The Housing Bubble

An amazing thread. I love the Taco Bell Manager who bought the $800K house in SD with an I/O loan that’s set to go up by 500% in three months, and the fact that for 12 out of the past 25 years, average mortgage rates have been in the double-digits.

“all’s fair in love and war”

1) no it isn’t
2) this isn’t war, this is ordinary commercial business.

Mortgage banker’s quote: “Loan products that are out there are a direct response from the lenders to the demand of the market. They allowed many consumers to get into the real estate ownership that they wouldn’t be allowed otherwise with the fast appreciating market as it is.”

I’ll translate: “Crystal meth products out there are a direct response from the dealers to the demand of the market. This allows many junkies to get into narcotics dependency that they wouldn’t be allowed otherwise with the fast appreciating cocaine market as it is.”

specifically: all that is the perfect reason for regulation, because in the short run, the dealers and the marks have a similar interest.

Look at penny stock scams: why are they illegal? Both the promoter and the client have an interest (the promoter in selling, the client in entering the opportunity to Make Money Fast!!!!!) and they are just satisfying market demand.

There was already talk of a bubble in SD back in 2000, long before it was discussed in the national or international media. I know an unfortunate chap who had to make the rent-or-buy decision back in 2000. His dad, a Realtor (TM), advised him that SD prices were overvalued, and that he should rent until the prices reverted to long-term trend. Guess what? He is still a renter!

I began researching the housing bubble back in March 2005. I realized that there was no way for the incongruities of the housing market to continue for much longer. But I also began researching the housing market because I realized that it was indicitive of the instability of our current economy and society.

I live in a town where everyone seems to drive a custom-built 4WD truck with wheels that cost as much as my vehicle. A lot of people I know have RVs, boats and/or quads/ jet skis/ sand rails. And I know that my wife and I make more money than they do, but I have never felt like we could afford to buy these things without sacraficing our financial future.

When you look at the run-up in the “value” of housing and the rampant spending of nearly everyone you know, you begin to question the stability of the whole of society.

The kids that I know are not very well educated and don’t have much of a work ethic. I am an engineer and work with a lot of younger technicians and engineers who do not seem to have the understanding that your work ethic and ability to learn are your keys to employment security. Instead, they spend every penny they make entertaining themselves and don’t think further than today.

I bought a nice house in a good neighborhood ‘98 and the PITI is less than $1,300 / month, so I am not worried about my housing situation, but I read this blog because what has gone on with the housing market is indicative of a weakness in our economy and our society.

I am not a doom and gloom person, but I feel that fundamentaly, we have moved so far away from what has made this country great, that I am worried for our future. In that respect, I appreciate a lot of the off-topic post here because it has given me a great education into the greater difficulties ahead.

Thanks to everyone that posts here, because I think this is a very intelligent group who shares the same misgivings that I have.

Deb,
Do you happen to know what the percentage of homes in the SFV are second homes or investment properties?

Just a reminder on the difference between median and average home prices:

http://tinyurl.com/ozwqq

Median prices for new home sales are from the U.S. Census Bureau. The data is derived from a survey that is primarily based on a sampling of houses from residential building permits. The median price indicates the mid-point of new home prices; one-half of all new home prices are above and one-half of all new home prices are below the median price. The median price differs in definition from the mean new home price, which is the average of all new home prices. If the average price is higher than the median price, it is an indication that the distribution of home prices is concentrated, or “skewed”, towards higher values.

BayQT~

Just a comment regarding the huge demographic changes in the SFV(San fernando valley). Draw a line from the 405 fwy going north to the 118 then east to the 5 fwy then south to the 134 then west back to the 405. This entire area is becoming inundated with recent immigrants, mostly Hispanics, and many of these illegals. Basically the entire eastern half of the SFV. This area would include Van nuys,parts of burbank,north hollywood, pacoima, sun valley, panorama city, north hills.

Take a drive thru roscoe blvd or sherman way going east off the 405 all way to the 5 and you can notice the changes.

I do not know how this affects SFV RE values though I suspect the effects would be mostly negative.

Yea and he think we will reach the low 6 years from now based on prior real estate cycles .

More and more people are reading voiceofsandiego.org. Get the word out. The UT is fishwrap.

Ridiculous prices, just as bad as Cali.

$600,000s= starter home?

Sad, isn’t it? That just shouldn’t be, I don’t care how cute it is.

BayQT~

Sounds like a good strategy.

“But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable,” Lereah said.

————————

Fuck you, Lereah!!!! What the hell makes you think I didn’t want to keep my computer jobs that I lost in the aftermath of the tech busts?!? What goes around comes around, dumbass!! It’s time for you to lose your ass and take your own damned medicine. I was “vulnerable” last time, so it’s YOUR TURN! You’re a lazy bastard who doesn’t want to lift a finger helping to build society up with hard work and make the world a better place to live. All you worry about is your damned money!

(shoots the bird with one hand and throws the goat with the other hand)

And… Man, you got shit ass-back’ards! A house is not a damn investment in the same sense as a financial instrument, or even better, precious metals.
1) It’s not liquid because you can’t take it with you
2) No uniformity as a commodity - wrong color shades?
3) It doesn’t last practically forever like precious metals
4) It’s not easily divisible - want the garage?
A house is a place to hang your hat, build a recording studio, set up an art workspace, a place of quiet for creative writing, parties to celebrate, privacy. You’ve lost sight of that and forgotten where you came from.

I leave it to you to figure your way out of the ruins of your mistakes.

Stephanie

hmm, can’t get link to work… http://www.fool.com/news/commentary/2006/commentary06060918.htm (i know it’s me)

I guess there haven’t been any bidders since April? The ad always says it will be sold on Sunday to the highest bidder.

Wow. It looks like this house was purchased for $300,000 on April 10th, 2006.

“Apparently, it’s rented at $740/month. At 169K, the 30 year mortgage alone is about 1100. Sounds like a great investment to me. ”
Breck, I hope you are being sarcastic. Looks like an apartment converted to condo job. $1100 mortgage when you could rent at $740? I won’t bite. My apartment I had in south Scottsdale was 2 bedrooms and 2 bathrooms at $785 per month from August 2000 to June 2004 (when I moved out). They converted that apartment complex to condos. The 1 bedroom units go for $180,000. I would never buy a conversion. IMO, a condo is not a condo if there is no attached garage.

If you have to ask the questions, then don’t even think about it.

Foreclosure auctions are an area that really is for the professionals only. Some of them have posted on other threads on this blog about the issues, and they are real; it’s not just insiders defending turf.

You’d be better off finding a specialist in the area, and looking for a resale from one of their purchases.

And don’t begrudge them their cut.

If you are even THINKING about it, make sure you go to several auctions and just observe what goes on.

Well, one could try the gov’t foreclosures. http://www.homesales.gov/homesales/mainAction.do
From there go to http://www.nhmsi.com/ Because I was interested in FL NY & NJ properties and since I live in NY, I went to here http://hud1.towerauction.net/NY.htm I selected a town nearby and watched the bid results and property descriptions for 3 months. Then I bid on this house http://hud1.towerauction.net/cgi-bin/e10_select_stats.cgi
for $37,758 in good condition 18 miles from work. Its a beauty
http://hud1.towerauction.net/cgi-bin/e10_select_property.cgi?id=371305981&state=NY&office=e10
and the positive thing is the selection is only going to get better. But forget the newspaper courthouse deal for a couple of years, the system is stacked against the individual.

I have been in the business over 15 years. Never purchased a foreclosure in an auction or directly from a buyer because the time spent is hardly worth any equity you may get.

I had a real estate professor in college who said the actual auction in a foreclosure never goes through to any buyer, and when it does, that buyer is usually screwed. (In Calif. anyway)

I do not know about other states.

As for realtrac.com, foreclosure.com, etc. they are good in a sense of showing defaults and actual foreclosures.

However, people in foreclosure usually are bombarded with mail and yours is just the one in the hundreds.

Oh yeah, and you need cash or at least a cashiers’ check at these foreclosure sales.

The best thing to do is to simply follow the foreclosure, and try to contact the bank once the property has been taken back.

Otherwise, unless you have a lot of time, don’t bother.

If there was actual equity in the property worth salvaging, the owner would be avoiding foreclosure by placing it on the market.

That is why the foreclosure rate has been exetremely low the last five years.

Good luck.

YOU ARE NOT, ARE NOT & ARE NOT GOING TO DO KILLING IN FORECLOSURES. Specially in this market that houses have hardly any equity in them due to declining price and robbery done on “house ATMs”.

Believe me, I used to buy properties at the auctions.

I follow the DC market closely. Sold my SFH April 2004. Been renting and looking since. Asking prices have come down a bit. Need to drop further.

I just did the math in Glendale, Ca.-25 percent year on year delcines as far as sold goes.
However, prices are up about 25 percent at the same time.

Kind of ironic.

If you were thinking of buying in D.C. area in 2005, think about the costs per month of owning - the cost of renting.

Then sit on your porch and drink a well deserved beer

FYI — Sold my condo just south of Old Town Alexandria in June 2004 for appx. 3.25x purchase in 1996. Prices went up about another 15-20% and appeared to peak in Summer 2005 (would have been equal to appx 4x my 1996 purchase price).

I look every few months for asking prices (there are a lot of the condos and they’re all very similar); asking prices are back to around my selling price. So they’ve already dropped 15% from the peak, althought the median may be holding up.

What a stooge.

Nothing over $600,000 in Santa monica! There is no property available in SM under $600,000, period! All fixers would have been brought up long time ago-I do not believe there is a single run-down piece of property in all of Santa Monica. Might get a fixer in malibu for 2 miilion!

Plenty of fixers in LA and Long beach. Just drive down figuera st off the 110 or drive along slauson or florence ave and you’ll see plenty of fixer-uppers.

A ton of fixer opportunities just outside LA downtown in the innor ring sections of Macarther park, boyle heights,jefferson park, westlake, rampart, echo park.

“I have a theory, or rather a guess, that we will start to see significant declines in asking prices when inventory gets to the 1-year level.”

That sounds like a reasonable guess to me; I am wondering if any statistics were kept in past downturns regarding how many months of inventory built up before prices clearly began to drop?

Eventually the inventory increases will be halted in their tracks by several inter-related factors, which will have the effect of offsetting further inventory increases by falling prices:

1) The more month’s supply of inventory on the market, the longer it takes the seller with a “typical” reservation price to sell, due to the increase in competition (more sellers / less buyers). By implication, it becomes increasingly imperitive for those who need to sell quickly to drop the price they are actually willing to accept.

2) As we have already discussed at length, a number of factors limit some sellers’ ability to wait forever before selling, including:

a) ARM resets which will be too much for many recent buyers to afford;
b) Negative cash flow catching up with investors;
c) The growing realization that the option to sell in five years does not work out very well when market values are dropping;
d) Rising interest rates which hit all the recent ARM-financed purchases;
e) Increasing inflation (e.g. gasoline) which hits cash-strapped homeowners especially hard;
f) Slowing or non-existent price appreciation which has the effect of shutting down the home-equity-cashout ATM;
g) Job losses in the real-estate sector (where a large share of private sector jobs since 2001 were created). These individuals will feel increasing pressure over the coming months to lower their prices in order to cut their losses.

3) Builders have been masking discounts in the form of buyer incentives; rather than directly dropping their sale price, they have booked higher prices (which probably translate into higher accounting revenues) and still sold by giving away cars and offering other valuable incentives. Although these do not show up directly as price reductions, they represent a discount to the market value of the buyer’s purchase which used home sellers must beat through price reductions (I guess they could give away new cars instead, but I have a hard time imagining this will happen).

4) Once the above factors lead those who have to sell into dropping their prices, the comps will increasingly bear out the fact that market prices have fallen, and future sellers will be forced to price off the more recent (lower-priced) sales data.

5) Once buyers see hard evidence that prices are dropping, they will become all-the-more hesitant in the face of the risk of catching a falling knife; this increase in buyer precaution will result in a still lower equilibrium market price, implying the need for still-deeper seller price reductions to move inventory.

You can think of the inventory crash underway as representing a freeze-up of liquidity in the market, and as my explanation suggests, the thawing process is somewhat glacial in pace, which I suppose is the reason it normally takes at least three years for prices to bottom out once a real estate slowdown begins.

“Speculator’s 12 Mo. Total Return -174% (SFRs) -233% (Condos)”

Ouch! Can these numbers possibly be correct? Was the stock market crash in 1929 even this bad???

Hijacked by a spam site. It’s happened to several other blogs, probably realtor trolls at work.

It was hijacked sometime last week. I sent emails to Blogger, but they haven’t done anything about it yet. The “posts” on there now look like computer-generated gibberish.

The old site will be back I’m sure - check it again in a few days…

A number of blogs on Blogger - not just housing bubble-themed blogs - have recently been hijacked. If you do a Google Groups search you’ll find quite a few bloggers complaining about this. There’s also comments about how slow Blogger has been to address this issue and how difficult it is to communicate with them.

It might help the owners of the housing bubble/RE blogs that we visit if we add our complaint emails to theirs, in hopes of getting Blogger staff on the job to help them reclaim their blogs.
Here’s the url for the Blogger help form: http://help.blogger.com/?page=help

Give them the name and url of the blog(s) and tell them you’re a regular reader who wants to see those blogs restored.

This is another huge black eye for Blogger, since this has happened before. Frankly, the long-term solution will probably be for those bloggers to use another service.

Auction! Where ya been? Miss your posts!!!

I think that the trolls are already hitting Ben and his site.

It looks like Ben or someone has to review posts before they go up.

There have been a number of very slow response times, resulting in double posting and some of my posts don’t make it through.

Attribute that first quote to this guy: “There were people who saw the market was up a year ago who weren’t prepared to sell, and now they are prepared and willing to put their house on market,” says Rick Chezik, an agent with Exit Realty in Medford. “They just didn’t choose the optimum time.”

I see they skimped and got the crystal ball with only a 12 month range.

“They might take the SUV on a family vacation…” or then again, they might take the SUV and torch it! LOL

Has there ever been a rate hike of 75 basis points? Maybe when Volker was Fed chief? I think the rate hike at the end of June will be 25 or 50.

Thanks John Law , good reading .

http://tinyurl.com/oew7h

Sorry, here are the links:

http://www.sltrib.com/search/ci_3922994

http://www.deseretnews.com/dn/view2/1,4382,640186058,00.html

IMO a substantial portion of Gen Y will be subject to some very harsh lessons in finance.

Out of the mouths of babes…

As us older generations have been educated through recessions, so will Gen-Y…and maybe soon.

P.S. Someone was asking about the demographics of FBs a couple of days ago, and this article provides some interesting stats on those who drank the I/O ARM koolaide, which generally confirm my hunches:

“More troubling, he said, was the finding that substantial numbers of borrowers using interest-only and payment-option loans have modest incomes and could already be stretched financially. One out of eight payment-option borrowers and one out of six interest-only borrowers earned less than $48,000.

Woodall said that “all sorts of events could trigger problems for these people” that could lead to defaults, foreclosures and loss of houses – unexpected medical bills, a loss of income by one earner, divorce – along with the 30 percent to 80 percent monthly payment jumps built into the loans themselves as they mature.

The CFA study also found that minority groups appear to be disproportionately targeted for certain of the high-risk loans: Latinos “are nearly twice as likely as non-Latinos to receive payment-option mortgages.” African-Americans are 30 percent more likely than non-African Americans to have payment-option plans.

Bottom line: Though the jury is still out on the risks of payment-option and interest-only mortgages, the CFA findings suggest that lenders are hardly reserving them for high-income, high-credit-score applicants. In an economic squeeze, some of these loans could prove highly toxic – a prospect almost certain to weigh heavily in the financial regulators’ forthcoming new guidelines. “

Time to share my housing bubble moment:

Today, I was driving on Hwy. 1792 in Casselburry (sp?), Fl,. about 15 miles north of Orlando. Guess what family member of ours was on the corner hawking homes? that’s right, it was our own Uncle Sam–on stilts, no less–waving a sign to buy a home built by Legacy. Maybe the dollar tankage has forced our Uncle into a part-time job. What’s next? David Learah claiming Jesus was first a carpenter, but fixed & flipped huts before he fixed souls. Good Grief, Charlie Brown!

The best-laid plans of mice and men often go awry. I keep trying to figure out how this plan of accumulating cash investments to save up for the fire sale in San Diego housing might backfire, due to some unforseen government intervention to prevent the many who bought at unaffordable prices with unsustainable financial arrangements from sinking the US economy into the next depression. Any thoughts on whether and how the government might reward financial imprudence if a critical mass of individuals borrowed imprudently?