May 26, 2007

How Many Can Actually Afford A $500,000 Condo?

Readers suggested a topic on housing bubble prices, “I propose a discussion of a topic the MSM-quoted cheerleaders avoid like the plague: How will the market absorb the huge glut of new homes targeted at the $500K+ price range now that home equity appreciation has gone into reverse?”

“Consider who was buying these homes four years ago versus who can buy them currently. Four years ago, when prices were going up by 10%+ forever (and 20%+ forever in El Aye), buyers with very little labor market income or accumulated household wealth could roll home equity appreciation on their current home forward into a move-up purchase.”

“Now that equity appreciation has stalled and, in some cases, gone into a tailspin, it seems as though only trust fund babies and CEOs can afford to purchase in the $500K+ price range, although there is no shortage of recent and current construction targeted at that price range.”

“The current median list price on ziprealty.com for our zip code (Rancho Bernardo W 92127) is $1.3m, but depending on whom you believe (DataQuick or Sandicor), the April 2007 median home sale price was somewhere on the range between $725K-$775K — at least $500K below the current median list price. This appears to me as prima facie evidence that there is a serious shortage of junior executives currently out looking for homes in the $1m+ price range.”

“As further evidence on this point, the used SFR inventory listed for sale in 92127 has increased by 30% since February 1 (from 200 to 260), while the median list price has dropped by $95,000 (from $1.395m to $1.3m). I believe the median list price has quite a bit of downward adjustment ahead of it before the market works through the housing bubble stages of grief. Sellers are still stuck in denial at the moment.”

One replied, “I posted here a few days ago about the news that my friends received down in SW florida. Their 1.2m condo purchase might now go for 750K IF someone were to be out buying. However, there are almost NO buyers out looking at these condo’s and there are something like 160 out of 180 that are EMPTY!”

“It is virtually empty in all 3 buildings and these are all upper-end condo’s on the west coast of Florida! The builder is offering the penthouse suites for 1.2M, formerly offered at 3.0M. No one knows how far this has to fall but I’m going to predict that ALL of these units are going to be well below $500K before this is over.”

“The number of people who can ACTUALLY afford a $500K condo or house is miniscule compared to the number of listings that exceed this price. Just imagine what is going to happen in places like Miami if this is happening on the West coast! This crash is just starting folks. No need to push, plenty of seats still available up front!”

Another wrote, “It’s the same here in Queens, You cannot get a SFH or rowhouse in a good neighborhood for under $500,000. The median income is $45,000. Unless every Wall Street type wants to live in Queens, I don’t know how these prices are sustained. Though there still seem to be a few greater fools buying.”

One from Arizona, “The higher end stuff ($600K to $850K and above) will crash much worse than the lower end stuff ($100K to $200K). There is almost no one who can actually afford a $750K home in the U.S. Even with 10% down, you would need roughly $225,000 per year.”

“There just aren’t that many people that make that kind of money. Granted this blog may skew to the higher end of payscales, but the majority of people make a household income somewhere between $50,000 to $80,000 per year. That doesn’t equate to median home prices in the $600,000’s.”

“The NAR keeps arguing that R.E. is local, but everywhere the homebuilding industry just decided to build homes and charge $500K to $800K (as based on loose lending). Just like with cars, the purchase is predicated on payment qualifying and not on purchase price.”

“Places like West L.A. and the beaches there will crash. So will most of South OC as the people are mostly fronting and dont have the incomes to back up the show.”

“In our Zip Code in Scottsdale, the median household income is about $85,000, meanwhile the median asking price is about $650,000, so something doesn’t equate. Prices will have to correct and anyone who is into an Alt A or pick-a-payment is screwed. This 15% to 20% correction stuff is b.s., everything will go back to pre-1997 prices guaranteed, and will probably overshoot as many here have predicted.”

One sees buyers remorse, “People are brainwashed into payments vs. purchase price. When it’s easy to get a $500k home for $1650 a month (interest-only), hell everyone wants a nice house. But as the piper comes to collect his dues, reality sets in and these asshats go running to the gov’t for a bailout ‘I didn’t understand the loan,’ ‘I was screwed over,’ etc.”

One doubts a policy influence. “I just don’t see how policymakers could reflate the bubble at this point. The Fed can’t drop interest rates significantly without creating inflation. They can’t drop regulations on lending standards any lower than than they have already.”

“Regardless, I don’t think any business entities want to follow New Century’s path. We already have huge tax breaks for with the mortgage interest deductions. What else could they do? I don’t think policymakers can stop this bursting dam.”




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139 Comments »

Comment by GH
2007-05-26 10:09:28

No doubt, I earn a bit over 100K as a software engineer, and depending on how much I put down would not feel comfortable borrowing a cent over $250K. So say I put $50K down that puts me in the $300K arena at the high end. Last I checked 8 news referred to those earning over $100K as “the rich” - Caviar dreams, first class travel - you know the drill. I suspect that almost any person with a REAL income over $150K who borrows $500k has a very high chance of losing the property to foreclosure.

Comment by sm_landlord
2007-05-26 10:25:16

“Last I checked 8 news referred to those earning over $100K as “the rich” “

Haaahahahaha! OMG, $100K rich? Off by an order of magnitude!

The MSM seems to have bought in to the lie that’s no noticable inflation, and hasn’t been any for the last 20 years. Rich is when you can pay 1x income for a beach house in Malibu. In cash. And it’s just your weekend place.

This BS about who and what is “rich” is simply more propaganda to make the middle class feel guilty enough to pay high taxes without complaining.

Comment by GetStucco
2007-05-26 11:31:44

Average salaries lower than past generation’s
The Associated Press

WASHINGTON - The part of the American dream that says children will be better off than their parents were has become a dream, not reality, according to an analysis of Census data released Friday.

A generation ago, American men in their thirties had median annual incomes of about $40,000, compared with men of the same age who now make about $35,000 a year, when adjusted for inflation.

That’s a 12.5 percent drop between 1974 and 2004, according to data from the Pew Charitable Trusts’ Economic Mobility Project.

Household incomes rose during the same period, though the main reason is that there are more full-time working women, a new report on the project said.

Although income is not the only measure of economic mobility, the findings challenge the historical presumption that each successive generation will be wealthier, said John E. Morton, the report’s co-writer.

“Today’s data suggest that during a 30-year period of economic expansion, a rising tide did not lift all boats,” Morton said in a release accompanying the report, “Economic Mobility: Is the American Dream Alive and Well?”

http://www.newsobserver.com/business/story/580872.html

Comment by Bill in Phoenix
2007-05-26 12:01:34

Middle class is a joke. In my parent’s generation, only one of the parents had to work. That is my definition of middle class. There are very few middle class people in America today. For those few who can make it work, congratulations. It’s no wonder divorce rates are high and the married person is now a minority (I saw a statistic somewhere about this recently). Having it all is getting harder and harder: Health, financial independence (or a good retirement plan) and comanionship.

Health: Hard to do if you have to commute 60 miles each way to work. The time in a car takes away from time on a treadmill or swimming pool.

Financial independence: Pensions are going the way of the dodo bird. So much more materialism these days, such as sending your high-school-aged kids on a cruise - unheard of when I was in high school. All those new expenses you really don’t need take away from your plan on saving for retirement.

Companionship - divorce rates high. People marrying too young (for looks usually) mean divorce within 7 years. It takes awhile to get to know someone, but if you are working 60 hours per week and are sacrificing health, no one will look at you if you are obviously sedentary!

I hope you all read this with a partial sense of humor.

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Comment by hd74man
2007-05-26 13:21:29

Bill in P.

I’m now convinced that the emergence of the middle class in the US was simply an abberation created by having the rest of the world lie in economic ruin after WW II.

 
Comment by Bill in Phoenix
2007-05-26 14:31:17

Interesting observation. You may have a point there. The size and scope of the government in the early decades of the 20th century grew significantly. The income tax did not exist until 1913, for example. However, the exception I have is “having” the rest of the world in economic ruin. As if we were responsible for the condition of the rest of the world somehow? I submit it is no coincidence that a nation founded by the words of the Declaration of Independence and the Bill of Rights (taken literally by the courts back then, but not now), can also be a prosperous nation. You cannot have economic freedom without political freedom and civil liberties.

 
Comment by Brian in Chicago
2007-05-26 14:53:37

Middle class is a joke. In my parent’s generation, only one of the parents had to work. That is my definition of middle class. There are very few middle class people in America today. For those few who can make it work, congratulations. It’s no wonder divorce rates are high and the married person is now a minority (I saw a statistic somewhere about this recently). Having it all is getting harder and harder: Health, financial independence (or a good retirement plan) and comanionship.

As it gets harder and harder to make a household work with only one salary, the more financial sense it makes to get and stay married! If both people maintained their previous lifestyle, then nearly half of the the household income will become “disposable” income. The problem is that all too many people immediately increase their consumption levels and wipe out that extra income. In fact I think most people go beyond and start piling up debt.

It’s really easy to do. I know that when I graduated from college I was making so much more money than I needed. I ramped up my spending pretty quickly - German sports sedan, etc. Luckily I had the common sense to be saving 25% of my salary. And thankfully I came to my senses within a few years, in fact I was just about ready to empty my bank account on a condo deposit. Then it hit me hard. I instead wrote a smaller check - for an engagement ring. Never looked back, and my bank account has never been larger.

Of course, if I ever actually need to buy a car again, it will probably still be a German sports sedan…

 
Comment by jerry from richardson
2007-05-26 15:22:48

I believe the higher divorce rates are due to the superficial nature of our modern society. Everything is based on greed, selfishness, hipness, and outward appearance. Who is willing to sacrifice and suffer for their partner? It’s all style, no substance.

 
Comment by Bill in Phoenix
2007-05-26 16:18:30

I’d rather have it where one of the spouses works and the other takes care of the kids and home. I have two older divorced boomer sisters and one single boomer sister. I’m single. Our cousins all bore large families. Family friends got married and had kids. We are considered odd. We had loving parents, so it was not really disfunctional. We had various reasons - money issues, as well as fear. In one case divorce was caused by infidelity. In another, her spouse was into spending and illegal drugs - she wised up and did not want to associate with a druggie. In my case, I lived in a small military town in my 20s and 30s and it was lack of eligible women, so I stayed single and I’m not interested in marriage anyway. I get my share of female friends, and that’s all I really need. Jerry’s point is good, for the most part.

 
Comment by GetStucco
2007-05-26 16:28:06

You can add the information in this new Economist article to the long list of reasons why it is a bad idea to give low income households the means to purchase homes they cannot afford with no skin in the game.

Marriage in America
The frayed knot

May 24th 2007 | MORGANTOWN, WEST VIRGINIA
From The Economist print edition

As the divorce rate plummets at the top of American society and rises at the bottom, the widening “marriage gap” is breeding inequality

http://economist.com/world/na/displaystory.cfm?story_id=9218127

 
Comment by CA renter
2007-05-26 23:50:27

Jerry,

You are 100% correct, IMHO. Too many fools marrying for all the wrong reasons, and can’t figure out why their fantasy didn’t work out as expected.

These are the same people who thought “real estate ALWAYS goes up.”

 
Comment by Bill in Phoenix
2007-05-27 08:31:24

On the occasions when I get lonely for companionship, I pull out my dog-eared copy of “How I Found Freedom in an Unfree World” and read Harry Browne’s chapter on Marriage. I had a non-marriage with a wonderful woman (while she was working on her phd) for 3 years from age 38 to 41. It was a live-together relationship, and it was wonderful. As Harry wrote: “why spoil the wonderful relationship by Marriage?” She wanted marriage and I didn’t, (but almost did).

 
Comment by CA renter
2007-05-27 12:01:27

As long as you’re honest, from the very beginning, about your stance on marriage, that would work out well.

Unfortunately, too many men think they are entitled to a woman’s best years without any sacrifice on their (the men’s) part.

Like everything in life, as long as all the parties to an arrangement have full disclosure & there’s total total transparency, then all is well.

Personally, I’m not into the live-in thing. Never understood why any woman would commit to a man who isn’t willing to commit to her (and that means marriage). Unless, of course, she doesn’t want kids & couldn’t care less about the long-term regarding their relationship.

 
Comment by Bill in Phoenix
2007-05-27 16:54:50

The only difference between “marriage” and “non-marriage” is government is involved in one and not involved in the other. So I could never get over why women want government guns behind that particular relationship. That was HB’s point.

 
Comment by CA renter
2007-05-28 02:05:17

Hogwash, Bill…and you know it! Otherwise, you’d be married if a gal wanted you to marry her (there’s no difference, right?).

For me (a woman), marriage means that a man cared enough to commit to having a family with me. We have three kids and there’s NO WAY I’d do that for just some random guy I’m dating. Women take huge risks when they have children (and those kids take on those risks as well).

I know you don’t want kids, so if you find a woman who feels the same as you, that’s great. But there’s a tremendous difference between a simple romantic relationship and one that includes children — HUGE difference.

Again, no harm, no foul, as long as everyone is fully informed from the beginning. I followed this rule myself, because I did want to marry eventually. I figured if a man got “scared off” by marriage talk, I’d be better off for it. My (current) husband asked my on our second date where I thought our relationship was headed & I told him I wasn’t looking for a long-term dating situation, that we’d be engaged or broken up within a year. We married 9 1/2 months later, and have had the time of our lives ever since (almost 8 years). Marriage truly is the VERY BEST thing if it’s right.

 
 
Comment by ajmstilt
2007-05-26 12:04:15

a rising t8ide may lift all boats… but it doesn’t help those who are without a boat and just treading water.

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Comment by OhMy
2007-05-26 12:23:55

That depends. It puts them out of their misery more quickly. They drown a lot faster.

 
Comment by GetStucco
2007-05-26 14:51:57

“a rising t8ide may lift all boats”

What if it is a rising tide of ARM resets and subsequent foreclosures?

 
Comment by Melsky
2007-05-26 17:45:12

That’s more of a sinking tide!

 
 
Comment by OhMy
2007-05-26 12:20:52

What’s the number without adjusting for inflation? (That is, in today’s dollars.) Just curious.

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Comment by ronin
2007-05-26 13:40:45

The federal government also considers that rich, as it welcomes you into AMT land, stripping you of deductions, and hence increasing your taxes.

You were taking home more at 96k than you were at 100k. This is the Bush tax cut we hear about, in which you are forced to pay more tax. The democratic congress, at the same time, considers you among the rich and consequently wants to tax you even more, since it is only fair that you have less.

 
Comment by michael
2007-05-26 20:14:39

> No doubt, I earn a bit over 100K as a software engineer,

Sounds like me. We paid off our home in the 1990s and currently sock away 25% of gross. My wife has never worked outside the home and we’re raising two kids; one entering college this fall.

Inflation is all over the place. Verizon just added a $2 fee for DSL tax recovery and another $2 minimum long distance fee for those that don’t make long distance calls. We have local unlimited service as a relic from the dialup age and I’m going to call to drop down to the lowest level of service that they provide. That should shave about $10 off of our bill (around $27/month on the $15/month plan) - it’s hard to get rid of all the taxes and fees. We have cheap cell phones ($8.33/month) that we can make most calls on and we use calling cards for long distance.

Our natural gas bill was very high for April though it came down in May. Normally it comes down March or April with the temperatures rising. I noticed that we’re paying quite a bit more for electricity too.

The price for eating out has gone up quite a bit. Inflation is all over the place and maybe that’s Bernanke’s plan. If prices are rising all over the place, then maybe it will push salaries up. Yeah, right. Maybe for some.

We could buy a $500K house (which would be pretty nice in our area), but I’m happy living in a place that’s probably half the size of the average house in my area. That means that my property taxes are about 3/8ths to one-half of the property taxes of my peers. When they choose to crank up school and municipal spending, they get to scream about their own tax bills while I just keep quiet as it affects them more than it does me.

$100K can be a lot of money in some places in the US with some dedication towards saving. If you’re in a big city with big taxes, then $100K is peanuts.

It seems that everyone is out there trying to pick your pocket and I get annoyed at spending the time figuring out how to get my pocket unpicked. I’m glad that we don’t have cable television. They have been relentless in raising rates in my area and stacking on fees whereever they can.

I haven’t been following Floriduh very closely but the snippets I’m hearing with no buyers in a bubble remind me of the long red candles when a company misses, warns, announces that the CEO is quitting and that they’re under an SEC investigation.

Comment by CA renter
2007-05-26 23:54:33

It seems that everyone is out there trying to pick your pocket and I get annoyed at spending the time figuring out how to get my pocket unpicked.
————————
It’s like being pecked to death by ducks.

Been trying to stay on top of things to keep them out of our pockets as well, but not having much luck. Anyone who believes the CPI numbers is a complete moron.

 
Comment by Blacque Jacques Shellacque
2007-05-27 03:04:04

I’m glad that we don’t have cable television. They have been relentless in raising rates in my area and stacking on fees whereever they can.

Ain’t that ever the truth. Here in Silicon Valley, those priques at Comcast charge over $50 forExpanded Basic service.

Once I get around to fabricating a bracket to hold a small dish that I can attach to my apartment’s bedroom window, Comcast is going to get The Boot.

Comment by michael
2007-05-27 08:18:19

It was $30 last time we had cable (trial). They bumped it to $40 and we said seeya. Now we get literature every week from them advertising tv, cable, phone, etc. Only $100 a month for packages. We don’t watch much TV and a $50 antenna from Radio Shack does a reasonable job for broadcast. When HDTV over the air becomes real, then that might be an option.

First time I had cable, it was under $10 a month with loads of channels.

I guess that it’s nice to have a monopoly.

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Comment by hd74man
2007-05-27 05:24:05

My wife has never worked outside the home and we’re raising two kids; one entering college this fall.

Ain’t no way I’d ever have a non-workin’ spouse.

75% of today’s divorces are initiated by women because their
“emotional needs” are not met (snicker)

Once a woman’s “Baby-Family” Phase is over, and she starts lookin’ at beginning her “Rediscovery-Divorce” Phase III, you will be one sorry azz MF, when the assets you’ve worked 80 hours a week for 20 years to accumulate, get divided up to support her; the kids, the dog; and her newfound “independance”.

If you’re real lucky the court will bounce you out of your house so her new boyfriend can move in.

Marriage today is for suckers.

Comment by michael
2007-05-27 11:15:14

That’s a pretty bleak view of society that you espouse there. My wife is from a very conservative formerly third-world country and her values differ quite a bit from typical US values.

My readings show that marriages typically fail for financial reasons and what better cause of financial problems than housing bubble busts.

Sounds like you had a pretty hard time. But it really isn’t all that bleak out there.

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Comment by CA renter
2007-05-27 12:05:59

HD,

I’ll bet if you tried to forge a good relationship with your wife, you’d still be married.

Marriage will either be the very best thing that ever happened to you, or the worst. It’s what we’re willing to invest in it that makes the difference.

It’s all about teamwork. BTW, wouldn’t it be funny if she started complaining about how you felt entitled to the kids — expecting them to carry your last name, etc. — when SHE’S the one who created & raised them?

 
 
 
 
 
Comment by sm_landlord
2007-05-26 10:12:11

“Places like West L.A. and the beaches there will crash. So will most of South OC as the people are mostly fronting and dont have the incomes to back up the show.”

No sign of this yet, unfortunately. The vast majority in my area are still able to keep up pretenses somehow. However, some cracks are starting to show. I have noticed a couple of stalled remodeling projects, and not everyone is driving this year’s Mercedes or Beamer. And I seem to remember seeing one condo on the market for less than $500K.

Got a loooong way to go…

Comment by bozonian
2007-05-26 10:51:23

My parents live in West L.A. near Pico and Sepulveda and I live in Southern California so I follow this market closely. This entire area has gone way past absurd. Houses are 4x 5x their 1995 prices. I was around for the 1990s crash and values went down by at least 30% so you can imagine what’s going to happen when this latest oops crashes. And remember, as a software engineer I was making MORE back then than I am now. If other incomes have also remained at these levels there is no supporting fundamentals for the insane prices.

If you bought there since 2004 you can kiss your financial ass goodbye pretty soon.

Comment by SoBay
2007-05-26 11:54:19

I sold my Manhattan Beach mone in Feb 1990 at the peak for 420k. Over a year later those homes were 320k. I work in the beach area and the contractors are mostly building for clients - not spec homes.

 
 
Comment by bozonian
2007-05-26 10:55:16

“Got a loooong way to go…”

Yes, but it might be a short walk off a long pier. It is Santa Monica after all.

 
Comment by plysat
2007-05-26 10:56:46

Very true. Seeing a few REO’s on ZIP (ridiculously priced BTW), and a few lowered (from insane, to ridiculous) prices, But most of the new listings (90048′ish area) are at peak prices. And people are still buying ‘em, though it has slowed down. Until people *stop* buying, the perty is still on here. It is a much smaller party though… :-)

Comment by plysat
2007-05-26 10:58:11

perty = party….

Comment by Ben Jones
2007-05-26 11:28:18

I thought maybe you were from Texas…

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Comment by GotRocks
2007-05-26 10:12:21

Outstanding Ben.

How about this for a future topic. “What exactly would you do if you were stuck in, say, a $600k house (100% financing, ARM), now worth $500k (and sinking), and had an income of, say $75k.”

I know what I would do (besides never spend that kind of money). I’d simply stop paying the mortgage (but still live there and try every loophole to keep from foreclosure) - but before my credit totally tanked, I’d have a nice apartment lease signed. I would never, for a minute, seriously try to pay down the house.

Comment by Cobradriver
2007-05-26 10:52:50

GotRocks,

I personally saw this happen in socal during the last downturn. A good friend bought a place in late 93 for 108k as a foreclosure. The neighborhood was being sold for 270-300k during the peak.
As i was helping my friend move in the neighbor came down and helped out. Nice guy. When he found out what my buddy paid i thought he was going to have a coronary. He had paid 280 with 30k down. He was upside down 150k roughly.

Two weeks later i was over at the friends for a bbq. The neighbor and his wife came down. They told us later that nite they had decided to turn the keys into the bank and walk away. This happened a lot, you just didn’t hear about it because the papers didn’t really report about the situation.

Chris

Comment by GotRocks
2007-05-26 11:35:45

I hear you Chris. That sounds on the bad side, even back then. But this time it will be (or is already, in some cases) much worse. I knew of people that were trapped by negative equity in CA last time, but managed to keep their job and things turned around.

But this time…I just cannot see how anyone with near 100% financing (not to mention ARMs, or especially Option ARMs) can survive this - it’s like (for this time) you keep your job, but then your mortgage attacks you and you don’t even have the option to stay put.

 
Comment by cassiopeia
2007-05-26 11:37:51

This happened a lot, you just didn’t hear about it because the papers didn’t really report about the situation.

Cobradriver, so true. I was hearing those stories first hand in 93 and especially in 94, right after the earthquake, and they were nowhere to be found in the papers. In this blog we always discuss the psychological side of the bubble on the way up and on the way down. Personally, I think those “jingle mail” stories from the early 90’s made us overly cautious about buying later.

 
Comment by GetStucco
2007-05-26 11:59:48

We had lots of Bay Area neighbors who similarly felt cheated when they learned that we purchased at 115 time rent in 1996. Impatience has its price, and patience has its rewards.

 
 
Comment by GetStucco
2007-05-26 11:33:32

“What exactly would you do if you were stuck in, say, a $600k house (100% financing, ARM), now worth $500k (and sinking), and had an income of, say $75k.”

Or what if you were an illegal alien who picked strawberries for a living and held a $500K mortgage that you needed to pay off on $20,000/year of illegal income?

Comment by GotRocks
2007-05-26 11:37:27

GS, If I remember right from a few weeks ago, that illegal was making $15k. Please - don’t inflate his income, we have enough fraud out there already.

Comment by GetStucco
2007-05-26 12:01:00

Sorry — I was trying my best to guess his income, which was not documented on the loan.

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Comment by nhz
2007-05-26 12:32:17

no problem ;-)

in the UK, even people without any income still report figures like 50-100K income on their mortgage application (and that is Pounds, not dollars …).

 
Comment by GetStucco
2007-05-26 13:22:59

“…still report figures like 50-100K…”

Maybe they are reporting “anticipated rental and capital gains income” on their buy-to-let deals (and forgetting to report carrying costs)?

 
 
 
Comment by diogenes (Tampa,Fl)
2007-05-26 16:14:00

Or what if you were an illegal alien who picked strawberries for a living and held a $500K mortgage that you needed to pay off on $20,000/year of illegal income?

Get 4 more of your illegal buddies to go in on the house with you , thereby increasing your HH income to $100,000. It’s happening everywhere here. Our formerly working-class neighborhoods have 5 to 6 cars parked on the lawns to support the number of house-mates.

 
 
Comment by Sabin
2007-05-26 12:20:23

“What exactly would you do if you were stuck in, say, a $600k house (100% financing, ARM), now worth $500k (and sinking), and had an income of, say $75k.”

buy lots of ammo…

 
Comment by CA renter
2007-05-26 18:41:09

I’d simply stop paying the mortgage (but still live there and try every loophole to keep from foreclosure) - but before my credit totally tanked, I’d have a nice apartment lease signed. I would never, for a minute, seriously try to pay down the house.
———————
With you 100% on this. If lenders were foolish enough to loan money like this, they can take the hit. “Not my problem,” will be the new mantra regarding foreclosed homes.

BTW, I’ve ALWAYS paid off my debt, even paid full interest when borrowing from my parents during the college years; but only a fool would pay off a mortgage that takes more than 30% of your take-home pay when you have no skin in the game (downpayment).

Lenders and regulators should have seen that trainwreck coming from miles and miles away, like many on this blog did.

Is there anything more obvious?

Comment by GotRocks
2007-05-26 20:12:04

And that pretty much sums it up. When you look at the fundamentals, if you loan $100 to homeless junkie (just using this as an example, not trying to type-cast anyone) - and the junkie doesn’t pay it back - should the junkie be punished. No. But you should be institutionalized for loaning the money and actually thinking that it would be paid back.

If the lenders, and the especially the buyers of these loans, are stupid enough to take these loans - and there is no reasonable chance of them being paid back - then the recipients should treat them as gifts, and keep whatever they can get away with.

 
Comment by HK_Vol
2007-05-28 00:40:46

Hmm.
Maybe we go back to debtors’ prison?
My word is my bond. I sign a contract, I expect to honor it. If the market goes against me, I lose money. I shouldn’t expect someone else take the hit. The lender didn’t “force” me to buy a new home…

But your attitude is prevalent. And it is why these lenders are all going belly up and the owners of all these CDO’s are in for a shock in the next couple of years….

JMHO

Comment by CA renter
2007-05-28 02:15:46

You misunderstood my point. I have **never** weaseled out of paying a loan (but had many who didn’t pay money I loaned them). We have 800+ FICO scores, and are proud of it because we delayed gratification & have lived well within our means.

I believe very much in honesty and integrity. The point is that the lenders threw caution to the wind (understatement), and they will have to pay the consequences for that.

We rent because we would not want to walk away from debt. Sometimes, it’s easy to wonder if we are the fools, though. Could have made LOTS of money if we did what everyone else did, but it just didn’t make any sense because we tend to be conservative & concerned about our finances.

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Comment by Lisa
2007-05-26 10:18:19

“In our Zip Code in Scottsdale, the median household income is about $85,000, meanwhile the median asking price is about $650,000, so something doesn’t equate.”

So, median asking price is almost 8x gross income. I’m sure this ratio exists in plenty of other markets as well.

Traditional standard used to be not to purchase at more than 3x gross income.

The SF Chronicle ran a big article today about tightened lending standards…higher credit scores required, down payments, cash reserves, proof of income, proof of payment ability at the reset rate, etc. Guess what? No one can do that and purchase at 8x gross income.

My first home was at 2.5x gross income, and that was NOT easy.

Comment by Darrell_in_PHX
2007-05-26 10:40:02

My first house was 3x income with $0 down VA. THAT was tough. It was ‘93 at the end of a crash. Prices were down and rates were falling.

I was 3 months out of college/Navy and at bottom of the pay scale for BSCS, so had prospects for rising income. Had to do a 5% ARM that could reset to 8%.

I have no idea how someone could do anymore than loan 3x annual income.

Comment by eastcoaster
2007-05-26 14:31:03

I have no idea how someone could do anymore than loan 3x annual income.

And yet realtors are still trying to fit the ugly stepsisters’ feet into the glass slipper. Case-in-point: a realtor who has been a lifelong friend of my family recently tried to convince me that I could afford a place that is just shy of 5x my income. He told me the 3x income is a thing of the past. Well if platform shoes, hip-hugger pants, etc. can come back in fashion, I’m pretty sure we’ll be seeing that 3x income affordability again. History does repeat itself.

Started moving into my new rental today!

Comment by CA renter
2007-05-26 18:45:22

Congratulations on the new rental, eastcoaster! What are the details? (sorry if you’ve already posted)

Hope this works out better for you and your son so you can enjoy life a bit more while waiting. :)

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Comment by Backstage
2007-05-26 23:09:20

You were paying principal AND full interest. If you shave off the principal you could boost up to 3.5x. If your interest rate is 2%, you can go 4X. If you have a neg-am loan and don’t have to pay all your interest, you could go to 5x.

But you better be damn sure you know how you are going to pay on the note at full payment. That can’t be done for very long ay 5x income.

 
 
Comment by hd74man
2007-05-26 11:06:23

The SF Chronicle ran a big article today about tightened lending standards…higher credit scores required, down payments, cash reserves, proof of income, proof of payment ability at the reset rate, etc. Guess what? No one can do that and purchase at 8x gross income

I couldn’t even begin to contemplate what a 1004 Residential appraisal has to contain in order to pass underwriting today.

My guess it’s probably $1200.00 worth of hard core, narrative work for a split fee of $150.00.

And then it’s no guarantee.

Great stuff for a realigned lending environment.

Scapegoat the appraisal-put his neck in the guillotine for the customer and realtor abuse.

Only the total losers will remain in this fooked up profession.

Comment by BanteringBear
2007-05-26 11:37:25

There are still plenty of no-doc, zero down products for those with good credit. It’s the lower credit score folks who are being squeezed out right now.

 
Comment by GetStucco
2007-05-26 16:31:40

Is this it?

How to deal with tighter credit rules
Borrowers may have to wait months
Carolyn Said, Chronicle Staff Writer
Saturday, May 26, 2007

http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2007/05/26/BUGIDQ20EH1.DTL&type=business

Comment by GetStucco
2007-05-26 16:35:19

From the SF Chronicle article:

‘”If somebody comes into the office now with less than perfect credit and no down payment, they’re eight or nine months away from (getting a mortgage),” said Honaker, owner of American Acceptance Capital in Antioch.’

Those eight or nine months could be a blessing in disguise, and save some buyers a bundle if prices continue their downward trajectory.

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Comment by IllinoisBob
2007-05-26 10:39:12

One example of the extreme excesses at the height of the boom:
(from the book by Bill Bonner Financial Reckoning Day: Surviving the Soft Depression of The 21st Century )

In the year of our Lord, 2005, on the Pacific coast of the North American continent, a two-bedroom trailer was offered for $1.4 million. This was hardly a first…or even a most. Other mobile homes have been sold for $1.3 million and $1.8 million. Still another was on the market for $2.7 million.

Why would people pay so much for mobile homes? The $1.4 million trailer, we were told, was in a gated community and on a “triple-wide lot.”

“Location, location, location,” a quick-witted reader might think to himself. And he’d be right; the views were said to be spectacular. But in this case, the buyer of the million-dollar trailer did not buy the location. He only rented it.

With subprime a-crumbling, inventory @ ungodly heights (and climbing), sales a falling, condo flippers in FLA a crying … it time to bring out the dark shades to watch (at a safe distance) the upcoming Trinity test :-)

Comment by Misstrial
2007-05-26 11:12:45

Let me guess: was the trailer located at El Morro mobile home “estates”??? Reason being, I used to live near there and my kids attended El Morro School on PCH. That entire area (including the school grounds which is adjacent to Crystal Cove State Park) is infested with rattlesnakes.

The State took back control of the property the “estates” rested upon by refusing to renew the lease. Prior to this event, housing advocates joined mobile “estates” residents in fighting the lease termination resulting in a Litigation Circus.

~Misstrial

 
 
Comment by CA renter
2007-05-26 18:49:13

If you read Bill Bonner’s books, it sure seems like he is a regular reader/poster on this blog.

When reading his book, “Financial Recknoning,” I was busting up through the whole thing because he writes like Sammy or some of our other hard-core, ruthless, but hillarious posters here.

 
 
Comment by Nick
2007-05-26 10:46:22

The buyers of the $500K condo can afford it on their moderate income if they extract the equity from their current house. But that sale ultimately depends on first-time buyers who ultimately enable the move-up buyers. Without first-time buyers, they can’t sell so they can’t buy. Hence the condo doesn’t sell. Lack of affordable, entry-buyer housing is killing the market. We have the wrong mix of inventory. I suppose the market will fix that in time.

I see the RE market like a game of musical chairs that has gone into reverse. Keep adding chairs instead of taking them away: no competition for a place to sit, no urgency, the perceived value of the chair declines, the music stops and you can look over all the unoccupied chairs and choose to sit where you like. Or you can keep standing, what the heck.

Comment by FrothyTown
2007-05-26 11:04:22

Nick, that was great. ‘Musical chairs in reverse’.

 
Comment by BanteringBear
2007-05-26 11:32:42

“Lack of affordable, entry-buyer housing is killing the market. We have the wrong mix of inventory. I suppose the market will fix that in time.”

Very well put. A lot of the $500k-$750k listings are really the $200k-$300k home market. The people paying close to $300k for garbage will realize that’s just what they bought, in due time.

Comment by Groundhogday
2007-05-26 11:50:31

“Lack of affordable, entry-buyer housing is killing the market. We have the wrong mix of inventory. I suppose the market will fix that in time.”

I thought builders were stupid for not attempting to meet this need in Eastern WA. But after quite a bit of investigative work, I’ve discovered that given current constraints it isn’t possible to build affordable housing here: (1) land prices have doubled or tripled; (2) construction labor costs have doubled or tripled; and (3) lumber costs have come back down from stratospheric levels, but concrete and other material costs are still quite high relative to pre-bubble levels. So builders have no choice but to slap granite on hastily built spec homes and try to target the “high end” market. But since all of the builders and developers are doing the same thing we have a huge glut of “high end” homes that aren’t selling.

To give you an idea of what constitutes high end, though, consider that the “best” custom home builder in town doesn’t backfill with sand around basement foundations because it is “too expensive”. This in very clayey soils notoriously prone to lateral water movement and perched water tables.

Comment by yogurt
2007-05-26 21:31:54

given current constraints it isn’t possible to build affordable housing here

Au contraire - housing has to be affordable, or no one will be able to buy it. Isn’t that self-evident - and the very reason why prices are falling now? And land and construction costs are driven by the market price of the finished housing, not the other way around. When the housing market really tanks, those costs will come down, big time. They will have to - you want a job? Take it or leave it.

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Comment by Liz from Boston
2007-05-27 12:40:10

Here in Boston, housing is so expensive because of zoning. Massachusetts has 351 cities and towns, and each one gets to make their own rules. Towns are terrified of families with kids moving in because that means more kids in the public schools. To prevent it, towns mandate 2-acre lots, big lawns, and other things. Many suburbs have banned multi-family housing. Kingston killed a “smart growth” project on a gravel pit near the train station because they were afrad of “single mothers” (a quote from the Boston Globe) moving in. The only things that get built are McMansions and $500,000 1- and 2-bedroom “luxury” condos.

A state law (Chapter 40R, I think) allows builders to get around local zoning laws if a certan percentage of units are “affordable” (subsidised), but 95% of those units end up being “active adult” (55+).

Prices have doubled or (in some places) tripled since 1997. Families can’t afford to move (or stay) here, and elderly people who want to downsize can’t find buyers.

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Comment by pete2303
2007-05-28 05:28:32

Its 40b, and you’re nuts if you think they need “smart growth” in Kingston, even if they don’t make anymore land, they got enough, as well of homes for sale.
Forget the New Urbanist crap it was an excuse for poor condo projects disguised as progressive. Oh and the prices are not high mostly to zoning but mostly to speculation.

 
 
 
Comment by andrewhac
2007-05-26 14:15:51

I am gonna wait until the price split in half like $175K. No way I am paying $300 K for that kind of house. Why ? Where I am coming from, I have learned that $300K is a lot of money, gigantic sum of money. And money does come easy to me, I work my ass for it and thus I am not throwing away into the hand of the current house owner or the builder. I will wait with patience…

Comment by Groundhogday
2007-05-26 19:26:58

Yep, I could comfortably buy a $300k home. But since it has taken years to save the downpayment to make it possible I expect that home to be something special. No way are we paying $300k for junk (old or new).

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Comment by IllinoisBob
2007-05-26 11:02:14

The only other way to afford a $1Mil+ property WAS to upgrade from your over appreciated 80 year old 2/1.5 800K bungalow, that was sold to a no $ense FB who (as well all know) is in the ER from drinking the sweet tasting etheline glycol spiked cool aid imported from China !

Comment by IllinoisBob
2007-05-26 11:42:24

oops! (as well all know) -> (as we all know)

 
 
Comment by SD CA renter
2007-05-26 11:14:00

They build for the trade up market as you state, and also for the upper double-income segment. The credit market distortion created more demand which is now gone. The problem is most of these houses are too far from jobs.

Comment by GetStucco
2007-05-26 13:33:03

The other problem is that most of these houses which are not too far from jobs are too expensive to purchase on the income from said jobs.

Comment by cami
2007-05-26 15:13:08

In the movie Head of State, Chris Rock’s characters makes a speech and one of the lines is something like, “If you work in a city that you’re too poor to live in”

 
 
 
Comment by stanleyjohnson
2007-05-26 11:20:30

I’m looking for a crash date for zips 90274 and 90275.

 
Comment by nhz
2007-05-26 11:21:17

for the foreign perspective, some data from the Netherlands:

* median personal income 30K euro (this is before taxes, about 20K after tax I guess)
* median homeprice 245K euro; price for a home that is significantly above average: at least 0.5-1M euro, depending on area
* number of millionaires: 0.6% of Dutch population

In my area median income is probably below 25K, and % of millionaires is certainly below average, but most of the normal homes in the inner city (excluding apartments/condos etc.) are above 400-500K, or around 20x income (probably 10x household income).

Now back to the question: I can easily afford a 500K condo and pay cash for it, but I wouldn’t think about buying one for a second. But I seem to be the exception to the rule over here. In Europe they are still partying like it’s 1929; Dutch producer and consumer confidence is off the scale (higher than at any time in the last 40 years, too bad the records don’t go back 80 years …).

Comment by GetStucco
2007-05-26 11:41:23

nhz –

I always appreciate your posts, which provide perspective from the other side of the pond. But I continue to insist that it is different over here, thanks to the deflationary effects of overbuilding. Like the money which is overprinted in an attempt to paper over the problem, overbuilding homes has the effect of reducing the real value of each existing home relative to real end-user demand.

As I type this post from the confines of the recently-opened 4ClosureRanch Library,
( http://www.sdcl.org/LOCATIONS4s.html )
I can assure you that if I merely stepped outside, walked a short distance and look around, I would see a staggering expanse of large, newly built single-family homes priced in the $1m+ range, for which there is a severe buyer shortage. There just are not enough junior executives to populate all these recently-built $1m+ starter homes.

You should come visit the U.S. southwest and see for yourself. (I recommend top U.S. economic policymakers do the same, before they continue assuring the world that “Subprime is contained;” otherwise, they run the risk of facing a Katrina-style credibility problem.)

GS

Comment by nhz
2007-05-26 12:04:48

GS: I agree that the situation is different; obviously overbuilding is an issue in some US areas like the southwest, but certainly not everywhere in the country. I don’t think it is an issue in Manhattan and they too have a bubble. On the other side, overbuilding certainly is an issue in some EU areas as well, like in Spain.

The disparity between income and home prices, and the price gains over the last 10-15 years are in general far bigger in Old Europe. We have less new building, first of all because homes tend to last 50-100 years over here (except maybe the last generation which I would guess lasts 25 years) and also because zoning severely restricts new building. By definition, most sales over here are existing home sales. Also, a big chunk of new homes in my area comes from splitting up of much larger homes (mostly 17th-19th century) into tiny appartments and other creative ways of increasing the housing stock.

It is VERY difficult to estimate real market demand: in Europe some people have to live with their parents for many years because they cannot afford a home; at the same time, a significant percentage of homes has been sitting empty on the market for years, because equity gains far outstrip any potential gain from renting out. I am sure we have many ’silent’ flippers and speculators in Europe; only when the prices start climbing we will see what real housing demand is.

Also, unlike the US, we no longer have an increasing population; net population growth in the Netherlands turns negative this year (mostly because of increased emigration). Despite this, my city of 40.000 people plans to build homes for 4000 new citizens over the next 5 years, while all experts think that the population in this area will shrink … politicians here still believe in the magic of RE to balance their budget.

Comment by nhz
2007-05-26 12:07:13

correction: start climbing’ above should be ’stop climbing’ …

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Comment by nova_renter
2007-05-26 12:57:11

I think it makes more sense to overpay in Europe, because people are more likely to stay put. If you live in Amsterdam or The Hague, you can buy forever. The same is far from being true here, in the U.S.

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Comment by GetStucco
2007-05-26 13:36:47

Another issue in the U.S. is the stability of neighborhoods. If housing really dives, “nice” areas could suddenly be overrun by gangs and illegal immigrants living 5 families per house. That will not help hold up the value of $1m+ priced McMansions.

 
Comment by cami
2007-05-26 19:00:18

GS, it’s already happening. I have a friend who lives in Reno. When their neighbors sold (flipped) the house next door for a 50% increase over there’s (some renovations but probably not 100k worth), they were so excited. Well turns out the people they flipped it to had a son in a gang. Year later there’s a retaliation drive-by and a police lockdown of the block. Two years ago, it was a nice middle class neighborhood where neighbors knew each other and didn’t mind letting their kids play basketball in the schoolyard across the street.

 
Comment by CA renter
2007-05-27 00:05:05

Very sad, and something that is happening all across the U.S., from what I read here & in other places.

Seriously, it only takes ONE house to destroy a neighborhood. Been through it myself, and hope never to see it again. It’s one of the many benefits of renting — you can just leave if the n’hood turns.

 
 
Comment by GetStucco
2007-05-26 13:34:54

“I don’t think it is an issue in Manhattan and they too have a bubble.”

Roubini would disagree with you. I saw him on TV many months ago pointing out the overbuilding in the vertical direction. They ran out of land on Manhattan long ago, but they are nowhere near running out of air (not to mention hot air).

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Comment by ex-WA
2007-05-26 11:52:36

Wasn’t it the Netherlands that had the famous tulip mania? Something in the water maybe?

Comment by GetStucco
2007-05-26 12:02:31

I am sure California would have had tulip mania as well, but the state (much less the U.S. of A.) did not exist at the time…

 
Comment by nhz
2007-05-26 12:10:05

yes, we had the tulip mania; just a few years after the stock market was invented in Amsterdam. There was a rather clear connection between this mania and the ‘financial innovation’.

Comment by ric
2007-05-26 16:55:50

I always thought the european stock market was “invented “by the Beurse family in Bruge, Belgium.

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Comment by nova_renter
2007-05-26 12:59:37

We have an SUV-mania and a flat-screen-mania here. I prefer tulips…

Comment by GetStucco
2007-05-26 13:30:43

Don’t forget the McMansions whose garages house the SUVs and other expensive HELOC-funded toys.

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Comment by Groundhogday
2007-05-26 11:37:27

Here in little Pullman, you really can’t find anything habitable for under $200k, and nice existing homes have wishing prices in the high $200k to low $300k range. New construction is $300k to $500k.

This might seem affordable to folks on the coasts, but home prices here–always relatively high for the region–went up 50% just in the past couple of years. With median family income in the 30-40k range, there are VERY few people who can realistically afford a $300k home. I make double the median, can put 50% down and $300k is still a stretch if I want to keep maxing out retirement and children’s tuition account contributions. Yet local builders tell us it isn’t possible to build a home for under $300k anymore, and a standard new 2200 sq ft spec home with no bling will still run close to $330k.

Somethings gotta give!

Comment by Groundhogday
2007-05-26 11:39:30

I should add that our friendly neighborhood lender would gladly lend us far more than we could afford. Double in fact. Easy money is still out there.

 
Comment by guyintucson
2007-05-26 12:03:42

Groundhogda,

don’t trust builders.

Development, 0.5 m from my home started
in low 200K( in 2002 ) and jump to ( high 400k)
in 2004.

it was the same model!

Comment by Groundhogday
2007-05-26 12:23:12

Yes, the builders are doing well… but so are the developers (rapidly rising lots prices), subcontractors, material suppliers (e.g. cement), etc… My point is that builders cannot unilaterally decide to build and sell at 50% off. Everyone else on the food chain has to take a hit as well. This is another reason why prices will be sticky downwards.

When carry costs are killing developers, subs are out of work and builders are desperate for a job, and we producing far more cement than we need, THEN we’ll start to see some serious mark offs. We’re not there yet.

 
 
Comment by nhz
2007-05-26 12:26:40

sounds similar to what I see in the Netherlands, both regarding incomes and cost of new construction. But I agree with other posters that one should be cautious regarding the costs given by builders. In my country roughly 50% of the cost of a new home is the price of the land (which has skyrocketed at least 500% over the last 15 years). For the actual building costs, about 75% is work and just 25% materials. A builder here will charge EUR 40-60 per hour to their customers; wages have increased probably 35% over the last 15 years, but in reality an increasing part of the work is done by Polish workers at something like EUR 5-10 per hour (think of the Mexicans in some parts of the US). And of course, many of the parties involved have big profit margins. All the buildings costs are horribly inflated!

We too have these discussions about why there are no small, affordable homes for which there is probably the most demand. Both local politicians (who control most new construction) and builders prefer to build expensive homes for lots of reasons. Many cities here even go as far as completely demolishing areas with older/smaller homes on a regular basis. They are then replaced with expensive apartment complexes or some millionaire mansions, filling city coffers. Too bad for the low-income or small-family people that used to live there, they will have to find another home, somewhere …

Comment by CA renter
2007-05-27 00:09:04

Many cities here even go as far as completely demolishing areas with older/smaller homes on a regular basis. They are then replaced with expensive apartment complexes or some millionaire mansions, filling city coffers.
———————–
nhz,
This is routine in many U.S. cities as well. Once-nice, but small, homes in simple neighborhoods are demolished and two or more McMansions (with no yards) take their place.

Most amazing thing is that people actually buy this junk! :(

 
 
Comment by Kid Clu
2007-05-26 16:37:15

Lot costs are the main cause of the current inability of builders to construct entry level housing. All of the Bubble Builders bid up lot prices, so now an empty lot costs more than an entry level buyer can afford to pay for a house. Until lot prices crash to levels in the $25,000 to $35,000 range, no one can build new entry level homes.

Comment by Groundhogday
2007-05-26 16:44:06

Even here, in the middle of the wheat fields and 60 miles from the nearst urban area, lots cost $45k minimum. Nicer subdivisions start at $65k .

 
Comment by BanteringBear
2007-05-26 18:38:14

Yep, the skyrocketing land prices are a big problem. But nobody put a gun to these builders and developers heads and made them pay those prices. They were bidding against each other and speculators, with nothing but dollar signs in their eyes. It doesn’t take a Phd to realize that the average family cannot afford nearly $100k before ground is even broken. These idiots should never have paid what they did for land.

Comment by yogurt
2007-05-26 21:46:39

I reiterate, land prices are driven by the market price of the finished houses. The land is already there and costs nothing to make. If the market price of the finished house drops, so will the land - builders will not pay a price that does not make them a profit. Land owners are price takers, not price makers. The price makers are thy buyers of the finished houses, and if they are not buying, the price of land will fall. As it already has, big time, in places like Florida.

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Comment by BanteringBear
2007-05-26 11:39:38

“It’s the same here in Queens, You cannot get a SFH or rowhouse in a good neighborhood for under $500,000. The median income is $45,000. Unless every Wall Street type wants to live in Queens, I don’t know how these prices are sustained. Though there still seem to be a few greater fools buying.”

This is the case out west too. Fundamentals have NOTHING to do with prices at this time. Only GF’s, move-ups, and speculators still buying.

 
Comment by Bill in Phoenix
2007-05-26 11:53:29

I just did a search for the Laguna Niguel area and neighboring cities on realtor.com Ocean view - checked, at least 1400 square feet - checked, SFH and condominium entries - checked. I found a San Clemente condo listed going for $645,000 in that category. Now when you have $600,000 lofts and high end condos going for sale, plus consultants like myself who do not have to be tied to a city, it’s an effortless decision to choose ocean view if the price is the same. I expect the ocean view prices to fall further. The one I saw was 3 bedrooms, 2 baths, and I think about 1600 square feet. No one can justify high Phoenix prices when California ocean view prices fall into the crapper.

Comment by Chrisusc
2007-05-26 19:13:40

Bill,

I agree with you in that when SoCal crashes, there may be many that move there (or move back there) from other places like Phoenix metro. Don’t get me wrong, this place is nice (live in Scottsdale), but most of our friends and relatives are still in CA.

Gwnster and the others must be right, in terms of that fact that there is a shortage of educated people in CA, because I get more offers now than when I was still in CA. Unfortunately, I understand that the state is going to have some serious problems n the near future, and it is gong to take a lot of money for me to move back.

I also like Laguna area, specifically the Nellie Gail area of Laguna Hills, although my wife prefers the beach areas as well. Wherever we buy, here or in CA, it needs to be gated with a guard because the crime is starting to take off.

Comment by bill in Phoenix
2007-05-26 19:45:51

Chris, I agree with your post. I’m sitting here with the “Ahwatukee Foothills News”. The back page is West Usa Realty add. There’s a 3,514 square foot $649,900 home for sale on the greenbelt. For me, size is too much. I would think the 1680 square foot ocean view home I saw this morning on realtor.com is the better deal, about the same price!

 
 
 
Comment by dawnal
2007-05-26 12:06:58

“I don’t think policymakers can stop this bursting dam.”

********************************************************************

You are probably right but never underestimate the powers of the desperate. Who would have believed that the Fed would print dollars so irresponsibly? Encourage imprudent lending? Work tirelessly to create bubbles?

At some point the Fed will run out of dirty tricks but when?

Comment by GetStucco
2007-05-26 13:29:16

“At some point the Fed will run out of dirty tricks but when?”

At some point Milton Friedman’s ghost will come back to haunt them, and their fooling games will no longer have any force.

‘Friedman used Abraham Lincoln in explaining his position on monetary policy: “You can fool all of the people some of the time, and some of the people all of the time. But you can’t fool all of the people all of the time.” A central bank can have occasional impact on the level of economic activity by controlling interest rates. But if this power is used too often, firms and households will adjust expectations of price changes and neutralise any impact on real activity. This is the core of monetarism, and it was and still is correct.’

http://193.41.101.59/debates/article.jsp?id=6&debateId=27&articleId=4132

Comment by technovelist
2007-05-26 22:17:30

As far as I know, Friedman didn’t understand that money cannot be defined by government; it can be defined only by the market. The government can, it is true, cheat for a time by watering down the “money” through credit expansion. But eventually the market will win, either by depression (if the government gives up inflation) or by hyperinflation (if the government does not give up inflation).

And yes, I know that the Federal Reserve isn’t a government body. The analysis is unaffected by who does the counterfeiting, so long as it is sanctioned by the government.

 
 
 
Comment by IllinoisBob
2007-05-26 12:13:25

Get Stucco: Ghosts of Christmas future for SD
The meltdown is occurring as we speak in my old hood (Northbrook) the high end is just sitting. Lots of McMansions have risen from the old 2/1 ranches and few takers. Sales for 4thQ of ‘06 in NB are DOWN 56.5% YOY YIKES !
AND 5 YEARS later I still can’t comprehend the logic of putting up a $1Mil + Mceyesore next to your handyman / plumber neighbor

(From the Bubble Meter blog)
Deerfield real estate agent Honore Frumentino described the current market as “strange.”

“On the very high end, we have two and three and four years of inventory on the North Shore,” Frumentino said. “The break point is $3 million. It’s really tough over $3 million. That’s where the air gets really thin on the North Shore.
??? $3Mil = break point ??? More like $1Mil
(Deerfield IL borders on the north side of Northbrook)

Comment by Brian in Chicago
2007-05-26 15:22:47

Deerfield real estate agent Honore Frumentino

Is that pronounced like the street? I never would have guessed that was how it was pronounced until I took a bus that passed Honore St.

For those outside of Chicago, a few years ago the city installed nifty GPS-enabled display boards on all the city busses. It displays the name of the street and then a speaker announces it as the bus approaches, giving you enough time to signal the driver to stop before the bus passes the bus stop. It’s actually a pretty nifty system - great for tourists and anyone else that isn’t familiar with the neighborhood they’re in. And especially great if you like to read a book or something and don’t want to stare out the window to see if you are approaching your stop.

People started to rely on it immediately, and soon enough there was a bit on the news that a lot of people were missing the Goethe Street stop and the city had so many complaints that they were considering reprogramming the announcement to say it like most Americans assumed it was pronounced! In the end they kept it pronounced correctly. Anyway, it’s kind of surprising how much you can learn simply by riding the bus.

 
 
Comment by Patricio
2007-05-26 12:16:53

I remember a few years back here in HB I was consulting for a large company and making 100k, and my wife as a nurse was about 60k I believe. And as we walked through one neighborhood I saw a house that was a shambles that was priced to sell at $460k I believe. I thought about it and said we could afford that, however in the tech environment the jobs are pretty unstable, immigrants from India and China working for peanuts tech changes etc. So, I wanted to make sure that the payment per month was reasonable, so I went home and used a mortgage calculator and sure enough the payment would be over 4k a month. I thought about it and said we just can’t get into that kind of risk, and my wife agreed and we still are in our 2br 2ba, gated, pool, apt for $1030 a month and saving. Very rare people who drive fancy cars or buy expensive booze at the bar have any money, and now with the new standards I think they will never qualify for a home….so get ready OC there is some shaking coming and there is nothing any bogus wanna be rich people can do to stop it.

P.S. I still laugh thinking back 2 years+ when I told people this could never sustain itself, they scoffed and said the most we would lose is 10% of value this is Southern California….people who can’t remember back 13 years I guess…who is right now? =)

Comment by OhMy
2007-05-26 12:43:42

So do they now accept that they may lose 65%? Just curious.

 
Comment by Annata
2007-05-26 13:22:29

We don’t talk much about how the stability of income affects housing affordability, but as you pointed out, it clearly does.

The old 20% down + 3x your income rule was probably written at a time when there was a single wage-earner per family who could reasonably expect to keep his job if he performed it competently, and who had secured health benefits and retirement contributions from his company.

These days, that kind of security is really only afforded to government workers and college professors. For most corporate drones these days, income is significantly less secure, as downsizing for any random reason has become acceptable, and retirement options have shifted all of the risk on the employees. In addition, most families already have two earners, so in case of a crunch, there is no way to generate any additional income. If anything, people should be spending *less* money than the 20% down + 3xincome rule prescribes.

Comment by Cinch
2007-05-26 14:27:37

Most certainly! It is time that we revisit this archaic rule of thumb. I think a new rule should have at it center the idea of carrying the smallest amount of debt possible. I think the idea of “how much debt you can safely carry” is as stupid as “you should get a credit card to start building your credit.” 2X, 1X or 0.5X whatever scenario you find yourself in, choose the lowest multiple is my rule.

 
Comment by Groundhogday
2007-05-26 17:25:04

Good point… the reliance on 2 incomes adds a great deal more risk that most people don’t acknowledge. Back in the day, if the husband was laid off at the plant, quite often the wife would get some sort of job to help bridge the financial gap until hubby found another job. If you have two incomes and need every penny to make the payments, then losing even one job leads to disaster.

Comment by Chrisusc
2007-05-26 19:18:26

Agreed, that is why my wife and I try to live on just my income alone, then if she quits or loses job, then we can still survive. However, we were already used to living on one income, as my wife didn’t work for the first 5.5 years of our duaghter’s life. So while many other people were driving new cars and buying new homes (both of which they couldn’t really afford), most of the time, we shared one used car (which I still drive because I haven’t broken down and bought a new one).

(Comments wont nest below this level)
 
 
Comment by CA renter
2007-05-27 00:27:12

Yep. I often bring up this very same point, but for some reason, people “out there” (non-HBBers) don’t get this.

People, we need to be spending LESS money now, not more.

BTW, the whole “two-income” thing is a bunch of BS. The ONLY person who **might** benefit would be the woman if she should find herself divorced/widowed later in life — at least she has maintained job skills (and a job, hopefully!) & might be able to support herself. Otherwise, the dual-income couple puts downward pressure on wages (more labor supply) and upward pressure on cost inflation (more money per family being spent on cost of goods and services). This is good for corporations, executives and stockholders (maybe), but very bad for the “middle-class” workers.

Unfortunately, the sheeple never think beyond tomorrow, and don’t seem to care about the consequences of their actions & behaviors. :(

Good topic for discussion, though.

 
 
 
Comment by IllinoisBob
2007-05-26 12:27:14

The MSM is finally reporting the TRUTH from Florida:

As Condos Rise in Florida, Investors Try to Flee
Barbara P. Fernandez for The New York Times

Condominium tower projects started during a construction boom in Miami have begun to lose investors even before the buildings are complete.

As dozens of condominium towers conceived during Florida’s real estate boom near completion, investors who snatched up units in the preconstruction phase in hopes of turning a quick profit are increasingly trying to break contracts, even walking away from fat deposits.

Gregg Covin says 45 of 200 preconstruction buyers in his condo tower in Miami have resold their units.

“Motivated” sellers are flooding online forums like Craigslist with advertisements for condo units still months or years from being finished. And lawyers have been inundated with calls from people hoping to avoid closing on units they bought during the speculative craze of 2004 and 2005.

“I get two or three of these calls a day,” said James Ryan, a lawyer in Boca Raton who said he had 40 clients looking to get out of condo contracts. One, Mr. Ryan said, abandoned a $340,000 deposit rather than close on a $1.6 million unit that lost its appeal as the market faltered.

 
Comment by az_lender
2007-05-26 14:00:13

A thought experiment. Let’s say ALL your income comes from investments. You might be a successful investor who reliably makes 10% on your principal, or a very cautious investor who reliably makes 4.5%. In the latter case, if you have a million bucks, your big fat income is $45,000. Would it make sense to spend FIVE times your income ($225K) to buy a house? Sure it would … except that you can be dead sure of losing equity instantly. Similarly, if you have $2 million and a $90K (or let’s even say $120K) income, you could perfectly well “afford” a $500K house — more than 4x your income — BUT you’re not going to buy it, because you know very well it will be cheaper in 08 and cheaper still in 09. So, the “affordability” problem comes down once again to a question of what it costs to rent. And the answer is, in most US markets, it costs very, very little to rent, relative to asking prices. At the end of the previous downturn, rents supported prices well enough. It will happen again, my guess several years ahead.

Comment by Chrisusc
2007-05-26 19:24:02

Agreed. And that also reminds me of what I was trying to tell others over the past few years of this bubble. When people were buying big homes and then renting them out for little positive cash flow (or negative cash flow), I would tell them that the property is only worth what it would bring in for rent minus expenses which should be AT LEAST 20%. Then every last one of these people would tell me that I had no clue. Everyone I know personally that has made money in r.e. has used the above %, or something close to it, when determining where to put their money.

My assertion is that when prices get back in line with that rule of thumb (profit expectation), then it is a good time to buy (either a primary residence or a rental property).

 
Comment by spike66
2007-05-27 04:25:40

Whether a cautious or successful investor, no one who pays attention to their money and has successfully accumulated a good sized stash is going to buy.. I would have thought.
But, check out the link provided in the next thread about the guy who trashed his foreclosed house and left pigs in it. He had put down 50k, on a @240k house. That 50k might well have been his life savings. It’s not clear from the article why he couldn’t keep up his payments–if he lost his job or what–but that rage from losing his home and his savings is not likely to go away. Another angry and alienated American who feels screwed. I think this is the real fallout from all the lies and spin from the folks at NAR–and you can multiply this guy by the thousands.

 
Comment by Faster Pussycat, Sell Sell
2007-05-27 10:33:49

This is precisely the point I make to my friends.

They always say, “But you can afford to buy”, and I always counter with, “Well then logically, I can afford to wait too!”

No response.

They look confused, then sheepish, then shut up. For a bunch of very smart people, they are sure droidish about certain things.

 
 
Comment by ejamie
2007-05-26 14:24:29

There is almost no one who can actually afford a $750K home in the U.S. Even with 10% down, you would need roughly $225,000 per year.”

Here’s how buying homes at $750K+ (near county median) is done in Sili Valley:

1) Existing home owners “move up” by rolling gains of $100K-500K+ from existing homes into these $750K+ behemoths.
2) Dual-income professional types with no kids can pull in roughly $250K total (heaven forbid one of them gets downsized) to meet loan qualifications.
3) Single income professionals or dual-income non-professionals are getting approved on ARM teaser rates - not the full payment amounts possible after ARM resets.

I had this confirmed when I met with a local lender recently just to get an idea of my purchasing power. He told me “90% of buyers in Santa Clara county are using 5/1 ARMs now. The other 10% are split between 3/1 ARMs and 7/1 ARMs. No one is buying 30-year fixed anymore.” Of course I fell out of my chair. This is a clear sign to me that buyers here are still getting in over their head and expecting prices to be higher in 3/5/or 7 years. Amazing.

1) and 2) may keep out of foreclosure as long as the local tech economy doesn’t collapse again any time soon.

3) is definitely hosed as soon their ARMs reset. Particularly if they purchased 2005 or later. Or, if they have been hitting the HELOC once to often.

Comment by GetStucco
2007-05-26 14:50:23

Amazing. Clueless.

 
Comment by Groundhogday
2007-05-26 16:39:40

“He told me ‘90% of buyers in Santa Clara county are using 5/1 ARMs now. The other 10% are split between 3/1 ARMs and 7/1 ARMs. No one is buying 30-year fixed anymore.’ ”

Believe it or not, builders have told me the same thing regarding Pullman, WA. Salaries are much lower here so people really have to stretch to get into a $350k to $500k home. The high priced coasts don’t have a monopoly on financial stupidity.

 
Comment by Nozferat
2007-05-26 20:24:55

Given how stupid and greedy people are, do you expect the latte drinking yuppies in Santa Clara to see a price drop in their neighbourhoods?

Please…these people are the same jackasses who will keep their SUV’s even when the price of fuel hits $6-7 a gallon. Self-righteousness and ego are traits people here will not lose no matter what.

 
 
Comment by GetStucco
2007-05-26 14:47:45

“There just aren’t that many people that make that kind of money. Granted this blog may skew to the higher end of payscales, but the majority of people make a household income somewhere between $50,000 to $80,000 per year. That doesn’t equate to median home prices in the $600,000’s.”

That ‘majority of the people’ you cite sounds a tad optimistic to me.
The Census Department keeps track of the household income statistics.
“In 2005, the median annual household income according to the US Census Bureau was determined to be $46,326.”
http://en.wikipedia.org/wiki/Household_income_in_the_United_States

The Employment Cost Index for Civilian workers in the U.S. showed YOY increases of 2.8 for March 2006 and and 3.5 for March 2007, for an overall ECI increase of 6.4%; updating the 2005 median household income by that amount results in an approximate 2007 median household income of about $49,000.

Assuming rough symmetry about the median, a better range estimate would be $49K+/-$15K, or $34,000 to $64,000 — about $16,000 less than your estimate. Were you including anticipated home equity gains in your estimate?

Comment by GetStucco
2007-05-26 14:48:52

Here is the link for the April 2007 ECI news release…

http://www.bls.gov/news.release/eci.nr0.htm

 
 
Comment by Affordability
2007-05-26 16:35:30

The affordable of a housing for most people can stay very rough for a long time. As the ones in the those high end houses start searching for the low end, they are in competition with the low end. I wonder if we will ever have housing under 100,000 again with so many wanting that end.

 
Comment by Affordability
2007-05-26 16:41:13

Someone mentioned having a bunch of people moving into one of those high end houses and I think you will see more and more of that. I have seen it in apartments in Virginia, as there was less and less affordable housing, rents went up and most people who could not afford the housing, also could not afford the rent. So you had 6 to 10 people living in two bedroom apartments. If you look on craigslist, there are always rooms for rent where they are evening renting out the living room as a bedroom because the rents in some areas are 2000/mth. Families and singles are already in homes with 4 or 5 other people and it is getting worse.

Yes those expensive homes will have 2 to a bedroom and more than that in the den, dininig, and living room in order to afford the rent.

several weeks ago there was a big to do over some people from ‘columbia’ or somewhere like that living 20 to a house and it only came to light because of fire and several chidlren were killed. I believe this was in Queens NYC

Comment by spike66
2007-05-27 04:11:06

If it’s the fire in NYC I’m thinking of, they were African polygamists, living in the Bronx, and yes, a number of children were killed.

 
 
Comment by Wickedheart
2007-05-26 19:25:49

Here’s who can afford $500,000 condos

Home Advantage
http://tinyurl.com/22njqq

UC Mortgage Benefit a Boon to Elite Staff
http://tinyurl.com/2o55l9

 
Comment by Wickedheart
2007-05-26 19:28:57

People who can afford San Diego home prices

http://tinyurl.com/2o55l9

 
Comment by Wickedheart
2007-05-26 19:34:40

I think my first post got caught in limbo because I had 2 links in it. Here’s the companion article to the link above.

http://tinyurl.com/22njqq

 
Comment by Liz from Boston
2007-05-27 11:42:44

“It’s the same here in Queens, You cannot get a SFH or rowhouse in a good neighborhood for under $500,000. The median income is $45,000. Unless every Wall Street type wants to live in Queens, I don’t know how these prices are sustained.
According to this New York Times Story, they’re sustained by Europeans, particularly Irish buyers. With the dollar so weak against the euro, Queens is cheaper than most of Dublin.
The weak dollar has made American real estate a bargain for many wealthy foreign buyers. Here in Boston, Saudis buy a lot of luxury properties. Non-wealthy people like Hubby and I either rent or leave.

 
Comment by Liz from Boston
2007-05-27 11:42:44

“It’s the same here in Queens, You cannot get a SFH or rowhouse in a good neighborhood for under $500,000. The median income is $45,000. Unless every Wall Street type wants to live in Queens, I don’t know how these prices are sustained.
According to this New York Times Story, they’re sustained by Europeans, particularly Irish buyers. With the dollar so weak against the euro, Queens is cheaper than most of Dublin.
The weak dollar has made American real estate a bargain for many wealthy foreign buyers. Here in Boston, Saudis buy a lot of luxury properties. Non-wealthy people like Hubby and I either rent or leave.

 
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