‘Housing Bubble Has Started To Deflate’: Fortune
This Fortune piece has people talking about the housing bubble. “The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others. The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.”
“The message is clear. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers’ pockets, and ignited a building boom that bolstered the nation’s economy. But it’s over. The great housing bubble has finally started to deflate.”
“Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day, so the downward pressure will only get worse.”
“Things are suddenly looking very chilly indeed in four coastal cities; Boston, Washington, Miami and San Diego, as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento. So far this year, monthly sales have fallen 11 percent to 25 percent in Miami, Boston, northern Virginia and San Diego.”
“The prognosis is even worse in Phoenix, where only 4,500 homes sold in the first three months of 2006, vs. 6,100 for the same period last year, and in Sacramento, where new-home sales plunged 57 percent in the first quarter.”
“The problem is as basic as beams and trusses: The triple threat of soaring prices, higher mortgage rates and relentlessly rising property taxes has drastically increased the cost of ownership and put many homes out of reach for a huge number of potential buyers.”
“With houses hovering beyond the reach of most potential purchasers, formerly frantic markets grow eerily calm. Sales shrink as buyers float low-ball offers, and sellers refuse them. Realtors and mortgage brokers find other jobs. The bubble areas turn into Dead Zones.”
“There’s no mystery about what it will take to close the affordability gap and bring the markets back to life: Prices will have to come down, and incomes will have to move up. The only question is how much of the adjustment will come from rising incomes and how much from falling prices.”
“Many individual homeowners have nothing to worry about: They can simply stay put and ride out the cycle. The only thing they’ll lose is the opportunity to brag about their paper profits. The real losers will be those who bought recently at inflated prices and are forced to sell, usually because they’re taking a job in another city or can’t make the payments when their adjustable mortgage rate jumps. And speculators who bought overpriced condos in hope of a quick killing are going to get hosed.”
‘Things are suddenly looking very chilly indeed in four coastal cities; Boston, Washington, Miami and San Diego, as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento.’
It’s good to see the press pick up on these hotspots, but they ignore the ‘rolling boom’ areas, IMO. What about all the little towns and cities in between? No mention of the overbuilding that is taking place all over the US, nor of the spontaneous condo craze in almost every state.
Although they are not talking about the rolling boom or condo craze, they sure have come a long way in the last few months!!!
One step at a time… The media is turning just about as slow as the RE market itself… like many say on this board, it is like watching paint dry…
I think the media is slow because a lot of the employee’s of the media may be in housing. I have heard different anchors comment several times that they had just bought a new house.
Goes to show that you need 0 brains in order to be an anchor…. Just learn to read the Teleprompter, and look good in a tie, or dres…..
I was just informed by realtors in our office that Northern Illinois MLS will no longer give Days on Market. LOL
oooops… LOL Well they certainly liked it when the DAYS ON MARKET was 7 but now that it is 200 they remove the stat.
Remeember the M3? CPI ? Ah Energy and Food, let’s just remove that data since it makes inflation look out of control.
You can get M3 which is = to MZM from economagic.com
Fascinating
“What about all the little towns and cities in between?”
Exactly. All the attention is focused on major metro areas. Nobody has address the question of how this will effect the outward migration of metro monsters to rural areas.
New Home TRACKS will have to shave prices . The question becomes even if builders do that can the people moving from the metros sell their home ? We could have vacant home ghost towns all over the place . I remember seeing abandoned
projects in Vegas about 25,or 30 years ago . They would just set there for years and you could tell wild life was starting to live in them and maybe the homeless .
I’m thinking we’ll be seeing this in Dallas in the not too distant future. Californians are still buying there. One couple just bought SEVEN homes in the first phase of building. They plan on selling them once they are complete because, well you know, prices always go up. I just bite my tongue when I see this ridiculous behavior.
I am afraid you may be correct. I am not sure about Dallas, but there are subdivisions in Fort Worth where at least one third of the houses are vacant — bought by California “investors.”
In Humboldt County (rural California) the price to rent (P/E) ratio has grown from about 16 four years ago to over 30 today. At least in California, I don’t think there is a distinction between rural/urban, or, to be more exact, I expect prices to fall in rural areas just as in urban areas.
I believe the rolling boom markets that have really been overbuilt and where construction is still going on will see up to 30% price declines. Perhaps Las Vegas is a good example with LA the big originator of the roll. The rolling boom markets that are smaller and which have not been overbuilt with new construction should be safer. The small size offers protection because even a small exodus from the nearby huge originator market can help keep demand up.
I’d classify Potland, Maine as such. I just don’t see anything like a 30% decline here. Maybe 10% followed by a few years of prices going nowhere. Of course I’m probably influenced by a touch of “It’sdifferenthereitis”. It’s just that we’re getting such a flood of equity bandits from NYC,Ct, NJ and California that are moving here, often with big retirement income or their own portable consultancy businesses.
I believe the some of the safest markets will be where a boom has rolled in from a huge originator market and where people have fled the second market to yet another market, even smaller , creating a tertiary boom. Up here that’s places like Waterville and Lewiston. After those, you’re so small you’re in the boonies and many people won’t flee to the country. They need their hospitals, culture and jobs.
What they did say would be enough to scare the heck out of me if I was one of those who was just pulling my head out of the sand!
Yo one house in Half Moon Lane in costa mesa has a SOLD sign up, out of like 25. Banners and signs still a-flappin like crazy and no activity cept for me zipping thru now and then on my new Husqvarna just to further drive down prop. value. Man i feel sorry for that lone buyer when they eventually pick up a copy of USA Today or People and… i actually do cause you have to be pretty dense to be taken such advantage of.
I keep checking that place out, too. Lower the price another $200K (they’re already down about $100K) and we’ll talk.
right, then they would only be as expensive as the nice 3/2 SFRs on 8000 sq ft lots…
I don’t see any SFRs in east Costa Mesa in the $700s. But yeah, make it $300K. I wouldn’t look at the Half Moon Laners unless they hit the $600s, in which case the cost of ownership wouldnt’ be dramatically higher than the prevailing rents.
take the baffle out and go caroling through your neighborhood.
preferably late at night
What do you all think of the possibility of a rash of housefires occuring to all of these distressed properties? Desperate people do desperate things. Why pay thousands a dollars a month on a house you can’t afford when you can get “Tony the Torch” to make the problem go away for less than the cost of an HDTV?
Subkommander Dred
It has happened before! And I know of one multi million dollar house in a North Shore Chicago suburb that was completed, never occupied and the fire is under investigation.
There are actually two builders at Half Moon. Shea and then some privateer. The privateer has 3 or four homes on Orange Ave. I laughed tonight as I drove by and saw some new banner that said something like “Surprisingly affordable” or some other lie. These are nice houses, but without a reasonable lotsize I say they drop below 600 maybe even 500k before they are worth looking at seriously.
Have you been watching the Richmond development on West Bay near the Arco station at Newport? There are also a couple of smaller projects by some Chinese Bank in the blocks between Orange and Irvine and 20th and del mar.
It seems the writers at Fortune have been visiting this blog. Good Show Ben.
When MSM like Fortune picks up this story it’s definitely OVER.
Aa many have stated on this blog, now the greatest fools will be dashing for the exits at once. Sit back and enjoy the show folks.
I have no qualms whatsoever seeing those who forgot the “risk-reward” equation get severly finacially burned. Those clowns have pushed up the prices of housing with erroneous economic assumptions about the validity of the markets and prices.
Of course I just talked to a dumb Florid-ite (coworker) who is going to trade up her house (purchased in 2004) next year for a larger house. Just who is she going to sell it to I wonder? Another co-worker once told me the key was to move every couple years and then “the fifth house is free”. It that were true everyone would be doing it.
Another co-worker once told me the key was to move every couple years and then “the fifth house is free”. It that were true everyone would be doing it.
That’s BRILLIANT! Kind of like buy 9 coffees and your 10th one is free - I like it. We should pitch this to Toll or Centex. They’ll probably sell more houses this way.
Free ? That is got to be one of those stupid things I ever heard.
Fed’s Bies: “Housing has … Peaked”
“Reuters reports: Rising rents may push CPI higher, Fed’s Bies says
The U.S. consumer price index may move higher as the U.S. housing market slows and the rental market strengthens, Federal Reserve Board Governor Susan Bies said on Thursday.
“Noting that the CPI’s gauge of housing costs is based on rents, Bies told a banking conference in answer to a question: ‘We’ve come through a period of weaker rents. Now, housing has really sort of peaked … that may rejuvenate rents and so you may see may see that, in turn, higher (CPI) inflation going forward.’”
More from Bies at the link…
“The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others.”
Saying the housing bubble has “started to deflate” is a small semantic step away from saying that “housing prices are deflating” (which Census Department data Ben recently presented here verifies — at least for new homes). The Fed must be sweating bullets, with headline statistics screaming low unemployment and raging inflation in housing and commodities, and the popping of the housing bubble creating a loud sucking sound as the reverse wealth effect drains spending money out of homeowner “piggy-banks.” What is a Fed governor to do?
raise rates???? Screw the Homedebtors, protect the banks (his constituency) and the international dollar???
Why would rents go up?
I would argue that in many areas they will begin to fall. Once the speculators realize that they can’t unload their properties and break even they will put their properties up for rent and create a glut in the rental market. Gluts=price reductions in my book…
Someone is smoking something. Depressed rents? Where? Mars? I’d love to know where he’s getting his facts. As housing prices go, so goes rents.
The entire point of the bubble is that there is no longer a relationship between price and rent.
Rents will face some price pressure as:
+ Consumer preference switches away from buying and toward renting.
+ Owners become less tolerant of negative cashflow as they realize that there is no quick profit ahead.
+ Owners pass rising interest-rate and maintenance costs on to renters.
+ Rising rates and tightened credit exclude more people from becoming home buyers, further increasing demand for rentals.
Eventually, builders will shift from single-family to multi-family properties and things will swing toward equilibrium, but aggregate demand for rentals will far exceed the supply of SFHs and condos held by speculators.
The exact opposite happened during the last downturn rents dropped on average of 30% in my area
Agreed. (btw Mrincomestream: I’m glad you’re on this board, I love your diversity of opinions… glad you ride out the oft-unfair criticisms)
Rents are based on income. Can’t finance rental payments (unlike overborrowing to buy a house)
Rents could theoretically go up IF more people start renting which increases demand etc, but that would be limited by their incomes.
Incomes aren’t going up.
If housing is prodding the economy, and housing tanks, it may pull down the economy, which will depress wages, which will pull down rents.
Owners can ask whatever they want in rent, doesn’t mean they’ll get it.
In SF during the 1990-1995 debacle everybody I knew had lowering rents… (including my family)
clouseau
Rents in Silicon Valley plunged after the 1998-2000 run-up. Prices on an endless rise with shrinking vacancies forced prices down. It was like night and day by the time 2001 was underway. I saw banners for “free first month”, landlords began giving rent reductions to keep their good tenants from shopping around, etc. You couldn’t miss it if you tried. The underlying cause of this was an exodus of people (thanks to an exodus of jobs in an area that has always been expensive).
Having observed that, I would say that the upcoming exodus of jobs in SoCal could have the same effect on rents. Realtors, people in the mortgage/lending industry, construction, and the various industries that go hand-in-hand with housing (granite, spa/pool contractors, etc.) will be losing jobs. This has already begun.
Also, the basic relationship between:
1) SoCal’s increasing housing supply (mostly small infill with a smattering of actual large tracts like the old Tustin Marine Base on Barranca and various others in Irvine) and
2) Shrinking or, at best, stagnant population. This could also accelerate due to affordability issues, a job exodus, or both –
could create a temporary imbalance that favors rental housing supply vs. demand.
I also noticed the rental price drop last time. And I lived in San Diego… sorry Chris.
Yeah, I so fondly recall the 90-94 years here in SD when 3 months free rent, new TV’s, no deposit etc. were pretty much the norm.
How will this downcycle be any different? Chris, sorry man, but your arguments hold no weight whatsoever.
I keep on posting this . Rents are going way up in Southern California (Los Angeles and Conejo valley) Trust me I know have been looking for a place for 2 months. Very low inventory and ones that are available have their pick of many tenants.
I’ve been turned down on 2 places already . My friend can’t believe what the landlords are asking and getting. He asked “what do they want your first born”?
Asking credit scores 725 and above , several months security etc.. One landlord wanted a signed agreement above and beyond the lease saying I would be responsible for any legal fees and lost rent .
Looked at a townhouse today in Westlake Village cheap for here $1650 for 1180 sq feet 2 bedroom ,1 1/2 baths built in 1970’s not in good condition(popcorn ceilings ,original kitchen ,windows banister on stairway was falling off in need of paint job . I’m getting desperate here and even considered taking it but realtor told my realtor it is also for sale for $488,000 and she really wants to have on the market for a few weeks.Why she put in on the MLS for rental I have no idea.
Left there looked at 3 year old apartments in Agoura $2200 and up for 1100 to 1200 square feet 2 bedrooms.Very nice and all the “stuff” granite,beautiful bathrooms etc.. I think I am just going to have to do this although it really irks me to pay this kind of rent for an apartment.
So please tell me where these cheap rentals are.
your a tard westlake village i work in 1000 jokes and the prices are crazy that area aint all that.bunch of overpriced crap and leases mbz.most people havent got 5 bucks to buy anything i know i manage a retail store there
can’t understand everyhting you wrote
the rent graph on patrick’s blog is troubling. http://patrick.net
The place I would have rented at $2,500/mo one year ago, but for the fact we didn’t like the owner’s attitude, sat vacant for the entire year and now is on the market for $2,000/mo. The only pressure on rents here is down.
Same here in Tampa Bay area (FL). During the last downturn (2000-2003) rents were so cheap that they actually declined every year for nice places. If you signed an 18-month lease you even got a free large screen TV (a POS one but still…)
The past couple years rents have been rising but now that rondo conversions have flooded the market with investors wanting to rent out rents will be heading down again. (I’m still paying less in rent than I was 6 years ago)
Rents will rise due to the high foreclosure rates.
Now they will base the CPI on home sales, so everyone will be screwed renters and homeowners. Great!
Yep, but that just means no inflation even with oil going to $150/barrel.
Once the mass media jumps on the bubble bursting bandwagon, you know the bursting is well underway…
http://www.novabubble.blogspot.com
marc faber’s lastest is great.
“As can be seen from figure 3, since last summer, home prices while only declining moderately in dollar terms, have declined significantly in terms of gold. So, whereas it took over 500 ounces of gold to buy a typical house in the US last summer, now, it only takes around 380 ounces of gold. In other words, home prices have declined over the last 9 months by 25% against the price of gold!”
AN ANATOMY OF BEAR MARKETS
Ben. Your summary was a lot more scary than the full more wishy-washy article. The safe havens chart is way off.
It is scary if you are a RE buyer from those cities that were mentioned in the article, and bought in the last 3-4 years!. Imagine loosing 40% of the value of your home, but still have a mortgage for 100%. I would have dirtied my undergarments, if I fell in that category!!!
One word for you: foreclosure. That way, WE get to pay the bill.
BUT, you ( the home owner) still get a lovely 1099 for the difference.
OUCH………….
Looks like we are officially moving past the denial phase…
Did the stoic journalists at Fortune use the term “get hosed?”
Yes, and they also misspelled Columbus, OH as Colombus, OH and listed its nearby cities as Omaha & Kansas City.
Apparently dope smoking is now permitted at Fortune.
Italics off!
Doesn’t pot smoking make people smarter?
Nobody wants to know where Colombus is — GO BLUE!!!!
Gary Watts won’t like that article. It shows a 2.7 percent decline in Orange.
It just keeps on coming.
I thought 15% was in the bag!
Neither will Suzanne.
“Noting that the CPI’s gauge of housing costs is based on rents, Bies told a banking conference in answer to a question: ‘We’ve come through a period of weaker rents. Now, housing has really sort of peaked … that may rejuvenate rents and so you may see may see that, in turn, higher (CPI) inflation going forward.’”
I’ve commented on this irony before. Because the CPI is based on the cost of housing (rent) not the level of speculation (price), and rents have been weak as people defected to ownership, the CPI has been low — causing lower interest rates despite the housing boom.
Unless the FED adjusts its thinking, it will read the figures to raise rates during a housing bust. But if it does adjust its thinking, then it would have been biased in favor of more liquidity to boost asset prices in each case — ie the “Greenspan put.”
Not a nice scenario. Rising energy prices and the housing bust causing depressed economic activity AND inflation. But somehow the economy keeps booming in spite of it all.
“Rising energy prices and the housing bust causing depressed economic activity AND inflation. But somehow the economy keeps booming in spite of it all.”
Hey…. George Bush and Larry Kudlow says so. It must be true. “We have a booming economy” says Curious George…. I’ve never seen such economic destruction in all my years. Never. And the problem with Larry Kudlow is that by the look on his face when he’s reading his script, you can clearly see he doesn’t believe a word he’s reading.
I’ve never seen such a bunch of liars elected to public office in my life.
Larry Kudlow is a perma-bull. In 2000, he was saying buy stocks, its a great time. He could be driving in a convertible in a rain storm a 100 mph headed for a brick wall and still say - “things look great”
I swear I closed the italics on my post!!! But now everything is getting italicized. Help!
Ahhh…that fixed it.
Btw, does anyone here think the chart saying 4% drop in San Diego housing prices predicted for 2006 (money.com) is even remotely right? Larger? Smaller?
It’s light. They are still being way too optimistic.
What these writers are missing is that the bust will also happen in places they deem “affordable,” such as Big Dump. Not only will happen concurrently but the fallout will be worse.
TxChick — that’s what I have been banking on.
LLC: The mark of the bubble beast?
“The Grunt has heard on the wire that Bank of America has ceased all lending to all real estate LLCs. This is highly signifigant since no real estate investor in their right mind would ever purchase an investment property without an LLC and it is also indication of the current mood in the lending world.
“There has been some rumblings that other banks may follow suit but nothing is official as of yet.
“So why would banks be reluctant to lend to a real estate LLC? It is all about cutting their losses. If the s**t hits the fan, alot of banks will be stuck with a ton of non performing assets. Banks are in the lending business not in the real estate business therfore they are ill equipped to deal with a ton of foreclosures.
“The LLC is the get the out of jail free crad for real estate investment which allows investors to be able walk away without further financial injury. Banks dislike this. They do not want to lend to anyone who is legally limited in putting their skin in the game. This is also another reason that banks will not lend to residental buildings that have less than 50% owner occupancy and is known to be a investment building.
“As far as they are concerned, the more of a stake a buyer has in a property, the more likely they will move hell and high water to keep it and not let it fall into dissarray.”
i’ve been lurking the investor websites and read about people buying 10 homes each via different LLC’s where one investor owns all the stock in each one. if you believe the postings on Fatwallet then there is a lot of stupid people out there that used some website to incoporate rather than a real lawyer since they needed it to be done cheap.
Now say you have someone with 10 homes and almost $2 million in debt who decides to foreclose on each home. is the bank going to go away or spend $20,000 sticking it’s lawyers on the poor soul in hopes of recovering $100,000 or more?
A decent lawyer should be able to cut through the LLC veil and into the individual investor’s bank accounts in cases like this.
Better make sure there is something in those accounts before spending on a lawyer
A decent lawyer should be able to cut through the LLC veil
Only if the LLC paperwork was not done right/kept up? and the countersuit $$ should be interesting too…
You can “pierce the veil” for sham entities. How difficult this is varies according to state law. This allows the plaintiff to go after the personal assets of the true “owners,” in this case, the member(s) of the LLC. One of the key factors in a “piercing” analysis is undercapitalization, which I’m sure is present with most of these clowns.
That said, if the members of the pierced LLC don’t have any assets, all you get is a worthless judgment.
Not being flip Bubbly but how can you say this.
“One of the key factors in a “piercing” analysis is undercapitalization, which I’m sure is present with most of these clowns.”
From what I know about buying property through an LLC and someone please correct me if I’m wrong. Is that it requires a significant down payment. In the event of buying a house thru an LLC/Corp last I checked it required a 25% down payment. Now if your buying a commercial property and utilizing tools like mezzanine financing or things of that nature you can come in with significantly less than 25% but the property must still meet certain guidlines and DSR which are pretty hard to fudge.
I hardly think undercapitalization is the problem. If your talking about Joe and Suzy Homebuyer holding title under an LLC more than likely they bought the property first in their names and transferred title to an LLC which makes them liable for the money not the LLC.
I’m not getting that statement
>
Any properly drafted and executed LLC is fairly “pierce-proof”. Take it from somebody who has drafted dozens. In any event, the idea is not to avoid mortgage liability, since virtually every bank will require all LLC members to personally guarantee the note. Instead, the idea is to provide protection from personal liabilities resulting from the operation of the property, above that amount which may be insured.
Further, most of the real estate LLC’s I’ve drafted have been to hold commercial properties. In this regard, I would think that BOA’s decision to cut off funding is more related to Bernanke’s “death threat” issued during a March 9, 2006 speech to the American Community of Bankers Association, something to the effect of: “Your lending standards for commercial real estate have been too lax, and I will soon be sending out my hit-squads to readjust your loan reserves.” That will have quite the chilling effect.
I recall reading recently somebody who advocated moving from residential investments, to commercial. Too that I would say: Big mistake.
I thought that you need to be in business for quite some time before any credit was handed to your company, and if you lost money, at least to the IRS, no FDIC insured bank would be able to loan you any money? Please correct me if I am wrong, because otherwise, banks deserve to be rightfully hose after this.
And would not evey Peter and Mary out there just start an LLC, run everything up in Credit and then declare chapter 11? Living for years like this?
I thought you needed good credit to be able to take out millions of dollars worth of interest only/option-ARMs. Oh wait, that aint true either. When borrowing’s cheap, guess it dont matter if you’re an LLC, LP, or just Joe Shmoe
No you can get a substantial amount of credit for an LLC or Corp. with only being established for a few months especially if you personally guarentee. As a matter of fact AMEX will give you a card with no personal guarentee if you’ve been in business 2 yrs and can show cerified financials of 2mil a yr for 2 yrs
Wait a minute — that “…especially if you personally guarentee…” phrase is not just some afterthought. Doesn’t it void the protection that was sought be being an LLC in the first place?
Yes it does, But most of the small investors doing these LLC’s or Corp’s don’t recognize that. They think they are being smart guys and protecting their assets not realizing that once they do that their veil has been punched.
My thought is the reason why B of A may have stopped lending to LLC’s is probably they have have a lot of non-recourse loans single entity loans out there. And because the bubble popping is not only going to affect single family homes it will effect the commercial suff as well they are circling the wagons they took a beating too during the last downturn
The most likely scenario is the bank will foreclose on the houses. They will probably open the bidding at 75% of their debt and if people are interested in the property, great. The price goes up, the bank gets cash. Otherwise they’ll take the property back for 75% of what they’re owed and pursue a deficiency judgment against the LLC for the balance ($500,000.00 on a $2m principal). They will spend $5-10,000.00 to get deficiency judgments against the LLC, alleging not only a cause of action for the Note, but also fraud and misrepresentation in the loan applications and financial statements, perhaps in appraisal fraud as well, whereupon the LLC will file for bankruptcy, probably Chapter 7, since there are no assets left in the LLC. The lender will then make a decision on whether it wants to spend another ten to twenty grand to prosecute an Adversary Proceeding in the bankruptcy court on the basis of fraud in the loan applications and financial statements. If they succeed, the judgment will become nondischargeable for all time. They may or may not be able to stick it to the members of the LLC. If the lenders were prudent, there would have been personal guarantees… suckers.
For me, this was the most significant part of the article:
“As painful as it will be for many people, the looming correction may turn out to be welcome news for house-hungry Americans. Young couples now priced out of the market will once again be able to buy a ranch or colonial without forking over half their income for mortgage payments. Growing families will be able to trade up for more living space without raiding the kids’ college funds.”
Amen to that.
Double Amen to that.
As this thing unravels, and things get nasty, we need to stay focused on the eventual outcome: it will be a welcome relief to finally get back to something solid.
The shaky ground we’ve been standing on the past several years has been tough to live with. And presents no opportunities for growth or a strong future.
Another lender bit the dust today in Seattle- Merit Financial. 300 employees let go.
Don’t miss the next piece (linked in at the bottom of the Fortune piece on which this thread is based). It reads like it was written by one of Ben’s regulars. Ben should sue for plagiarism:
‘Unmaking the myths
Real estate survival guide: The sudden shift in the nation’s housing markets is exploding some long-held beliefs. Here’s the conventional wisdom you should ignore.
FORTUNE Magazine
By Shawn Tully, FORTUNE senior writer
May 4, 2006: 12:42 PM EDT
NEW YORK (FORTUNE) - The sudden shift in the nation’s housing markets is exploding some long-held beliefs. The first is that a scarcity of buildable land on the coasts keeps a cap on supply and prevents prices from falling.
But high prices inevitably work their magic, encouraging more people to sell existing homes and sparking new construction. Sure enough, prices are already tumbling in Boston, where a swarm of downtown condos is swelling the number of properties for sale and punishing the price of all housing.
A second myth is that today’s big homebuilders learned their lesson in past downturns and now launch projects only when they have firm buyers lined up. But housing starts are still running at near-record levels of some two million units a year.’
http://money.cnn.com/2006/05/03/news/economy/realestateguide_2_fortune/index.htm
“The buyers’ sense of urgency is gone,” says Bob Toll, CEO of luxury builder Toll Brothers (Research), who has long been a housing bull. “They see the market going soft, so they stall.”
Does anyone else suspect that Robert Toll’s son is short his father’s company’s stock (kinda like Ken Lay’s son was short Enron)?
“There’s no mystery about what it will take to close the affordability gap and bring the markets back to life: Prices will have to come down, and incomes will have to move up. The only question is how much of the adjustment will come from rising incomes and how much from falling prices.”
Hmmmm… (scratching my head, looking upwards) I wonder which it will be…..everyone in the US gets a raise equivalent to the increase in bubble prices - so for LA, median incomes are around 55K so that’s a 150% raise for most households? Or home prices coming down? Wait! Don’t tell me.. let me think - I think I can figure this out!
Hey, I’ll take a 150% raise
Anyone remember the old Saturday Night Live skit with Dan Akroyd as Jimmy Carter telling America his new economic plan is to give everyone a million dollars? “Hey, everyone wants to be a millionaire.” In that time period people laughed at the joke because of what I think might have been a better perception of what that action would cause in the economy. I’m not so sure people would get the joke now….
Effect not cause. Duh.
I agree; do the writers at Fortune waltz into their bosses office and demand raises?
This article is good at pointing out the breadth of issues that are dampening things down, but there is not much mention of insurance which is a huge issue in disaster centers but still problematic in ordinary places as well. The carrying costs of housing assets are increasing strongly in many ways all at once.
I agree. In CA, earthquake insurance is very expensive and most do without it. Now that homes are double what they were a few years ago, it is even more expensive. It would be interesting to see the percentage of CA homes which carry earthquake insurance.
It could be that the ultimate prick in this bubble would be a good size earthquake somewhere in CA. 6.5-7+ causing serious damage. And, of course, we are due for one. It has been 12 years since the 6.7 quake in Northridge.
Should one occur, you can knock $100K off all CA homes right then and there.
Can you even still get earthquake insurance in Souther Cal it’s been awhile since I inquired. The last time I did it was a state policy I forget the name. BTW if another Northridge quake hits you can take off more than a 100k right there on the spot. In the valley they were selling condo’s for 15-25k a pop in some of those damaged buildings. I know a guy who used to do bracing who was going around buying these properties. Who ended up with over 100 sfr’s.
You can still get it, every insurance company that sells residential property insurance in the state of California must offer it. It’s VERY expensive though.
“Sales shrink as buyers float low-ball offers, and sellers refuse them”
Friend of mine just made a lowball offer of 450K on a 3 BR, 1600SF, luxury condo in glendale, ca where a comp/identical unit recently sold 2 months ago for about 510K in the same unit. Guess what, was a trust sale, offer accepted.
He is very happy since he had to move out of his rental, due to neighbor problems, which was also a 3 BD about the same size, which he paid about $2200 per month.
He is going to put down about 10%, 30 yr fixed, difference is about $900 more than renting.
So some low ball offers will get accepted just got to be persistent. He made offers on about 6-7 difference all about 10% below comp.
Wow, so he’s paying about what it would have sold for in early 2005? I guess he’ll only be 40% underwater.
One man’s low ball offer is another man’s ridiculous price.
So why are they happy about buying a depreciating asset which is going to cost him $900 more a month? Do financial mistakes make your friend happy?
Well for starters, his income is about 100K+ thus he will get a tax write off. Secondly, about 400-500 of that money is going to principal per month. So this means he is getting the condo for about the price of montly rental.
Exactly, that wasn’t what you would call a low ball offer. Lowball would have been 250-300k. IMO
AND: ~12% below asking price is NOT a “low ball offer”. Get real. This is just a new coat of paint on the Titanic as it sinks.
what happened to the old adage that if you are not ashamed to make the offer, you may be paying too much!
My lowball was $160 for a one bedroom at the lockbox bench place. I decided to be nice, my goal price next year will be 150. Since they didn’t respond I’ll get it in forclosure sometime next year when the ARM adjusts, based on the number of ads for well above market rents there.
In NoVA, your just setting your self up for failure by offering anything more than 30% off comp.
Why did you stop at one, if your going to operate like that your supposed to hit everything in the complex for sale at $160. You got to create inertia there bluto
The article also only makes a passing mention of property taxes. If I had bought the house that I continue to rent in Santa Monica at last summer’s prices, my property tax ALONE would have been equal to about 2/3 of my total current rent…Not even considering the mortgage!
Care to provide some details? I find that a little hard to believe.
Believe it. My house’s rent is around $3500 (but certain freebies make it more like $3000 to me). Last Summer, even teardowns around here were going for $2 million - and selling, amazingly. Property tax would have been nearly $2000 a month. It’s already a lot better (teardowns asking “only” $1.5 million - and NOT selling), but has a long way to go.
I live in Santa Monica. So I take it you live north of Montana? If so, the house must be tiny or very run down to rent for only $3500 per month.
Bwwwahhhaa, North of Montana for only $3,500. I would think that would be about 800 sqft wood frame surrounded by McMansions.
Where else are there “$2 million teardowns”?
LOL your right
A couple more good reads……..
http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/?cnn=yes
And this one from Australia………
http://www.abc.net.au/pm/content/2006/s1631068.htm
A couple of good reads………
http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/?cnn=yes
And from Australia…….
http://www.abc.net.au/pm/content/2006/s1631068.htm
The “Coming Real Estate Collapse” is the front cover story of this weeks “Harper.” See the funny picture.
http://www.harpers.org/MostRecentCover.html
“Harpers.” Sorry, bad typing.
http://www.harpers.org/MostRecentCover.html
Harpers also used a nice title for the cover story:
“The New Road to Serfdom - An Illustrated Guide to the Coming Real Estate Collapse”
http://www.harpers.org/art/covers/2006-05_350×476.jpg
STock market hits all time high today. Somehow it isn’t seeping into the consciousness, or people think it’s discoutned already.
I’m thinking maybe BB raises interest rates by 50 basis points instead of 25. That would get the market to take him more seriously.
What hit an all time high? The Dow hit a five year high, but not an all time high. I will be surprised if the stock market holds out much longer (meaning more than a couple of months, but I expect less) no matter what BB does.
it’s an illusion. In real uninflated doller terms the dow is where it was at the end 1996.
This is where the selloff starts.
I know it is OT, but I believe that it is time for a laugh, if it were not so real…
http://www.theonion.com/content/node/47978
That’s a good laugh. I can’t help it. So funny
The third part of the article closes with this last line:
“It’s the bright side of our gloomy outlook: The bargains are coming.”
Nice.
http://news.yahoo.com/news?tmpl=story&cid=509&ncid=509&e=24&u=/ap/20060504/ap_on_bi_ge/mortgage_rates
http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/?cnn=yes
and from Australia…….
http://www.abc.net.au/pm/content/2006/s1631068.htm
I was thrilled to open the mail box and see “Real Estate Survival Guide” on the Fortune cover. It doesn’t matter what the article says. It’s the cover that matters.
The Fortune story is big, even if the actual article was rather tepid. It’s one thing for high-brow, literary magazines like Harper’s to report on the coming housing collapse. Now, despite the best efforts of the NAR truth-makers and their shills, the story is perculating up in high-circulation business mags. Next it will start showing up in mass-market rags like Time and Newsweek, written for people who can’t read without moving their lips. By the time it shows up in PEOPLE, we’ll know the bottom is in.
Right now it seems like most people, at least the ones I know, have bought into the NAR “pleateau” fiction. But reality is starting to impose itself, thanks to real-world observations and the increasing storm warnings from responsible publications and opinion-makers. There has been a palpable shift in sentiment in just the past two months, to a more sober, bearish outlook. By this Fall, I predict a sea-change in popular perceptions regarding RE, and the first beginnings of panic-selling as the smarter herd creatures and FBs head for the exits.
People magazine - LOL. I think your right.
Cosmopolitan: How To Please Your Man After Foreclosure!
“Prices will have to come down, and incomes will have to move up. The only question is how much of the adjustment will come from rising incomes and how much from falling prices.”
Hello, hello, out there ! Incomes cannot bail us out of this one. Think people, What would happen to the elderly if this were to happen? There is not enough in SSI right now and those drawing on it barely get by; inflate wages and you have a compound problem. Those overbuying today have many years in which to bail themselves out of the hole that they helped dig.
This is one of the reasons that SS benefits are tied to a wage index rather than CPI.
Chris….tie them to what you want, no SS payment is going to cover much more then a old clunker, a little gas, small amount of food and about $400 a month rent. If there is a spouse you can figure their income may get in the $1500 per month range.
I had a guy call me up wanting to rent an apartment I own. He is living on $122 a week government benefits; and was trying to find a way to reduce the $400 move in cost. Hint: If you tell me you can’t raise $400 to get it, then what’s my confidence that you can consistently pay the $250/mo rent?
Anyway, I was thinking about this guy, and his $122/wk income as I was filling up my truck (which thankfully, I don’t drive very much) this morning. With the cheapest gas available, it cost me $115.
Something’s gonna give folks.
dwr - what’s your point?
I read all three articles and I must say, this is the most negative mainstream media major reportage I have seen to date. I’m guessing this may push the rest of the mainstream media into facing reality.
With that said, quick, everyone move to Omaha!
THis article has the median price for Los Angeles listed at $438,000 and they forecast a decline of 3%. The C.A.R has the L.A. median for March at 512,500
So if they predict a 3% decline from 438,000, that would be more like a 15% decline from todays median