HBB Rates The Media: Northern California
The look at the media and the housing bubble in northern California.
The good:
Santa Cruz Sentinel, May 2005: “The median price for single-family homes in April was $715,000; March’s median was $723,129. The average price of a single-family home last month was $803,238, the second time it’s been over $800,000; the average in March was $821,695. The continuing high housing prices, said (realtor) Szychowski, are the result of those low interest rates, combined with low inventory and the loans available.”
“The interest-only loans have pulled in another huge buying pool,’ he said. ‘We’re seeing a lot of dual incomes and a lot of big down payments on the move-up buyers, which is new equity created by this run-up.’”
The Contra Costa Times, May 2005: “The president of the Federal Reserve Bank in San Francisco, Janet Yellen: ‘There are some fundamentals that explain why housing is doing so well at the moment. A key one is low interest rates. Mortgage rates remained quite low, and they really haven’t risen a lot since the Fed started to tighten monetary policy. Incomes are rising. People feel more optimistic about the future.’”
“‘The Bay Area economy has roughly stabilized, but we haven’t regained what we lost. We’re just growing modestly. I don’t think the IT sector has revived and is growing robustly enough at this point to really generate strong growth in jobs here.’”
“‘Is it a bubble? Nobody ever knows for sure until one pops. I wouldn’t rule out the possibility that there’s a bubble and we could have house price declines ahead.’”
The San Francisco Chronicle, May 2005: “Why buy a home when you can rent for half the cost? That might seem like heresy in the Bay Area, where real estate is not only a craze, but sometimes feels like a cult. ‘Every two or three years, I get the urge to buy a place to live in, and then the urge goes away very quickly,’ said Guy Smith, an Alameda marketing consultant who lives and works out of his rented $1,300 beach cottage in the island city.”
‘Smith said that if he bought a $550,000 home in Alameda, he’d put down $50,000 and borrow the rest, making his monthly payments somewhere around $2, 500. But because he is worried about a Bay Area housing bubble, and enjoys the hardwood floors and water views in his rented cottage, Smith says he will stick with renting. ‘I would like to be putting equity into my own pocket, but there’s no way to do it,’ Smith said. ‘The amount of risk and up-front capital is not matching the amount of reward I want.’”
“Real estate agents, for their part, will tell you that the tax advantage that comes from deducting mortgage interest is enough reason to buy a home if you can afford it. It’s money down the drain to rent, they’ll say. But there is an alternative viewpoint held by people who do not value building equity above all other considerations, or have no desire to house-hunt in this atmosphere. ‘Personally, I don’t like the idea of overbidding 13 times and not getting the house,’ said Jim Buckmaster, chief executive of Craigslist in San Francisco. ‘I am a minimalist and I don’t have the patience for that type of thing.’”
“Even mortgage professionals see the point in renting. ‘It’s easier to be a renter with the current level of competition for buying homes, especially if you have a static income,’ said Kevin Clay, a former head of the California Association of Mortgage Brokers. ‘When you rent, you have more flexibility. You can get another job and move. You don’t have the responsibility of a home. You don’t have to pay the plumber to fix the toilet.’”
The Mercury News, March 2005: “Mortgage rates are creeping up slowly but relentlessly, pricing more residents out of the Bay Area’s housing market. That means some residents can’t buy houses because they won’t be able to afford the higher monthly payments.”
“Last spring, a buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76. (Mortgage broker)…Doug Jones says he thinks a big pool of homes could hit the market this year, especially as many homeowners with lots of equity in their homes think to themselves, ‘If I don’t get this house sold, rates may go up and I may not have the qualified buyers.’”
MN, April 2005: “Bay Area residents have invested heavily in property outside the area, especially in places like Las Vegas, Sacramento suburbs and Phoenix. In the first eight months of 2004, Bay Area buyers purchased more than 13,700 homes outside the region and somewhere in western states.”
The Sacramento Bee, April 2005: “It’s hard to find a bigger proponent of homeownership than Scott Syphax, head of Sacramento-based Nehemiah Corp. Syphax’s advice: Wait it out a year. In that time, he suspects, the market will cool, meaning more homes to choose from and maybe even some bargains.”
“In today’s market ‘it’s certainly hard to even think of breaking even in terms of the rents,’ said Joan Krizman, a longtime Sacramento investor-landlord whose family owns nearly 70 homes in the east Sacramento and Land Park areas. Krizman said the woman, who’s been buying homes as rental investments nationwide, was hoping to get $1,200 a month because her mortgage payment was $1,600. ‘I hate to disappoint her but I have to. She’ll be lucky if it rents for $995 a month.’”
“Rental industry sources say investors from other regions continue to purchase single-family homes here without doing their homework. These investors, including many from the Bay Area and Southern California, are often disappointed to learn that the rents they had hoped to fetch here are hundreds of dollars above market.”
The bad:
Modesto Bee, April 2005: “The California Housing Finance Agency has thrown a ‘life raft’ to residents…’A fixed-rate, 35-year loan — an alternative to the mortgage industry’s conventional 30-year loan — offering buyers interest-only payments the first five years. ‘It’s aggressive and exactly what’s needed at this point in California,’ said Michael Faust, legislative chairman for the California Association of Mortgage Brokers.”
April 2005: “The Contra Costa Times tells us buyers are sleeping in their SUV’s to get to bid on homes. ‘In one respect, it’s sort of sad that it’s come to this,’ said Jim Croy, who took a day off work to take the head of the line.”
“San Francisco resident Melissa Shanoian persuaded her sister to drive by periodically to see if a line was forming. She and her husband, rushed to the site at 9:30 p.m. Thursday to become fourth in line (for) townhomes that go on sale Sunday. ‘I just made it,’ she said. The couple placed a television in their SUV and inflated an air-bed for the night. Shanoian’s sister brought her a muffin and coffee in the morning while her husband went to work.”
“The camp-out pleasantly surprised company officials, said DeNova sales and marketing director Debbie Bahr. Her husband slept in the van overnight and she stayed there during the day, alternately knitting an orange scarf or reading. ‘Right now, the price looks OK, and that’s the reason that we’re jumping into this. But I didn’t know that people do camping for housing.’”
The San Francisco Chronicle, April 2005: “Last week, a little duplex in Bernal Heights was listed for $799,000. As is customary for most real estate sales in the City, offers were to be reviewed on an appointed date about two weeks later. But after the property had been on the market for only a few days, as agents and prospective buyers were still swarming the property at the broker’s tour, the building was already in contract. The price? More than $1 million. The buyer? Someone who knew better than to wait around for the offer date.”
“I thought about how to coin this kind of activity: ‘cut ahead of the line and pay through your nose’ bid or ’snooker the suckers, then laugh all the way to the lender’ offer. In real estate parlance, though, it’s already got a name replete with hawkish overtones. The pre-emptive offer.”
“‘It’s become a standard question,’ said veteran agent Jan Neufeld, who added that at a recent showing of one of her listings, three real estate agents in a row asked her about backdoor bids. ‘First, you ask when are offers being presented,” she explained. “Then, you ask if the seller is accepting pre-emptive offers.’”
“‘People are trying to do more of them,’ said Alice Micklewright, of Pacific Union Realty. ‘I’m getting approached [about pre-emptive offers] every time we have a new listing.’”
“In a market that is so inherently insane, perhaps it’s only agents, with their acute sensitivity to the ethics of their industry, who will dare to use the innocent word unfair in the context of real estate in the Bay Area. Who really cares if some people aren’t waiting for the offer date, but, instead, throw cash at the problem out of turn? The offer date is good for sellers, because it foments a bidding war, and it’s fair to buyers, because they all get to bid on houses. But, of course, what’s unfair is that the majority of people can’t afford them, no matter how you slice the business ethics.”
“In the end, the pre-emptive offer is emblematic of the way the real estate market has come to represent the businessification of the average citizen. Once, buyers were just home seekers; now, if they want to join the game, they are aggressive players in a dog-eat-dog industry.”
Market observers, you decide:
March 2005: “Another month, another real estate record. Median prices for existing homes in the Bay Area hit an all-time-high of $569,000 in February, rocketing 19.5 percent from $476,000 in February 2004 and up 2.3 percent from $556,000 in January. Prices are increasing at their fastest pace in four years, according to DataQuick Information Systems. ‘It’s stronger than we’d anticipated,’ said John Karevoll, a DataQuick analyst. ‘These numbers show there’s still gas in the tank, and the market has a way to go before it levels off. We did not anticipate a downturn but thought we’d be coming in for a soft landing.’”
“The bottom line is lots of buyers and very few homes,’ said Joan Underwood, a broker who specializes in El Cerrito and Richmond Annex. In the Annex, she’s seen ‘a huge surge in prices in the past month or so, almost like a racehorse galloping out of the gate.’ She sold one house for $621,000, 25.7 percent over its list price of $494,000. Another that listed at $429,000 went for $511,000.”
“Another factor in the increase is that interest rates are inching higher. ‘In the last few weeks, interest rates have gone up, so there might be a little bit of panic in some buyers,’ said Bill McDowell, a Realtor with Berkeley Hills Realty. They’re thinking, ‘If we’re going to do this, we have to do it now,’ he said.”
“Everyone who looks at the market says the price acceleration can’t last, but real estate agents and other experts said they expect a gradual leveling rather than a bubble bursting. ‘I think it will taper off because it can’t continue this way,’ McDowell said. When a slowdown does occur, he thinks it will hit the more-outlying areas hardest.”
“‘In 1990, the door slammed shut with no warning, and we went through several years of declining prices,’ Underwood said. ‘This will probably be more gradual than a door slamming shut.’”
April 2005: “Apartment rents and occupancy rates have stagnated in the Bay Area and most other parts of the West, which is good news for renters but not for landlords and investors who are thinking of hopping into the real estate market. Rental property is usually valued using the cap rate, which is the property’s annual operating income divided by its price. If an investor pays $1 million for an apartment building that generates $90,000 in annual operating income, the cap rate is 9 percent. When apartment prices go up, cap rates fall. Falling cap rates mean investors are willing to pay more for a dollar of rental income.”
“‘It’s like the inverse of a price-earnings ratio for stocks,’ says UCLA economist Ed Leamer.”
“Is this the sign of a market top, like the proverbial taxi driver giving stock tips? It could be, says Leamer. But it also reflects the fact that ‘people have no place else to park their money.’ ‘The stock market is not giving you very much,’ he said, and neither is the bond market. ‘You have a choice between cash and real estate.’”
“Lance Sherwood, a flight attendant who lives in Capistrano Beach, is involved in a real estate club in Orange County. The organizers ‘investigate different properties and then throw it out there for people to choose to invest in or not. They look at different cities, their local economies and make a prediction’ about which markets will make good investments, he says.”
“Almost all of the opportunities are outside California because property prices here are too high. The homes usually cost around $100,000 to $150,000, low enough for the landlords to break even. Sherwood bought his first house in a foreclosure sale in 2000 and is about to close on his sixth. He bought most through the club, but he bought a couple on his own. Most are in the Southeast. Sherwood always looks at the property before he buys it but says some club members ‘just look at a picture on the Internet and invest.’”
“Apart from the club, Sherwood is buying property in El Salvador, which he hopes to subdivide and sell to local people.”
May 2005: “Two out of three Bay Area home buyers are choosing interest-only loans, and some experts warn that the popularity of the controversial form of mortgage debt is a sign that the overheated housing market is boiling over. ‘This is frightening, frankly,’ said UC Berkeley economist and real estate expert Ken Rosen. ‘I’m worried that more and more people are using (homes) as an investment vehicle and not as a consumption market, and that’s true of the peak of housing markets.’”
“With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income. His new technology consultancy is flying, and Kelly is confident that with a fixed monthly payment of $4,200 for the first three years, he chose the right mortgage.”
“He acknowledges some of the possible perils of his mortgage. But even in the worst-case scenario, he figures he could refinance or sell the house and move to a less expensive part of the Bay Area. ‘For most people,’ he adds, ‘I think (interest-only loans) are a terrible idea. If they don’t have bright prospects (for income growth), they could be in real trouble.’”
“California Association of Realtors economist Leslie Appleton-Young admits there are some troubling potential scenarios for interest-only borrowers. But she argues that the loans are just the latest advance in the mortgage market. Little outright speculation is occurring, she said. The popularity of the loans reflects the fact that they allow people to get into homes they otherwise wouldn’t be able to afford.”
“‘Given the performance of the housing market over the long-term, instruments that help people get into the housing market are a good thing,’ she said.”
“The California Housing Finance Agency has thrown a ‘life raft’ to residents…”
Don’t get on that raft…it’s got a giant hole in it.
Correction:
The agency has tossed a boat anchor into the raft and the raft is now taking on water. Residents are expected to be treading water very soon. Bailing is fruitless as water is coming in faster than it can be bailed out. It’s only a matter of time before the captain and crew meet their inevitable fate. Unfortunately, the passengers (taxpayers) on the ship of state are being pulled down into the abyss with the sinking ship of fools known as Spectacular Speculator.
investor pays $1 million for an apartment building that generates $90,000 in annual operating income, the cap rate is 9 percent ??
No…The cap rate is based on the “net” income not the operating income…
Which, if I’m understanding correctly, would lead to a cap rate of considerably less than 9 percent.
Yes. In California, the operating expenses run about 35%, making the Net Income 65% or $58,500. So assuming vacancies stay low, rents hold steady and expenses don’t rise, the buyer will achieve a 5.85% return on the investment. Unfortunately, vacancies are rising, rents are dropping and expenses are increasing. And if they have any debt at say 6%, they are likely to see substantial drops in the Net Income.
In southern states, expenses can run as high as 65-70%, leaving much less in Net Income. Demand is less and rents are much lower relative to expenses.
there is no chance you can run at 35% try 50%
so the income is now 45k annualized at $3,750 a month
the note on 1m at market rates at least $6,500
Ladies and gentleman we have a bleeder
“Little outright speculation is occuring, she said”
Folks, even by Leslie Appleton-Young standards, that’s a whopper! Once more there was ample cause for concern well before “things got crazy”. Great roundup Ben!
‘Given the performance of the housing market over the long-term, instruments that help people get into the housing market are a good thing,’ she said.’
…
Well, let’s not leave out the in-between sentence:
“The popularity of the [interest-only] loans reflects the fact that they allow people to get into homes they otherwise wouldn’t be able to afford.”
How about this translation:
“The interest-only loans are especially popular among realtors, as they allow people to pay ridiculously absurd prices for homes that they actually might’ve been able to afford a few years ago, but can’t afford now, and will never pay off. Whadda we care, our commissions are based on the nominal sale price.”
Poster children for the NorCal housing bubble:
Impossible loan turns dream home into nightmare
Carol Lloyd
Sunday, April 15, 2007
When Alberto and Rosa Ramirez began looking for a home, they never imagined that 18 months later they would personify a national real estate crisis.
It’s not that they bought a house with walls crawling with toxic mold or inherited an insane neighbor next door or even, God forbid, that they didn’t buy at all. They bought, and they love their slice of the American Dream.
“It’s all very nice and beautiful,” Rosa tells me through a translator. “The neighborhood is very peaceful. The problem is not with the house at all. It’s the price of the house.”
Indeed, in a different era (when housing prices were lower), their story might have been one of those bootstrap tales about homeownership transforming immigrant lives. The husband and wife work as strawberry pickers in the fields around Watsonville, and each earns about $300 a week. They have three children. Not only did they dream the impossible dream, they managed to finance it.
…
“We wanted to live in Watsonville,” says Rosa. “But (the real estate agent) said the houses there were older and more expensive.” One of the first homes they were shown was a four-bedroom, two-bath house in Hollister (San Benito County) for $720,000. When the Ramirezes heard the price, they worried that they couldn’t afford it. But the couple say they were assured it was possible.
“The monthly payment was supposed to be $4,800, but then, after we bought it, it went up to $5,378,” says Rosa, speaking of their zero-down mortgage with a one-month “teaser rate.” “Our agent told us that once we refinanced, we could get the payments down to $3,000 or less.”
…
PB,
Back when there were (2) HBB’s ( Ben’s & Patrick.net ) Carol Lloyd was asked to be a guest blogger and did stop by to opine from time to time. She was among the first MSM’ers to offer to her readers that there ‘might’ be a problem?
In those days it was blasphemy to offer a contra opinion to “it only goes up”.
FWIW, when I started this blog there were about 6 HB blogs. But 3 were inactive and had been for some time.(One had started in 2002!)
The active blogs I remember were Patrick’s, Rich Toscano’s and the Vancouver Housing Blog. They all helped me out tremendously.
Ben Jones,
Thanks for pointing that out. I was perhaps taking a bit of ‘license’ w/ that kind of statement but suffice to say, just about every major metro area now has more… than enough bubble coverage!
The frustrating part about participating in our ( relative ) fledgling Portland Blog is that there are any number of posters that got on the bandwagon a little late and you spend much of your time explaining what Credit Default Swaps are?
That couple were pulling in $2600/month and were trying to pay a $4800/month teaser-rate mortgage?
Does anybody take math anymore?
DennisN,
By God you wanted an HBB rundown on NorCal so here-it-is!
Damn it.
Apparently mortgage loan underwriters circa 2007 weren’t too good at math…
It was likely a stated income mortgage and a 0 was added…by mistake I’m sure.
They also knew EXACTLY what they were doing. They were just hoping the could sell it before TSITF and make a profit.
Reuven, don’t you mean TSHTF? or am I misunderstanding?
I’m sure these people don’t even have a high school education. We get all of Mexico’s rejects. The smart, educated ones stay put, and the unskilled, braindead folks, like these, grace our lands. They were ripe for the shearing, as the story suggests. Wall St. had a field day with these sorts of rubes. The fact that they would default was known ahead of time, but immaterial. The loan sale was needed to generate those delicious banker bonuses.
I’m sorry to say this, but, based on my 22 years of living in Arizona, which includes a lot of interacting with Mexican immigrants, I agree with you, Bear.
I’ve met people from many Spanish-speaking countries who have come to this one. Without exception, the Cuban emigres have been very sharp cookies. Running a close second are the Puerto Ricans.
When I lived in Pittsburgh, I was friendly with the family of Rennie Stennett’s brother, Jose. (Rennie played for the Pirates during their heyday in the 1970s.) The Stennetts were native Spanish speakers (of African descent) from Panama. They were so smart it was scary.
Jose was also quite committed to physical fitness. When I knew him and his sons, he was in his forties, and was delighted to challenge the kids to pickup basketball games at the city rec center where he worked. More often than not, he won the games.
I was talking with someone a while back, whose job was as a Spanish interpreter in a court. She told me that she had a hard time understanding what her clients were saying because they were so uneducated they could barely speak their own language.
Yeah, several ESL teachers have mentioned such problems…if the students are illiterate in their own language, and don’t know its grammar, how are they going to learn to read and write a second language, and speak it grammatically?
They take math but don’t understand it.
Not when it comes to commissions!
I’m curious whether borrowers such as these are the targets of Making Home Affordable workouts? I am thinking it would cost more than $100K to bridge the affordability gap for this couple…
Here is a bit of housing bubble math:
Home price = $720,000
Annual income = 52*($600) = $31,200
Home price to income ratio =
$720,000/$31,200 = 23.
Any value of that ratio north of ten is indicative that the market is getting a bit frothy.
I’m so sick of this Dream Home sheee at. Sure it was a dream, with these fraudulent loans, you got to live in a lux-o house for FREEEEEEEEE.
YOU FOUND IT!
Was trying to resurrect this story from the archives to no avail. Well done, Proff!
“Is it a bubble? Nobody ever knows for sure until one pops”. ~ Janet Yellen
Right Janet, no one knows. Except those that do!
Amazing that people like Janet ever got as far as they did in their profession, at least to me.
Hint to egg head academic economists: If you see US home prices decline by a record percentage, you can be fairly sure you are staring a popped bubble in the face.
On the flip side, once average home sale prices are north of 10X local incomes, you are staring at a bubble on the brink of popping.
I am certain that most academic economists are smart enough to do fourth-grade level long division — aren’t they???
C’mon Bear, ‘fess up. Are you an econ prof?
One problem was, the market looked absurd when the price-to-income ratio got above 4 or 5. And then prices kept going up. And it looked insane when the price-to-income ratio got above 7 or 8. And prices went up some more. So when it got above 10, I suppose nobody could say for sure that prices wouldn’t go up some more. I think it was only when we started to see inventory build-up and slowing sales volume that we could really say TSWHTF soon.
“Amazing that people like Janet ever got as far as they did in their profession, at least to me.”
Never underestimate the stupidly of job interviewers!
It’s funny to read comments like yours, realizing you have probably never glanced at a peer reviewed economics journal article. Jobs like Yellen’s are not easy to get. I was joking about the math skills of economists, and either those commenting played along, or you missed my sarcasm. It still amazes me that those with the math skills to succeed as professional economists seem to either missed or pretended to miss something as obvious as the housing bubble…
Bay Area residents have invested heavily in property outside the area, especially in places like Las Vegas, Sacramento suburbs and Phoenix. In the first eight months of 2004, Bay Area buyers purchased more than 13,700 homes outside the region and somewhere in western states.
One thing that’s on my mind is that Bay Aryans were so drunk on local housing appreciation that they went on a western buying spree, thus expanding the bubble to places where it wasn’t expected. My landlord/realtor in Boise told me that in 2005 something like 60% of all houses sold in Boise were sold to out-of-state speculators who didn’t intend living in them. He said one investor from Sacto sent him a check for $100K with the message “buy me three houses”. The realtor was dumbfounded, and asked him what kind of houses he wanted (size, price, location, etc.). The investor didn’t care: “you know . . . some houses.”
“on a western buying spree” LOL!
Hey, call it for what it is? I was almost envious how bubble-sitters in the SAC area were really among the first to have a front row seat for The Great Implosion ( and a little relief? )
It would take another year for OR to even admit a Bubble ‘might’ be possible and another year + before prices budged an inch. Dennis, if you’ll recall, Patrick.net regular ( SAC QT ) was able to pick up a decent home in a nice ‘hood for around $275k.
Not long before she guessed it may have sold for as much as $450k!
I wonder what percentage of Bend houses were sold to Bay Aryans…..
Certainly that “Hobbit village” tract in Bend was targetting at the Berkeley hippie crowd.
I tried to talk my sister into dumping her place in Rocklin CA (just north of Sacto) before TSHTF, but she wouldn’t hear of it. “I don’t want to throw money away on rent.” Oy veh. Her place has dropped from about $400K to about $235K on Zillow. She was planning to shortly move out of the area for retirement anyway - not like renting for a couple of years would have hurt much.
We had 31 NOD’s in one day here in southern OR with probably a monthly average of 200+ and yet
everyone here keeps saying “it’s different here”.
New housing developments are still selling at 6-7
times average take home for this area, and sales
of older, more established neighborhoods are
above that.
It was a mania. My Nor-Cal friend’s friend bought 6 houses on one street in Arizona and my friend was thinking about doing it. I couldn’t talk him out of it on the basis of the bubble but I asked him if he wanted to be a landlord hundreds of miles away. He declined. His friend is in big trouble.
I know three couples who bought in the Bay Area in 04-06 that lost the house and are now divorced. I know one couple that should be divorced but both live in the underwater house and don’t know what to do.
One person left their spouse in 07 thinking their 2 houses made them rich and now it was fun time. Well from what I hear, it ain’t no fun time now.
I know one guy who bought a 600K fixer. Spent 3 years working his tail off to make 2 illegal rentals cut outs, lives with the renters, fixed the foundation and is still underwater and estranged from his wife because of the stress. Oh yea his mom lent him money to buy the house.
I know one guy who……
My wife found some new construction at the end of ‘03. We spec’d out our house, gave them a deposit, and waited for our house to be built. In June ‘04, we moved from our 1600 sf starter home into our new 4100 sf dream house. We put down $150K of savings and bubble equity from the old house, and financed another $240K. In ‘05, my mother in law was moving to Florida, and offered to sell us her town house as an investment. We declined, since being a landlord didn’t sound like all that much fun. And we figured our existing $240K mortgage was enough debt already, with my $109K income. Today our mortgage balance is down to $200K, and we’ve refinanced into a 15 year fixed at 4.375%. I should have the mortgage paid off just in time for my oldest to start college. Last week, my wife gave birth to our 3rd daughter, so all those square feet are coming in handy! Not all bubble buyer stories end in tragedy, but we’re obviously not in California.
…being a landlord didn’t sound like all that much fun.
Take it from someone who’s known more than a few landlords and ladies: It’s NOT fun.
BTW, if you want an idea of how much fun it isn’t, read Leigh Robinson’s book, Landlording. It’s about 400 pages long, and it will throw cold water on any notion you may have about the ease of being a landlord.
My “starter” home was 700 sf, my ugh, “dream home” is 1600 sf for a family of 4. it’s all relative I guess, though IMHO one extra child doesn’t require an extra 2,500 feet, that’s a whole extra house.
We do not travel much, and spend a lot of time at home. So that’s where we decided to spend our money. Here in Chicago, the extra space helps to reduce cabin fever during the winter. I can play dodgeball inside with my kids.
My mother in law can stay in the guest room with her own bathroom, and the sitting room makes a fine nursery for the new baby. I like that the house is an efficient 2 story design, with 6″ outside walls and R19 insulation. Our highest heating bill to date was only $200.
“Not all bubble buyer stories end in tragedy.”
Chris, you “paid” $390K for the house, is it still worth more than the $200K you owe?
But I agree, there are worse things than losing some money on a house.
And I am going to admit for the first time on this blog that I have just decided one of my clients may be seriously underwater. The one who owes me $105K on a 3BR house in Superior AZ. According to recent news (maybe on this board or maybe in the MSM), Phoenix houses in the $75K-$80K range mostly have three or more bedrooms. But what is my client doing? Walking away? NO! — my client is making extra payments to amortize the debt. (I don’t know why, it’s just what some HBBer’s have said: people who CAN keep their houses often choose to do so.)
AZ:
Maybe they don’t want their credit destroyed? Or those $75K houses are not in a safe area? Or they intend to die in that house?
Seems kinda silly to walk away for so little money, now if it they owed you $205K then bye bye.
The most recent comp sold for $300K in September, so I’m not underwater yet. And that equity is just paper wealth anyway. We’ll still need a house to live in for several more decades, and we’re very happy with where we live. I’ve always been more concerned with the debt than the house’s supposed “value”. Ever since I became a loanowner in ‘97, I’ve been sickened by the amount I spend on interest each month. That money might as well be flushed down the toilet, as far as I’m concerned. I think the people who borrowed 5 or 10x their income are just insane. They obviously don’t look at debt the same way as I do. I remember when we were spec’ing out the house at the “design center”, the lady said something like “an extra $10K in upgrades is only like $60/month”. Many of our neighbors took her bait, and spent $450K or more for their houses. We skimped on the upgrades, figuring we could always get the “pergraniteel” at some later date. In the mean time, my kids can trash the cheap carpeting, and I won’t sweat it.
The Sacramento Bee may deserve credit for that article, but most of the articles they published during the bubble period advocated for making the move to homeownership, no matter what the cost. I remember that Andrew LePage (the former real estate writer for the Bee, now at DataQuick) once interviewed a “financial advisor” who suggested that homeowners tap into their home equity to make other investments.
I didn’t know/remember that LePage wrote for the Bee. How does one go from that to DQ? The SB was fairly cautious, as was the Press Democrat. I recall the SC Sentinel doing some stories on mortgage fraud early on. And the SF Chronicle did give a lot of attention to the matter, even if they didn’t fully grasp what was going on.
One thing I came to feel after putting the S/N CA reviews together; I’d say the northern press and market observers were a bit crazier than those in the south. Especially the Bay Area UHS.
How could you expect Carol Lloyd (SFGate) to tell the truth. She was making money with housing seminars on the side !
I know Carol and her husband and they are cheap cheap cheap. Did well by housing but rent and landlord now - they rent out their house for what I think is highway robbery.
Llloyd’s articles in SFGate were usually filled with a million quotes from real estate shills. I don’t recall any articles doubting the bubble…
…I think it was hard (and still is) for anyone who is trying to make money on housing to be objective.
When I was working on the mortgage fraud stuff in 2006 & 2007 and trying to get traction with the sub-prime lenders, the FBI and the DRE, I sent a great deal of information to Jim Wasserman at the Sac Bee. I was very disappointed he would not take the story and run with it.
I rememeber at the time there were lots of articles in the Tampa Bay paper and later in the Phoenix paper about mortgage fraudsters. Those stories provided many of the facts I used to recognize the typical mortgage fraudster patterns. The Bee later wrote some O.K. stuff……much later, after a great deal damage was done.
I always felt the newpapers were reluctant trash housing because it was the only industry still pumping in big advertising dollars.
Paladin
“I always felt the newpapers were reluctant trash housing…”
They outsourced that job to the blogosphere. I think we did a pretty good job, too.
Well, you quit working for the Bee and then reappear at DQ. My only contact with LePage was a couple of emails on early on in the bubble years. When he discovered that I wasn’t in “the industry” and was, in fact, a rabid rent-controller, he wasn’t interested. (I wasn’t surprised; I expect that sort of thing.) But the Bee real estate writers have never hidden their connections to the industry. And the Bee constructs tenants as people who can hardly wait to let the lawn die and install the car on blocks.
And when they tapped into their “expected home equity” to invest elsewhere? The lost their BA home and also all the investment houses elsewhere.
Tap into for other investments ! OK: Let’s get a boat, a SUV, a trailer to haul the boat, twin SeaDoos, a downpayment on a condo in ‘Vegas; well, you get the idea.
“With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income. His new technology consultancy is flying, and Kelly is confident that with a fixed monthly payment of $4,200 for the first three years, he chose the right mortgage.”
I would love to see a follow up story to this guy!!!!!
A quick google search shows the address. According to the “home value estimates” on redfin, he’s doing okay: http://www.redfin.com/CA/Foster-City/805-Lurline-Dr-94404/home/1269986
Hmmm.
A 2600 SF home on the water channel in Foster City. $880K first, $100K second and $100k down.
$900,000 at 6% is $54,000/year is $4,500/mon (interest only)
Taxes of $1,000/mon
Insurance of $100/mon.
Possible HOA?
Appreciation? None. Value after sales commission is nill.
So Michael Kelly basically rented a nice 2600 SF apartment for $5,600/mon. He probably threw away $2,000/mon for the last 69 months. Hey, it is only $138,000 loss.
If he had rented, put his $100,000 down payment into a 5-year CD, plus added his $2,000 a month, he would have about $285,000 today, instead of a depreciating asset in Foster City.
He may be doing O.K., but he could be doing much better if he had not purchased the house.
Paying 1,000,000 to live in…. Foster City?
Fail.
This thread would be incomplete without a little Sean Snaith.
[Snaith] told chamber members the housing prices may level off, but they will not depreciate. (August 5, 2005, Elk Grove Citizen)
—
[H]ousing price appreciation will slow and level out at around current levels, the [UOP] report said. “It appears that all the talk of a housing ‘bubble’ has amounted to just that and will be placed in the museum of forecasting right next to the predictions of doom that were made about Y2K,” Snaith wrote. (September 22, 2005, Stockton Record)
—
While some experts have raised the specter of a real estate bubble, in which unrealistic expectations overinflate prices and post the risk of a sudden collapse, Snaith said the current economic expansion is supported by strong fundamentals…. “The construction-led California expansion appears to be made out of bricks, not straw or sticks as others have claimed,” Snaith said. “All their huffing and puffing about a housing collapse has not been able to blow down this economy.” (December 22, 2005, Stockton Record)
—
Housing prices will continue to decline until the excess inventory can be worked down. Current worst case scenarios for some areas put declines in the range of 10-20%. A bubble bursting? Hardly. If NASDAQ had fallen 10-20% in 2001 from its high point, would we still refer to it as the dot-com bubble? (December 20, 2006, UOP Press Release)
—
California’s economy is headed for a soft landing, not a recessionary crash, according to the latest forecast from University of the Pacific’s Business Forecasting Center. “To say we’re going downhill is a fair characterization, but we’re not going off a cliff,” said Sean Snaith…. (July 20, 2007, Stockton Record)
No need to stop there. Check out “Money Talks America — An End to the Housing Crisis?” — Nov 6, 2008. Sean Snaith. (I’m no good at pasting links but this is easy to find googling snaith.)
It’s amazing how often the local newspapers relied on over-the-top bullish economists such as Snaith. A search of the Stockton Record shows that Sean Snaith was mentioned and/or quoted 101 times between 2005 and 2008.
Quoting a bulli$h eCONomi$t keep$ their RE adverti$er$ happy. It’$ all about the money.
“With a down payment of $100,000, Michael Kelly bought a $1 million home in Foster City last year despite the fact that he was unemployed at the time. Kelly landed an interest-only loan using stated income only; that is, he was not required to submit written proof of income. His new technology consultancy is flying, and Kelly is confident that with a fixed monthly payment of $4,200 for the first three years, he chose the right mortgage.”
There is no house worth $1 million in Foster City. Foster City is a city created on land fill.
I’m actually surprised that there wasn’t wholesale destruction in Foster City during the 1989 earthquake. Maybe those mud flats are packed better than we think.
Much of the “Marina district” in SF collapsed in 1989. The Marina district is built on ironic fill - debris dumped into a low spot from the 1906 earthquake. Fill tends to compact during an earthquake….no so good for structures built thereon.
It’s called seismic liquefaction.
That listing (provided above) it perhaps the most insane thing I’ve ever seen. I wouldn’t buy that house for 300K, perhaps not even 200K. Does CA really have to fall 80% (from current prices) before it become reasonable?
Take a good look at the aerial pictures of that house. Look at the cars on the street. That’s not a neighborhood of people making 300K+ a year!
SLO county is down 8+% from last year; Thornberg says it will drop ANOTHER 10% to next November ! Catch a falling knife anyone? Why don’t they use $ per sq ft rather than median prices?
‘When you rent, you have more flexibility. You can get another job and move. You don’t have the responsibility of a home. You don’t have to pay the plumber to fix the toilet.’
LOL! I have personally maintained the toilets in our rental home ever since we moved in five years ago. And we are sharing the cost with our landlord of having new (water efficient) toilets installed next year. So much for the much-ballyhooed advantages of renting…
PB,
So funny you would bring that up. While I rented the (then) condo unit we got roped into ‘owning’ ( long story ) I was a LOT more open to volunteering and pitching in etc.
After we became loanowners, my mood soured considerably. In fact other HOA members wondered, “Whatever happened to ‘nice’ Matt?” Well LOOK dude, I was renting a lugjury condo for $850 a month. No HOA’s, no “special assessments” ( which are -now- facing ) Nothing but hassle-free living!
You ‘think’ I’m going to mess that up for something as trivial as kicking ‘in’ once in awhile? NFW, whatever happened, I wasn’t going to go down the tubes over b!tching and moaning to the property mgr. giving the LL the perfect excuse to say; “This is more PITA than it’s worth!” In the end, ‘his’ over leverage ruin’t my good thang, but it wasn’t going to come from ‘me’?
Dinor,
I for one would love the long story - apparently much pent-up frustration in your post. If I’m interested, I’d bet there are many more just like me…especially if HOA’s are part of the equation.
I did a bit o’ plumbing in the rental I lived in before I bought the Arizona Slim Ranch. Matter of fact, the landlady was quite eager to show me how to do it. That’s come in handy here at the Ranch.
Like, for example, with the ongoing saga of replacing my blasted kitchen sink faucet. Tried two Delta single-handles and they both leaked like sieves. Back to the plumbing supply house I went. Twice. I’m about to try an American Standard, and I sure hope that one doesn’t give me grief.
Ceramic valves are worth their weight in gold. Replaced three as long as 20 years ago. Not one leaker yet.
“Two out of three Bay Area home buyers are choosing interest-only loans, and some experts warn that the popularity of the controversial form of mortgage debt is a sign that the overheated housing market is boiling over. ‘This is frightening, frankly,’ said UC Berkeley economist and real estate expert Ken Rosen. ‘I’m worried that more and more people are using (homes) as an investment vehicle and not as a consumption market, and that’s true of the peak of housing markets.’”
And what exactly is he saying today?
A good time to buy a home
The federal home buyers tax credit, set to expire in July, and low mortgage rates make the next six to nine months a good time to buy a house, if you plan to live in it, real estate economist Ken Rosen tells Stacey Delo. (Nov. 23)
‘if you plan to live in it”
I dunno, it’s either a good time or isn’t, without regard to “if your going to live in it.” See, this must suppose that if a family stays there a few years, bubble pricing will return. IMO, we’ll never see these prices again in our lifetimes. Good catch PB.
Just remember, Rosen runs a REIT, and if housing is a terrible investment, destined to crash further, then I guess nobody would expect a REIT to do very well, either…
I never ceased to be amazed by how many PhD economists with training from places like MIT come off like hawkers and shills.
The housing market in the Bay Area is still insane - especially in the “fortress areas”. For example prices in Mountain View/Los Altos are still $750,000 for a 3/2 house in a not so good school district and $900,000 and above for an okay school, then +$1,000,000 for the good schools 9and these are the low end houses that need some work).
I wonder when or if it will crash here, I don’t know how people are affording these mortgages.
Hubby was starting to want to buy a house again and getting cross with me for not even looking (he has a realtor friend who was encouraging him to buy - now is the time, house prices are going to go up next Summer and the tax credit is expiring) - luckily he is listening to me telling him to wait until we know what is going on with the company he is working for (again), but it made for a whole month of arguments. See, I don’t think we can afford mortgage payments on a +$700,000 house and he thinks we can from what he is being told.
Could it be they have stopped paying the mortgage and the bank refuses to foreclose?
—————-
I wonder when or if it will crash here, I don’t know how people are affording these mortgages.
There’s been no bubble popping in SF proper. A 10-20% reduction is a drop in the bucket, IMHO, for housing that should be half of what it is.
Who are all these people still buying fixer-uppers in my neighborhood for 700K?
We’ve been renting the same SFH for 10 years. At $2200. month, I’ve spent 264K on rent. As much as I want to agree with all the “renting is better” talk, in our situation, I still wish we had bought it 1999.
Back then, our house would have been about $300K, which I thought (at the time) was insane. NOW - the hosue next door - in worse condition than ours - just sold last month for 725K.
The San Fran Carbunkle is a fishwrap loaded with agenda laden souls. That they would go to any lengths to steer what readership is left goes without saying. Iv noticed an interesting left twist on an article on continuing extended benefits for the unemployed; if you read the comments after the article and try to give a “thumbs up” on a conservative view, it wont be allowed, but it will allow a “thumbs down” vote. Just another way to manipulate the sheeple to think that up is down and down is up.
“Impossible loan turns dream home into nightmare”
I think the title of the article should be. “Insane illegal immigration policy turns life in California into a nightmare !”.
or maybe: ” Competition with illiterate mexican peasants for health care, housing and education, bankrupts the nation !”
A Bank loaned two illegal aliens $720,000 on a $2,400 monthly income!
And then Bush, Obama, Pelosi, Reid,and Bernake, force The U.S. taxpayer to fund the bail out of the lenders that lent that money!!!
Where is the outrage!!!
Havn’t you also noticed no heads either in Congress or Wall St. have rolled because of this. In fact over at Goldman Sacks, BOA, J.P. Morgan and CIti group their getting 30 billion in bonuses this Christmas. The US tax payer is getting the tab.
Folks where is the outrage!
“Folks where is the outrage!”
The outrage has been diverted to more important issues such as the happenings of Tiger Woods, the NFL, Paris Hilton, and the rising price of botox.
Combo:
Wait till we have demonstrations over reducing the number of breast reductions in America. The doctors will side with the “patients”
It will devastate our income…by raising the amount we take out of each breast to qualify for insurance coverage.
I think 90% is cosmetic and should never have been covered in the first place.
Whether its 2005 or 2009, the prices in the Bay Area are still way too high and even though I don’t totally believe it myself, I’m afraid they aren’t going to ever come down to levels that I find acceptable. I have an interview in Austin next week. If all goes well… buy-bye Bay Area. I’ve had enough.
How funny… Been away from the RE bubble blogs for a while. Started reading the cascade of stories, not looking at the 2005 dates. I thought, “My God, is it starting all over again? What’s going on here? Are people insane?”. And then I looked and saw the article I was reading was dated June of 2005. I laughed out loud. I’m not in the Twilight Zone after all. Close call.
The Santa Cruz Sentinel has a guy, Peter Boutell, a mortgage pusher who’s been shill writing “Lending a Hand” for years.
Here’s quotes from a 2005 article.. (Many of his “articles” were even worse)
The median-priced home in Santa Cruz County for 2004 cost $622,000. This compares with $542,000 for 2003.
Let us compare two families, each with $40,000. One decides to invest that $40,000 in mutual funds and rent a home. The other family decides to buy a home as in this example for $660,000.
Based on the current rental market, this $660,000 home might rent for $1,700 per month. Which family would you like to be, the one that rents for $1,700 per month or the one who buys and has to fork out $2,800 (after factoring in a prime rate rise and a tax savings) each month?
It is also assumed that home prices will continue to rise, but at a more conservative pace of 7.5 percent per year. At the end of the five years, the home is sold for $947,500.
Based on this analysis, the family that purchased a home would be coming out $128,000 ahead of the family that chose to rent.
http://www.scsextra.com/story.php?sid=22982
Peter Boutell is a mortgage debt seller who wrote and writes for the Santa Cruz Sentinel. It’s always the “best time to buy” for him and he has bragged and disparaged renters for years. He gets blasted in the comments sections of his “articles” lately. People are mad. Here are some of his headlines from years past.
Bubble theory created by the media to play off our fears
Sentinel Staff Report
12/17/2005
Lending a Hand: Don’t blame it all on the mortgage industry
Sentinel Staff Report
06/24/2007
New higher loan limits mean savings for borrowers
Sentinel Staff Report
12/04/2004
Lending a Hand: Stats do not support a bubble theory in Santa Cruz
07/09/2006
Peter Boutell, Appraisals are key to getting loans approved
Sentinel Staff Report
01/21/2006
With mortgage rates still low, it is a great time to buy a home
12/31/2005
Those are classic. The same thing happened with the SacBee. Circa 2005/2006, most of the commenters were Kool-Aid connoisseurs. Now, they regularly blast any hint of bullish housing sentiment.
I bought my house in Los Altos in ‘59 for $13,100. My neighbors, at that time, thought I had been taken. I doubled the size of the house in ‘62 for another $10,000. A few months ago, my neighbor sold his house for $1,500,000. So here is the answer to all problems. Stay put for 50 years. It transcends all hiccups in the market.