‘People Are Waiting For Price Bubble To Burst’: California
The Tracy Press reports on a return to the old days in California. “To woo an ever-dwindling number of well-heeled buyers to developments like Mossdale Landing in Lathrop, builders of new homes are offering incentives such as swimming pools or $20,000 in free upgrades.”
“In the Bay Area, some developers are even offering new cars, said Susan State, owner of a monthly insider’s look at the Bay Area and Central Valley housing markets. The one thing they have yet to offer is lower prices, State said.”
“‘If pricing doesn’t come down, we’re going to have houses that don’t sell,’ said real estate agent Sid Reams.”
“There are 12,000 new homes planned for the Central and Mossdale-areas of Lathrop, and that has agents like Reams concerned. In some cases, developers are offering incentives of $30,000 or more for upgrades, said (broker) Jim Muthart.”
“But incentives are only a temporary solution to a deeper problem, Reams said. ‘Incentives can work in the short term,’ he said, ‘but you have to help buyers with lower prices and lower monthly payments. Prices have to come to at least 10 percent.’”
“‘If not, he said, foreclosures are sure to continue to grow. Since the start of last year, there have been 404 foreclosures in Manteca and Lathrop.”
“Reams warned that prices are too high for new buyers and investors. Meanwhile, inventory is booming. There are more than 300 homes for resale in Manteca and 102 in Lathrop. People are waiting for the price bubble to burst, or looking for cheaper homes, Reams said.”
“That’s good news for Pulte Homes in Mountain House, which sold 48 town homes in the Cambridge Place section of Mountain House last month alone. At $300,000 and $400,000, they’re affordable enough for first-time buyers or investors. With high prices, the new-home business relies on well-heeled buyers from the Bay Area. At the moment, there just aren’t enough of them to absorb the inventory.”
“In the meantime, buyers are foregoing pricier new homes and even second-guessing the half-million price tags on older homes for resale, prices that sellers knew they could get in the boom times. ‘We’ve gotten spoiled over the last few years,’ State said.”
“Manteca-based real estate agent Cheryl McFall agreed. ‘We’re done with the market where you stick a sign in the yard and the property is sold,’ she said. ‘It’s kind of like the old days.’”
The Record Spotlight. “Home sales in Shasta County dropped from 574 in the first quarter of 2005 to 365 for the same quarter this year. Shasta County mortgage banker Darrin Johnston said sales are down because not as many speculators are buying homes in the area.”
“‘Investor participation has dropped due to the increase in (mortgage) rates,’ said Johnston. Redding was a hot spot for housing speculators last year, with 22 percent of all homes sold in the area going to investors, according to LoanPerformance. For the first two months of 2006, 19 percent of all homes sold in Redding went to investors.”
“Foreclosure activity in Shasta County jumped from 78 homes in the fourth quarter of 2005 to 93 in the first quarter of 2006. Mortgage specialist Tina Parisotto surmised that speculators who helped Redding lead the nation for much of last year in the percentage of homes sold to investors, could be the problem.”
“‘If they don’t have any equity and they can’t rent for what their monthly (mortgage) payments are, I could see those (investors) going into foreclosure quicker than the people who own a home,’ said Parisotto, who is president of the California Association of Mortgage Brokers Greater North State Chapter.
Forgive my ignorance, but where is Lathrop??
In a place where few would care to live - 70 miles east of Berkeley in the middle of the desert.
Okay, when an article like this comes out about LA or SF, then I’ll get excited.
Me too lainvestorgirl.
I believe our wait will be longer than everyone else, especially if history is an indicator.
Los Angeles lagged the housing market in the late 80’s and did not begin to lose value until 1991 while the east coast was getting pounded in 1989.
I think there are some people in Los Angeles like a monopoly board and are working on acquiring through Real Eatate Trusts to acquire more and more real estate so they have more and more ability to monopolize the real estate and name their own real estat rent rates.
One thing I think congress needs to investigate is these real estate trusts or corporations which are acquiring land, therby putting fewer competing rental businesses.
And interestingly, these real estate trusts or corporations seem to have a vail of stealth that joe or jane homeloaner does not posses. And they have the ability to buy and sell real estate through loopholes in law and Prop 13, so that their assessed real estate values do not go up like everyone else that buys and sells real estate.
These loopholes make for unfair competition for “not real estate trusts/corporations” because their taxes are less and thereby are able to take in more profit which they can then, like in the game of monopoly, acquire more real estate, furthering their ability to control the rental prices.
I welcom comments.
Los Angeles Friends In Deed
Your not wrong in your assesment about the trusts and corporations. Donald Sterling and a few others hold considerable assets using those vehicles and quite frankly its prime stuff. Sterling holds mostly commercial. But there are quite a few sfr hogs out there. I know of one gentleman who holds over 300.
If you think congress is going to investigate it. Your sadly mistaken. It would be akin to having the fox checking the security of the hen house.
I disagree with your assesment that these tools need to be taken away especially in the instance of trusts. I enjoy that tool if for nothing more of protecting my heirs from some land shark a$$hat probate lawyer and the state of california. I have watched too many famillies get raped like that.
While your assumptions about the rental market maybe true. I value the protection of my assets for my family way more than I give a damn about some renter getting a fair shake on a rental.
Speaking of L.A., did anybody else see this in the LA Times this weekend?
http://tinyurl.com/knr9v
Only 12% of households in Los Angeles County, for example, can afford a median-priced home, according to the California Assn. of Realtors’ most recent statistics, compared with about 38% in the summer of 2000.
Considering the record run-up in prices, it’s no wonder. The median price for a home in Southern California in April 2000 was $201,000, compared with $485,000 in April 2006. In Los Angeles County, the median price rose from $195,000 to $508,000; in Orange County, from $262,000 to $628,000, according to DataQuick Information Systems, a La Jolla-based research firm.
The situation probably will not change anytime soon. In the last 62 years, there has been only one significant downturn in home prices, and that was between 1990 and 1996 — amid an exodus of defense-industry jobs — suggesting that a sustained decline is rare, said Michael Carney, finance and real estate professor at Cal Poly Pomona.
The main culprit behind the latest price hike is the unrelenting demand for limited housing, a problem fueled by record-low mortgage-interest rates, adjustable-rate financing and a population stampede into Southern California that shows no sign of slowing.
From April 2000 to July 2005, California gained 1.56 million people through natural increase — the difference between births and deaths — and 1.42 million from international immigration, according to U.S. census statistics. Domestically, more residents left California than moved here from other states. Southern California’s population is approaching 17 million people and growing at a rate of 200,000 to 300,000 per year.
Meanwhile, developable land in the Southland continues to shrink. And residential projects slated for urban areas on old industrial and commercial sites — which could add significantly to the region’s housing stock — often take years to get underway.
In Orange County, where land costs $1 million to $2 million per acre and the need is particularly acute, 7,206 permits for homes and apartments were issued in 2005, compared with 12,400 in 2000, according to statistics from the Construction Industry Research Board.
One of the few Southland counties with significant developable land — Riverside County — issued a bounty of 34,000 permits for new homes and apartments last year, compared with 15,400 in 2000. But that number still falls far short of the need, housing experts say.
Somebody needs to poke holes in these numbers. Don’t most new arrivals (who aren’t babies) look for affordable rentals? Which are getting converted into condos nobody can afford by the hundreds?
In other words, isn’t this current bubble making SoCal’s affordable housing crisis worse, not better?
The situation probably will not change anytime soon. In the last 62 years, there has been only one significant downturn in home prices, and that was between 1990 and 1996 — amid an exodus of defense-industry jobs — suggesting that a sustained decline is rare, said Michael Carney, finance and real estate professor at Cal Poly Pomona.
How many times in the last 62 years have prices in LA shot up by 160% over a six year period?? We’re in very uncharted territory. To declare that a price drop is unlikely simply because they don’t happen very often is absurd. When in the past have prices ever been this far out of alignment with fundamentals (income, rent, etc.)? Answer: never, not even close.
In the last 62 years, there has been only one significant downturn in home prices, and that was between 1990 and 1996
The answer is, that statistic is a lie (I knew it — help to have lived in SoCal for the past 30 years!). For proof, read this classic oldie from the NY Times, circa 1980:
http://tinyurl.com/btoj4
Isn’t it nice to know that an “LA Times Staff Writer” is still surviving comfortably on checks from both Times-Mirror and the NAR?
It’s really horrifying. But the real statistic is interesting. If I’m remembering right, there was also another bubble/crash in the mid seventies, when interest rates went through the roof. So if I’m right, we’ve actually had a SoCal bubble, pop and crash about every ten years for the past thirty. If the last one ended around 1996, then we’re due for another now, with a cycle ending in about 2010-2011.
The writer needs to get his facts right. There were downturns in the 70’s and 80’s. Guess that is why he is a writer and not a RE mogul.
Re: http://tinyurl.com/btoj4
What a gem!! Thank you for that link. How much do you want to bet that there will be a very similar article written in 2009-2010, with a sentence something like: “Then the music stopped, some afternoon in 2006…”
This is only the beginning.
Quote from La times Article
“Contributing to the shortage of moderately priced “workforce housing” are builders’ preference to construct more profitable “luxury” homes and buyer demand for upscale housing, industry analysts say.”
My comment:
Workforce housing is code phrase for building Taxpayer-subsidized housing units for those unable to afford current market rents and/or home prices.
More quoteS:
“Mayors and city council members who used to view housing as a no-win situation politically have begun to press for permanent sources of affordable-housing funding, and some have helped streamline the process for high-density urban building.”
“L.A. Mayor Villaraigosa has proposed a $1-billion bond to provide funds for affordable housing. The mayor also announced in March that the city would spend nearly $51 million this year to increase the supply of affordable housing.”
“Gov. Arnold Schwarzenegger recently signed the $2.85-billion Strategic Growth Plan housing bond, which will provide homeownership and rental opportunities to more than 34,000 Californians.”
Since when is it the Governments duty to provide Taxpayer-funded(subsidized)funds to assist the poor working classes with obtaining affordable housing.
The Free Market should be allowed to do this.
This article reeks of Big-Government intrusion and meddling in an “affordability housing Crisis”. If they want to provide affordable “workforce housing” allow the free market to increase the supply.
Lathrop is a toilet community on I-5 north of Tracy. I say toilet because it is a restroom stop for drivers going from the Bay Area to Tahoe (or points east) and drivers on I-5 between LA and the north. The climate and vegetation in Lathrop resembles that in Texas. Need I say more ?
I thought it would be hard to find a place less desirable than Tracy, CA. But I think I found it in Lathrop !
Funny. There are plenty of people in the valley that think the same about Berkeley, which would be seriously improved after a few passes with a D-9 and a stubble disk.
Berkeley is a diamond. Lathrop, while I’m sure possesses certain charms, is a lump of coal. Suggesting Berkeley be bulldozed because it is a bastion of open-mindedness and forward-thinking betrays the kind of stinginess and cynicism that eventually leads neighbors to slaughter one another.
When sacred cows get gored, somebody always bleeds. Figured if I baited the hook someone would just have to come screaming to the defense of that pearl of highmindness on the East Bay. And you must admit that the best descriptor for ‘toilet’ is any square foot of People’s Park.
People’s park is a very interesting place and it has a history and a meaning to it that idiots who love to talk in metaphors involving goring and bleeding could never understand.
How about idiots who use vague, meaningless phrases like “very interesting place” and “a history and a meaning to it” in lieu of actual arguments or evidence. Sheesh.
Much bigger and more influencial than the rest stops in Lathrop is the prison, and there is an awkward link there with the East Bay which supplies a significant fraction of the population there. California is full of complex social balance and unexpected connections.
I was just out in Berkeley for the first time in a while (I live in SF). I was saddened to see that Telegraph Ave. is looking shabbier than usual these days, and that Cody’s Books is closing its flagship store there. Why does Berkeley seem to be somewhat on the decline if indeed everyone in the Bay Area is now a millionaire as a result of the housing boom? (Rhetorical question.)
Cody’s is closing? First it was Wordsworth in Harvard Square, now this. Very sad to hear about this…
I think Telegraph Av. would be looking shabbier BECAUSE of the influx of millionaires, not in spite of them. Who in their right mind buys a 2 million dollar home only to hang out with the dregs on Telegraph Av.? Anyway, the millionaires are likely driving up property values to the point where the hippies have to find some place else to live. Same phenomenon in Venice Beach - hippies getting displaced by yuppies, burger shops getting displaced by sushi bars. Soon, the whole CA coast will be off limits to anyone worth less than 7 figures.
I think Telegraph Av. would be looking shabbier BECAUSE of the influx of millionaires, not in spite of them. Who in their right mind buys a 2 million dollar home only to hang out with the dregs on Telegraph Av.? Anyway, the millionaires are likely driving up property values to the point where the hippies have to find some place else to live. Same phenomenon in Venice Beach - hippies getting displaced by yuppies, burger shops getting displaced by sushi bars. Soon, the whole CA coast will be off limits to anyone worth less than 7 figures.
> Soon, the whole CA coast will be off limits to anyone worth less than 7 figures.
That’s the plan. I’m sure it will eventually all be fenced off as “open space”.
That sentiment pretty much sums up the morons who live out in “the valley” as we like to call the great wasteland out around Tracy and Stockton.
The fact is that Berkeley is a beautiful cosmopoliton city and the home to one of America’s greatest public Universities. Sadly, the masses of suburban, SUV driving, beer-guzzling shopoholics who reside out there have a hard time dealing with a place like Berkeley where most people both think for themselves and care about others.
LOL! I guess the weed is still good in Berkeley these days as well! I’ve been to Berkeley and I guess beauty is truly in the eye of the beholder. All I have ever seen when I have been there is filthy people, stupid little shops, smug balding ex-hippies, and Asia’s best and brightest up on the hill!
Man I thought Santa Cruz sucked, then I went to Bezerkley!
We do not need to trash the valley. But it is interesting how quickly we reach for the revovler, isn’t it? I did not say Berkeley was without its flaws. I just hate to hear people asserting their prejudice as if it were fact. I, literally, have seen every street and house in Berkeley and been familiar with its denizens. It is radiant with natural, cultural and social diversity. Just in terms of its arts and crafts architectural heritage it is monumental. Telegraph Avenue is 5 blocks long and a perfect example of what happens when you treat resources (people) like trash, the wind carries them to the street. Berkeley will deal the the “refuse” of the world because Berkeley is resourceful.
Oh holier than thou Binko:
The extremism in your views is the biggest reason your party has been getting it’s ass handed to them in recent elections..
The fact that Herr Lingus hasn’t chimed in yet makes me worry for his safety. Should we call his parole officer?
Is bad enough to respond to him, but do you gotta invite him?
And human beings are trash, BTW. For a few decades or so we keep it together, get up and walk around quite impressed with ourselves… and then inevitably go back to being the garbage we started out as and the rest of us dispose of them like we would any other garbage desperately pretending that’s not where we’re headed.
I do have kids and life is a wonderful and joyous illusion, but at the end of the day we are all eaten by something else who then proceeds to crap us back out in small piles.
Invest accordingly.
the masses of suburban, SUV driving, beer-guzzling shopoholics who reside out there have a hard time dealing with a place like Berkeley where most people both think for themselves and care about others
Binko obviously cares a lot about others and thinks for himself (within prescribed party guidelines)…
LOL. I tried to get into Berkeley law myself. Didn’t happen. I think I was the wrong . . . .
Anyone looking for a job in Dallas? Here’s one. Too damn funny!
http://dallas.craigslist.org/etc/168202610.html
Berkeley wasn’t exactly a bastion of open-mindedness for me when I was in law school and joined the conservative-minded Federalist club.
those berkley people will have to pry my gun from my cold lifeless hand
LOL! Well you can’t be open minded to people that are obviously wrong!
Violent pacification is the way of the future.
“I’ll force you to be nice to each other
Gonna kill you, before you kill each other!”
DRI baby!
No, but seriously, Its OK to eat your young! Just that the f*ing liberals don’t want to admit how tasty they are. mmm! I already got your gun, bottomsniffer, you were looking in the wrong direction for commies under your bed. BANG! hahahahahhahahahah………..NUKE NUKE NUKE
Um…70 miles east of Berkeley is NOT a desert. A desert gets fewer than 5 inches of rain annually. It’s at least a steppe, but certainly not a desert.
From San Francisco, you go east until you smell it and north until you step in it.
These directions work well for both Lathrop and Berkeley
“‘If they don’t have any equity and they can’t rent for what their monthly (mortgage) payments are, I could see those (investors) going into foreclosure quicker than the people who own a home,’ said Parisotto
Now that is one quick bunny. Amazing how zero value, zero income equals zero ownership. And to think we disparage these people.
[D]evelopers are offering incentives of $30,000 or more for upgrades, said (broker) Jim Muthart.”
$30k “upgrades” are typically 100%+ markup items; spa tubs, tile entry, finished garage, landscaping. $15k is $100/mo on a 30yr fixed. In this market a new home could lose that in a single comparable transaction. So that’s the new paradigm; wait a month and save$100/month for 30 years. The problem this time is that builders overpaid for land and construction and used short term lending that is pricing through the roof as well. The homebuilders will start losing money almost immediately with even just the slowdown they admit is already happening. Selling houses won’t stop the bleeding either.
In a subdivision near Merced, CA, the lot costs are running $125K on homes priced at $450K - there simply isn’t much room in those numbers. A $50K reduction will eat these builders alive.
At Arizona prices, the $325,000 spread between lot and selling price would build a 3250 sf home - inlcuding 10% profit for a builder. $100 a sf can still build a lot of home (I’m doing an owner-builder home now for less than $70/sf.)
I realize California costs more but put a nice 1500 sf home on that $125000 lot and sell it for $275000 and you have a “real” price.
Welcome fellow owner-builder. I’m doing the same thing in CA - lot was 85K, well and power 15k, permits about 10K. done 80% of the work but will still be pressed to keep it under 300k total for 1750sf. That’s right at 100 per sf. If my ‘free labor’ were added it goes to 350k minimum. Makes me wish I’d built in Arizona.
“But incentives are only a temporary solution to a deeper problem, Reams said. ‘Incentives can work in the short term,’ he said, ‘but you have to help buyers with lower prices and lower monthly payments. Prices have to come to at least 10 percent.’”
I suspect ‘incentives’ will work mostly on people who do not believe prices will fall. For ‘housing bubble’ believers, and for those who beleive these are uncertain times, the only thing that will tempt them to buy is a substantial reduction in price.
Manteca and Lathrop?
There is nothing there! NOTHING! Farm jobs maybe. Who on earth can afford $300,000.00 unless you are doing a hell drive to the bay area?
First, we’ll see free upgrades. Then, the small price decreases. Then, panic. I’d guess by Labor Day, 2007, the question will be when will the decline end. Also, how steep will the decline be. Everyone will claim that they knew there was a bubble.
This is all coming apart much faster than I thought. I believe by Labor Day 2007 we will see people saying “the Decline IS Over - the worst is behind us”… just to see it happen again on schedule in 2008.
Labor Day 2006 is going to be bad. Really really bad.
Yep. I think a lot of people around here are counting on collecting their summer rents and then selling without a clue about how prices are dropping. towards the end of the summer when they start talking to the realtors about selling is when we will have some fireworks.
OK, y’all, just my 2 cents, but you are NOT going to see things “get really bad” in a matter of months.
I won’t expect to see “things get bad” until a matter of YEARS. I am *not* seeing abundant and significant price reductions just yet. I *am* seeing stagnating prices sprinkled with an ever growing amount of *slight* price reductions.
The ARM resets won’t all be happening tomorrow. Interest rates aren’t climbing to 9% any time soon. Banks are helping out the FBs so that the FBs can hang on longer and not get foreclosed on. People are STILL taking on I/O and Option ARM loans (i.e. the last lemmings over the cliff) on places they really can’t afford.
The thing to remember is that the housing ‘bubble’ is like an over-inflated balloon, just waiting for a sharp pin to come pop it. The “sharp pin” could be a natural disaster, a recession, another war, curtailed oil supply, growing unemployment, high inflation, a stagnant or shrinking economy, significantly rising long and short term interest rates, or any combination of these. Until then, you can expect to see stability (no more ‘air’ [buyers] to pump up the balloon further) or leakage (air [buyers] escaping from the balloon), but no big pop.
Unfortunately for the RE bulls, the longer this balloon stays *over* inflated, the greater the chance that some ‘pin’ will come and pop it. My bet is a recession based on contracting consumer spending (no more housing ATM) and increasing unemployment (RE and construction related jobs, boat, Hummer sales, etc.)
This is just the beginning…the end game is years away. So pull up a chair, pop a cold one, and learn firsthand from what will later be a significant historical event.
And if you are near the beach, go there and chill…I spent the weekend at Avila and Santa Barbara, and it’s done wonders for my mood…
Well, that’s why words are so difficult and the NAR has been able to snow everyone by disputing the word “bubble” when no one even agrees what the exact definition is. They can talk all day long without saying anything.
When I say really really bad, I mean compared to Labor Day 2005. And now I don’t think 2007 or 2008 or probably even 2009 will be the bottom. So it follows 2009 will be really really really really bad.
But seriously, see my post below… I am not discounting the “Greater Depression”.
So… really really bad in 2007. Worse in 2008. Worse still in 2009.
2010? Ah, I’m not clever enough to go that far. Probably not so great.
Feep-o-lini, what horse do you see crossing the finish line first in the Belmont? Any year will do.
This post by arroyogrande is very good. I agree with his assessment of the bubble here in SoCal. I have felt that for a true bursting of the bubble, there needs to be a precipitating event. My guess is a big earthquake or terrorist action. Otherwise, a long decline in values as ARMS and payments adjust. I know that people can make burdensome payments and will as long as they see the benefit of increasing values. However, the high cost of living here, increasing mortgage payments, housing taking all the joy out of life (no vacations, new clothes, old cars) will affect the housing market in the next 3 to 5 years.
I disagree. Just as there was no single “precipitating event” to run up the bubble, there doesn’t need to be one to blow it up either. It was largely herd mentality associated with the self-perpetuating (to a point) easy money–endless increases–more speculation cycle that inflated this market. The same mentality, only in reverse, of tight money–price stagnation–speculators dumping could easily undo it.
Economists feel the need to explain cause and effect, but they’re just guessing. It soothes the public to know “why”. So, when the bubble pops, abruptly or gradually (who cares?), reporters on the financial beat will post facto identify the ‘precipitating events’. You can always find something - all the easier if there’s a big event. But without the big event, it will be the summation of smaller events. Same difference.
Precipitating events are humans grasping to make meaning of what happened and find blame outside of themselves.
Nothing can be done but give the masses their excuse.
It doesn’t matter someone will find one and use it to blame the bursting of the bubble.
At $300,000 and $400,000, they’re affordable enough for first-time buyers or investors.
Where on earth, other than California, can this possibly be the case? Correct me if I’m wrong, but a $300k house leads to a 30-year fixed mortgage payment around $2k a month… plus taxes, insurance, HOA, etc. That seems like a big nut for a first-time buyer, unless we’ve reached the point where drapes and furniture are optional.
Yuo beat me to this one. Kind of says it all, doesn’t it? Entry level homes at 300k-400k. And correct me if I’m wrong, Central Valley median income sucks.
entry level in la is 500k
Entry level SFH in Santa Clara, CA is $550k - $600k. And they rent for $1000/month.
Entry level about 10 miles up the peninsula is $800k. I know MANY first time buyers who have forked over this and more.
Yep, a house up the street from me by the Crystal spring Shopping center went for 1.3 million. It was on the market for a week. I rent a 2 bdrm with storage, and two covered parking spaces for $1500. A like condo would sell for at least 500K. There is a BIG disconnect between rents and purchasing in San Mateo.
Check it out, everyone, it’s a “my sh!tbox is more expensive than your sh!tbox” thread.
Entry level for a house in San Diego is right between your cheeks…you pick which ones.
Assuming the buyer has $40k for a 10% down and closing costs on a $350k unit, P&I would be $2212 (@ 6.5%). Taxes and insurance should bring PITI up to about $2637. Old fashioned lending guidelines used the ratio of no more than 28% of gross income for housing. That would bring the necessary income to qualify for this affordable first time home to $113,000 per year .
Even at 33% of gross, a buyer would need $96,000 per year. Of course, there are wonderful loan programs that can help buyers who might not otherwise qualify under these “old fashioned” lending guidelines by making this home affordable for them too!
Forgot to account for HOA fees, which should add another couple hundred a month to the buyers housing expenses, but you get the picture…
This is the essence of it. And it explains why, even in California, prices have to drop radically. Unfortunately most people here in CA think that a $300,000 crapbox is a great bargain. So it might take 5 to 10 years for this decline to play itself out.
Face it, the average Joe’s wages aren’t going up unless somebody turns back the clock on globilzation. In fact they are probably going to slide slowly down and down for the forseeable future.
How low will prices go once it sinks in that we have more houses than families to live in them?
I had the same thought. The home prices are so disconnected from wages it cracks me up. The way I see it, once some of those 600,000 dollar shacks closer to the coast drop to 500,000, buyers will step up thinking they are getting a real bargin. The fact that they make 60,000 in household income irregardless. These people are brainwashed on high priced housing and will give a slew of reasons why these prices are justified. Oh well, I guess variety is the spice of life.
When 600K houses drop to 500K, those buyers with 60K will no longer qualify.
OT…
Forbes.com
Implosion
http://www.forbes.com/free_forbes/2006/0619/168.html?partner=yahoomag
A. Gary Shilling
gary shilling is a god
Maybe not quite a god, but I agree with most of his thoughts on housing.
I’d disagree with the god part; he knows economics and we’ll leave the discussion to that.
I find it interesting that he states a 35% drop to normal levels with “markets overshoot on the downside as well as the up.”
I also 100% agree that the “investors” pulling out will trigger the bubble pop.
75% of homes are being built by small builders… wow! The small builders I know will be ok. They saw this coming and have liquidated enough of their inventory to ride out the downturn. In fact, most are waiting for home material prices to drop in order to build their dream homes.
Take it easy,
Neil
Wow, and if the nationwide median drop is that significant, what will it be like in the severe bubble markets?
“You can short-sell the bunch through the SPDR Homebuilders Index Fund (XHB )”
Can someone explain this recommendation ? When I look at XHB it looks like a homebuilding index that is losing value rapidily.
Mo Money,
When we “short sell” a stock or commodity it just means that bad news is GOOD news! Especially if you can find leverage.
so how do you short sell a Index Fund ? I thought from the recommendation that the fund was doing just that but a closer look says not.
It’s not an index, it’s an ETF based on an index. You can short sell ETF, they trade like stocks.
destinsm,
Thanks for the link. That’s pretty candid talk (and necessary to). I love the comment about it “not being too late to short”! LOL. This brand of candor would have been more helpful earlier on though that’s for sure. I’ve been bearish on housing since maybe mid-2002 so a lot I know!
HBs are DYING today.
“This is the first nationwide housing bubble since the 1920s, and it’s driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000–02 debacle.”
That about sums it up. Except for one little detail: What will happen in the aftermath of the first nationwide housing bubble since the 1920s?
Shilling provides his opinions later in the article:
“Even a 20% price decline will be devastating for many homeowners. On average, those with mortgages have 37% equity in their abodes. Of those who borrowed or refinanced in 2005, 29% have zero or negative equity, calculates First American Real Estate Solutions.
A house-price collapse will be far worse than the 2000–02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers’ ability to make payments. Both Toll Brothers at the high end and DR Horton in the starter market will suffer.”
A house-price collapse will be far worse than the 2000–02 bear market on Wall Street and will bring a serious global recession.
Okay, class, what happens to a country up to it’s eyeballs in debt when a “serious global recession” guts already insufficient tax revenues?
Tax cut for the rich?
Just sit back and keep your powder dry folks. The fact that they expect us all to jump back in at 10% just proves that those on the selling side continue to have no clue as to why buyers are no longer buying. But, by acknowldeging that if the rents do not cover the carrying costs foreclosures are in the offing they are showing that some of them do indeed see what has happened. It is going to take time, but it’s coming.
Was out rental and purchase shopping this weekend in NoCal. We have to move within 6 mos even though I would prefer to wait. Still waiting for more price drop on homes-some already evident. Disturbing trend on the rental market in our town to report. No 3bed 2bath homes on the market!? Evidence that the equity nomads are taking refuge in rentals-Ads in “Rentals Wanted” section of the paper stating such cashed out, waiting to jump back in positions for small families. This has tended to drive rents up. One small consollation: You can watch the price fall week over week on the ones that did not get a bite. One landlord I talked to admitted to being in a tight spot with his “investment”. All are eager to show their place and exceedingly polite. I am not desperate yet but will definitely be lowballing their asking. Oddly there is a GLUT of reasonably priced 1 and 2 bedrooms (I only look for rental HOUSES) and a GLUT of Waaaay overpriced 4beds. I think that as more FBs realize that they are FBs (I estimate its about half the for sale inventory and half of the rentals) things could change. But what scares me is that aside from the old “supply and demand” rule there is another rule, “set price according to what the market will bear”: and that may depend upon the number of people like me who absolutely have to move(we are adopting) to a larger place and the number who are still scared they will miss an opportunity. So the ? is: to what extent can the deperation of floks to prop their investments up with “over-priced” rentals actually drive rents up and, by association, provide a certain level of support for bubble prices?
stever,
Sometimes one can find themselves in that position. Last Friday my daughter’s boyfriend came by to see if I could unlock the garage so he could get his bicycle. No problem. I go down and the guy that owns the center unit says his tenant is complaining about the parking. (Well we’ve never met, but yes I would be glad to hear your complaint!) O.K, whatever, you’re an owner I’m a low-life renter but tell me? She’s seldom here enough TO complain! Well he shows me this note (written on stationary from a swanky place on the OR coast) saying she’s not happy. Well what brass! I told the guy I didn’t know a thing about it and that we don’t have any parking issues. Anyway from a fairly unfriendly conversation I start “working” the guy and told him we might be interested in “buying” his place! Seriously. This way “big fat stacks” of cash are dancing in his head everytime he gets a check for 1K on the rent! We can “work” on him about the price later. Put a ton of “feelers” like this out there and when they reach the “threshold of pain” they’ll be calling YOU! Believe me. Now “work” it!
You are too cruel.
I think that mindset of “lowlife” renter will change. Purchasing had become a status symbol. I know a couple people who rent in California but have purchased places elsewhere. One in Austin if I’m not mistaken. Just to get in on the ownership thing.
Once renters realize they have the upper hand it’s going to be tough on the landlords.
by association, provide a certain level of support for bubble prices?
No. You would have to prop up wages across the economy to support the bubble. You are paying a VERY temporary premium for mobility later. I would just grab one of the overpriced places 4 beds that is remotely reasonable… then plan to look in 6-9 months. I’d try to find a roomie in the meantime, but that’s just me being cheap.
The problem is that they didn’t BUILD any 3br/2ba detached, so there is actually a housing shortage… of those. But we built a zillion 4 and 5 bedroom McMansions and two zillion condos. Supply/demand rules all and unfortunately the 3br/2ba supply is low! The high-asking prices for the 4br is fantasy and the owners are kidding themselves… they won’t last.
Here in SoCal I can see the rental market is starting to stumble. I don’t think NoCal can be far behind.
Waiting for a price bubble to burst? Boy you got that right! In my area, south of LAX, the markets for the most part are softer and sluggish. DOM is up, inventory is up, real estate $$$ transacted is coming down, but the real pin to burst the bubble is a distance away. Maybe the autumn selling season will reveal something different.
bearmaster
I love the info you publish. Your blog is actually the one that pulled me into the whole nest of real estate bubble blogs.
Neil
Heh heh - you’ve been sucked into… THE MATRIX!
Which will it be.. the “green” or the “red” pill?
(wink)(smile)
Suprise Suprise…
George Clooney-backed condo project sold
Proposed $3 billion Las Vegas development scrapped as market softens
http://www.msnbc.msn.com/id/13146745/
All I can say is Wow! Gravity and reality suck! You mean 40% of the homes sold in 2005 were “vacation” properties? Ben Jones has done a great job exposing this for the fraud that it is, (speculation!) So many of these (now on the market) gleefully advertise that they “Have never been lived in” a phrase I’m sure we’re to hear more of soon! You mean you bought this investment property with an IO loan and even at that you can’t find a renter that will pay enough to cover your “training wheels for for people that think they’re investors” monthly payment? (B/c that’s what IO loans were designed for you know). I say turn all these vacant homes (b/c that’s what they really are) into homeless shelters to further drive down prices!
so neighbor across the street doesn’t like us to park cars on his side of the street. I have a Ranger truck, wife has Benz, girl in rear unit has nice Subaru and her boyfriend who sometimes stays over has BMW. So, wife tells neighbor sorry but it is a public street and we all pay taxes. NO! He says, you people are RENTERS! you don’t pay any taxes!!
I had to laugh.
catspit1,
Funny! Next time ask knucklehead if he can show you a deed to “his” property (if he knows what one looks like?) Please when you get a chance read my comments just a few posts above. Oh, and I told the “landlord” of the center unit that even though I’ve lived in Oregon for about 25 years I grew up in Chicago. There (I patiently explained) a parking area this big would have 30 cars (not 3 on avg.) and there would also be a “whiffle ball” game going on! He said, “But…..but….. bu. I said there is enough room here to park an aircraft carrier!
Most Renters = Normal Renters
A Lot of “Owners” = Renters paying a higher price to the bank
I hate to pile on :-), but the builders’ slide is starting to look more and more like a bloodbath. But we still have not seen capitulation; that day is out in the future somewhere, maybe this summer, or next October. That will be the day when the builders sell off so resoundingly that it will not be possible to profitably “buy the dips”, because the market will tank and stay in the tank (a la Nasdaq circa the tech stock bust).
——————————————————————————-
Hovnanian to sell $350 mln in notes; home builders weak
By Michael Baron
Last Update: 11:02 AM ET Jun 5, 2006
NEW YORK (MarketWatch) — Shares of Hovnanian Enterprises (HOV :
HOV31.10, -1.26, -3.9% ) lost almost 5% to $30.84 on Monday. The move came after the Red Bank, N.J., home builder filed with the Securities and Exchange Commission earlier for the sale of up to $350 million in senior notes. In addition, fellow home builder Standard Pacific Corp. (SPF27.45, -2.55, -8.5% ) issued a disappointing outlook on Friday, prompting a broad sell-off in the industry. Other weak stocks in the group included Pulte Homes (PHM30.08, -1.25, -4.0% ) , down 3.4%, Ryland Group (RYL46.32, -3.18, -6.4% ) , off 4%, and Toll Bros. (TOL :
TOL27.64, -1.19, -4.1% ) , falling 2.7%.
BubbleWatcher wrote:
“The answer is, that statistic is a lie (I knew it — help to have lived in SoCal for the past 30 years!). For proof, read this classic oldie from the NY Times, circa 1980: http://tinyurl.com/btoj4
Thanks for sharing that info.
I would like to add, where did the Los Angeles Times article get their data? And why did they cut off 62 years ago? 62 years ago would have been the year 1944.
Did they want to leave out the downturn seen nationwide in the 1930’s as well?
I still have not gotten the data on what happen after the Sylmar earthquake. I suspect there was some downturn then as well.
I think another factor that contributed to the run up in prices, this last time, was a culmination of the change in tax law which allowed people to pull out up to $500,000 of profit tax free, a post 9/11 and tech stock bust meloncholia, and greed, among other things.
And now there is the hangover from the gorging on credit, supposedly cheap or free money that miraculously appeared in homeloaners equity piggybanks. Ahhh, that money makes for some great partying to deal with an emotional depression and shock caused by the other factors I spoke of above.
Los Angeles Friends In Deed