What bubble?

Is this blog dead?

2007-11-30T10:32:00.001-08:00

Yeah, pretty much.

It served it's purpose which was to be a repository of information, links, and graphs. I've never wanted to be the universal link provider for all things housing-bust. There are other blogs that do that already.

It does require a lot of time to keep a blog going, but in the end there was not a lot new to say. Everything that I said would happen has happened and is happening. EVERYTHING. My analysis was spot on. If nothing else this blog serves as evidence to that claim. I am still stunned that the professionals in the industry couldn't see this happening.

When I began blogging, you could not find ANY housing bust news in the MSM. The was only the blatant corrupt cheerleading and parroting of the RE whores. But I understand. They are beholden. It was the Shillers and the Schiffs and the bloggers who spoke the plain truth. Their common sense was first derided as pessimism. They were scolded as "Chicken Little" fear mongers & party poopers. Truth is they were merely making common sense analysis on the fundamentals without blinders of optimism. Don't the Realtors look like Stepford wives in cheerleader uniforms now? It's very clear now who was right and that there was massive problems and unethical behavior in the REIC.

The NAR continues to call the bottom nearly every month. They are liars. Professional liars, offering nothing but spin like you'e get from a shady used car dealer. Nothing more. They do not have anyone's best interests in mind but their own, and lining the pockets of the 6%'ers. We housing bloggers continue to be vindicated everyday.

Manhattan Beach Hat tip

2007-04-20T16:24:00.000-07:00

Great graphic dug up at the Manhattan Beach blog. Also celebrating their 1-yr anniversary. Kudos

How's Los Angeles holding up?

2007-04-19T11:47:00.000-07:00

For Sale signs are popping up again. I think a lot of people pulled their homes off the market so they could re-list (all fresh & new) during the traditional "spring bounce" when sales and prices are seasonally higher. My seat of the pants estimate is that we're close to the inventory high from last year and will be setting new highs in the coming months. Also, as long as I'm making predictions, 2007 is the year this city feels the sting.

Looking at housing tracker for L.A. show a 7.2% decline in the median price over the last 12 months. We all know that the median price is a "well-padded" figure due to seller incentives such as free closing costs, upgrades, etc. Adding inflation we're over 10% down from last year and I would guess it's really more like 15% in reality.

Over at The Bubble Buster the forecast for Los Angeles looks pretty bad. L.A. has lagged behing San Diego & Sacramento but the pressure from OC, riverside county, and Santa Clarita is mounting.

But don't worry kool-aide drinkers, the Housing (bubble) Bust is a good thing. While it's true that you're home is loosing value, it's only a number. Remember, a house is a home, not an investment - so quit worrying about it like it's an investment. It's not, silly! There don't you feel better? And there's more good news. The more prices come down, the more people can afford to buy homes. Then we'll all be homeowners - and that's what all the smart people are, right? No more bitter renters. So, home bust = good.

Here come the fire sales

2007-04-19T11:03:00.000-07:00

Well I guess it's official. The shit's hitting the fan. Don't expect it to get any better for as couple years as more toxic loans reset.

And now a message from Ron Paul

2007-03-28T16:13:00.000-07:00

Click

Anyone wanna buy a used Porsche?

2007-03-28T16:04:00.000-07:00

At Phillips Auto in nearby Newport Beach, California, no one from the mortgage industry is shopping for Porsches these days, said Theresa Seradsky, the dealership's general sales manager. Instead, they're putting their Porsches up for sale through the consignment program, she said.

No Buyers

``Two years ago, every other day we had somebody coming in to buy,'' Seradsky said. ``In the last two weeks, we've had nobody.''

Well, the housing bubble is now affecting the luxury auto industry. See, it is all connected! Get 'em while they're cheap!

also of note from the article "Subprime Mortgage Collapse Eviscerates California Headquarters": "Office vacancy rates are poised to double this year", and "Massive Layoffs' Coming". Go Irvine!

Westside, Los Angeles

2007-03-21T12:05:00.000-07:00

I have no particular interest in the Westside of L.A. but I consider it the weathergauge for the region. Here's a couple new blogs I've come across that focus on that area.

westside-bubble
westsideremeltdown

Sales data show some big-time losses b/w '05 & '07 for the specific listings shown. I wouldn't have guessed. I know prices have softened but are not really reflected yet in median price. L.A.'s been fairly resiliant so far, comparitively. By most accounts, it's all over the map but still headed in a downward trend . The biggest factor now (and latest news of course) is the collapse of the Sub-Prime market. Expect that to grease the skids for declines. It should fairly well kill first time buyer demand & lead to gridlock in the "move-up" market segment. The usual "spring kick" may mitigate that somewhat, but no much IMO.

Congress is having hearings tomorrow over this (lending) mess. Expect a pitch by the same socialist idiots to bail out the "poor disadvantaged, duped consumers" (stupid people) at the expense of the taxpayers (responsible people). Same shit sandwich. Talk about adding insult to injury. That would also prevent a much needed full & true correction.

Doomsday Blogging

2007-03-01T10:27:00.000-08:00

I've recently been informed that I visit too many doomsday blogs. But equated a 30% correction to "doomsday" is pretty ridiculous. I'm not talking about nuclear bombs, canibalism in the streets, or even the great depression (Note: my Chaplin pic below notwithstanding - for comedic satire only). Hey, just because I'm holding the coffee and you don't want to smell it doesn't make me crazy or "the bad guy". It jsut makes you an ostrich. Maybe I wouldn't have to be the bearer of bad news if people would just do their own research.

Painful hiss from Subprime Balloon
Subprime Collapse is a 'scary sign'

A subprime mortgage is one granted to borrowers with less-than-perfect credit histories because they've missed payments on credit cards, they are too young to have established a credit record, or a similar issue. As housing boomed in recent years, lenders rushed into making these loans, in some cases letting people borrow hundreds of thousands of dollars without ever having to prove their income or assets. Subprime lenders now represent about one-fifth of the overall $5.5 trillion U.S. mortgage market.

also ...

the number of homes entering the foreclosure process increased by 19% in January, compared with December's numbers. Compared with January 2006, the number of homes in the process is up 25%. In 2006, a total of 1.2 million homes entered the foreclosure process, 42% more than 2005.

Sorry about that .... would you like a cup of coffee?

Stupid is as stupid does

2007-02-28T15:09:00.000-08:00

Simple Math

2007-02-28T14:37:00.000-08:00

plus (+)

plus (+)

plus (+)

plus (+)

equals (=)

Ah Ha!

2007-01-05T09:50:00.000-08:00

Confession!

Well, not exactly, but let me interpret, or clarify if you will, what she is saying. The Economy is doing great, Jobs are great, interest rates are still near all-time lows. If all conditions remain ideal, HOUSING IS STILL GOING TO DEPRECIATE 2%.

First of all, you shouldn't believe the optimism of a paid cheerleader, but more importantly, what's going to happen to housing if (and once) our perfect sailing weather turns to something other than "clear skies ahead"?

article linked here
---------------------------------------------

We finish our eyeballing with Leslie Appleton-Young, vice president and chief economist for the California Association of Realtors trade group. She's a University of Pennsylvania grad, like your blogger, and she's certainly got an interesting vista of the state and local market.

Us: What's your outlook for the O.C. housing market for 2007?
Leslie: Sales statewide will be down about 24 percent in 2006 and another 7 percent in 2007. Orange County will see slightly larger declines because the run-up in sales activity was initially stronger than the state as a whole and the median home price in Orange County at $699,200 is well about the statewide median of $555,290. Affordability issues also will work to constrain sales activity in 2007. We are projecting a 2 percent decline in the statewide median price (this) year as the market continues to normalize. Orange County prices may be slightly softer because the inventory of unsold homes for sale is higher in Orange County than in many other parts of the state.

Us: How would you describe the risks for a huge price drop?
Leslie: Unlikely across the board as long as the economy continues to grow, job gains are positive, interest rates stay low and incomes increase. A huge price drop requires a much larger increase in the inventory of homes for sale than we have seen to date. If we head into a recession, all bets are off for the housing market. If growth continues at the moderate pace we saw in 2006, the correction in housing will be contained.

Us: How do you think O.C. will differ from the nation or state market?
Leslie: Because of the greater-than-average inventory of unsold homes on the market, sellers in Orange County will need to be especially motivated and realistic if they are really interested in selling in today’s market. There is a lot of competition, so only those homes that are priced to sell and are in excellent condition will sell quickly.

Us: What events might change your outlook, pro or con?
Leslie: A recession or spike in mortgage rates is the most obvious negative scenario for housing.

Us: What might be the housing surprise we'll be talking about a year from now?
Leslie: Not sure, except that there will be one!

What gives?

2006-12-06T12:50:00.000-08:00

Not sure what the high was, but at least 6.6 for 30 yr fixed jumbo.
Bankrate says 5.94% today.

Why have mortgage rates been dropping?

So, so predictable

2006-12-01T10:42:00.000-08:00

Regarding my last post, it's still amazingly funny how predictable these guys are with their official REIC spin. This link should give you a good laugh. Or just a "warm feeling" if you like the sensation of smoke being blown up your ass.

Not only do they say "It's a great time to buy" buy they're still parroting the "priced out forever" myth.

"If you continue to wait, you may never be able to afford to get into the housing market."

The biggest threat according to them is rising rents. Since you can currently rent for less than half the cost of a mortgage, you'd need 10 yrs of constant rent increases before this "risk" materializes.

"In short, the smartest and safest time to buy is now."

Oh no you dii'int!

I wonder if there has EVER been a time for these guys when it wasn't the right time to buy?

Amazing.

P.S. They should be sued in a class action lawsuit for fraud for saying "All of the economic fundamentals show that this is a good time to buy a home and that there is upward pressure on rental apartments. The real risk isn’t in buying a home, it’s continuing to rent." Tell that to the suckers that are $100K in the hole because they bought in Sacremento in the summer of 2005. The risk of being lied to be the NAHB (Nat'l Assoc. of Home Builders) spokes-holes is nearly 100% certain. Take that to the bank.

Everything is rosy for housing!

2006-11-29T14:17:00.000-08:00

- Interest rates still historically very low.
- Unemployment is exceptionally low
- The economy is still growing, albeit slowly
- The stock market is jamming - setting new highs
- Home sales have returned to normal, "pre-boom" numbers (not historically weak)

A realtor can throw any of these factiods at you and they're ALL TRUE, along with the obligitory "more great choices than ever for buyers". Everything is rosy, no?

But something doesn't feel right. Hmmmm? ... The way I would assess this is that EVEN with EVERYTHING that influences the big housing picture (jobs, mortgage rates, and economy) in good shape, PRICES ARE STILL GOING DOWN.

If housing is "strongly correcting" now, what happens when one of the support legs falls out, which it most certainly will eventually? Recession? Unemployment? Higher rates? Bueller? Any of the above and I imagine this ship will sink like the titanic.

One man's floor is another man's ceiling as they say, or vice-versa. And so it goes with all the spin. All depends how you look at it I suppose!

The Coming Collapse in Housing

2006-11-21T10:28:00.000-08:00

It's hard to find anything really new about housing and/or the housing bubble. I've been at this since February and it's all old hat. During those first months, and through the spring, we were still in a discovery phase. The bubble articles in the MSM were really nowhere to be found but started popping up here and there. By the summer, the MSM had finally caught on but were cautious about any predictions. It wasn't until fall that the MSM seemed to be in agreement with the blogger that there was, in fact, a bubble, and that the party was over. For the early bubble spotters, we're hunkered down now, waiting it out with little expectation of any *new* news. For the newbs, I'm sorry that I can't provide the "discovery" information that will help you to do your own analysis in a more helpfull way. My advice to you is to read the archived posts where you'll find a wealth of information.

The blog architecture does not lend itself well to the goal of presenting and perserving data and analysis like a typical website does. Blogs are more of a diary architecture, and as such, require constant work to deliver content that seems temporary, quickly displaced, and easily missed. I'd prefer a website w/ a forum that would allow the best threads to be preserved and updated and threads to be easily resuscitated. Too much work for now though. I could fix some permanent links as a hybrid solution and maybe that's the best compromise. I'll think it over. The last thing I want to do is to post a bunch of non-sense for the sake of some kind of need or obligation to create new content. HP is a great example of that. It devolved from a humorous, biting, and relevant tabloidesque blog into a Jerry Springer inspired sleaze circus. That blog has jumped the shark and lost all the good contributors (commentors w/ real insight).

An important thing to consider is the goal. If you want to be a top-tier blog you have to define that. I don't have the time or desire to do that. This was really all for me, friends, and family. It's been a good learning experience and fun as well. I haven't decided what to do next, continue or change what I'm doing. I've yet to define my goal but I do know that I'd like to continue to build my network of blog buddies as they are both interesting and intelligent.

Oh yeah, I almost forgot, the title of this thread The Coming Collapse in Housing is a new article that I've linked too for anyone interested in another comprehensive analysis of the housing bubble. A good read for the new bubble watchers but nothing really new for the veterans but you may find a few interesting nuggets.

What now?

2006-11-08T15:21:00.000-08:00

The primary reason a home doesn’t sell is it is overpriced.

Now that it's generally accepted that the bubble is bursting, I just don't know if there are any new post-worthy revelations out there. I guess the only thing left is to monitor the denial-tracker for the hard-core bubble-deniers and, so it seems, craigslist sellers.

Denial in the face of decline

2006-10-30T09:53:00.000-08:00

Went to a couple of open houses in South Bay this weekend. I didn't sense a lot desperation, but the realtors were certainly not in stand-off mode that they were a year or two ago. They were much more engaging. I even got a "now is a good time to buy." Yeah ... right. Talk about rolling the dice. Anyone buying now, unless you're getting 20-30 under asking price is going into negative equity IMO. If you're going to live there forever, no problem, but if you think you might want to move in 5-10, you should rent an equivalent place for half price, because you'll be lucky to get what you paid for it. If you have to sell any sooner, you'll be in deep, deep debt for a long time.

Home prices drop dramatically - Nationally, the median price of a new home plunged in September by the largest amount in more than 35 years, down nearly 10 percent from September 2005.

Housing Decline Slows the Economy - The bursting housing bubble slowed economic growth in the third quarter to 1.6 percent, its slowest rate of expansion since the first quarter of 2003, according to a preliminary estimate by the Commerce Department. Economists were expecting growth of around 2.1 percent, down from 2.6 percent in the second quarter. There's no doubt that another huge drop-off in residential real-estate investment was again a prime culprit in the economy's sharp slowdown.

meanwhile

GAO chief warns economic disaster looms

"Housing is in a full-blown recession" - Merrill Lynch economist David Rosenberg. Link
The principal culprit: housing construction, which plunged at a 17.4-per-cent annual rate, the worst performance since the recession of 1991.

Worse, new-home buyers can now expect that the value of their investment will fall. In the U.S., the national average price of existing single-family homes dropped by 2.5 per cent over the past year, the worst showing since this data began to be compiled in 1969.

Maybe not EVERYONE should own a home

2006-10-17T10:28:00.000-07:00

Edit note: The title of this post is not meant to convey a classist or elitist attitude. Worthiness is not the context of the statement but rather, financial prudence. Many may "deserve" to buy a house but that doesn't make them capable of keeping it.

This chart shows home ownership as a percentage of the national population. While the goal of increasing ownership may have good intentions, it may not be realistic. Is it a good thing to promote buying overpriced assets? That may sound like a slanted take, but the reality is that 5% represents people buying things they can't afford. Is that something we should look at and consider to be a good thing? It would be one thing if they (houses) were within reach of buyers by traditional lending standards, not bought with "creative" or "toxic" loans, and (fundamentally) valued at or close to a historically normal level.

So I believe this 5% increase, which also represents a 5% increase in historical levels of Demand, is due to the following:

1. Speculation - the expectation of appreciation, that borrowed money would make them more money. People buying befoer they could afford so that they could start getting rich quicker, or before they were "priced out forever."

2. Dangerously "creative" loans. Yes, they monthly payments look low. Especially when you're only paying the interest on the loan, or an even lesser teaser rate. These loans actually work and can be advantageous in an appreciating market, but if the market turns, those borrowers can find themselves in deep kimshi.

3. Fraud - realtors and lenders "helping" people buy home that they really can't afford, either through deception, or taking advantage of "unsophisticated buyers", not advising them and not practicing "full disclosure". There is also outright fraud, with lenders "fixing" the numbers of "no-doc" loans and appraisers overvaluing homes.

Does it make sense that home-ownership can go from 64% to 69% (almost an 8% increase) while wages are stagnant and home prices going thru the roof? No wonder foreclosures are soaring.

A rose by any other name ....

2006-10-06T09:49:00.000-07:00

..is a rose, but in the case of how this bubble ends, it is apparently anything but.

Study sees '07 `crash' in some housing (free registration required)

David Lereah, slimeball used-car salesman extraordinaire / spin doctor / professional liar of the NAR, thinks you can polish a turd by giving it another name. Or that housing won't crash if you don't use the word "crash". Please people ... soft landing. It creates the magical feeling of pillows and slow-motion euphoria. But I guess that's why dealers no longer sell "used cars", only "pre-owned". That's why 800 sq. ft. is "cozy", not "tiny". I didn't grow up on a farm but I know what bullshit smells like. Listen Dave, your lying is partially to blame for all this you phony, bought & paid for, lying thru your teeth, scumbag puppet (too harsh?) And no amount of lipstick is going to make this pig any less of a pig. You can call it a "correction", "bust", "crash", whatever, but calling it a "soft landing" brings to mind memories of Baghdad Bob and a chuckle. "Baghdad Dave" .... hmmm ... fits. Actually I think we should all call it a "crash" just to be fair: to counter-balance the lies, fraud, and collusion so prevalent in the REIC. BTW, I also refuse to call a "used" car "pre-owned". It makes me feel like a stupid sap.

excerpts:

Applying the word "crash" to sagging real estate markets in some parts of the country, a new study predicts that in the coming year, the nation's median home price will decline for the first time since the Depression.

Real estate prices in more than 100 of the nation's 379 metropolitan areas have a "significant probability of decline" by this time next year, according to Moody's economy.com

The prognosis was more dire for 20 other cities in the report's so-called "crash" area, where it predicted that prices would decline by double digits from their peaks before leveling off next year and into 2008.

The most serious price slides are seen in southwest Florida, numerous California metro areas and in the Phoenix, Las Vegas, Washington and Detroit areas, according to Zandi.

David Lereah, chief economist for the National Association of Realtors, disagrees with the severity of the price downturn in the report. "I don't think I would use the word `crash,'" he said. "When you use a word like that, it's almost a self-fulfilling prophecy in the housing market. These are people's homes. Their retirement is depending on it."

Zandi defended the use of the word and his choice of 10 percent price declines as a benchmark. "It's a round number, but it's also a rule of thumb that would be applied to the transaction costs in selling your home," he said. "If you have less than 10 percent equity and your prices fall by 10 percent, you're toast."

But Zandi sees a somewhat bright side. "Even though this is a very serious correction, that these [market conditions] are things we haven't seen before, I am still arguing that the economy is going to hold together, that there's enough strength to overcome housing's weakness."

"That's nonsense," Kasriel said. "The housing market is an accident waiting to happen. We're already seeing a slowdown in employment growth, and a lot of it is housing-related. We're also seeing a slowdown in consumer spending, and that's housing-related."

"It's beyond me how something that has dominated the U.S. economy in the past four years and is clearly in a recession now won't have spillover effects on the rest of the economy."

Bueller? ..... Bueller?

2006-10-03T19:33:00.000-07:00

You gotta love Ben Stein. He is truly a renaissance man who I have a great deal of respect for. This is nothing earth shattering, but I wanted to post it anyway.

From Ben Stein.

"In March of 1990, after two years of looking for a house during a hysterical real estate boom, I bought a modest home in Malibu for exactly $600,000. The real estate crash to end all real estate crashes began the next month. Within three years, I couldn't have given that house away. If I'd been able to sell it, I might have gotten $350,000 for it.

The price languished in the same miserable range for a few years, then revived, and then took off for the moon. By early 2005, I might have been able to sell it for $1.8 million.

Then, in the early months of 2006, the real estate boom collapsed. I could put the house up for sale, but there are few buyers out there. I certainly couldn't get anywhere near what I could have gotten for it in early 2005.

There's a bit of a moral here. When real estate crashes happen, they rarely involve that elusive creature called "the soft landing." Yes, friends, when real estate starts to fall after a meteoric rise, it tends to fall hard."

FB's Anonymous anyone?

2006-10-03T12:25:00.000-07:00

Notices of Default are up 250% in San Diego and about 45,000 properties in some stage of foreclosure in California. These may not simply be people who bought in the last year. A lot of people took a HELOC and sucked out every bit of "paper gain" that the bubble gave them. These loans have to be paid back of course, or the "lendee" will lose their home.

Here's a couple charts for ya. These are form the article "Lenders gone wild".

This is significant in a couple ways - and I'm not talking about the shocking #'s of stupid loans, I'm talking about the impact of any foreclosure. First, anyone who loses there home adds to Supply AND the inertia of falling prices. Second, since the owner's credit is ruined, they will not be part of Demand for quite a while. Third, and most importantly, it shows that price decreases will not be limited to places where there was excessive building. Demand is detached from Supply.

I could say a bunch of stuff about people seeing their homes as investments and taking out $$$ like it's an ATM to finance shameless lifestyle purchases, but you already know that. It's probably more insightful to recognize that a lot of people pulled $$$ out of their homes to buy "investment" properties, in effect, leveraging their equity to make more $$$. It's important to realize that leveraging works both ways - it can work for you AND/OR against you.

The death of Demand

2006-09-28T16:24:00.000-07:00

So I've been having discusions w/ co-workers and they are more in the "soft-landing" camp than am I. Actually, it took quite a bit of convincing to get them that far and honestly I don't think it was me that swayed them. I've been going on about the bubble ending for 6 months and they've only come around in the last month since all the MSM coverage finally began.

Their idea behind a "no-bust" or "soft-landing" scenario is basically that sales are down now but there are a lot of buyers on the sidelines and once prices go down a bit, say 10%, demand will jump back up.

I think that's an intuitive response, given your basic econ 101 supply and demand, but dead wrong in this case. Here's why: consider demand. The demand we've seen over the past few years was vastly inflated. And it's been inflated in almost every conceivable way:

1. Speculative demand accounted for 38% of sales in 2004 and 2005. This is, of course, due to the incredible rate of appreciation, and the massive amount of money that could be made in a short time through leveraging (borrowing more to make more). Of course there was high demand for a 20% appreciating asset! That's why there were bidding wars and "please pick me" letters and why houses would sell in one weekend above the asking price. In fact to say speculation was only 38% would be foolish because even people buying as a "primary residence" knew that the market was so hot, they would be making more money (in their sleep) off of their house (read: investment) than with their 9-5! "You couldn't lose"! This level of speculation, where the appreciation itself is fueling the appreciation, was seen last during the .com boom/bust. We won't see it again in housing for a long, long time. And worthwhile to note that all of this speculative demand has now shifted to the supply side.

2. Cheap money. All-time low interest rates made monthly payments low enough that buying a house came into reach for a lot of people even as home prices shot up, while a more historically "normal" interest rate wouldn't have allowed that. A good portion of these buyers would have represented "future demand" had they not been used up. After 17 sucessive interest rate hikes, do you think the FED is going to slash rates to 1% again?

3. Toxic loans - ARM's / interest-only / neg-am loans raised the "ceiling of affordability" for buyers. These loans can work to a buyers advantage in an appreciating market, but in a depreciating market things get ugly quickly. As stated earlier, a lot of people speculated that prices would continue to rise, accepting the risk of these loans. Other "less sophisticated" buyers were tricked into thinking they could afford these loans by predatory lenders and realtors. This is scraping Demand's "bottom of the barrel". In either case, the ceiling of affordability simply can't be raised any higher without loosening lending standards, coming up with new "creative loans", or lowering interest rates. And that's not too likely at this point is it?

4. Lenders allowed lending standards to become so lax that anyone with a pulse could get a half million dollar loan - whether they could afford it or not. Stated-income / "no-doc" loans, or "liar-loans" allowed people who could not afford homes to buy them anyway. How does a 21 yr old kid get $2.2 million in loans? By EVERYONE looking the other way. The amount of fraud and collusion is unbelievable. The Senate had inquiries last week over this and in the VERY FIRST bit of good news, "State targeting abusive lenders", Massachusetts is going after predatory lenders.

5. Homeownership is now at an all-time high already thanks to #2-4 above - 3% above the historical average - at least for now until the foreclosures really begin to kick in, at which point lives (and credit) will be ruined, life savings lost, comps forced down, and foreclosed properties added to Supply. BTW, foreclosures are already up 250% in San Diego and the ARM reset's have hardly started! And guess who pays for the bad paper when the loan goes into default? All of us! If you have investments there's a very good chance you have MSB's (mortgage backed securities) and that your MBS's will de-value when the loans start defaulting en masse.

6. Affordability. Last time I heard, in San Diego, affordability was at 2%. This means only 2% of the population can afford to buy a median priced home. Housing is like a pyramid in that it starts w/ first time buyers. If someone wants to move up to a larger home (family is growing), they need to sell their 1st home. People will typically go from "starter homes" to bigger & more expensive homes throughout their lives, as opposed to downsizing. So if first-time buyers are "locked out" because of affordability, we're now in a gridlock situation. In essence, it's impossible to be "priced out forever" because the market NEEDS first-time buyers to sustain itself, and will adjust accordingly. "Priced out forever" is a realtor scare tactic.

7. Psychology - Just as appreciation fuels appreciation, the same is true for depreciation. "Buy before you're priced out forever" - that was the psychology (and Realtor cliche). That's now changed to "buy a depreciating home now and be screwed good when the price drops another 10%."

The "ceiling of affordabilty" has been pushed up and up through a credit expansion driven by incredibly low interest rates, "creative lending", collusion and fraud. This, coupled with speculation created a huge amount of demand - artificial, inflated demand. This demand help to sustain the bubble, fueling it to unprecendented levels. But there's nowhere left to go. While median home values jumped 32 percent from 2000 to 2005 nationwide (and more like 200-300% in bubble areas), incomes dropped 2.8 percent during the same period.

If the hangover from credit expansion and debt bomb result in reduced consumer spending and layoffs, a recession would further reduce demand.

Affordability is now at an all-time low. Even if prices come down a bit, affordabilty may not improve if rates go higher. Who else is left to buy that hasn't? Recent graduates and illegal immigrants? Not at these prices. There are some bubble-watchers, myself included, and a certain amount of people who may be at a point in their lives when they're just ready to buy. Let's acknowlege that there will always be some demand but not overestimate overall Demand without scrutiny. My two co-workers think of Demand as a single-sized, consistent force that's either up or down. I think that's a very naive viewpoint. It's anything but. And there's just not that much real Demand left.

Writing on the wall: this is just the beginning

2006-09-27T12:22:00.000-07:00

Here's some (abridged) news from the first chapter of the housing bust. There will be many to follow.

P.S. Los Angeles is down 6% (YOY).

From USA Today - Home prices likely to fall more
- Supply of homes for sale at a 13-year high - nation-wide
- The median-priced U.S. single-family detached home fell 1.7% year-over-year (YOY). - Prices haven't fell nationally since April 1995.
- The price drop was also sharp, the second-steepest in 38 years.
- Sales of existing homes fell for the fifth month in a row.
- The confidence level of builders, who are slashing profit forecasts and seeing their stocks pounded on Wall Street, plunged this month to the lowest in 15 years, the National Association of Home Builders says.
- "We have a serious correction taking place in the housing sector," Richard Fisher, the Federal Reserve president in Dallas, said in a speech Monday.
- "The speed of the collapse has been astonishing," (economist) Shepherdson says. "This time last year, single-family home prices were up 16.4%. With inventory still rising, there is no chance of any short-term relief. Prices and volumes have a long way to fall."
- "If we have prices drop for the rest of the year and sales also continue to drop, then we will have a bad situation in housing of balloons popping rather than air coming out," David Lereah of the NAR (Nat'l Assoc. of Realtors) said.
-----------------------------------------------------------------
From the Boston Globe - Mass. home prices fall 6.1% as downturn gathers speed
- The downturn in the Massachusetts housing market gained momentum in August, with the median price of a single-family home falling 6.1 percent the Massachusetts Association of Realtors said yesterday.
- The median condo price fell 3.3 percent in August, to $278,000, and sales fell 18.5 percent.
- While sales volume has been in a freefall for months, price declines began showing greater momentum during the summer and are expected to continue into the fall.
- "Things are not over in terms of the price declines," said David Iaia, a senior principal for Global Insight, a Lexington economics consulting firm.
- "Now you're at the end of the major selling season, and people who've had their house on the market all summer and haven't sold it are getting concerned, so there are probably more price declines coming this fall," he said.
- The real estate market is slowing across the country, although not as dramatically as in Massachusetts.
-Massachusetts experienced the most price appreciation of any state between 2000 and 2003, and the appreciation continued over the next two years and pushed sales and prices to record levels. The downturn is now in full swing, analysts and agents said.
- The August price slide was confirmed in a second report yesterday by the Warren Group, a Boston real estate and publishing firm that compiles market data. Warren Group said the median single-family price declined 8 percent, condo prices fell 5 percent.
- Both the Warren Group and the realtors base their monthly report on actual sales closings in August, but their data sources are different. The realtor association sales and price data are based on house-listings posted in the multiple listing service, an agents' database, while Warren's data is culled from court records on home-sale closings statewide.
- David Wluka, president of the Massachusetts Association of Realtors, blamed soaring appreciation during the boom for making it difficult or impossible for many first-time buyers to afford a single-family house. Without them, homeowners are unable to sell when they want to trade up. (suprise, suprise)
- High prices are "creating a clog in the system," he said. "People trying to buy houses can't buy until they sell houses they own, and unless they price houses they own correctly they're not going to sell." (that's the way a pryamid-scheme works)
---------------------------------------------------------------
And then there's the news from California
‘We’re In The Initial Stages Of Adjustment’: CAR

The California realtors report on August home sales. “Home sales decreased 30.1 percent in August in California compared with the same period a year ago. ‘We experienced the greatest year-to-year sales decline last month since August 1982, when sales fell 30.4 percent,’ said C.A.R. President Vince Malta. ‘This is another indication that we’re in the initial stages of a long-anticipated adjustment in the market. Some sellers are still clinging to price expectations that are no longer valid in today’s market,’ he said.” (this is amazing, usually you only hear the normal cheerleading and 'positive-spin' from these guys)

“‘Although the median price in the state and in several regions hit an all-time record in August, we expect softer prices toward the end of the year,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘The median price typically peaks somewhere between June and August before declining toward the end of the year.
There you have it — any price declines we see from now until the end of the year are due to normal seasonal fluctuations. Please ignore those declining YOY price changes, as they are irrelevant.
Some areas of the state already have experienced year-to-year declines for more than two months.’”

The Orange County Register. “House prices in Orange County showed a (2.5 percent) annual decrease for the first time in a decade, the CAR reported today."

“The last annual price drop reported by the state association was in July 1996, at the height of the housing bust that gripped the region in the early 1990s.”

From KGO-TV. “Bay Area homes sales are slowing down. The latest real estate trends show sales down by nearly 25 percent from August of last year. About 9,000 homes and condominiums sold in the Bay Area last month, that’s the lowest number since 1997. It is also a significant drop off from peak sales of 12,500 in 2003.”

“In eight of the nine Bay Area counties, prices haven’t fluctuated more than a point or two in the last year. San Mateo home prices really took a hit last month, dropping nearly seven percent. Dan Newland, Alameda Home Seller: ‘Well it certainly is a different market than it was even three months ago.’”

“The slowdown comes as the inventory is piling up. Of the 1,231 apartments that have been converted in El Cajon, about 500 are on the market, twice as many as a year ago, said Ron Pennock, chairman of the East County Construction Council.”

“Notices of default in the (San Diego) county, notices sent to property owners who’ve missed at least one mortgage payment, have increased 250 percent since last August, according to the County Records Service."
------------

speaking of which - more info
‘As of Sept. 11, there were 44,683 properties in some stage of foreclosure in California, and again, these exotic mortgages are a major factor,’ she says. ‘In San Diego, more than 50 percent of purchase money mortgages issued in recent years were these so-called creative loans.

The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM’s taken out in 2004 and 2005 are at risk of defaulting.

(comments from people who remember the last housing bust in CA - found on Pigginton's)
- Now add to the people that purchased last year all the equity junkies that refi-ed every last bit of their appreciation. It’s not just those who purchased last year that are now under water.

- Even the early 1990’s bust saw some properties drop up to 40% (I was there and one of those was mine) and that bust was a mouse fart compared to what is in store this time around.

- Actually, Santa Monica 90405 declined 50% between 1989 and 1995 and all of California declined an average of 21% during the same period. It was terribly painful but not the end of the world. The current bubble makes the 1989 bubble look like a hiccup, both in terms of magnitude and scale. Now, instead of a few cities and regions, it has spread to about 20 states including both coasts and some popular western cities.

- My mom bought her condo in OC in 1990, saw its price plunge 33% and didn’t get back to its purchase price until approximately 1998.

- In the last cycle in soCalif, prices dropped 35% from 1990 to 1996. A nice $325,000 house dropped to aobut 200,000. I saw condos drop 50%. It took 11 years to break even, 1990 to 2001.

- If you adjust for inflation over that period, housing dropped more that 50% in real terms. Even more for some high end areas in OC.

- Condos and some extremely bubbly zip codes dropped 50% after the 1989 bubble collapsed. Someone on these blogs posted a whole bunch of headlines from this implosion and the current headlines look very much like the fall of 1989. The 1990 headlines included bank failures. It unwound very quickly then with most of the deprectiation happening in the first 2.5 years of the implosion.

- Japan RE prices dropped 80% over 10 years.

- Why, after watching prices rise 300% over the last 7 yrs with no fundemental means of support, does it seem impossible that they’ll return to fundemental support levels -ie 50% off?

-

“Home sales decreased 30.1 percent in August in California compared with the same period a year ago. ‘We experienced the greatest year-to-year sales decline last month since August 1982, when sales fell 30.4 percent,’ said C.A.R. President Vince Malta.”

1982 was the year of the second dip in Reagan’s “double-dip” recession. How did it get so bad so fast, especially given the underlying strength of the overall economy?

- Because it really is different this time? (LOL!! Now THAT was funny!)

Stalling economy?

2006-09-23T18:09:00.000-07:00

Philly Fed points to stalling economy

Factory activity in mid-Atlantic region fell for first time in more than three years.

September 21 2006: 4:32 PM EDT

The Philadelphia Federal Reserve Bank said Thursday its business activity index tumbled to negative 0.4 this month from 18.5 in August, far beneath forecasts of about 14.8. It was the first reading below zero since April 2003, indicating a decline in regional manufacturing.

"We're seeing signs in the Philadelphia survey that the economy is cooling off," said Gary Thayer, chief economist at AG Edwards & Sons.

The entire survey was troubling, with new orders also slipping into negative territory. The six-month business outlook turned gloomy as well, showing its first negative reading since just before the last recession, which ended in 2001.

"The region's manufacturing executives were significantly less optimistic about future activity, with most indicators dipping to their lowest readings in six years," the survey said.

The survey added to evidence that the economy is entering a rough patch led by a sharp slowdown in the housing sector, which is expected to take a toll on consumer spending.

"These are very weak numbers," said Chris Low, chief economist at FTN Financial.

Many economists had been counting on business investment to pick up where consumers left off. The Philadelphia Fed data suggested, however, this handoff has so far failed to take place.

Excerpts above from money.cnn.com

I believe that the job losses and reduction in consumer spending (which results in more job losses) from the combined impending housing bust and debt bomb will add a great deal of recessionary pressure to our economy. 70% of the GDP is consumer spending, so as ARMs & HELOC's reset and people realize that their house is not an ATM - the loans actually have to be repaid - the amount of escalades and frappacino's sold will expectedly decrease.

I'm not an economist but I'm firmly in the recession camp. How many red flags do you need? Look up "Inverted yield curve" and see what that gets you.

We have a National sickness with credit (read: debt) individually and as a nation. There should be no argument about that. We lead lives of shallow consumerism because ... I guess ... image is more important than substance and maintaining a hip lifestyle is more important than financial security. I like "things" as much as the next guy, but I don't buy things I can't afford and certainly not to keep up with the Jones'.

Keeping up with the Jones': Buying stuff you don't need with money you don't have to impress people you don't know.

Who will the housing crash effect? Everyone. Real estate agents will be first.

2006-09-23T16:35:00.000-07:00

From Mish's great blog, Mish's Global Economic Trend Analysis

No Hard Landing
I have it on great authority that there will not be a hard landing in real estate.
Who told me that? It was none other than Mike Morgan at MorganFlorida. Please listen in to what Morgan has to say.

Mike Morgan:

Will there be a hard landing? No!
Will there be a crash landing? Absolutely!
Who will the housing crash effect? Everyone. Real estate agents will be first.

full article

How many jobs did the housing boom create and sustain. And what happens when the boom cycle turns into a bust cycle?

How low can we go?

2006-09-23T12:51:00.000-07:00

I'm not saying this bubble will end the same way it did in Japan, where housing slid for 14 straight years, but rather point out that it is possible for real estate to go down over a significant period of time. BTW, might be a good time to buy in Japan - it's starting go up in Tokyo.

How fast and how far this housing market (bubble) will correct is anybody's guess, but every asset bubble since WWII has eventually returned to the mean.

Ever get the feeling you're being lied to?

2006-09-22T17:03:00.000-07:00

Bernanke: "There's No Housing Bubble to Go Bust"

In the spirit of the great Johnny Rotten ("Ever get the feeling you've been cheated?"), I give you our new FED chairman, Ben Bernanke.

Way to go Ben. What's next? "These aren't the droids you're looking for." ??!!??

Don't buy stuff you can't afford

2006-09-22T16:40:00.000-07:00

Here's a classic! Great for the negative savings/new Escalade crowd.

Debt Bomb

2006-09-22T10:23:00.000-07:00

I love graphs. They really put things into perspective.
Note that they are adjusted for inflation.

So what does all this mean? Well, a hangover for sure but more importantly, the consumer spending that has gone on as homeowners used their "best investment" as an ATM and truly made the transformation into homedebtors simply can not be maintained. Like home prices, there is a ceiling where no more refinancing can occur and the piper demands payment.

Rich Dad, Poor Dad - Robert Kiyosaki says:

2006-09-21T19:55:00.000-07:00

The Catastrophe Ahead

... we recommend that you change yourself and prepare for the economic turbulence that lies ahead. If you think political action can save this country from itself, I'm afraid you're dreaming -- or perhaps daydreaming as you waddle through that figurative crosswalk.

In the next five years, the United States and the world will go through some of the most financially disturbing times in the history of the world. Once again, the rich will become very, very, rich, and the unsuspecting will be left like the passengers on the S.S. Titanic, heading straight for an economic iceberg.

...Which reality you choose -- deciding on how much you can earn and how fast you can earn it -- will determine your station in life five years from now, when things start to get really sticky.

Full article here

He's a real ass to suggest that we should all be out making $70K/day and that we're suckers to work for $70K/yr, but I give his prediction of a dire economic situation about 50/50.

2006-09-21T19:50:00.000-07:00

When you do the math and hear the stories of people who bought homes ten years ago for $80K and now owe $300K, it makes you think we might be in for a bit of a hangover. Credit is what got us into this mess. And because of that, cash will be king ...again.

This is gonna hurt

2006-09-21T19:49:00.000-07:00

Ouch! - OK, that's adjustable rate mortagages (ARM's) , but what about all the HELOC loans that have to be repaid? Add this to the equation. Looks like a lot of Ramen noodle dinners in California's future.

2006-09-21T19:44:00.000-07:00

I've shown this to people who ask "What dies this mean?" and immediately (before I even respond) try to explain that there's no crash going on, or why the housing market won't crash. Here's my take: This chart isn't trying to convince you of what is going to happen, it's purpose is to simply illustrate how large this last housing boom is in relation to historical booms/busts. It's a big'n.

The Hard Landing For Housing is Already Here

2006-09-19T11:00:00.000-07:00

from Comstock Partners, Inc.

The market is suddenly assuming that since energy prices are declining and mortgage rates are drifting down, consumer spending will pick up and the housing industry decline will end. In our view this outcome is highly unlikely. Our negative outlook for consumer spending is based far more on the end of the housing boom than it is on high oil prices. In turn, it is now evident that housing is already undergoing a hard landing that can’t be cured by a downturn in mortgage rates, and that the situation is likely to worsen. Here are some facts to consider.

• 32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000

• 43% of first-time home buyers in 2005 put no money down.

• 15.2% of 2005 home buyers owe at least 10% more than their home is worth.

• 10% of all home owners have no equity in their homes

• $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

• 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.

• Homeowners face higher payments as mortgages are reset. Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.

• According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.

• The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.

• New home sales are down 22% and existing home sales down 11%.

• The NASB housing market index has recorded an all-time decline.

• The housing affordability index is at a 15-year low.

• The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.

• The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.

• According to the NAR the year-to year prices of existing homes are now flat. A short time ago they were rising at a yearly rate of 16%.

• Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.

• Sales incentives are now estimated at 3% to 7% of selling prices.

Although new housing starts directly account for only 5% of GDP, the indirect effects are far greater. Some studies show that the housing industry and all its related activities have accounted for 30% to 40% of the entire employment growth in the current cyclical expansion. In addition it has been well demonstrated that mortgage equity extractions have been a cash cow providing home owners with hundreds of billions of dollars that have gone into consumer spending. With housing already in a hard landing, it will be extremely difficult to avoid a hard landing in the economy as well. In our view the stock market is in the same kind of denial it was in 2000 when the vast majority of strategists and economists already knew the dot-com bubble had burst, but mistakenly thought it would have little impact on the rest of the economy or on stocks.

coming home to roost

2006-09-19T10:58:00.000-07:00

posted in athread at HousingPanic
----------------------------------------------
Stolen from the SDCIA website which is home to the San Diego Real Estate Investors Club. These are observations of a sub-prime loan office manager:

I think that the “experts” should just spend one week in my office observing the financial profiles of our refinance applicants. I believe their outlook would be much different.

Most people simply cannot believe the profiles that we see.
I am the sales manager of a branch office of a top-10 national lender.

My office of 7 loan officers takes +/- 100 loan applications per week, 90% of that coming from cold calls.
Of the last 100, I have taken some simple statistics and have found the following:

68/100 had LTV’s over 80% at time of application
16/100 had LTV’s over 100% at time of application
78/100 had back end DTI’s over 55%
31/100 had back end DTI’s over 70%
23/100 had FICO’s under 500
81/100 had credit card debt above $10,000
54/100 had credit card debt above $20,000
18/100 had credit card debt above $50,000
66/100 had Pay-option ARMs
27/100 had Pay-option ARMs and mortgage lates
22/100 were either in forbearance or had been in forbearance within the past 12 months
We took 14 applications today and we cannot qualify a single borrower for any type of loan. We are sub-prime, in fact, sometimes I say we are sub-sub-prime. We can qualify almost anyone for a loan. Not today.

Let me tell you about just one borrower from today:

Husband and wife
Husband on fixed income military retirement $1800/mo
Wife makes $9500/mo as a registered nurse
5 properties with $3,400,000 in mortgages
All mortgages currently have prepays
8 interest-only mortgages
1 option ARM deferring $3500/mo
3 in Chula Vista and 2 in Escondido
No more than $75,000 equity in any of the homes (verified by comp checks with 3 appraisers)
All properties with front end LTV over 90%
$65,000 credit card debt $672 Mercedes payment
One property had 3 mortgages, one of them hard money
621 mid FICO
2×30 in the past 12 months
Not a dime in the bank
They have been making mortgage payments with their credit cards and refinancing to pay off the credit cards. They are at the end of their rope, but refuse to throw in the towel.

This is not even an “extreme” example. I could show you dozens of these every single week.

I just wish the experts would see what I see. I think the statistics released would be different.

Granted, I only see applications from San Diego and Imperial Counties, but this is just getting out of hand.

“I have no idea what the general public is like. I only know that this is what I see each day. We certainly do see our share of 800 FICOs and 25% LTV’s, but it is the exception, and not the rule.

Most applicants are desperate to lower their payments, not realizing that they cannot lower a payment when they currently have the option arm.

Others are desperate for debt consolidation. When their mortgage payment went from $3000 to $1000 (fixed or ARM to option ARM) they found other things to do with the cash flow. Mostly toys.

We generally pitch up to 4 strategies:

Debt consolidation - most common
Max cash - a close 2nd to debt consolidation
Max cash same payment - almost never possible
Term reduction - hardly ever fits DTI
We do not sell Option ARMS. We hardly ever sell interest-only. The bread and butter of my office is selling people out of option arms and IO and back into a “real payment.”

The broker office next door simply can’t believe that we stay in business without an option arm to sell.

I will say this without any hesitation: 9/10 borrowers who currently have Option ARMs have no real understanding of what their loan is doing. I have had more than a few old ladies cry in my office when I show them the amount of deferred interest on their loan.

They were careless enough to sign a bad loan (ultimately the responsibility of the borrower to read the docs before signing), but it doesn’t help that every hack broker out there is pitching the option arm just because the rebate is so high.

Almost daily I see 70-year-old+ borrowers who used to owe $50k on their home now owing $600k on option arms.

FIRE!

2006-07-13T10:58:00.000-07:00

I think it's particularly funny how people, and it's usually sellers or a seller's realtor, seem to think that the "slowing" or "softening" RE market is somehow due to housing bubble news articles and blogs. As if they could actually sell their overpriced house if it wasn't for the chicken-littles and our self-fufilling prophecies. Maybe if we're all quiet we can go back to believing the Realtors Association's lies and buying houses we can't afford with suicide loans ... and the market will come roaring back making everyone millionaires. The end.

They view us (the bubblewatchers) at worst as "letting the cat out of the bag" and spoiling the Pozi scheme buy tipping off the potential suckers. At best, they see us as yelling "Fire" in a crowded theater - i.e. creating panic when there is no need. We, however, see ourselves as yelling "Fire" in a crowded theater because, and this is the important part - There is a fire! Look over there man! See the smoke!? See the Fire!? Sorry that it's going to spoil your movie and all but it doesn't change the fact that the theater is on fire! ... you dumbass. FIRE!

:)

Let's go house shopping!

2006-07-11T10:12:00.000-07:00

...on the internet.

Let's see ... craiglist ... pasadena ... zillow. Let's see how it's looking.

http://losangeles.craigslist.org/sgv/rfs/178689736.html
$639000 - PRICE REDUCED TO AVIOD FORECLOSURE

920 N. Raymond Avenue, Pasadena, CA 91103
OPEN HOUSE SUNDAY'S 1-4 P.M.
Was: $669,000
Now: $639,000 !!

NON PROFIT ORG. MUST TAKE A LOSS!
PRICE REDUCED BELOW MARKET TO AVIOD FORECLOSURE STARTING JULY 24, 2006!

Features
3 Bedroom/2 Bath. Sophisticated Craftsman on Tree Lined Street. Vaulted Ceilings. Upgraded kitchen and bath. Home offers formal dining room, bay windows with garden view, and hardwood floors. Outdoor trellises, beautifully landscaped yard, orange trees, and large front porch accent home, while white picket fence gives a classic charm. This well cared for home is in close proximity to Rose Bowl, Downtown Pasadena, and minutes away from Mountains and Freeways. A must see! And there's more...a bonus detached structure on premises can be used as office, additional storage or convert to guest house for income!

Punching that into zillow reveals the following:

zEstimate: $656,327 1,202 sq ft built in 1903
Sale History
08/31/2005: $599,000
08/26/2003: $236,000

"Nonprofit", that's funny. Wow, this sucker (flipper#2) bought at the absolute peak. Flipper#1, who sold (after almost exactly 2 years) to flipper#2 cleaned up big-time, gaining $363,000 out of the deal. Someone just financed their retirement and then some. Anywho, back to the FB (flipper#2 = f@ck*d buyer). He/she's desperately trying to get out with their skin. Now Pasadena is a nice area, but good luck. I have a feeling that payment is gonna break 'em.

They were trying to mark this one up $70k when reality hit! It must've hit hard b/c now they're trying to bail and just break even. Apparently the writing is on the wall. If they don't move this one soon how do think it's going to play out?
----
Afterthought: Flipper#2 isn't actually breaking even. First there is broker commission of $38.4K and then there is 12 months of mortgage payments. I'd say Flipper#2 just lost $30-$35K unless they can sell w/o a realtor.

The best new articles

2006-06-14T14:19:00.000-07:00

It seems there has been an explosion of "bubble danger" articles in the MSM during the last month. Seriously, what you've been reading in the blogs all this year (I started reading them 4 months ago and began blogging shortly thereafter) has finally been noticed/believed/corroborated/reported by the MSM. 2 months ago you still heard the NAR spin stated page and verse, with maybe 1 negative bubble article. The kool-aid was still flowing and the MSM seemed to be essentially agents (or the PR wing) of the RE/Mortgage lending industry. 1 month ago, we saw inclonclusive and/or mixed news articles, but still the blogs were mostly ignored or demonized (as if jinxed it). This month the MSM is dominated by stories of the impending housing bust and the repercussions that come along with it. The greater public is learning that the cynicism over the NAR's spin is well deserved and that the industry has been unethical - corruption and greed, while not all-inclusive seems to be "built-in" at some level (like many other industries). If it's human nature or the nature of business, I can't really object to systematic problems, but it's very sad that a lot of people have been suckered into financial ruin. Yikes, I sound like a liberal, which I'm definitely not. I think we need some good regulation to protect the general public from predatory lending. On the other hand, freedom means letting people make their own stupid choices. When there is money involved, keep your bullshit detector on high alert mode. In the end you have to be personally responsible to protect yourself - and maintain a skeptical attitide. Never believe the bullshit.

Here are some of the better and more relevant articles I've read in the last few days.

I Want My Bubble Back!
LOOK OUT BELOW
How to Profit From a Cooling Real Estate Market
Look who's renting
San Diego County home prices take a tumble
Housing bubble correction could be severe
More housing markets overvalued

Misconception: Renting is for Suckers

2006-06-02T17:37:00.000-07:00

Misconception: Renting is for Suckers

I've been discussing this issue with friends recently and this article really does a nice job at delivering the relevant points. Timely indeed. I've copied this one in it's entirety but have bolded a few bits I find particularly insightful.
-----------------------------------------------------------------------------

You’ve heard all the reasons that people want to stop renting. “I don’t want to waste my money.” Heck, you may have even said them yourself. Many of my friends are reaching that point in their lives where they’re considering buying a home. However it’s unfortunate that so many choose to buy over rent, especially in this expensive market, because many well-intentioned people are buying homes that are actually damaging their finances.

Despite the fact that many people disagree with me that the real estate market is going to deflate, there is a rule of thumb that I use that should give you an idea about how much you should spend on a home even if the market is in a slump.

For every $100 you spend in rent a month, you’d be better off buying up to $12,500 in property instead.

For example, I live in Northern New Jersey, and currently pay $1,000/mn for my 1 bedroom apartment. I would be better of financially if I were to buy a condo that cost up to $125,000. The only problem is that where I live, there’s nothing habitable that I can buy for under $125,000, and if I spend much more than that, it’ll actually cost me more money to buy than rent!!! Unfortunately this is a problem shared by my friends in major cities around the country.

Okay, you’re skeptical. I know it and I don’t blame you. So I’m going to prove to you right now, why my rule of thumb works.

The Proof is in the PITI

The great thing about a home is that you get to build equity. It’s like your home becomes this great big piggy bank and with every mortgage payment you’re saving more money. But, this privilege is not free. Unless you can pay for the entire cost of your house in cash, which is rare, banks offer loans to help individuals purchase the properties in exchange for interest.

Like rent money, mortgage interest is essentially “wasted.” It goes neither to improving the property nor to building equity. It’s simply a fee for the privilege of living in your house. And in addition to interest, you’re also required to pay property taxes and insurance every month as well. All these payments are known as the PITI payment, which stands for Principle, Interest, Taxes and Insurance, and is a single payment you pay to your bank, who then distributes your money to the government and insurance company.

Houses also have additional expenses, such as lawn care, maintenance, and big ticket expenses like a new roof, new appliances, or a new furnace. As renters we don’t have to worry about any of these expenses because most leases include them as part of your rent, meaning no extra money out of your pocket when the freezer stops freezing, and someone will install it for you! A responsible homeowner should set aside some money every month to pay for these expenses when they eventually occur (and they always do).

So there are a lot of extra expenses that are essentially wasted when you buy a home. Wasted in the sense that they don’t build equity, which aside from taxes and appreciation is the only real advantage to owning a home.

So let’s compare renting and buying

Buying a home should not be about what you can afford. It should be about wasting as little money as possible. For example, let’s say you can afford to pay $1,200/mn for a condo, but rents in your area are only $800/mn for a nice 1-bedroom. You’d actually be building more assets if you rented, and saved the extra $400/mn in a mutual fund.

So again, how do you determine when you should rent and when you should buy? When the combined home expenses, interest, taxes, and insurance equals your rent, that’s the point when you can and should buy a home.

I’ve run all kinds of numbers to prove out my theory, and when I look at it $12500:$100 seems to be the ratio I keep coming up with. If you pay more than that (especially as you near the $1400 level), you’re actually spending more money on your home than if you were renting. Of course this number changes slightly depending on your tax and insurance rates, but I’ve built a comfortable cushion in this ratio to cover the wide range of rates.

What about taxes, appreciation and multi-families?

Look, I like being appreciated just like the next guy, but this rule of thumb takes into account two assumptions. First, we can’t take into account taxes or price appreciation. With few exceptions, a home purchase should first make financial sense without taking appreciation into account, so that no matter what the price of your home does, you won’t be perched precariously over a financial disaster.

Because personal mortgage interest is deductible on your taxes, your overall tax burden is minimized at the end of the year. Because most of the interest in a mortgage is paid at the beginning of loan, your first year you would receive the greatest benefit. For a typical mortgage on a $125,000 house at today’s interest rates, you’d be spending about $7,400 on interest for the first year (it drops to $7300 in year 2). Of the deductible amount, the standard deduction may chop off a good hunk of that right away, so you’d be saving maybe an extra $1,200 on your taxes, and that’s for only the first year! The longer you have a mortgage the less you pay in interest a year, and the more inflation will eat away at your deduction. In either case, I don’t believe you should spend more money to have a bigger deduction.

In terms of appreciation, I think most people agree that the real estate market is going to slow. I personally believe that we’re going to experience serious price drops in major metropolitan areas, such as here in New Jersey. Renting is just too attractive an option for consumers, and the rents are too low for investors. If the prices of housing at the very least stagnate, we’ll see appreciation of less than 5% for the next few years, if not longer. That being the case, you’d be better off buying a mutual fund making 8 to 12%, even if you’d be affected by long-term capital gains taxes. Unless the real estate market is red hot in your area and you want to flip your property, don’t rely too much on appreciation.

[NOTE] Home price appreciation is magnified by leverage. If housing prices increase 5% and you only put 5% down, you’ve doubled your money your first year on paper. With a mutual fund, though, a 10% return is always 10% no matter how much you invest. In real estate taking control of a property for less than its value is known as leverage, and can lead to serious returns in booming markets. However housing prices are softening in many areas, and selling your home with a real estate agent can cost as much 6% of the value of your home, eating away at your sale price. For Sale By Owner (FSBO - “Fiz’ bow”) will help you avoid those costs, but in a buyer’s market can also lead to a significantly lower sale price. Is it possible to make a lot of money with price appreciation in the next 5 years? Of course. But don’t bank on it unless it’s a sure thing.

Additionally, this discussion only makes sense if you’re talking about buying a single family home (house/condo). When you throw multi-family into the mix, the discussion gets more complicated, so since the vast majority of people start off with a one-family we’ll use that as our basis. Becoming a landlord can be very financially rewarding and hopefully more people will choose that as an option to first-time home ownership.

Wrapping it up

If you take away anything from this article, I hope it’s the fact that there are many expenses involved in owning a home, especially when you’re just starting out and are struggling to afford a place to live. While it may be easy to think that home ownership is a way out of the rent trap, consider how much money (and don’t forget time) you’d actually be wasting every month just to own your home.

Unfortunately in most major cities these days, buying property is so darned expensive it doesn’t make sense for many of us to own until we get married and start families. But how bad is that really? Sure you have to deal with your neighbors, but renting means that someone else worries about your leaky faucet and broken washer, and that kind of good night’s rest is truly money in the bank.

Don’t get me wrong. I think homeownership is a wonderful thing, but think long and hard about the decision before you make the leap. Unless you can find a cheap condo somewhere or live in a market that hasn’t had the kind of price runups we’ve seen in the past 10 years, I think it makes more sense to start saving for your downpayment in a diversified mutual fund, and wait for prices to stabalize.

root cause of the housing bubble, pt. duex

2006-06-02T17:12:00.000-07:00

From The Dallas Morning News Danielle DiMartino Column: Housing Troubles? Bank on It

The answer gets to the root cause of the housing bubble -- the credit binge.
Consider that only one of the 53 banks surveyed by the Federal Reserve through the three months ended in April said it had tightened lending standards. About 10 percent had the gumption to loosen standards further.
With no lending standards to speak of, it's been almost impossible to corral the speculation that drove sales and home prices to their bubbly heights.

"The Credit Binge" - I love it!

Related to this issue is, of course, demand. Home sales are dropping and mortagage applications dropped, which obviously go hand in hand. But why? Fixed interest rates haven't gone up that much - their still in the mid-sixes. Well, 1.) the speculators are gone 2.) too many first time buyers have been priced out (esp. compared w/ the cheap rents). The Lenders loose standards (no-doc) and "creative loans" (I/O, neg am) have been the great enabler. It has in effect raised the ceiling of affordability, allowing people to buy homes they couldn't really afford. So as crazy as it is, the lenders who have loosened their lending standards, are doing so because their business is drying up. It's a downward spiral and a self fufilling prophecy of the worst sort.

My advice - Live Free. Debt free, that is!

Implosion

2006-06-02T16:41:00.000-07:00

This Forbes article is mcuh more pessimistic than I would expect. His predictions are stated very matter-of-factly. Here are some of the highlights.

With inventories high and sales falling, the ratio of inventory to sales flow is rising. Inventories for both new and existing homes have jumped from 3.5 months in 2003 to 5.8 months and 6 months, respectively. It is reasonable to expect those ratios to climb into the 6-to-8-month range of the real-estate-troubled early 1990s.

Already inventories since last year have jumped 91% in Boston, 236% in Miami and 149% in Los Angeles. Asking prices have been cut on one-third of listings in Boston, San Diego, Sacramento, Los Angeles and Miami. Nationwide median prices will probably fall at least 20% before the break is over. It will take a 35% fall to return prices to their long-run link to the Consumer Price Index; markets overshoot on the downside as well as the up.

Even a 20% price decline will be devastating for many homeowners. On average, those with mortgages have 37% equity in their abodes. Of those who borrowed or refinanced in 2005, 29% have zero or negative equity, calculates First American Real Estate Solutions.

A house-price collapse will be far worse than the 2000--02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers' ability to make payments. Both Toll Brothers at the high end and dr Horton in the starter market will suffer.

Prospering in the Housing Bust

2006-06-01T14:04:00.000-07:00

How can you protect your savings or even find good investments during the downturn in the housing market?

Here's an interesting article from Forbes.

What if the U.S. goes into a full-on recession? Any ideas? Please list your comments and links in the commments (hint: use tinyurl if necessary)

So, what caused the Boom?

2006-05-30T11:39:00.000-07:00

...was what an old friend of mine asked when I was telling him about the current state of housing and how speculation has driven prices far above what home values really are. But to discover the seed (or fertixlizer) from which speculation blooms is not easy to impart. He was an engineer and me ... a bus. ad major back in the day at Marquette U. I take a lot of economic theory for granted, or rather, I assume that others know it as well.

This morning I found a great article on the very subject titled "How to buy a $450K home for only $750K".

Off topic - Used cars

2006-05-18T10:29:00.000-07:00

I'm 37 years old. When I was growing up in the midwest a car would typically be rusted after 5 years and rarely make it to 100,000 miles. My dad always believed it was best to buy a new car so that you wouldn't have to worry about reliability. It was a valid philosohy. We've come a long way. Yes, a car may cost more in inflation adjusted dollars, but think of how are expectations have increased and how much better cars are today.

I bought a 5 year old BMW 328i 5 years ago. It's now 10 years old and has over 130,000 miles. It's still a solid vehicle with a strong engine. No rattles, no rust. Even oil has gotten better. You'll never appreciate just how slippery synthetic oil is until you run over a bottle in you driveway. It's like an asphalt ice rink in the summer.

So I just bought another used car. The amount of quality used vehicles seems to be quite high. In fact, you might argue that the market is flooded with them. I bought a 2002 BMW X5 3.0 loaded with 34K miles. 8K mi/yr. ... that's nothing! It was $50-55k new and the equivalent today is $60k. I paid $25.5k so do the math. A 4 yr old vehicle (w/ less than 3 yrs worth of miles) for less than 50% of the original cost. What a great way to save $35K and get a very desirable ride!

It really seems that your used car dollars are going a lot farther than they used to 10 and even 5 years ago. Yeah, I'm a value shopper (hey, I'm saving for the house fund!) but I won't sacrifice quality.

--- added 5/22
There have always been a lot of nice cars here in CA. But the last year or two in particular it seems that there are soooo many expensive new cars. Do you think it has anything to do with "paper gains" and HELOC's? The owner of Bimmer Clinic told me the used market was flooded right now. I guess that makes sense. People trading in their x-pensive lease cars for the new hotness would create a large pool of very nice low mileage vehicles. God Bless them.

A picture is worth a thousand words

2006-05-18T10:25:00.000-07:00

Just in case you didn't realize how big this housing boom was. A lot of people made a lot of money. 2005 buyers are in a dangerous position.

Notable quotables

2006-04-20T14:24:00.000-07:00

**InfidelSix notes: Nicked off Housing Panic**
Robert Campbell said...

As a real estate builder/developer in San Diego, I lost $700,000 cash and three years of my time when the Southern California housing market crashed in the early 1990s.

Housing prices fell by 30 to 40 percent from the peak of the market in 1990 to the bottom of the marke in 1997.

As a 2nd generation buider/developer, I know from first hand experience that anybody that says real estate is always a good investment is either a liar or a fool.

Nothing is permanently safe in this world. Nothing. And that's why 96% of all Americans end up essentially broke and living on Social Security when they retire at age 65.

Sad but true.

Sunday, April 16, 2006 8:25:01 PM

----------------------------------------------------------------------------------
**InfidelSix notes: RTC is Resolution Trust Company. Google it yerself!**

Anonymous said:
I'm the former RTC REO Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.

When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle.

While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate's former value from just 2-3 years earlier.

Mortgage defaults and bank REO are increasing rapidly already as of today. Keep in mind that banking regulators will never give lenders leeway to play the market so to speak, or hold on to REO in the hope of an improving market to get a better price or to cover their nut (i.e., mortgage). They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I'm convinced this time it will be far worse because back then we didn't have any of the Geo-Political crises we have now (rampant illegal immigration, wars, we're a bigger debtor nation, we have a bigger trade imbalance with China than we ever had with Japan I'm sure, etc., etc.), interest rates that were artificially depressed to levels not seen in 40 years, dangerous and irresponsible lending products, and because the advent of the internet now facilitates the free flow of information much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It's almost an avalanche of data supporting why all but the most ill-informed should not be looking to buy for at least 2 years.

I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren't going to report it because their largest advertising constituency is Realtors/brokers.

With the internet and the info that is available on it, you'll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.

Homeowners are now increasingly starting to put their homes up for sale to get an early start on the summer home buying season, and some are just now realizing how inventories on their local MLS's have tripled, quadrupled and worse. As of today, ZipRealty reports that San Diego is just about 4 weeks away (based on the average daily increase in inventory I have been monitoring since late last summer) from breaking the old record of 19,250 during the last down cycle.
I know some have said that you can't use that figure because San Diego has a larger population today, but I disagree and here's why. There are far more FSBO related companies today than 15 years ago because of the Internet and collectively, many of their their thousands of listings are not included in the ZipRealty figures. Also keep in mind that last year population in the County went down, and don't be surprised when it goes down again after this year finishes up.

Look how the tone of articles from mainstream media in the last 2 months alone have changed. Panic has already set in for many, but they have no idea how ugly it will get.

The one thing I'm always amazed to find out is how many borrowers think that when their home goes back to the bank, that's the end of their problems. What they don't realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but now penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven. I personally knew a borrower who had 11 rental properties and after he lost the first one to foreclosure, he got hit with a huge IRS penalty. He started selling off the others, but had huge tax hits because of depreciation recapture, and because the market was getting worse, he could not sell some for what he owed. I was an underwriter at the time and on paper, just prior to losing his first property he had equity of over $1,000,000; but in the end he lost it all because he couldn't sell in a market where bank REO dominated, and when he tried, the tax hit from depreciation recapture buried him further.

The same sheeple psychology that drove everyone to ignore cash flow fundamentals by flipping condos and homes based on the greater fool theory, will invert like it did in 1990, and for the next few years you'll hear nothing about real estate except how terrible of an investment it is, and it will be true for those who either bought with high leverage or refinanced with max cash out based on the value of their homes in the last 2 years.

And anyone who says rents will catch up to all the adjusting I.O. and ARM loans is in fantasy land.
Between 1990 & 1994, I had my landlord reduce my rent three times by simply giving notice that I could rent a better condo at the
beach for less. And you know why that's possible? Because of all the bank REO that was (and will be again) unloaded on the market. Owners who buy REO can easily compete on price alone. Market rent is meaningless to them. I rent a $750K place now and have been renting since we sold our residence in 2002 and our rent is under $2,000 and in the 5 years we'll have been here, the rent will have only increased by 3% from 2002 through 2007.

To those who ask how long to wait and how low will it get, here's my answer. Even though the Internet will compact the time it takes to crash, I still say don't even think about buying for at least another 18 months. Don't be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are "Dead Man Walking".

As far as the percentage, don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me. Even if you don't for whatever reason, others who are diligent will.

In 1995, my wife and I bought a La Jolla 1-BR condo one block to WindanSea beach with a peek ocean view off the balcony. It was in default and we bought it for a total price of $104,000 AND got the broker to kick in half his commission. That's how bad it was last time : )

IT WILL GET VERY UGLY \"/

Sunday, April 16, 2006 10:55:03 PM
----------------------------------------------------------------------------

Has anyone noticed the cliff up ahead?

2006-04-20T13:12:00.000-07:00

Those people who are now wondering how they got into such a pickle (read: screwed) must feel like they're on a train headed toward a cliff ... and wondering how to get off. If you bought 3 condos to flip & now you're neighbors are trying to sell for less than you paid (and they're still not selling) then you're the sucker left chairless when the music stopped.

So the dollar is dropping, Gold and oil are soaring, and housing has stalled. What's a FED committee to do? Raise rates, killing housing and slowing the economy, but propping up the dollar? Or sacrifice the dollar and discontinue the raises?

Recently, the FED hinted at ending rate hikes. This, after they had suggested there would be at least one or two more for now. Hmmmm... they must be reading the blogs.

Meanwhile foreclosures in Los Angeles County increased by 63 percent this quarter (YOY). But it's even worse in Colorado.

But really, it's just begun. Most ARM's haven't even reset yet. When they do, hold on. A 2% increase from 4.5 to 6.5 on a median priced home will increase your mortgage $1000/mo. And you can't sell if you're underwater in negative equity. Mortgage payments may even double for those who had short-term "teaser" rates. Yikes!

Meanwhile back in the RE market, buyers are finally finding themselves no longer in a very disadvantageous position. No having to decide on the spot, no bidding wars. No pressure from knowing that this property will be sold the same weekend it goes on the market (and there will be 20 offers). Seller have ridden roughshod over buyers for many years. But the boom is over. Dead. And now it's funny to hear the greedy sellers complain. All of a sudden there's not enough sensitivity! Like the Prom Queen/cheerleader who finally has to get a job like everyone else. What goes around comes around. Deal with it.

So what about this soft landing? Arguing for a soft landing is the halt in FED rate hikes. Competition between Lenders (due to a lot less applicants) has pressured Lenders into not tightening they're lending standards (or pushing they're dangerous/exotic loans) even in the face of rising foreclosures. But I don't believe it can overcome the inertia of speculation that has fueled the boom. "speculation was rampant thru '05. An that has pretty much ended.

A Florida developer has stated: "The market has totally collapsed."

Wells Fargo, one of the nation's largest mortgage lenders, felt the impact of the slowdown in the housing market in the quarter. The bank said home mortgage revenue declined 43 percent, from $1.5 billion in the first quarter of 2005 to $853 million in the first quarter of this year.

Smells like housing related layoffs are forthcoming.

93 Percent of Lenders Predict Housing Prices Will Drop 10 - 20 Percent

2006-04-05T10:54:00.000-07:00

The Realtors will tell you there is no bubble. Try not to choke on your kool-aid when they tell you they expect apprection to slow to 6-9%.

The mortgage lenders think different.
Here is what they think

Tighter lending standards = less buyers

2006-04-04T18:43:00.000-07:00

If the housing opportunity index (affordability) for Los Angeles is 2 (The percentage of new and existing homes sold in the fourth quarter of 2005 that were affordable by a family earning the metro area’s median income) and lending requirements are tightened, who will be left to buy the $500K-$700K "starter" homes.

Read this to judge for yourself if defaults & foreclosures are going to influence lending and the housing market. Beware: some of the #'s are shocking!
First Federal's reliance on mortgages that allow for reduced payments at the start raise concerns among regulators and analysts.

Can OTS manuevers force lenders to hold back more reserves and shrink the money supply and pressure a recession?

An oldie but a goodie

2006-04-04T18:40:00.000-07:00

Just found this one. Who says you can't time the market.

The MSM is coming around

2006-03-24T13:48:00.000-08:00

Slow but sure I suppose. I've recently seen some 'Housing Bust' pieces in the MSM.

Here'd an ABC vidoe that shows what happens when your interest only/ARM honeymoon is over

and then today @ CNN Money

New home sale slump

... now is when I should mention something about a river in Egypt and the smell of coffee.

2006-03-15T14:36:00.000-08:00

If you're, not readings the articles at Professor Piggington's, you are really missing out. The data and analysis found there are top notch. Check out his entry regarding The FED's Poole's dismissal of the housing bubble (What bubble?... right?) titled "Drink the Poole-Aid".

P.S. make sure to read the comments...trust me.

Springtime tells the story

2006-03-15T13:13:00.000-08:00

I found a very informative article (The next 60 days) which, apart from it's great analysis, shows the "seasonality" of RE and how it revolves around Spring (well o.k., Feb. thru June). IOW , Springtime performance is the "make it or break it" indicator for the entire year.

Speaking truth or crying 'wolf'?

2006-03-14T11:30:00.000-08:00

By Paul B. Farrell, MarketWatch
Last Update: 6:02 PM ET Mar 13, 2006

LOS ANGELES (CBS.MW) -- Back during the '70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I've worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.

But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm.

But when it gets up close and personal -- like my family's home -- well, suddenly I'm shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us -- from San Francisco to San Diego -- is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs investment banker John Talbott in his new book, "Sell Now! The End of the Housing Bubble."
Next time you're in a bookstore check out his top 130 metro areas. The chapter's titled, "Are You in Trouble?"

Warning: Chances are you're in big trouble, or in denial.

And folks, this is not just an isolated West Coast phenomenon. Talbott points out that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer: "Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

Yes, the irrational exuberance of our failed stock market simply shifted over into a new irrational exuberance in housing. In five short years an estimated $30 trillion was added to housing prices worldwide, an unsustainable 75% increase to $70 trillion, largely due to then Fed chairman Alan Greenspan's cheap money policies.
Greenspan dismissed the global bubble, telling Congress it was just a little "regional froth." Happy-talk, while our housing and mortgage industry has been taking advantage of naïve home buyers and sellers with loose underwriting practices: Low-interest home equity loans, and interest-only, low-equity loans feeding housing price inflation.

Curse of Cassandra
My files are full of warnings from America's top economists predicting a housing market collapse and a widespread global disaster: Gary Shilling, Bill Gross, Jeremy Grantham, Robert Shiller, Robert Rubin and others take exception to the deceptive happy-talk of self-serving spinmeisters in Washington, Wall Street, realty brokers and homebuilders.

Lately, powerful voices are challenging the happy-talk. In his latest "Investment Outlook: The Gang That Couldn't Shoot Straight" Pimco's Bill Gross takes direct aim at President Bush's Economic Report prepared by ex-CEA boss and now Fed Chairman Ben Bernanke. He bluntly accuses them of outright lying: "It's not so much that the report was a compilation of untruths or even half-truths. It's just that it failed to tell the truth," hiding the fact that we have "borrowed from the future to pay for today's party."

The party's about over. Economist Gary Shilling recently wrote in Forbes: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... China will suffer a hard landing ... and weakness in the U.S. and China will spread worldwide."
Unfortunately, bubble warnings are routinely dismissed. Our brains can't handle all the bad news. Besides we've been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls.

Still, experts like Gross, Shilling, Talbott and others are dismissed as "crying wolf" one too many times. The housing bubble hasn't popped, warnings accumulate, we're overwhelmed, confused, numb, feel helpless, so we fade into denial. And our leaders are even more oblivious, hardened and ineffectual.

But ... am I going follow Talbott's advice and "sell now?"

No. We love our home and our town. Besides, even if prices do fall 55.8%, we're still ahead of the game, out of harm's way. But maybe you should sell now. A lot of people are going to get badly hurt in the real estate crash, far worst than in the 2000-2002 recession when we lost $8 trillion in market cap.

If your stock portfolio were out of whack there's a possible solution: Dump equities now, go all-cash or to the "nuclear bond option:" Put one quarter in each of four sectors: Short-Term Corporate Bond Index (VFSTX) ; Intermediate-Term Bond Fund (VFITX) ; Inflation-Protected Securities Fund (VIPSX) ; and Money Markets or U. S. Savings I-Bonds. Shilling favors bonds in a deflationary recession. They paid roughly 10% in 2000-2002 bear. Alternatively, if you have a well-diversified portfolio, sit tight; back in the 2000-2002 they beat the S&P 500 by an average of 15% annually

Sadly, unlike the stock market there's little you can do once the illiquid housing market collapses. If you can't sell now, you'll have no choice but bite the bullet.

For example, assume you live in one of America's top 40 metro areas. You bought last year for $500,000 with $450,000 in mortgages. If the market drops just 10%, your equity's gone.
And if it drops the predicted 47.2%, your home's worth $250,000, you really are in trouble. If you lose a job, or suddenly get hit with extraordinary expenses, or just can't make tax and mortgage payments, or otherwise forced to sell, you could be wiped out under the tough new bankruptcy laws.

So please read Talbott's book closely: Is your home is at risk? Then quickly decide whether you can hang on in a housing collapse, a stock market bear and another long recession. And if not, consider taking his advice to sell now.

Los Angeles market overvalued by 61%

2006-03-13T13:53:00.000-08:00

This CNNMoney.com article, Mortgage rates up...affordability down lists overvaluations/undervaluations for different U.S. markets and explain how rising interest rates will reduce demand to pressure price drops.

P.S. A 61% overvaluation would require a 38% decline in price to return to normal. Here's the math.

a. $1,000,000 = 161%

b. $1,000,000/X = 161/100 (represented as %) - mult ea. side by 100

c. 100,000,000X = 161 - divide by 161

d. X = $621,118.01

Industry ‘Heavyweights’ On The Housing Bubble

2006-03-09T10:42:00.000-08:00

Industry ‘Heavyweights’ On The Housing Bubble

If you don't know who Robert Shiller is, you should.

Here is another good article he wrote recently.

More Americans are losing their homes

2006-03-09T09:34:00.000-08:00

Foreclosures up 45% (YoY) for January. Article here

This article is a great prelude to the subject of affordabilty. Remember, it all comes down to Supply v. Demand. Affordabilty limits demand.

Hurry, buy now before prices come down!

2006-03-08T09:03:00.000-08:00

Can't afford it? You can't afford not to! Rates are still pretty low you know! C'mon you can still get in at the peak!

/sarcasm

The MSM is not covering the bubble as it should. Granted it might not be as sexy as the car chase or cartoon riots, but although I don't watch tv, I do check cnn.com daily & there isn't much. Thank God for the internet! I almost walked right into this tar-pit of a market, but for blogs. There is a lot of data out there that you have access to. Once I started really doing my homework it became very clear how bad of an idea it would be to buy right now at current prices.

The links are to your right. These blogs have the best data that you won't be getting from any realtors. Use them well and good luck.

"surreal estate" exuberance

2006-03-07T23:46:00.000-08:00

Price trend = falling in San Diego

This is either
a) hilarious
b) pathetic
c) both

Great commentary though!

Supply and Demand

2006-03-07T14:40:00.000-08:00

Pricing is determined by Supply and Demand. Period.

You can say the last bust was fueled by the areospace industry collapse or recession - it really doesn't matter because those things are simply factors that affect supply and demand. You can say exhuberance (irrational anyone?) fuels the increases, but that is simply a factor that affects demand.

And when you look at the RE market purely in terms of supply and demand, and the figures we're seeing right now, there is no conclusion except that a housing bust is upon us. But the market is not liquid enough to undergo sharp changes like the stock market where a single report can drop a stock price like a rock. In analyzing past booms and busts, the RE market is like a rollercoaster, at then end of a large boom (and this is the largest) it slows at the peak and crests. Downward momentum begins slowly and builds exponentially, the force of the movement feeding on itself.

During the years 2001 thru, and especially including, '03-'04, the RE market was in a frenzy. Many listings were sold in days. Not weeks, days - with multiple bids. There was not enough supply for the demand and bidding wars were common. Accordingly during this period of exhuberance, home prices increased monthly. Demand was incredibly high. And because of the strong appreciation, not many people that didn't have to sell were particularly inclined to. Why would you, when holding the property was making you more than your salary over a year? So the supply was very restricted. It's a little weird how these market forces feed upon themselves. But there is a limit. Demand is ultimately curtailed by affordability. If you can't qualify for a loan, you no longer contribute to demand. And demand begins to decrease. How does this end? Badly for some, depending on your timing.

Right now, supply vs demand has turned upside down is getting worse (better if you're a buyer). Supply is going thru the roof as speculators run for the exits. On top of that, demand is decreasing. Prices are dropping due to this pressure in "leading areas" where appreciation came late and strong and builders overbuilt to meet the inflated demand. In other places price appreciation has flattened while listings have doubled or tripled and sales decline steadily. In those places, the sellers may think they're in a staredown that they can win thru patience, but this Mexican Standoff favors the buyer. The buyer can continue to rent indefinitely with no change in lifestyle, while the seller is carrying an extra mortgage payment every month. My $1000 vs his $5000. No contest. Once prices start to slide he loses equity on top of the 5K. That will add "corrective" pressure. ...and the rollercoaster gains speed.

Welcome to my blog

2006-03-07T10:24:00.000-08:00

I started this blog so that I could refer people to a single (and continually updated) location for links and articles relevant to the housing bubble, specifically in SoCal.

I am a buyer. I do not own, nor ever have owned any properties. I am a complete rookie. Specifically, I am sitting in a position to buy, down payment ready, but would have to leverage myself (and my future) pretty heavily just to get into a starter. And if it doesn't appreciate or if it depreciates, your starter could be and ender! It's a risky time. The last few years felt very risky too, but in a different way. Risky if you didn't get in, because you could "miss the boat" and be locked out, and risky because even then, prices seemed pretty outrageous. The timing was never right for me though. Something essential was always missing from the equation, so I was really not able to buy in those early (good) years.

Now, my personal situation has changed. Everything is stable, everything is good. And I'm finally in position to be a buyer. Luckily, we have the internet and can get a lot of good data outside of the traditional sources (MSM, realtors, lenders). I'm a researcher by nature and what I have found leads me to believe that now is the very worst possible time to buy a home.

Your comments, charts, & spreadsheets are appreciated.