. OTOH, because 40% of our economy is somehow related to the RE ‘business’, any contraction will certainly affect us at the macro level. Ultimately, this will be good for the economy, but in the short term, it may very well be painful for many, many people.
Current sellers fail to understand that the marketpalce is fluid. As prices rose they adjusted their expectations accordingly, as prices fall they are slower in accepting the new reality. Fishing for buyers in a shriviling pond is what we are seeing at the moment.
Thanks to the reader who sent this link in.
‘Darren Fulhorst bought his five bedroom, three-bathroom home in La Jolla in Jan. 2005 and he put it on the market one week ago. Fulhorst said he isn’t desperate to sell, but he nevertheless put his home on the market for $100,000 to $200,000 less than comparable properties.’
Makes you wonder, why is he selling? He’s only had the place for just over a year.
I wondered that as well. LaJolla is really expensive and Darren is relatively young. It wouldn’t surprise me if he’s leveraged to the hilt and knows it.
I know why…..I did a little research….He better have a good job….
He probably doesn’t want to bring cash to the table and therefore cannot go under a certain price.
Not desperate to sell, because he still has time on his ARM. What does he have left, 3.75 years? 1.75 years?
He might be more desperate when the prospect of increasing payments is 6 months away.
It won’t take that long at his bleed rate….
“I’m not accepting anything lower,” Fulhorst said. “I’m listing it for six weeks, at the peak sales time, at an excellent price, and if it doesn’t sell, I’m holding onto it.”
It sounds like he is trying to convince himself. Let’s check back on him in seven weeks.
“the reason the high inventory levels haven’t translated into substantial price decreases is that sellers are not yet willing to let go of the equity they have built up in their property. ‘What you have is a large number of people who are sort of sticking it out there and hoping that some accident will happen, that someone will offer them a high price for it, but they’re not sufficiently distressed that they’ll take the low offers that come along”
This is EXACTLY the explanation for today’s market. Nothing more, nothing less…
Soon, sellers will start to part with their “equity.” Then, once the pressure of unemployment/underemployment and ARM adjustments, and the reality of seeing their retirement funds dwindle, and watching neighbors undercut the market, they will panic.
Funny thing about real estate…if you don’t price your property correctly on the initial offering, you find yourself chasing price down. Picture chasing a ball down hill, and you get the picture.
I’ve said it a dozen times 20 cents on the dollar by 2010. You heard it here first.
sellers are not yet willing to let go of the perceived equity they have built up in their property
I’m noticing this to . Sellers would rather sit on the market for 6 months or longer than sell lower than last years peak . It truly is a stand-off . For each interest point interest you should get a 10% or more decrease in prices ,but I’m not seeing that sellers wanting to make that concession ,(at least not right now ).
Yep, there’s a house I drive past that has been on the market since last summer for $990k (SF East Bay). They have finally reduced the price a whole $30k after 9 months on the market. And of course, the MLS listing says “DOM: 14″. Riiiight…
That’s simply human emotions speaking. When lenders have to unload a property because a regulator is breathing down their neck there is no emption involved in the ensuing transaction…
Eleua,
Great analysis and comments at your blog. A bit patrician, but I am impressed with how well mannered all participants are-due to your management of the content(?)
I want to add a varaible to your analysis. I have recognized in the culture of late that a certain amount of consumption should be categorized as hostile consumption-that is the “they’ve got theirs so I am gonna get mine” kind of consumption. Lending for this consumption is like arming the populace. And it is only right that the disenfranchised should take up such arms to brandish their self worth in the face of the vulgar displays of wealth by the more priveledged classes. True the HELOC $ is spent this way as well, they are combatants as well, but the lax lending needs to be factored into the insolvency equations: The amount of bad debt owed by the non-property owning class is also huge and not likely to be accomadated through foreclosure auctions or other government sponsored arrangements extant or soon to be implemented. When the SHTF, what weapons and tactics will the serfs use to defend their right to have their debt excused as well. How will their reactions impact the political and economic outcomes of a sharp downturn?
Poor people just stop paying, thats it, excused or not. That blood from a stone thing
economic suicide
Q: What weapons will the poor use to excuse their debt?
A1: The ballot box
A2: Oprah, Katie, and Baba Wawa
It’s called bankruptcy. People making below the median can still go with a chapter 7 bankruptcy.
I agree with the ’sticking it out’, but not with the ’soon’ part.
In Europe people have been sticking it out for years, mostly thanks to easy money (effective mortgage rates below inflation, plain fraud etc.) and probably an even stronger bubble psychology because of 10-15 years of uninterrupted gains. They KNOW from experience that RE never goes down, and even if it does government will bail them out for sure.
Despite ever rising inventory, asking and sales prices keep rising; gains over here are bigger (500-1000%) than in most of the US, but nobody worries.
So I guess that a few US areas will get into serious problems soon because they have way too many speculators (with adjusting ARMs etc.); but most of the market will do a slow slide because the Central Banks will keep the easy money flowing just like in the previous 20 years.
IMO what you describe isn’t ’sticking it out’, it’s ‘waiting it out’.
‘Sticking it out’ is what a lot of young Australians were doing in the early 80’s, or recent SouthEast UK purchasers in the early 90’s. They were continuing to make that mortgage payment when it was really hurting them; cutting back on spending, brown-bagging lunch, getting another year out of the car etc. etc. Anything to keep the house out of foreclosure, because they felt that if they fell off the RE ladder they would never be able to get back on.
“I’m not accepting anything lower” - Now there’s a quote to keep for posterity. I wonder how many flippers are currently saying that - and what will they be saying in 2007 and 2008?
“Fishing for buyers in a shriviling pond is what we are seeing at the moment.”
I recall a lot of talk about finding a Japanese buyer fresh off the plane in early 1990s New York. Perhaps it will be the Europeans or Chinese who will be the last buyers this time, thanks to a dollar decline. Wealthy immigrants not moving to your area? A problem.
For all the talk about Reators sleazily talking up prices on this board, the Mexican Standoff is actually the worst situation for them. If houses sold at prices prices could actually afford, they wouldn’t make the easy money of 2000 to 2005, but at least they would make something. They make nothing if the market locks.
So it wouldn’t be much of a surprise to see brokers trying to talk sellers down as the year progresses. That happened in early 1990s New York too. I remember one broker telling me (as I waited and waited for sanity to return) that sellers just didn’t understand that with the carrying costs they were paying they’d be better off selling at a lower price rather than holding out. Some people seemed insulted and angry with the fair offers we made (we didn’t offer less than houses eventually sold for). I eventually bought a place when an offer was accepted, plus a couple of thousand, months after we had made it, in late 1994.
That’s what I think is going to start happening as well. The Realtors will start cannibalizing their customers to keep the transactions going. That will wash out all of the hacks that were late to the RE craze.
With nearly 20,000 homes on the market in the county, all the analysts know something has to give.
Ah, sellers in San Diego are experiencing the long awaited “Why 20K?!!” problem.
Good one
“I’m not accepting anything lower”
Darren, the journalist is just interviewing you for an article, not making an offer on your house. Get a grip.
He already hears the lowball offers and nobody has even looked at the place yet! (what a difference a year can make)
“hoping for some kind of an accident”
Uh huh, like some greater fool to show up on their doorstep with suitcases filled with cash? Not likely. I have to agree w/Ben and others here that observed Darren’s holding pattern. Assuming there was a gain it would be taxed at the short term rate and he would not be entitled to the “2 year/500K” exemption. But no, he’s not desperate, not desperate at all. C’mon! These people are so deluded it really angers me b/c there is always this smugness about them. I’ve been an investor for years and I’ll say up front, I just try to be right a little more than I’m wrong. To hear these guys talk you’d think they never had a “mis-step” in their lives!
“Darren Fulhorst bought his five bedroom, three-bathroom home in La Jolla in Jan. 2005 and he put it on the market one week ago. Fulhorst said he isn’t desperate to sell, but he nevertheless put his home on the market for $100,000 to $200,000 less than comparable properties.”
La Jolla, probable paid $2-3M. $100-200K less is not much percentagewise. Can you say market chasing bagholder?
Brad,
Yes I can say MARKET CHASING BAGHOLDER! It’s not just his holding period, look at he entry point as well. JAN 2005. No, I’m not a momentum player, not me! Back to the holding period just to give this some perspective. Had Mr. F bought a CA state muni bond he would have rec’d a July payment and a January payment and that is all! If all goes as planned for Mr. F there would not even be a third payment. But NO, housing isn’t like the stock market at all. The transaction expenses keep people (speculators) from doing rapid fire day trading. O.K, whatever.
This also disproves the common lie that rich people will hold this market up. Lots of people at all economic levels are in deep to this bubble, and it will affect housing across the board. This Fulhorst ‘tard is screwed.
Notice Mr. Fulhorst says that if it doesn’t sell “he’ll hold on to it”. Further signs of delusional behavior. Yeah o.k, that might work, sounds reasonable enough right? Wronggggg! What these types (and I hate to keep saying that, but;) fail to realize is that this isn’t just the peak of another garden variety RE cycle. This is the mother of all bubbles, the greatest of them all! We’re in totally uncharted waters here and while he thinks he’s ahead of the game by knocking off 100 or 200K he is one of 20,000 listings! I believe that the majority of those that DO get sold in the next 6 weeks will be at or below the median price if at all. Who wants to live in La Jolla when EVERYONE will now you JUST bought?
DinOR:
“This is the mother of all bubbles, the greatest of them all! We’re in totally uncharted waters here…”
*******************************************************************************
You couldn’t be more right. The circumstances going into the coming depression are worse then they were before the Great Depression of the 30’s. We will be lucky if we get off as well as folks did in the 30’s.
There’s no question but that this is the mother of all RE bubbles, mainly because of the excess liquidity. The thing is, with globalization of financial markets, the bottom may not be the mother of all bottoms. All that global liquidity, even if it dries up to some extent, may very well prevent a complete RE price meltdown… I still think 50%-60% seems a lot more plausible than a ’30s repeat.
“All that global liquidity,…”
Nothing but bytes & paper — no intrinsic value whatsoever.
KJ, the voice of Reality, has this update on the housing bubble:
Anyone holding a spec property today with massive financing will be burned to a crisp in next 6 months, I guarantee it. After you get your balls handed to you in a silk purse, you will have your name published in your local paper under Greedy Bastards Who Went Down With The Ship for all your friends to gawk at.
‘I think the market is in serious trouble, in San Diego and in many other places as well,’ said (economist) Edward E. Leamer. ‘It’s not a sure thing. Something could jump in and save it, but we don’t see anything on the horizon, nationally or locally, that will turn these markets around.’
I am very curious what Dr. Leamer has in mind when he says “something”… Personally, I have a hard time envisioning what this could be. It is rather like saying “something could have saved the Asian coastal communities from the Dec 26, 2004 tsunami.”
jump in: like the black Ben B. helicopters dropping from the sky?
Probably more like fires, which hit san diego pretty hard every
5-8 years and usually take 100-150 homes out. Would have to be
a massive fire though, and we had a wetter than normal March.
Keep dreaming, Ed.
A “wetter than normal March” could mean more fuel in July.
What happens when someone does sell under market
in a given neighborhood?
(ie. forced sale due to estate liquidation, etc)
Wouldn’t such an event force down future LTV comps?
It seems to me that a mix of mildly lowered LTV and
mildly higher interest rates could be enough to set off
a chain reaction, possibly causing individuals like
Mr. Fulhorst to re-evaluate his position.
Yup, and yup.
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MHO43.41, -2.70, -5.9%) said quarterly net income was $16.4 million, or $1.14 a share, compared with $16.7 million, or $1.16 a share in the year-ago period. The company said the results include a tax charge of 4 cents a share for stock-option expenses.
Total revenue jumped 7% from last year to a record $259.1 million.
A survey compiled by Thomson First Call had analysts expecting earnings of $1.45 a share on sales of $321.5 million.
Investors punished the stock Tuesday as shares slipped as much as 6% to $43.29 in afternoon dealings.
“With nearly 20,000 homes on the market in the county, all the analysts know something has to give. Whether disappointed sellers pull their homes off the market until things calm down, or relent on prices and give up some of the gains of the past few years, remains to be seen.”
In my mind’s eye, I keep seeing an image of the bathroom ceiling in my old apartment. The lady who lived upstairs (Section 8 resident) had left the water running in the bathtub, and it had overflowed, resulting in a rather ominous sag in my bathroom ceiling. The beautiful hardwood floor of my apartment was soon destroyed when the ceiling caved in.
I’d been thinking that the upcoming contraction will be in the range of 35% in southern California, because that decrease would bring the cost of ownership down to only slightly above the cost of renting.
I’d been thinking that the prevailing rent rates reflect the true minimum clearing price for housing. But I’m reconsidering. The more I’ve researched option ARM loans, the clearer it is that even though the total interest on a $900,000 house is twice or more the cost of renting an equivalent house, the minimum option payment on that $900,000 house is still less than the rent.
That is, large numbers of housing consumers are paying less than the prevailing rental rate. Assuming that the monthly payment is largely all that matters to people anymore (the morons), it may be a safe guess that the average person is spending the maximum amount he can afford on housing expenses.
The conclusion to be drawn is that the true clearing price for housing is actually lower than the prevailing rental rate.
What happens when option ARMs are less widely available (as will happen as soon as year-over-year appreciation ceases, or when regulators clamp down, or when there’s a credit-contracting event)? People who would otherwise be using option ARMs to buy homes at, say, a $1,600 minimum monthly payment won’t have that option. The only way they can remain part of housing demand would be if (1) rent rates dropped to $1,600 or (2) fully-amortized purchase financing payments dropped to the neighborhood of $1,600. Either way, the market has to account for this change. I’ve been trying to draw supply/demand curves for this operation, but I’m pretty rusty.
The point I’m clumsily trying to make is that aggregate demand for housing consists of both purchasers and renters. Uniquely in this cycle, many people’s purchase financing results in them paying less out of pocket than they would in rent (even though they’re piling up negative equity, which they ignore, because they think positive equity appreciation will keep up with it). The clearing point for the total aggregate demand is thus probably lower than the current clearing point for the rental component of demand. Assuming, after a credit contraction, that everybody had to rent, there wouldn’t be demand for housing at the present rental clearing point. The majority of housing stock would sit empty until the market adjusted.
Where would the new equilibrium be? If the number of people using exotic financing is substantial (as in the case of southern California), the clearing point would probably be below the prevailing rental rate. I expect both housing prices and rental rates to decline, as sellers gradually realize that (1) they can only sell at prices that can be afforded using conventional financing, and (2) if they’d rather not lower prices as radically as that adjustment would require, there aren’t enough renters able to pay today’s rental rates to consume all of the housing stock coming onto the rental market because owners refuse to sell for the new clearing price.
In my neighborhood, it would take close to a 40% drop to bring the cost of ownership in line with the cost of renting. If rental rates dropped (as the above analysis suggests it might), it would take more like a 50% drop, or more.
Anyone want to take a stab at swatting some flies in the ointment of the above argument?
I would agree with your assessment. It does however seem to hinge on a credit correction. Although I think that correction will happen, it’s debatable as to what Helicopter Ben might do in the face of a nasty choice between defendign the dollar or hyperinflating in an attempt to save the legions of FBs.
Easy to tell:
1) The Fed has been warning housing market “investors” that they will not get any plunge protection since early 2005.
2) The US economy will be permanently screwed if the dollar devalues and thereby loses its primary reserve currency status. The probability of this occurring is nonnegligible, given China’s move to diversify their foreign reserves into a basket of currency last summer (ending the dollar peg). The short-run negative consequence of a few FBs getting their come-uppance is far preferred to the long-term decline which will ensue if the dollar is dethroned.
“I’d been thinking that the upcoming contraction will be in the range of 35% in southern California, because that decrease would bring the cost of ownership down to only slightly above the cost of renting.”
- Rents and owner-occupancy prices will both correct due to the mutually-compounding supply pressures of flippers and FBs dumping their overleveraged investments plus builders trying to milk the last profits out of generation-high price levels.
- Annuitized owner-occupancy costs (e.g., monthly payments+taxes+insurance+maintenance) will overcorrect (just like they did last cycle, only more) because the noose of tighter credit conditions and reversion to historic lending standards (downpayment requirements and the like) will price out all but the very small minority of Americans who have savings or wealth to fall back on.
- The cost of ownership will fall to more than slightly below the cost of renting, as credit constraints, downpayment requirements and fear of falling prices will keep many would-be buyers, who were happily able to buy into the mania, on the sidelines…
as mentioned above, during the Great Depression in some US cities rental buildings sold for 2-4 times yearly rent.
This doesn’t tell you where the floor for current home prices is, but it definitely shows that the normal math does not apply in those conditions.
YES!
I think you may be correct that those factors lower the equilibrium beneath the price of renting. However, more people renting will drive up the price of rent, contrary to your scenario.
Of course all of this inventory will drive both rents and housing prices down.
All that said, I think the point where rent and housing payments are equal under normal conditions, or the “true rent” is about when things are in equilibrium. Where exactly that is in relation to right now and how long it takes to get there is the interesting question.
All that said, I think somewhere around 25-40% price declines in real terms is what we’re looking at.
There is no contradiction in arguing that rents and owner-occupancy prices will fall, but ownership prices will fall by relatively more. In fact, this is exactly what needs to happen to restore the housing market’s internal equilibrium (between the prices of renting and owning) and external equilibrium (between the level of investment in the housing sector versus the rest of the macroeconomy).
More people renting ordinarily would drive up the cost of rent. But in this case, the additional renters would mean fewer buyers. The houses those buyers would have bought would either have to lower their prices to the point where the lost buyers would be able to start buying them again, or enter the rental market. In other words, there would be more renters, but there’d be more rentals, too.
My point was that the “new renters,” assuming they were maxing out their monthly-payment capability with their option-ARM payments that were lower than the prevailing rents, would have less purchasing power than current renters. So if additional rentals came onto the market, they would not clear at the present price.
Think of it this way:
When there are 100 renters total, each with the ability to pay $2,000 a month in rent, the rental rate will be about $2,000.
However, 100 Original Renters@$2,000/mo. + 50 New Renters@$1,500/mo. = 150 total renters @ $1,833 per month.
That doesn’t mean that all rents will suddenly drop to $1,833. These numbers are averages, reflecting the whole range of quality. What would happen is that the people who were paying $2,000 a month will wind up in the best-quality housing, and lessors of lesser-quality housing will have to accept less if they want to land tenants.
As credit tightens and FBs default (their credit scores make it impossible to qualify for a mortgage) there will be a vacuum in housing where the pool of prospective buyers evaporates far more quickly than REO inventory appears - A trade imbalance. That’s the point at which we see the 50% off sales…
Remember that this boom has led to building exceeding household formation by over 50%, the remainder going to second homebuyers and/or speculators. This “hidden inventory” and lower overall employment will definitely drive rents down.
Thomas,
I think you are exactly correct. Right now, in SD, it seems that $2,000 is considered to be an average monthly payment for either rents or mortgage pmts. $2,000 is actually a lot of money for most people. As we see defined-benefit pension plans and employer-provided healthcare become less and less common, people will need to save more. Combine this with lower wages due to globalization, and there is less money per month for people to allocate toward housing costs. Landlords will either have to lower their rents or take in more people per unit, which can be VERY costly in terms of maintenance, turnover and non-payment of rent (generally lower quality of renters who don’t feel compelled to take care of the LL’s house, as they feel paying so much entitles them to do as they please with the property).
IMHO, SD prices are likely to fall 35-50%. At that, it would bring prices back in line with rents and income. That’s IF there is not a depression. It could well go below that if things get dicey economically or politically.
Two words: Beanie Babies.
*LMAO*
funny…
“Two words: Beanie Babies.”
“…But perhaps the biggest indicator of a shift in sentiment is that secondary-market prices for some of the retired Beanies have dropped somewhat over the past few months. The price of the “American trio”–Lefty, Righty, and Libearty–has dropped from $1,400 in April to $1,000, says Sobolewski. Some say that’s evidence of a downtrend, but Beanie mavens say the market is just undergoing a correction because prices rose too fast earlier this year. “I promise you, in September and October you are going to see a big increase in these prices again,” says Sobolewski.”
This blast from the bubble past brought to you by
http://www.aboutbeanies.com/news/1998/article.cgi?article=1998_08_03_Beanie_Bubble_Prices_Insane_How_Long_Will_It_Last.txt
And another one:
“…In many ways, in fact, Beanie Babies mania was the dot-com stock bubble writ small.
Both were creatures of a frothy, peacetime economy with low unemployment and towering consumer confidence. Both were abetted by the advent of online trading and the explosive growth of the Internet. Both gave rise to celebrity oracles who seemed able to decode the mysteries of the market. Both spawned fraud and even episodes of violence. And, finally, both flouted all classical notions of investment value. Until they didn’t.”
http://seattletimes.nwsource.com/html/businesstechnology/2002020751_beaniebabybubble31.html
Assuming that the monthly payment is largely all that matters to people anymore (the morons), it may be a safe guess that the average person is spending the maximum amount he can afford on housing expenses.
Good argument, I think.
And as time goes forward, the average person may have even
less to spend, due to increases in non-housing
related costs. (ie. fuel).
Since average houselhold incomes are flat to negative, a typical
borrower will have even less financial leverate with his ARM resets.
No way but my gut reaction as Joe Sixpack is that sounds about right. Burrrp. Then we’re back to about 2000 prices… unfortunately, none of us will have 2000 money probably, so…
(I’d been thinking that the upcoming contraction will be in the range of 35% in southern California, because that decrease would bring the cost of ownership down to only slightly above the cost of renting.)
It will be interesting to see where the rent/ownership cost ratio goes. The rent is the value of the housing TODAY, but there are other factors.
In normal times, it makes sense to pay a premium to own, because your housing costs (assuming you don’t have an option-ARM or other idiocy) are “locked in,” and your “risk” as far as housing costs are concerned goes down. In addition, you gain the upside of price appreciation.
OTOH, if housing prices are falling, ownership increases your financial risk. If rents are rising this is offset, but if rents are falling it is not. So until prices reach equilibrium, they may have to be cheaper than renting. Which is to say that until owning is cheaper than renting, they may not reach equilibrium.
I think what you’re saying is that the decline, in theory, has to overshoot first before stabilizing.
Good point about housing costs reflected in rentals. I would like to add another factor not brought up.
Many of the homes that are rentals in my area, Huntington Beach, Fountain Valley, are not occupied by familes but roommates. Tweny-somethings splitting up the 2200-2500 monthly payment. I live in a townhome at 1525.00 a month. Most of the rents range from 1500-1700 monthly in my area and are all occupied by families. So, the point I am trying to make is the lower rents are a true reflection of family affordability. Most families do not bring in roomates to cover housing costs. Twenty-somethings don’t care. Their costs would be around 500.00 per month per person.
What do you think?
Yeah, I had similar thoughts on that as well. I’ll go one step further and say that right now the rents are skewed higher because many renters with high incomes (DINCs) are waiting out the bubble and have decided to rent nice places they couldn’t (or wouldn’t) otherwise buy right now. I would include myself in that category.
Buying a home also gets you a tax deduction, or at least a potential deduction. This is another reason why it makes sense to pay some premium….Just not 50%.
Regarding Thomas’ posting above, I developed a theory in the late 80s here in Socalif, that I called Unaffordability, which says that home prices will rise to the point where they are not affordable any more. This is primarily driven by the cost of financing. Now, people can buy without downpayment, with payments below the interest due (at very low interest rates), and can overstate their income to afford even more. There is now no other financing trick that can reduce the cost of buying a house, so prices have reached their maximum.
I say: “San Diego condos for everyone!”
“My family has been investing in So CA for the last 30 years”
Time to get into another profession.
“I am a bear as well, but 50-75% drops are out of the question because so many rich folks own property”
Rich from what ? Maybe Real Estate ?
Just a note — there seem to be two Thomases on the board now. I’m OT. (Kinda like OG — “original gangsta” — except “original thomas”.)
A new marketing concept: Sale by Dutch auction (actual ziprealty listing shown below).
“13285 CALLE DEL CAMPO #4, SD - Rancho Penasquitos, CA 92129**
List Price: $425,000 - $425,000
Description
Seller motivated. Reducing price $500 per week until sold and offering 1 year hoa fees a coe. Vacant / go show.
ZipRealty Price Track:
Price Reduced: 04/24/06 — $425,500 to $425,000″
WT………..F?????????????
Isn’t this why deflation is a killer? Why buy now when I can save 500 bucks by waiting a week. Hold on a sec - why buy next week when I can hold on for two? I actually am making 500 dollars (plus interest, in an ethereal sort of way) a week by sitting on my butt!
That thinking works until someone out there buys the house, then you can’t just wait another week for a discount, because the house is gone.
BTW, I think another thing Nick is missing is that a lot of rentals have been pulled off the rental market and converted to sales. Tens of thousands in SoCal alone (too lazy to look up exact number, but I’m possibly understating). Also, many long-term LL’s are trying to sell their rental homes at the top of the market. Many of the tenants have been kicked out so the LL could refurbish the place. Now, the homes sit empty. Look at all the listings and you will see many, many vacant properties.
As the deflation hits, both home prices and rents will fall in the long term. In the short term, I think we will get a squeeze on rentals (already happening) as the sales market transitions from a sellers’ market to a buyers’ market. After things get going, people will start getting fearful of holding on to vacant properties. These homes will be released on the market either as rentals or lower priced homes, IMHO.
I suspect Nick is not really a housing bear. Strip out his first sentence and his message reads like a housing bull in defensive mode.
In North Orange County, CA I see a lot of former rentals being cleaned up/renovated and put up for sale. With relatively low rents vs. current value, doesn’t it make great sense for the owners to sell at current market prices?
Nick said…
“Again guys, what your guys are expecting is unrealistic, and will not happen, because I know of 10 people right now who have upmost of 5-7M credit line waiting for the coming drop, and this is only in my hometown, and these guys are going to buy at break even just like me.”
AND
“I am trying to help you guys, as to your credit line, what they have cannot go down, it is like a HELOC but bigger.”
_________________________
Nick,
I appreciate your perspective, but if this CREDIT BUBBLE shakes down like many of us think it will, lenders will be in a very bad place a few years from now. Those institutions/individuals who have promised these lines to your friends may not even be in business in a few years.
Many of us are predicting an economic collapse. It may or may not happen. However, you should not rule it out. This is a CREDIT BUBBLE, not a housing bubble. Your family, with 30 years of experience, has not seen anything like it.
Additionally, the past 30 years have been exactly the period when most baby boomers were forming families, buying homes and investing. Now you will see the “vacuum effect” as they move into retirement. Just because we’ve experienced inflation for so long doesn’t mean that’s what we’ll continue to see going forward. I’m specifically referring to wage inflation, as that’s what counts in housing prices. Cost inflation is actually deflationary for housing, as more money is allocated toward other expenses.
“Something could jump in and save it, but we don’t see anything on the horizon, nationally or locally, that will turn these markets around.”
Perhaps Bill Gates could jump in and buy all existing inventory at 100% asking price. I hear he is giving away $1.00 for every email you forward for his new tracking system.
-40% AND THEN SOME
I predict a 150% correction : )
Surffroggy,
How are you liking LA compared to SD? Do you intend to stay there in the long term or move back?