patrick.net

DS,

I think the credit squeeze is the key,

Sure prices will be sticky, as long as there is at least some buyers acting at the current price level, and must-sell sellers are outnumbered by can-buy buyers.

The real question what the current tightening in Jumbo (>$417k) mortgage underwriting will do to all of this. With no buyers (because of the squeeze), the must-sell crowd has no choice but reducing price.

It was the loose credit that made the prices go up, and likewise one could speculate that the severe credit tightening will be what makes the prices go down, perhaps faster and sooner than what ARM resets will do.

You should probably specify whether predictions about cuts are in nominal dollars or real dollars. We've already seen 2 years of inflation from the 2005 peak. And it could be about to get a lot worse, as all the ingredients needed for another bout of stagflation are present, including job losses in an important economic sector, a looming recession, while at the same time we have rising commodity prices and a falling dollar. Shucks, we even have another energy crisis brewing - can polyester leisure suits, bell-bottom pants, mood rings, and disco music be far behind?

A cut in the funds rate to 4.5% now seems in the bag, possibly by year's end. Before the cycle is over we could see 4% or lower. This won't be good news for the dollar, or US savers holding cash equivalents. At some point foreigners will refuse to lend long at today's ridiculously low rates and the game will be up, long rates will soar as the market finally prices in the inflation risk that it's ignored for so long. The only winners will be debtors with fixed-rate loans, and owners of tangible assets.

So my bet is that there will be an optimal point sometime in 2008 or 2009 when mortgage rates will hit the sweet spot, and nominal house prices will be down just enough, to create an opportunity for buyers. I don't think that will be at fire-sale prices, at least not in desirable areas (e.g. areas where you, Randy H, would consider living), simply because I don't think that many houses in those areas were bought with exploding loans. People with fixed-rate loans or 5-year ARMS can hunker down to ride it out, rein in their spending, postpone their plans to trade up on the property ladder, or whatever. People forced to move can, if necessary, rent in their new city and rent out their bay area home. My guess, which I'm pulling out of my @$$ and is for entertainment purposes only, is a 10% nominal haircut from 2005 prices in 2008, perhaps another 5% in 2009, and then everything depends on whether Ben's Huey can fly him out of the stagflation trap or not.

Randy,

Is Emerald Hills western Redwood City bordering 280? I think it is a very up-and-coming area. If I were to bet anywhere in San Mateo county that will have a great appreciation potential, I'd say that is the place.

DifferentSean,

you miss out one thing about California real estate - anti-deficiency protection. I doubt if Oz has such a thing.

In Japan where it took 16 years to unwind, there's no such thing as anti-deficiency. If you sell and you owe the bank money, you pay till you declare bankruptcy or die, whichever comes first. Here, one can just walk without even triggering a bankruptcy event. I am sure that many FBs will take advantage of such a wonderful protection.

Did Japan go to ZIRP because of the property crash? Was property implicated in the overall economic doldrums Japan might have been facing? (Too lazy to google it -- but there could be some prognostication value in it...)

Here is a update about house prices in Stockton that demonstrate the stickiness in prices as well as the factors that overcome stickiness.

Single family homes, 3 bed, 2 bath in the area I am familiar with, were selling at their peak between Mid 2005 and Mid 2006 at about 370K. The sellers were very slow to reduce prices and have been chasing the market down. The median price in Stockton has fallen about 10% while existing home sellers have only been gradually reducing prices.

The foreclosures and REOs on the other hand have been much quicker to react. I have seen comparable 3 bed 2 bath homes that have been foreclosed listing for 330K six months ago. The prices have been aggresively reduced to the 260K range, about 25% drop in six months. If there are enough foreclosures. They can drag down existing homes prices reducing the stickiness.

OT, this is a 1-year running thread (!) from Ireland on the crash:

Dublin property prices falling by €4,500 a month :: Politics.ie

RandyH said:
It is my current opinion that nothing significant will break in prices — and I mean significant — until next Spring.

You may be correct - however, I have said referred to this Masai saying before and I will say it again. The birds will show you where the leopard moves, not the grass.

In this case, watch the credit market, and not the prices. From everything that I am seeing, many sales are falling apart due to financing issues. In other words, no Jumbos for the Dumbos.

SP
test

what do we think of Dr Kurt Richebächer at patrick.net? Passed away at 88 last month, the patriarch of the 'anti-bubble' camp. I'm surfing all manner of strange money sites for the first time and turning up all kinds of oddities...

Ron Paul-love having him in there for the sake of debate, like his foreign policy proposals, scary, scary domestic agenda.

Different Sean,
My cleaning lady bought rental property in San Francisco (Potrero Hill) in 1995. She lived very frugally, scrimped, and bought in an up and coming area when just the first few gay pioneers were living there. Now she has a couple of rental units and lives in the small unit (now that her kids are in college). It can be done, it's just not easy or comfortable sometimes.

OO,
Probably 10-20% of the houses and condos I looked at in 1994 were places that owners had walked away from.
There was a difference between then (still falling market) and now (psychology has finally changed, fallen a bit in real terms, not so much nominally)-there was a TON of stuff on the market. It will be interesting to see when the number of things for sale really starts picking up.
I was in southern Oregon this summer, there was so much for sale there it was unbelievable. A lot of new spec stuff and tons of two year old houses for sale.

re: Ron Paul

That maybe moonbat craziness is exactly what the doctor ordered?

Actually, no. I think a lot of things he wants destroyed has some value. He seems like a decent guy and I would agree with many of his points over a beer, but what he proposes is impossible and rightfully so.

DJM

I like your analysis. I am talking about *NOMINAL* prices in my original post. The reasons are (a) it is a lot easier for people to think about; (b) I learned in my brief foray on the Zillow discussion groups that realtors are trained to attack anyone using the words "adjusted dollars" or "real prices" with folksy, belittling "common wisdom". If a reader in a forum like this doesn't already know a little bit about inflation, or at least want to know a little, then arguing about it only makes them think you're trying to pull something over on them; (c) I assume in my economics analysis that inflation is a macro force largely affecting the buyer-demand curve.

We've been talking about stagflation for a probably a year and a half now. It emerged during the "deflation or hyperinflation" debate. I see neither of those as likely, but stagflation is probably just as likely as a true soft-landing, maybe moreso now.

I think your nominal price cuts guesses are in line relatively, though I'd argue that the 10%, 5% could easily be 25%, 15% respectively. Truly, none of us can know until after we get there.

i think there are a lot of well funded housing speculators in san francisco but they still borrowed the spec money and they are not going to be able to flip in the spring 08. everyone says that RE will be sticky on the way down....well just give it awhile. we are going to see a massive collapse when we start falling in this country. we are going to have a massive depression as people lose their 'service' jobs in the next several years. we dont have anything to fall back on now. 40% of the jobs got shipped overseas. 90% of the manufacturing is gone. we have no savings. our 401k's are invested in mbs, cdo, cds, and siv's so they are gone!

all the illegals in the more hostile states the ones passing laws to fine landlords and employers for hiring illehalss) are moving to socialist california where they can get social benefits. california will see massive tax hikes and stealth taxes to pay for all the illegals and unemployed people associated with the RE industry...i.e. all those laid off tech bubble workers. rents will fall like in 2003 and then plunge 50% farther.

california infrastructure is worn out. raise taxes. stricter auto emission standards will prevent lower income people from keeping their older dirty cars. insane gas prices because of the stupid special calif blends. you will lose your last refinery. calif refuses to build new power plants so you are going to get higher and higher utility bills.

can you say pissed off lower classes. higher crime. i checked my old cow hollow apartment rent and it is now 150% higher in 3 years. cool place to live but i am paying 90% less rent for a 500% larger space in the midwest. i miss the ocean but i dont miss paying a tax for a frwaking plastic bag at the grocery store or paying $100 for my auto emission inspection.

does california have rent tax yet? i cant remember seeing a story about it but i am sure it is coming. californians are going to get eaten by taxes. all my friends in the financial area downtown are scared to death they are next in the layoffs. all my friends that are left in the tech companies just manage visa workers that will be dumped (again like in 1999) at a moments notice. they all live 15 to a 2 bedroom apartment inpalo alto!

california is rolling over and it wont be a slow slide ...it is going to be a parabolic fall whe it gets going.

skibum Says:

> However, last weekend was the same. Downtown Palo
> Alto’s faux-trendy restaurants were half-full as a rule.
> We had a nice dinner at a half-full Zbibbo on Friday
> night, walked by a nearly-empty Mantra, nearly empty
> Junnoon, and only Miyake was near full. Tables were
> even available at Evvia, something I haven’t seen in a
> few years. But that’s a bunch of young, single renter-types
> most likely!

I was one of the renters that just walked in to Evvia last Saturday and couldn’t believe it when they had a table available. I was at Zbibbo last month on a weekend night and the place was barely half full (I walked in through the back door and the place looked like it was closed)…

> Other casual observations about local consumer sentiment:
> Stanford shopping center is still as crowded as usual
> Costco lately has looked like a ghost town, even on Saturday
> Ikea was likewise near-empty on a weekend

The reason I ended up down in Palo Alto last Saturday was to see some of my Formula Ford friends who were showing cars at the Palo Alto British Field Day (across the street from the Stanford Shopping Center). I bet that at least 250 of the shoppers in the mall on Saturday were wives, girlfriends and daughters of guys at the car show…

Randy H,

I don't want to imply that your entire basis for this thread is faulty, but we may be glossing over some major issues? Recently there's been quite a stink from the SAC area where it seems more often than not the abandoned repo with weeds and a mosquito farm can be traced back to a BA address. Sure, it's easy enough for specuflippers (TM) to ditch their failed investment like an ugly girl at a dance but then in turn re-re-refinancing your BA home to avert your impending reset may not be so easy? In fact w/ a foreclosure (or 9 delinquent payments) it may be damn near impossible!

With as many as 8 in 10 NOD's having ties to the BA you've just gotta' believe it will equate to more forced selling? Or perhaps this will be like so much water off a duck's back.

GC spoke an ugly truth about race and the welfare state, and therefore must be silenced, lest protected groups are offended.

No asik, GC has a long history of intentionally saying anything offensive, regardless of who it offends, simply to ruin the thread. That will not happen on my threads.

DinOR

So what are you implying the effect of that would be? Faster price correction in the BA? It seems we're seeing a polarization of folks who think the correction will take until some time around 2167, and folks who think it will happen much sooner. I do think you're talking about a small percentage of BA'ers who own SAC investment property. Probably well under 1%.

I wrote:

> In America anyone can buy land (you can buy a decent
> home in Ohio or Michigan for less than $100 a month).

Then Different Sean Says:

> The only thing missing from this is an outline of other
> variables in Michigan or Ohio such as:
> what is the typical income? what is the job market like?...

Why does that matter, since if you make the minimum wage (or even less) you can afford to buy a home in America (You won’t be able to live in South Marin, Emerald Hills or Woodside where vacant lost cost over $4mm but no one has to be a renter in America).

P.S. I wish making a profit in real estate was as easy as hiring a manager and paying 7%...

Is Emerald Hills western Redwood City bordering 280? I think it is a very up-and-coming area. If I were to bet anywhere in San Mateo county that will have a great appreciation potential, I’d say that is the place.

I worked for this guy in 1997 who built a home in Emerald Hills for 900K, he was happy when he finally could use Emerald Hills instead of Redwood City on his address, I think it's still un-incorporated.

SFWoman Says:

> I think Peter P. may feel that the welfare recipients are
> parasites because he feels he doesn’t have a choice in
> paying tax dollars that he believes go to them. I do feel
> that way sometimes, when I see an idle young able bodied
> man in the projects in particular, but I feel much more
> strongly that way about the Halliburtons, KBRs and
> Blackwaters than I do some single mother trying to feed
> her kid on WIC.

I sometimes feel like I’m the only one in America that does not like to see $100mm programs that allow pregnant Welfare Moms to sit around smoking pot in the Housing Projects “AND” $100mm no bid contracts for contractors in Iraq. Most “Conservatives” only get mad about the waste of money on “Social Programs” while most “Liberals” only get mad about the waste of money by “Big Government Contractors”…

P.S. I dream of a day when the politicians pay for the “poor single mother problem” by forcing the “irresponsible baby daddies” to pay for their kids rather than just letting them hang out on corners doing nothing all day while the rest of us work paying for all their kids…

DinOR,

That is a very interesting point. If BA residents are getting foreclosed on their Sacramento speculation objects, for certain they will have trouble refinancing their local BA digs.

I can see it now, trying to explain it to the bank. "Well, yeah, I foreclosed on that Sac Shack, but don't worry, I won't happen again".

Perhaps real estate is not quite as "local" as certain professions would like us to believe?

FAB,

>“irresponsible baby daddies” to pay for their kids

Do you think that in this day and age, a woman gets pregnant unless she wants to? I'm not so sure about that. I have a hunch that quite a lot of accidental pregnancies are quite well-planned, if you catch my drift. So then who is being irresponsible?

We almost ended up in Emerald Hills in 2002. I like the area a lot. It was unincorporated then which had a lot to do with school districts, if I recall correctly. There was also some ruckus about garbage collection and water & sewage. But RWC was always full of politics; reminded me a bit of a little Chicago in the way it was run, only without Daley.

P.S. I dream of a day when the politicians pay for the “poor single mother problem” by forcing the “irresponsible baby daddies” to pay for their kids rather than just letting them hang out on corners doing nothing all day while the rest of us work paying for all their kids…

FAB,
Here's a solution to both of your problems: if you have a kid and the kid and the mom go on welfare, you get shipped off to Iraq.

That is a very interesting point. If BA residents are getting foreclosed on their Sacramento speculation objects, for certain they will have trouble refinancing their local BA digs.

Even though we've all seen the news stories about Bay Area "investors" using MEW off their primary residences to buy "investment" properties in Sac, LV, AZ, Central Valley, etc., I think it's not a large enough portion of FBs in the Bay Area for this cascade phenomenon to have much of an impact. On the other hand, I DO think there are more than enough 2 earner families with $1M+ mortgages living on a razor thin edge around here that their financial distress WILL have an impact. Of course, if you predict a "Black Swan" moment, it's not really by definition a Black Swan, but I think that moment will be severe economic downturn from the credit crunch leading to recession that hits the tech industry harder than most predict.

FAB,

Believe it or not, I agree with you completely. I do admire the permanent welfare mother niche. These women have more spending money, free time and security than a good chunk of the middle class. And they can actually afford to have kids...I don't think I can afford to have kids.

"correction will take until some time around 2167" LOL!

I've heard those arguments too! Still I wouldn't be so quick to dismiss it as a factor. It's hardly just SAC. Elk Grove, Modesto, Tahoe etc. From an anecdotal standpoint, and I can't say as I don't live there, how many times have you overheard people boasting about their "investment properties"? A few may have been talking about Aruba but look at what an impact it's become for L.A where PHX and LV are concerned?

All that excess Cali equity had to go somewhere and everyone I know considers themselves a RE investor. I just wanted to point out that the 40% of sales in 2005 that were "2nd homes" will have to have implications for major metro areas. I imagine most folks SFWoman knows own RE elsewhere in CA or beyond. Some will be able to weather it better than others.

skibum,

I would agree with you, except it wouldn't be fair for the Iraqis, whom we're still nominally there to help.

Okay, so Oil hits a record price today on low inventory. Add to that Gold has been hovering above $700/oz, and the dollar is at near-record lows against the Euro and Yen. Who else thinks a Fed rate cut, although likely a given, will look silly. In my book, it would erase any remaining credibility they have on the inflation fighting front.

DinOR

Still, you're talking about a small percentage of BA denizens. I'd be really surprised if even 5% of the total home-owning BA population has a second investment property. Especially if you exclude legacy properties -- extra homes people have picked up through inheritance.

FAB,

I woulda thought you'd be in Frankfurt checking out the autoshow there!

Randy H,

Oh agreed and in ways I was being a little snide. With ALL of the focus on SAC, PHX, LV (or Bend for that matter) I just thought it might be an appropriate point to give the 'Primary MEW Generators' equal time.

If you were forced to sell your BA home b/c of a failed specuvestment you couldn't afford to live here to begin with!

"Who else thinks a Fed rate cut, although likely a given, will look silly."

On that topic;

(and I know I should know this by now)

I'm I correct in assuming that a fed rate cut will devalue the dollar against other currencies?

And additionally add fuel to the inflation fire that's eating up my paycheck?

AND...not help FBs at all?

If these of those assumptions are correct, why again is Cramer (and his buddies) screaming for a rate cut ?

(and I know I should know this by now)

# skibum Says:
if you have a kid and the kid and the mom go on welfare, you get shipped off to Iraq.

Aren't we having enough trouble there already, even without giving guns to a bunch of shiftless, irresponsible deadbeats? I would vote for a local gulag instead, where they can coat children's toys with lead paint, so we can compete with China more effectively.

SP

FAB and Astrid:

I see that the "welfare queen" myth is alive and well.

FAB says: I sometimes feel like I’m the only one in America that does not like to see $100mm programs that allow pregnant Welfare Moms to sit around smoking pot in the Housing Projects “AND” $100mm no bid contracts for contractors in Iraq.

First of all, the bipartisan welfare reform bill eliminated welfare as a lifestyle choice. What remains is a strict program with a 5 year cap, which rewards work. It would be nice if the same sort of consensus could be reached on military contractors, but so far it hasn't happened.

Would you really want to eliminate ALL welfare? A pure free market capitalist system with no social insurance has other costs which you may not be considering.

FAB says:

I dream of a day when the politicians pay for the “poor single mother problem” by forcing the “irresponsible baby daddies” to pay for their kids rather than just letting them hang out on corners doing nothing all day while the rest of us work paying for all their kids…

That day is here. The "baby-daddies" are required by law to pay child support. If they are earning a paycheck and don't pay, their wages are garnished. Child support obligations are nondischargeable in bankruptcy. However, if the "baby daddy" is unemployed, or in jail, or participating in the "underground economy" it is hard to collect from them.

Your family has apparently done quite well for themselves. The military industrial complex and the "prison industrial complex" (2 million in jail and counting) are there (at great expense) to protect you and your property rights from kidnappers, vandals and invading armies. The welfare system is in place (at a much lesser cost) as part of the cost of keeping the peace.

Don't begrudge the few crumbs that are thrown in the direction of the needy. Remember what happened to Marie Antoinette.

FYI... a couple of threads back Glen did a "Buffet stress test" of WaMu's loan portfolio versus earnings. A couple days ago WaMu announced an increase of $500 million for their loan loss reserves, bringing the total to around $2+ billion, which was the number used by Glen in his calcs. To review if 10% default and the defaults result in a 30% loss, then the net is a loss of around $7.9B ($263B x .10 x .30). Subtracting annual earnings of around $3.2B and loan loss provisions of $2B, they are still left with a loss of $2.7B, not covered by loan loss reserves.

I did a similar calculation for Wells Fargo. According to their second quarter report they hold $342.8B of loans and $34.6B of loans for sale, or around $387B total. If 10% default and the defaults result in a 30% loss, then the net is a loss of around $11.6B ($387B x .10 x .30). Subtracting annual earnings of around $8.7B and loan loss provisions of $4B, they come out about even.... hmmmm....

Glen,

The problem is that throwing the crumbs leads to more crumb eaters. I also know of people who work two full time jobs to support their families, they certainly seem more deserving of more free time/more spending money than people who live largely off of taxpayer largess.

Then again, I also think poor people shouldn't procreate (and neither should stupid rich people), so I'm probably just a fringe wacko.

I LOVE lead paint! LOL!

Yes, we would be much more competitive! I also visualize "Meth Camps" in the desert where abandoned aircraft hangars provide "shelter". Weekly air drops of meth and twinkies are provided along with just enough water to make sure tweakers can't pack it out.

No more identity theft and car break-ins! :)

Most “Conservatives” only get mad about the waste of money on “Social Programs” while most “Liberals” only get mad about the waste of money by “Big Government Contractors”…

I am not a fan of corporate welfare either. We should let the market sort things out.

However, social welfare is a bit worse than corporate welfare. One can at least choose to become a shareholder of Haliburton. :)