‘Bad News For Amateur Alligator Wrestlers’
Several readers sent in this article for discussion. “All over the U.S. there are stories of a rise in real estate foreclosures. Many people who took those exotic mortgages are struggling to make their payments, and some aren’t making it. Also, a glut of new property supply, especially condominiums, is coming on line.”
“A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market, just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he’s correct, that means 12 years of supply will be ready for market in the next year.”
“The people who are in the most trouble are flippers. Many were buying condominiums off the plans, which means the projects were yet to be built, in the hopes that when the homes were completed, they would sell for a tidy profit. The trouble is many of these flippers, lured into the market by stories of people making a huge killing earlier with a similar strategy, are now the ones to be slaughtered.”
“Now, they either lose their deposit or have to cough up the money for the purchase in the hopes there’s a greater fool than they were somewhere out there real estate. If you recall, the same thing happened around the year 2000 as amateurs jumped into the stock market.”
“In the coming months, I predict we’ll see an increase in people dumping real estate they can’t afford. They’ll be forced to sell because they’ll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators, if you can’t afford to feed the property every month, it eats you.”
“I know of one so-called real estate investor (and I prefer to call people like him speculators rather than investors) who has three homes he thought he could flip for a profit, but he priced them too high. Now, $7,500 comes out of his pocket every month to feed the negative-cash-flow alligators.”
“The problem is, he and his wife don’t earn that much a month. Their three alligators are literally eating them out of house and home, consuming the profits they made from other flips, and their savings.”
“To add more pain to the misery, they still have to pay the capital-gain taxes they made from their previous successful flips. They’re toast. The alligators are eating them alive. They can’t afford to feed them, and they can’t afford to sell them because the prices they paid for these alligators are more than they’re worth today. And this is only one story.”
“Now that the market is cooling down, sellers are a little bit more humble. You have more time and can do your due diligence carefully. You can negotiate better terms and make a better deal, especially if the seller has his leg inside an alligator’s jaws. But don’t be in too much of a hurry.”
“A year ago, I sent out a warning to investors, especially flippers, to cash out quickly. I received a lot of irate e-mails from people who thought I was turning on them. They thought I was spreading bad news. Little did they know that by forecasting a real estate downturn, I was spreading good news, good news for real investors and bad news for amateur alligator wrestlers.”
“A friend of mine, a very seasoned real estate investor, says in San Diego County, once one of the hottest real estate markets in the country, thousands of new condominiums are getting ready to come to market, just as the market softens. He estimates that over 12,000 new units are coming on line, and the market, at the best of times, can only absorb about 1,000 condominiums a year. If he’s correct, that means 12 years of supply will be ready for market in the next year.”
It is great to hear that Mayor Sander’s affordable housing crisis will soon end. Let me be first to say, “Free San Diego condos for everyone!”
i will buy two.
one for living and
one for storage
cereal,
Oh I intend to! Part of my post bubble fantasy involves renting a McMansion JUST for parties! No one will actually live there I’ll use it just as a “weekend hangout”! Can you imagine how much fun that will be? Leaving it trashed from Sunday night until Friday afternoon week after week while some FB is next door trying to get out from under his?
Nice fantasy, but keep in mind that the inevitable tighter lending standards will mean that very few will actually be able to buy a house in the next 6-8 years. How many people out there REALLY have 20% down? And if you do, why would you invest it in a declining asset when you can invest it other places (bonds, stocks, commodities, businesses?) and gain 5-15% a year?
I realize you were being facetious, but this is still worth pointing out. At the bottom of this bubble (2011-2013), the economy will be hurting pretty badly. You may have assets now, but your job or business may be hurting so badly that you’ll need those just to live. Frankly, I am scared for what the future holds. Since so much of our economy is now involved in homebuilding, it’s going to impact ALL of us when that cash flow stream dries up.
Be 100% debt-free and invest your money wisely… although even all of that may mean that you will not be able to afford a house (or that you won’t be interested in buying a house.)
Nicely stated.
Not that I am predicting, but if you look up “Depression” on Wikipedia, you get the following text (I added the parts in italics to draw a parallel)
———————
Depression
Prior to the Great Depression a huge wave of investing in the stock market ( real estate ) had taken place which created artificially high prices of stock ( homes ). This process was driven by the fact that shares ( homes ) were being used as a collateral for loans in order to buy more stocks ( real estate ). When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. The investments lost their face value and the loans on them “went bad”, which, among other things, triggered a crisis of the banking system. In consequence, there was the famous run on banks, with people not being able to access their deposits.
Yup. How do bank runs fit in here? Maybe something to do with a collapse of Fannie Mae?
(It is now 2008 at an RE bank auction) Step right up folks, get them condos while they are cold. They are now half off, that is right 50% off the 2005 price! What a deal! The developer couldn’t sell them and the bank asked us to give you a good deal.
Beats buying while they are really hot, this is when someone can get burned.
You may not want the condos a few years from now. For all we know they could be in the middle of gang land by then. Downtown San Diego was a pit filled with prostitutes and other low lifes in the 70s. History has a funny way of repeating itself.
If you want to bottom fish the San Diego market then buy something close to the beach. I think there will always be a demand for that type of property.
“In the coming months, I predict we’ll see an increase in people dumping real estate they can’t afford. They’ll be forced to sell because they’ll be eaten alive by a phenomenon known as negative cash flow. Investment properties that you have to feed money to every month are fondly known as alligators, if you can’t afford to feed the property every month, it eats you.”
I knew alligators were a problem in Florida, but I did not realize that San Diego was also alligator-infested…
lol
Go Gators!
Yeah, Go Gators!!!
From this point forward, I will think of toxic loans as “Gator Bait”.
That’s a good one.
Naah, the loans are the hooks!
The FB’s squirming around because of a monthly payment in their guts are the bait.
Florida officials have said that more than 100 people a day are moving into their state, and insurance costs in some areas have risen 90 percent since last year, when both Hurricanes Katrina and Wilma hit the state.
Story.
“Florida officials have said that more than 100 people a day are moving into their state,…”
Can anyone tell me what the real net influx to Florida truly is?
Apparently these “Florida officials” didn’t have the foresight to ask one of our best and brightest real estate agents here in Orlando who have been telling me over and over for the past 3 years that there are not 100 but 1100 people a day moving into the Central Florida area alone!
Somebody doesn’t know what their talking about since obviously at that rate our fair city should have another 1.2 million more residents than it currently does.
After a hurricane, a years’ worth of influx probably pours out.
I don’t think they count the people leaving FLA ..lol
The general consensus for the past 10 years or so has been 1000 per day………i.e. 350k to 400k per year. So, another 3.5 to 4 million in 10 years. The number is beginning to change, as Florida is no longer a CHEAP retirement area, which has been the major draw, aside from sunshine and warm weather. This too may change, but for now, i believe the influx is starting to wane………….one can only hope>!
One of the weather folks CNN sent out to cover the hurricane through out the “…that’s the price you pay to live in paradise…” line today when speaking about having to endure hurricanes. I nearly drove off in a ditch.
IMHO “But don’t be in too much of a hurry.” (Sums up the buyers market for real estate. And the analysis of the current bond market I believe to be correct.) “…we still have some bad news yet to come — and I believe it may come from the bond market. I suspect that many of our foreign investors who have been buying our debt may be becoming more cautious about investing in American assets, especially U.S. bonds. Many foreign bankers may be having doubts about the U.S. government paying the interest on our debt. In other words, many investors will be moving increasingly out of their cash into tangible assets such as gold …”
This is one of the reasons we will see more rate hikes to come. US cannot afford foreign investors to sour any more than what they already are when it comes to sucking up our debt. Now that foreign central banks all over the world are beginning to raise their rates, some of that stuff is going to start looking really good as an alternative to US debt and the risk it bears. Bernanke has to continue to prop up this allure with rate hikes, otherwise there could be a real disaster in the making. Just Imagine if all that US debt owned by foreign investors was suddenly dumped back on the open market. (whistle out loud!)
However the 10 year is up 4 to bring yields down to 4.96. Lower long term rates indicate the bond market feels BB will lower rates after he drives us into a recession.
I think the bond market senses a recession and deflation. That is why the 10 year is so low. An inverted curve is further evidence to support this view.
The FRB doesn’t control whether we have a recession; the business cycle does. Even if BB lowered rates the bond market would be spooked by inflation and long rates would rise. Either way, we are facing a recession.
I think the Feds will choose to prop the dollar because it would be too costly to finance the massive deficit should rates rise too high.
I see a scenario where we go through several years of price deflation in housing and more or less simultaneous price inflation of just about everything else. There is the counter, “If other costs are going up, that must include construction materials and by extension, house prices will rise.” But I think there was SO much profit in the past 2-3 years’ construction that builders who want to continue building can suck up a lot of materials price increase from their profit. Inventory is so high, it may not matter much if they don’t. The government will set COLA increases for social security and everything else at least a couple of points below real inflation, as a stealth way of reducing its real net obligation (and real net worth of the recipients). Win/win for the government, in a way it may not be able to brag about very easily, and lose/lose for a whole lot of FBs.
And retirees.
“And retirees.”
True. We all have known that they would figure out some way to do that. My guess is, this is it or a big part of it.
Investment advice from Kenny Rogers-
You got to know when to hold ‘em; know when to fold ‘em,
Know when to walk away; know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.
It is like sitting at the table being a millionaire and the other players are billionaires. How long before you run?
He said “Son, I’ve made a life
Out of buyin peoples’ places
Knowin what their helocs were
By the way they set their price
And every home’s a winner
and every home’s a loser
and the best that you can hope for
is not to bring a check to your sale
Excuse me Miss, I’d like to buy a round of “ass-pounding” for that table of RE Flippers sitting over there. Put it on my tab.
Oh…
And don’t forget to warm the Vaseline.
No, I believe this round should be without the vaseline. Vaseline is for closers.
Glengary Glen Ross? ‘First prize is a new Cadillac. Second prize is a set of steak knives. Third prize is you’re f****ng fired.’
That is cruel, and unworthy of rational people like the current bears.
Ohhhh….
And don’t forget to send over some warm Vaseline ….
Kyosaki is a colorful character. I think his books have some merit to them and I think he truly wants to share his lessons learned. But on the other hand he wrote books like OPM (Other People’s Money) for laymen, which is dangerous.
One thing I will say for that guy is he has been a very effective evangelizer. The three people I know personally that got into the property flipping craze all cited his book as the one that convinced them to get into it. Rich Dad, Poor Dad is very well written, in the sense that as you are reading it you really do get the sense that this is the type of old-fashioned common sense that the rich have been handing down to their children for generations. As you read through it, each of his individual points is hard to argue with. Like any political or religious treatise, however, most who subscribe to it have sort of ignored his moderating advice-the parts of his advice about debt to equity ratio, living within your means (that includes the payments on your investmens), etc. This guy has built a huge business-not just book sales, but seminars where people will pay hundreds to listen to him basically do a powerpoint of his book.
Yeah, it’s ironic that his book got folks excited about buying investment property, but those same folks completely ignored all his advice about the critical importance of positive cash flow.
Its no accident that he didn’t make his fortune off of real estate but books, seminars and building a business empire in general. Sooner or later to win big you have to step up to the plate and build your own empire.
Kiyosaki is a con artist, and his books (which contradict one another) are fiction. There is no evidence supporting his claims of fabulous wealth, a rich dad, a poor dad, or anything else. He made his original money pawning his books at Amway conventions, after which their popularity soared among Ponzi schemers and get-rich-quick suckers.
http://www.johntreed.com/Kiyosaki.html
Thanks for that! Great but long read. Amway…Hmmm….
Kyosaki reminds me a bit of the talking head TV stock jocks. They always seem to tell you the good deals that just happened — as in, past tense, no good deal actually left for you.
Speaking of dumb investments, Toll stock is only 2000% overvalued, down from 5000% overvalued as of last August!
http://tinyurl.com/zrt4o
Did you see the global market sell-off?? WOW! Soft-landing here we come!?!??
The month-long slide in global stocks has wiped out at least $2 trillion in wealth, leaving investors few alternatives to preserve their holdings aside from bonds and money markets.
This is straight from Reuters.
Now, I must admit, I sometimes do buy to flip, so I can’t be too critical. “Yet it’s the amateurs who come late to the party — and who eventually donate their money back to the professionals. What I’m saying is: Now is the time to turn pro. Now is not the time to be an amateur. It’s the amateurs who jump in when the market is hot. It’s the professional who comes in when it’s cooling down. Get the message?”
Totally.
1. You are a flipper, just like the “alligators” you are ridiculing.
2. You have a bully pulpit to help you convince the sheep who follow you to catch a falling knife by buying too soon into a crashing real estate market.
This comment reminds me of a professional gambler I knew.
He would go to community gambling joints and relieve the ametue gamblers of their cash. He made a living depending on that there would be people out there willing to give their money to him.
That phenomena seems similar to the housing bubble situation of 2002-2005, and the stock market and real estate crash of the late 1920’s.
However, with the stock market and especially the real estate run up’s in price, there was some major cheating going on.
The gambler guy, I think he won by playing by the rules and his skill at playing the game.
Los Angeles Friend In Deed
There was a story in one of Richard Feynman’s books about the time he met the famous gambler Nick the Greek. Feynman had researched all the odds for craps and wondered how there could be such a thing as a pro gambler like Nick, who claimed to have won millions playing craps. The odds are, like any table game, stacked towards the house, so over time any gambler should go broke playing. He got obsessed with this, and finally somehow met him. “How can you possibly win at craps over the long haul when the odds to the house are .517?”(or whatever). He answered that he never played the regular game-instead he would come up to a table and make an individual side bet with one of the players or spectators “Hey buddy, I’ll bet you $1000 that that guy craps out within three rolls” or whatever, the guy would take it, partly due to the celebrity of Nick the Greek-and he knew all the probablity tables cold, so always came out ahead. Most casinos would bounce you now for making side bets.
I believe the pro gambler I knew specialized in “poker”.
I believe in the game of poker you are playing against other players and your chances of winning can be in your favor, depending on the skill levels of the other players.
Anyone know more info about that?
1) It is true that poker is skill-based. Unless you have two other players colluding (see the movie Rounders) Don’t bother online though, where collusion is the norm.
2) You can also count cards at blackjack. I’ve done it and it’s fun… for awhile. Then it just gets tedious.
Everything else in Vegas is the house’s game for the most part.
Poker to my knowledge is the only game that ACTUALLY favors the player over the house. (I forget the percentage, but it is there).
For a more thorough and interesting explanation: read “Bringing down the House”, a true story of 6 MIT whiz kids who won millions in a short time period against Vegas in blackjack.
There are a few reasons why blackjack favors the player over house:
1) the house must stop on certain numbers and must draw on certain numbers… so the house has less “choice” compared to a player who can hold whenever or take a card whenever they choose… and a player can double down etc too
2) if there is a draw, the player does not lose
3) if the player hits blackjack, their winnings are usually 1.5:1 (this is the BIG reason)
4) the cards can be counted, so are not really “random”
MIT people figured this out, and found that blackjack can be consistently won WITHOUT cheating. (but it would take forever to amass a significant pile of cash)
IF you add cheating (as they did, if you consider using secret silent partners to be cheating) then you can win millions as they did.
Read “Bringing Down the House”
fascinating story
Clouseau
Forget Vegas. I learned and played poker with some of the greatest players in the world.
That was when I was in the Army. Try winning something (ANYTHING) from an old Army sgt.
“Try winning something (ANYTHING) from an old Army sgt.”
LOL — I can remember those days. So true — Sgt. Bilko was just an exaggeration, but the basics were there in a lot of ‘em. “Four for five on payday.”
> There are a few reasons why blackjack favors the player over house…
I know only of one that wasn’t figured into the calculations of the house before the “MIT raid”:
> 4) the cards can be counted, so are not really “random”
I heard that now there are safeguards against players knowing too much about which cards are still in the game, like frequent change of card stacks.
Chip wrote:
Some more from John Talbott:
The Growl of a Housing Bear.
http://tinyurl.com/oahlm
John Talbott warned that home prices were ready to fall back in 2003, when he wrote the best-seller The Coming Crash in the Housing Market [McGraw-Hill]. In this year’s follow up Sell Now! The End of the Housing Bubble, Talbott’s take is: “We are in for a fairly rough ride in the housing market for the next five to seven years.”
BusinessWeek Online reporter Sonja Ryst recently spoke with Talbott about his bearish outlook for housing. Edited excerpts of their conversation follow.
What do you think is happening to the housing market right now?
The smart money is getting out. The inventory of homes for sale is increasing dramatically across the country. That’s typically what happens before you see price declines…. The investors who are flipping homes for profit, like non-owner occupied condominiums, those are the people you would expect to sell first. You’re already seeing that happening.
In San Diego, for example, the homebuilders themselves are getting out. I know a condominium developer in San Diego who had properties he was building, and he made offers for people to take them out of the market. He hadn’t even completed the building yet, but he was selling the condominiums for ridiculously low prices like $190,000 if the buyer would just come in and finish the floors. He was minimizing his exposure for the downturn. In San Diego, condos are off around 30% — that’s huge. Prices normally trade off 1%.
How much do you think prices will decline, and how long do you think it will take?
I think that it’s a worldwide phenomenon, and in the 25 cities that have had price run-ups, which make up 40% of the market, we’ll see corrections of 40% to 50% in real terms over the next six years. It has already started, and you’ll see it happening in more cities in the May-June time frame.
What happens to the U.S. economy if the downturn you predict really happens?
I think it will be a disaster. Not only will people in fields like banking be unemployed but consumers themselves will spend less. They’re spending a lot now because they think their house is worth a million. If they find out it’s only worth $400,000, they’ll spend less. As foreclosures increase, the banks will get hurt and pull back on lending. That can drive the country into a recession.
What role does the Federal Reserve play?
The Fed messed this up. They had a bad situation with the Internet bubble in 1999 and 2000, and to keep that from turning into a recession they lowered the federal funds rate down to 1% and held it there for four years. That created this real estate bubble.
Didn’t you already say all this in 2003?
I wrote my first book in 2003 saying Fannie Mae and Freddie Mac were overleveraged and the market was too high, but I was careful in the book not to say it couldn’t go higher. I wasn’t trying to call the absolute peak in the market. But now with the Fed basically out of the picture and giving up on 1% interest rates, I think the cracks are beginning to show in the inventory of homes for sale and the way the non occupied real estate investors are behaving.
If you call the National Association of Realtors, they will say that prices are going to bounce back up, but there are a million signals that this is serious. It’s not like in 2003, when I was talking theoretically that things are overvalued. Now they’re more overvalued, foreclosures are up, and investor-owned property prices are going down. It’s happening.
“…The smart money is getting out. …”
In condos, at least, I think the smart money GOT out. The least-dumb of the flippers are now getting out and the best of those are taking what they can get and running with it.
Why do people keep saying “they’ll lose their deposit” as if that’s all that can happen on a default? Builders have the right to sue for the lost value of the contract too, i.e. if they were going to sell the house to Bob for $500k, and Bob defaults, then the builder tries to resell the house, but can only get $400k, the builder has the right to sue Bob for the lost $100k as part of their breach of contract claim. If Bob is an investor who defaults on five such contracts, the builder can, and almost certainly will sue Bob for $500k for the losses on the contracts. Such actions are not widespread yet, but as the builders look at their shrinking bottom lines and their stock continues to plunge, the concept will gain traction.
Then how much will the super-smart savvy investors have “made” during the process? Hmm? How about disgorging all of their profits?
Would they bother to sue, though? What are the odds that Bob is going to be able to come up with $500K? Seems like it would just be a waste of time.
Perhaps they can get Bob’s house ?
“Why do people keep saying “they’ll lose their deposit” as if that’s all that can happen on a default? Builders have the right to sue for the lost value of the contract too…”
To me, one of the greatest things about Ben’s blog is that it pulls together so many experts and wise people. Over time, you will read excellent reasons for why this happens and that doesn’t, including your own question.
I believe it depends on the state condo laws. Some states specifically cap exposure at say 5% (like Washington) or 15% in Florida, and no matter what purchase and sale agreement says, there’s no ability to sue for specific performance, or liquidated damages beyond the deposit.
Of all the names to pick!
Sorry to go OT, but this post about a builder suing a customer called Bob cracks me up.
Maybe it’s UK/Australia-specific, but I just bought my pre-school nephew some “Bob the Builder”-label stuff for his birthday. Apparently the gear is a spinoff from a kid’s TV show.
Anyone listening to Street Signs…..they just interviewed a ‘useful idiot of the RE industry’ that said people were still buying in the hot areas because it was still cheaper to buy then rent!!!
Gonna be a loooooooooong hot summer….
Interestingly, there are several new condo buildings online now or about to be ready to come on line.
One of those condo buildings, in particular, I have been following since before the demolished the previous apartment building that sat in its place.
The guy that owne the apartment building had been trying to sell it for years. He was, IMHO, asking too much for it. So around 2002 or 3, he decides to demolish the apartment building and build 12 condomiums in their place.
The apartment building was vacated for about a year before the ground broke(approx 2003). Then for the last 2 and a half years it has bee under construction. He put signs on the building advertising the condos for sale sometime around Novemeber 2005. Not a single condo has sold.
His asking price for the condo’s is from about $600k-$720k. He establashed the HOA dues to be about $350/mounth.
If someone bought the cheapest condo at the best interest rates of about 5.7% on a 30 year loan. That mortgage and HOA duses would be about $3,500 plus $350 per month, wich is just under $4000, and does not include any of the maintenance inside the condo. The condo’s are essentially 2 bedroom 2 bath apartments.
Rent for a 2b 2ba apartment in the area is being advertised for rent at about $1700 per month.
I just spoke to anothe person who just rented their 2bedroom 2 bath townhouse, not to far away, for $1700 per month. He claimed the asked rent was “low balled” and he thought he could get about $1900 per month for it. But he needed to rent it quick.
So, if we look at the fundementals on the asking price, these prices are more than 50% over priced.
I did some more homework and discovered that this guy has run himself into a cashflow problem. And I suppose either he quickly starts dropping the price, or this venture is going to go belly up shortly.
It looks like he might have protected his other assets by developing this property under an LLC.
Anyone know how much protection of his other assets he has, if his LLC goes belly up?
If you use one of those “1% loans” advertised on the radio, it IS cheaper to buy than rent. At least, cheaper in the sense that your monthly payment is less. The other 5.5% of unpaid interest is accruing night and day.
But real estate always goes up. So don’t worry about it — no matter how much unpaid interest piles up, equity will pile up faster, so you’re actually coming out ahead.
This is really an article of faith to Realtors and their victims.
The REALLY bad thing is that people actually believe that it would be cheaper to own than to rent with that program. I was watching HGTV last night and there was a couple bragging about their $680 dollar a month payment on a $200,000 dollar loan. They said to rent a similar place it would cost them $900 a month. When the actual mortgage payment should be around $1,500 a month. They are probably adding about 8K to 10K a year onto their principal balance. I had to turn the show off.
What’s really sad is that I know several families in the LA area who have done this. They couldn’t afford $1500 in rent, but they could afford to buy a house.
It makes me wonder where landlords think the rent increases are going to come from when these people couldn’t afford to rent in the first place?
How long can these people get a lower-than-rent payment on a purchase? When it resets, it will be far higher. More FBs/GFs. Sad. Teaser rates will kill those who aspire most to join the now-70% of US homeowners.
Cheaper because they never sat down and did the math. renters never take taxes, upkeep, increased heating/cooling, improvements, decorating, yard care, etc. into account. Plus having a house is a lot of hard work if you have to take care of eveything yourself.
Trust me, a lot of these people plan to walk away when they can’t afford it anymore. Right now, they are saving on rent! In the case of a family living in a house, the house is only in one person’s name so the rest of the family doesn’t end up with destroyed credit and they can still go and rent under another one’s name.
We used to have a neighborhood who was collecting government aid because she was a single mother with two children under 5. Of course, at nights, her husband would come home. He was making a decent salary but they had figured out how to work around the system and make money off it.
Once the Neg am loans go away, I think it’s going to be startling how many empty homes are left.
Street Signs…..they just interviewed a ‘useful idiot of the RE industry’ that said people were still buying in the hot areas because it was still cheaper to buy then rent!!!
Yeah I saw that. Had to rewind the Tivo to make sure I hear it right. Amazing…
“John Talbott warned that home prices were ready to fall back in 2003, when he wrote the best-seller The Coming Crash”
I think that Talbott is totally wrong here. Prices will fall 100% or more in some areas. Everyone wants to compare today’s potential declines to past declines. No can do. Today is different because of the fraud involved that pushed prices far higher then they would have without the fraud. This is and was a well orchestrated Ponzi scheme that’s going to come to roost at the feet of the banking/mortgage industry.
i think i’m missing something here. how can a home price fall 100% or more?
I think some people confuse a 100% increase as sysnomous with a 100% decrease. I presume the person really meant that 100% of the increase would be lost.
Just 100% of my cents on the the subject, at today’s prices (wink)(smile)
It is not possible, but in salinasron’s defense they probably ment that it was going to drop by more than 50%.
I hate to say it, but I would probably buy before it dropped 50%.
yea, i think he means 100% of the gain since the last sale. very, very possible in some cases.
On a side topic to this.
I was just thinking about how realtors and NAR are gleefully including appraisals which incorporate incentives such as rebates, cash back, cars, boats or whatever is not physically part of the real estate.
The buyer of that property is paying real estate property tax on that on the value of that car, boat, or cash they got back, for as long as they own the real estate. And on top of that, they person could have sold the car or boat long ago, but will still be paying real estate property tax on the value of the car or boat.
And regarding cash rebates on the purchase, the buyer is paying real estate property tax on that as well, even if they used it for buying food, and craped it down the towel year ago.
Say a person got $30,000 in cash rebates, a car, a boat etc. That $30,000 is part of the real estate purchase price now. And the person will have to pay property tax on that 30k.
And let’s say the property tax on that property is a conservative 1% per year. That’s an extra $300 per year. And if you incorporate a conservative return on that 30k, if you put it into an interest bearing account of 5%. That incentive is costing you another $1500 a year on top of the $300 in property taxes you are paying out. Plus you you lost the liquidity of that 30,000 bucks.
And say you had to borrow 30,000 to pay for the incentives. Sure, you coul, if terms on your mortgage allow it, could dump the cash rebate back into paying down the loan. But the car and suv, and added difference in price of the total value of incentives are tacked on the property tax you have to pay each year.
And if its a car and/or boat that you do not need or want, you will have the added expense of trying to sell them to recoup whatever money you can. You will be saddled with the maintainance and registration costs of those items, which can be quite hefty. You may even be saddled with a “sales tax” when you try and register them with the DMV.
And at the same time your neighbors that are trying to buy will be saddled with a higher real estate property tax, because their appraisal will be derived from the purchase price you paid.
Did I miss anything on how incentives can affect a buyer?
Any comments, pro or con would be greatly appreciated.
Los Angeles Friends In Deed
“The buyer of that property is paying real estate property tax on that on the value of that car, boat, or cash they got back, for as long as they own the real estate.”
Ab-so-barfing-lutely. Not to mention the lender was effectively defrauded by the value of those “freebies.” I suppose the more clever of the thieves figure that when prices go down everywhere, they’ll just appeal the assessed valuation of their property and get it reduced.
Prices will fall 100%? You mean houses will be worth $0?
It’s happened before. Detriot enacted an ordnance that required sellers to bring their houese up to code before putting them on the market. This resulted in widespread abandonment of property because it was actually a financial liability to the owner - i.e. it was worth less than $0 and literally couldn’t be given away.
I have read an interesting true story very recently. Within oneyear say. Due to all this making easy money craze, many bought prperty unseen. In one such case , the property was in a rundown area of a dying town. Somewhere in the North eastern half of the map.
Anyway after the purchase when he was visiting the place, the taxi driver did not let him get down, as the area was so unsafe!
The building was not livable, almost falling apart, the owner had to PAY the city for the demolishing cost…..
We will hear those story more and more when common people gets into trouble…and they describe on TV what led to their ruin.
The stock market tumbling 10%-20% down all over the world and gold falling about $150 in 30 days should be an wake up call.
From $730 to $560 for gold…. $1400 to $960 for silver…when those prices were going up fast how many common folks thought correction can be as brutal.
Stock market in India went up 33% in 3 months, well that disappeared even faster. The fall in some markets in Middle east has been even more brutal.
I am actually getting a bit worried, falling housing price or not!
Lemme see now … that town wouldn’t have a pro football team by any chance, would it?
Is it possible for a person to delete their own comment on TheHousingBubbleBlog.com?
I know on blogspot, a person can delete their own posts if they used their user ID to post the comment. Is there something like that on this blog?
No. There was such, a (relatively) long time ago. Personally, I think Ben made a wise choice there, assuming it was optional when he changed services. Posting can elicit a response that can be read/interpreted totally “wrong” if the original post is subsequently deleted. As Crispy would no doubt attest, that is why accountants must post their work in ink and cross out errors, rather than erase them. For truth, ya’ need a trace.
No I’m saying that they will fall back to 2000 levels. Housing prices here have gone from $50,000 to $550,000 in the last 5-6 year span, I expect them to end up around $100,000 to $150,000 max. When I said 100% I was thinking of a number going up not down at the time, which would be a 50% reduction from current pricing but still too low of a percentage for this area….thanks for the correction
OK, good…. You’re not crazy after all!
Slightly OT but does anyone know when we can expect to see the dataquick numbers for May in SoCal?
I was wondering the same thing about my area (Boise, ID). Nomally the MLS folks release within a few days of the next month. June is almost already half over. I’m starting to think they are holding them because May was so bad.
Hot off the wire…
San Diego County home prices take a tumble
YOY up .4% according to the chart!
In San Diego County, the median price decline in May occurred because of a major drop in the category that includes new construction and condo conversions. That decreased by $71,000 from April to May to stand at $424,000, a reflection of the impact of lower-priced conversion sales.
I love how they try to explain that a DECLINE is not a DECLINE. A drop in prices, is just that, a drop in prices.
Imagine what June numbers are going to look like!
She added…”How do you describe markets that are totally f@#$@# without saying that?”
“I’m searching for a new moniker”
Priceless
Leslie Appleton-Young, chief economist for the California Association of Realtors, said she no longer uses the term “soft landing” to describe the state of the housing market, but has yet to found a way to characterize current conditions.
“I’m searching for a new moniker,” she said.
How about :
“I am fixin’ to get my ass reamed by this real estate market that I helped to trump up”
“Hard landing”?
“In the coming months, I predict we’ll see an increase in people dumping real estate they can’t afford. They’ll be forced to sell because they’ll be eaten alive by a phenomenon known as negative cash flow.
And it “ain’t” just single-family condo owner’s on the hook. Real estate sale’s agents have been peddlin’ mult-family’s with income statements that come from FantasyLand and are nothing more than figments of an agent’s imagination.
“What do you mean there’s made no provision for reserves for replacment? I’ve put down the property taxes and insurance charges…What else is there?”
DUH!!!!!!!!!!!!!!!!!1
When I’ve met people at property prior to an appraisal inspection, and ask for 3 years of accountant certified statements-the broker’s look at me as if I am the Man from Mars…
Praise the Lord for the rubber stampers and number hitters. Without them legions these idiot brokers wouldn’t have a chance.
“And it “ain’t” just single-family condo owner’s on the hook. Real estate sale’s agents have been peddlin’ mult-family’s with income statements that come from FantasyLand and are nothing more than figments of an agent’s imagination.
“What do you mean there’s made no provision for reserves for replacment? I’ve put down the property taxes and insurance charges…What else is there?””
I thought that was just a Los Angeles “problem”. I’m trying to bail someone out now purely funny stuff too bad the guy is going to loose close to 200k.
“I’m trying to bail someone out now purely funny stuff too bad the guy is going to loose close to 200k.”
What a heart. How is it you are “bailing him out?” By buying his property at a $200K loss to him? I think it is fair for you to make a profit wherever you can, but to call it bailing someone out is a real hand-washing to make yourself feel better, IMO.
If I guessed wrong on this, please tell us how your charity is helping someone in need and I’ll be happy to apologize. Profusely, even.
Sorry, but that one just struck the wrong chord. Maybe the wine was corked.
Nah, I’m not buying it. Far too pricey for me. Some out of towner didn’t do his due diligence bought a large apartment complex in an area that would make most ghettos look like Beverly Hills. He was trying to use a discount residential broker who didn’t know his a$$ from a hole in the ground to sell the deal to no avail. He kept dicking around with this broker who kept telling me he had other offers or was waiting for a counter everytime I called because he didn’t want to split the miniscule commission and got a few months behind. He basically bought an eastside property at westside cap and grm and didn’t calculate the “extra” expenses of dealing with the eastside especially with bangers in the building. I’m not going to go into details but lets just say I’m not making all that I could from this deal. I’m making a profit yes, am I making all thats available no not even close, Will I make more than the discount broker, yeppers by at least double. The dumb bastard seller is still bitching and moaning like I’m butt raping him even though no matter his efforts I’m the only game in town. In hindsight I should have just watched while the bank took it back. But my buyer is an exchanger and needs to move now and the deal cash flows marginally for that area but it still has juice and it’s good enough for my buyer. So to me I’m being very charitable
MrIncomeStream - Thanks for the courtesy of a detailed reply. I stick to my point, however (as, in fariness, you did). You made a rational decision as an investor. That you say you didn’t get as much as you could have, is unprovable, just as many who sell a house think they’d have gotten more if they just held out longer. I think you were logical in your approach, but no Mother Theresa award for you. It was just business, IMHO. It might be that you think forbearance from trying to totally screw the guy is charity. If so, we’re from different sheets on that.
The only way to make money inveting in RE in SoCalif is to buy at the right time and sell at the right time. Yes, this involves a lot of luck. Prices on houses and small apartments are so high that even if they drop 40%, you still have negative cash flow (using normal mortgages, not artificial mortages, and actually maintaining your building, which very few do.) And if prices drop big, and slowly increase like the last cycle, you could be 10 years with no appreciation and negative cash flow ( I know people this last cycle that were negative for 10 to 12 years after buying at the last peak.)
Robert K makes his money selling books and he can’t really say that the best time to buy may be many years from now….
I like you. Can we talk business in about three years?
As I already have suggested, Robert K may have a few lingering real estate “investments” that he would like to unload, and he is trying to manufacture a few more greater fools by broadcasting the news that it is a buyer’s market, now that prices are no longer rising…