patrick.net

Just put the toilet in and don't bill 'em for the upgrade. :)

Obama promises to get better teachers by paying more.

This is a pitch to the NEA. If he really wanted to help teachers, he would take action to allow teachers to throw out unruly kids and to remove policies such as not permitting a kid to be flunked more than once.

It is not the pay so much, but the disruptive and imtimidating students that force teachers out.

Just put the toilet in and don’t bill ‘em for the upgrade.

But they will bill me for having to put the crappy toilet back in. :(

Besides, I think the rental agreement does not allow that.

This is a pitch to the NEA. If he really wanted to help teachers, he would take action to allow teachers to throw out unruly kids and to remove policies such as not permitting a kid to be flunked more than once.

I agree 100%!

If he really wanted to improve education, he would try to implement school vouchers.

Go to the library and get a newspaper dated at your move in. Have a buddy take a picture of you reading it while sitting on the thing and just say that it was always there. :)

LOL! Toilet proof-of-life?

OP said:
So why the long delay between this implosion in lending and price falls in more expensive neighborhoods?

The big layoffs haven't started yet. The four pillars supporting this market were:
1. stock option windfalls at large employers
2. easy access to Alt-A and Jumbo mortgages
3. dual-income couples
4. bubble-mentality ("RE always goes up!")

#1 is gone.
#2 is gone.
#3 is still here - and is allowing people to hang on.
#4 is going away fast.

Take away even one of the dual-incomes, and it becomes unsustainable.

The chart does not herald the end of mortgage securitization in general. The chart covers only Alt-A, subprime and Alt-A loans. It does not cover conforming loans (e.g., the traditional, non-jumbo prime mortgages), which has always been and remains a large piece of the mortgage securitization market. It is no surprise that the the bundling of Alt-A, subprime and jumbo loans have dropped significantly as the volume of those particular types of loans have dropped. Mortgage securitization of conforming loans, however, remains alive and well.

Could someone clarify something about this chart?

Jumbo loans are displayed as green bars along side Alt-A and Subprime like a different product. Isn't "Jumbo" just catagory of loan by total amount lent? Can't jumbo loans also be of Alt-A or Subprime quality?

It seems like we have heard many examples of exactly this situation.

There's an assumption depicted here, that is not clear. (At lease to me...)

Oh-HO!
Thanks Sandibe. I cannot believe I missed that. They chart purposefully leaves out the segment of themarket that is likely both healthy and at near-normal levels (of course, all sales are down).

Back to my school thesis.
Obama states that if education paid more, people in industry might be attracted to becoming teachers. Or recent graduates may choose to pursue teaching as it becomes a viable economic alternative to other industries.
Consider CA, however. Here the union will simply pay the already unfirable bad teachers MORE to continue being bad. Unless the additional funds brought additional freedom to hire and fire (basically to break the CA teacher's union) then more money will effect exactly nothing. Fixing education is beyond the scope of a housing bubble board (and so should have the previous handgun and mpg discussios) but until education is exposed to the rigors of the free-market we can expect no better outcome.

least

The chart probably doesn't include Fannie Mae/Freddie Mac. They are picking up the volume from Wall St.

SteveOh,
I have had a chance to read Mr. Hooper's oroginal article. Sadly, he did not make it clear. However, I belive your observation to be correct. Since the jumbo is just size, to avoid double counting I think that jumbo is not placed on the same stack as as alt-a and sub-prime. Previously, securitzation was wholly in the real of the GSEs and they did not do jumbo's. So, I am guessing what is really being shown is that Wall-Street is not performing securitzation, not in alt-a, sub-prime, or jumbo.
I am further guessing that since the GSEs offer the lowest rate of non-jumbo loans (the so called 1% benefit of implied gov't backing), that reporting no 'normal' securitzation again reflects that this is a wall-street securitzation chart.

Fixing education is beyond the scope of a housing bubble board (and so should have the previous handgun and mpg discussios)

I thought this is a "reality parser."

So, for solid conforming loans, it's business as usual I guess. That makes sense. Good debt is good debt. In fact, that leads me to wonder if demand for that debt has gone up. Money has to find a home somewhere.

It is misleading to compare percentage declines in fortress areas with percentage declines in non-fortress areas unless you take into account their relative percentage gains during the bubble. I can't comment on other areas, but at least here in Los Angeles, the percentage gains in fortress areas during the bubble were smaller than the percentage gains in non-fortress areas, especially when compared with many of the non-fortress areas with the steepest declines during the past year. Even if you believe fortress areas will suffer to the same extent as non-fortress areas, the math would dictate a lower percentage decline. For example, if you believe that equilibrium is 120% of pre-bubble prices, a house that doubled in value during the bubble, would need to drop 40% to reach equilibrium, while a house that tripled in value would need to drop 60%.

Inflation will happen independent of housing depreciation. More specifically, the risk of stagflation is high.

Well, the problem of fortress area is, all people with cash on the sideline are bitching and moaning about it. So how can you blame them for not coming down fast?

Do you know anyone who is socking away dp diligently and says, oh gosh, I really want to live in East Palo Alto, and I am waiting for the price to come down?

No matter how bad the recession / depression is, prime hoods, particularly in one the richest areas on earth, are always the last to fall. If crime becomes an issue during the downturn, prime neighborhoods may even hold the value better.

I bought in the last downturn, and my experience was, prime neighborhoods had very few houses for sale, because either they were (and still are) in the hands of retirees who live in them till death or passed on to kids at no cost, or in the hands of higher income couples who could afford mortgage payment. So the volume was very thin, but whatever that came out to the market must clear at the market price, most of the homeowners in fortresses just chose to stay put and ride it through.

Another possibility is that people upgrade to better neighborhoods, so their requirement for loan is actually not that big, they have their previous equity gains as a cushion. The first time buyers are obviously very stretched, but if you roll over your previous equity gains, the loan amount shouldn't be that much of a burden even for an one-income household.

HeadSet, you are so right. They could increase spending 10 X, and schools would not improve without discipline.

This is my #1 criteria when looking for a house to buy - is there discipline in the local schools? If the parents and administrators don't support the teachers when they discipline unruly kids, the town or neighborhood is trash and I wouldn't spend $1 to buy a house there.

In fact, that leads me to wonder if demand for that debt has gone up. Money has to find a home somewhere.

I know personally that I have a pile of cash and can't think of anyplace "decent" to put it nowadays. CDs pay 3%. Commodities I don't trust: not even AU. Certainly I'm not going into RE any time soon.

A couple of good points. Yes, I agree with Richmond, truly wealthy people use loans as a tool, not just out of necessity. Also, these nicer areas are a different market than a starter area. I doubt the fluctuations in price would hurt as badly to someone who has set down roots in a true dream home and neighborhood as they would to some speculator in a starter home. It is an interesting phenomenon, but new buyers in these neighborhoods may find themselves strapped as well. My guess is that these neighborhoods will be hit by the coming econimic slowdown verses the lending crunch that has obliterated the average neighborhoods.

I'm not saying that I would invest in RE right now nor do I think that it is wise to do so in certain areas. However, properties are moving and I was speculating on the funding and money movement. Someone is taking the risk.

One hour program on Bay Area housing on KQED's Forum radio program today. You won't have too much doubt about prices going down in the Fortress after listening to it. And forget about any bounces when we do hit bottom as we'll be staying there for 2 to 3 years:

http://www.kqed.org/programs/radio/

A new study indicates Bay Area housing prices fell 22 percent in the past year. Is the worst over, or is there more to come? What effect does the declining real estate market have on the economy at large? We discuss those questions after an update on fires burning throughout California.
Host: John Myers
Guests:
Andrew LePage, analyst with DataQuick Information Systems, a provider of real estate information solutions
Christopher Thornberg, principal and co-founder of Beacon Economics, a consulting firm focusing on California and other western states
Ruben Grijalva, director of the California Department of Forestry and Fire Protection
Tracy Saizan, realtor and president of the Sacramento Association of Realtors

So that's the million dollar question. If properties are moving in those areas (as one would expect they would because they're desireable areas) are the buyers getting a deal, or are they premature? Honestly, I don't have a solid opinion either way. Maybe they are, maybe they aren't. Patrick built his site on the premise that housing was overvalued based on fundamentals. These small highly desireable areas arguably are valued on by who can pay the most for them. There is a relatively small pool of buyers, and if they pull back the prices in my opinion can become very volatile.

Malcom,

right now is hard to tell, but my experience with these neighborhoods in the downturn was, the shrinking buying pool met with a shrinking selling pool. Obviously, the 89 peak was never as crazy as this one, so even the first time buyers into these neighborhoods had to come up with sizable downpayment (20% at least in 1989).

What I expect to happen in these higher-end neighborhoods is follows:

Phase 1 - volume drying up, lots of wishful listing price, desirable homes more reasonably priced (5-10% below comparables) will sell very fast.
We are right now at Phase 1.

Phase 2 - layoff starts, recent buyers can no longer sustain the mortgage payment, have to sell. There will be a sudden glut of inventory at a lower price (15-20%), but such inventory dry up very fast.

Phase 3 - holding pattern. What's left will be established homeowners, paid-off retirees, or owners who inherited from parents. These people have no reason to sell except for divorce, job moves (but BA is a major job center) or some odd reasons. There will be very few buyers and sellers. Homeowners who can manage it choose to ride it out because RE "always go up in the long term".

Phase 4 - slow dropping for years, and eventually homeowners are realizing that we could be Japan II. At that point, volume will start to pick up as price sinks. Housing will really start to bottom out.

Last time, the BA bottomed at Phase 3, we never experienced Phase 4.

Sandibe Says:

> It is misleading to compare percentage declines in
> fortress areas with percentage declines in non-fortress
> areas unless you take into account their relative
> percentage gains during the bubble. I can’t comment
> on other areas, but at least here in Los Angeles, the
> percentage gains in fortress areas during the bubble
> were smaller than the percentage gains in non-fortress
> areas, especially when compared with many of the
> non-fortress areas with the steepest declines during
> the past year.

Over the past 10 years I’ve noticed that the biggest “percentage” gains in the fortress areas have come at both the high end “and” the low end. For example on the Peninsula where I grew up crappy Burlingame condos and small homes near the railroad tracks went up almost 5x just like the big Hillsborough estates while most of the “average” Burlingame and Hillsborough homes just went up about 3x from 1995 to 2005. I’ve noticed the same thing in the city where crappy places in Lower Pacific Heights (where you can hear the gun shots in the Western Addition) and Lower Cow Hollow (where you can here the noise from Highway 101/Lombard) went up close to 5x just like the Pac Heights and Presidio Heights homes designed by architects with household names. The “average” Marina, Pac Heights and Presidio Heights homes just went up about 3x.

Malcolm Says:

> Yes, I agree with Richmond, truly wealthy people
> use loans as a tool, not just out of necessity.

I hear this often, but in real life the number of people that do not “need” a loan to buy a home is very small (it is really statistically insignifigant)…

The Mom of one of my friends started selling real estate on the Peninsula when we started Junior High in the 70’s and since the late 70’s she has been in the top 1% of all agents in the US. We were talking about cash sales a couple years ago and she said that only a handful of her buyers over the years have not “needed” a loan…

In the city I know some agents that work in the high end and it is only the $5mm+ second homes and $10mm+ homes that have more than a small percentage of buyers who did not “need” a loan to close the deal…

FAB,
But there are also lots of cash buyers in the older set who downsize, although that probably is more applicable for those who move out of expensive SF. I paid cash for my place here in Boise.

There are 48 total condos & townhomes in Cupertino for sale now. Of those,
35 are less than $750k. 7 of those are 3bed/2bath.
I pulled some Cupertino statistics for you from Q1 (Q2 is not ready yet).
The average "CDOM" (Continuous Days On Market), was 46 days. The percentage
of sold condos/townhomes that received list price was 99.39%. Total sales
volume was $19,471,846. Q1 was much slower than Q2

I would say that the number of cash buyers has gone way, way up recently. Many who saw the run-up for what it was sold at/near the peak knowing they could buy their own house back for a 40+% discount. Aso, a good chunk of the Fortress was built in the 50s, placing oringnal owners in, roughly, their 70s and 80s. These pople can afford to downsize and pay cash, as can the children who inherited their housing wealth.
Of course, I have no better method for guessing, but I would venture that 1 in 10 could buy with cash. And of those, maybe 1 in 100 actually would. I mean, talk about a non-diversified portfolio! $1m in equity just sitting in a home and hoping like heck it does not drop in value?

It is still easy to get a 30yr FRM at 6.5% if you have a 20+% DP. So it's not outrageous for a dual income family to own a 1M home in the Fortress with 250K DP. A loan of 750K is still at 3 times the combined 250K gross annual income.

I made my crash predictions based on the logic that the mortgage bust would elevate the risk premium and push the interest rates higher. It did not happen for last 2 years. Credit is still cheap. Way cheaper than what it was during the internet stock bubble.

The increase in ARM rates and disappearance on creative mortgage products was enough to prick the bubble in the non-Fortress areas. Those are in complete free fall at various speeds. In fact it's possible that bottom has been reached in far flung areas of Contra Costa county. They will be stuck at that bottom for next 10 years. I have stopped paying attention to Tracy et al. These days I concentrate on Dublin, San Ramon, Evergreen and Morgan Hill to see how fast the bust is happening. The bust has not slowed down a bit.

Even in the Fortress prices are down based on my conversations and observations. Since the drop pales in comparison, it just seems like no drop. But it is there. I agree with OO's observations - sales are suffering far more than prices.

So hang in there. Patience is still paying handsomely.

SBUX eliminating 12,000 FT and PT jobs, closing 600 stores.

Many months ago, SP made a joke about Starbucks opens new shores even in their restrooms. It has always amazed me how many 5$ coffee stores do they think we need. But investors in those days were cheering their "business expansion".

That was simply over-capacity as Mish has been pointing out with respect to malls. At least Starbucks gets it now.

http://biz.yahoo.com/ap/080701/starbucks_closings_urgent.html

This is a good thing. Clearing this rampant over-capacity, over-debt, over-leverage is the way to come out of this slump.

Hey SP, what do you say, great minds think alike ? :-)

Hummer is dead.
There will be fewer Starbucks stores.
Stucco sh*tboxes in Crappertino are down YOY.

Whaddaya know, maybe there is a Santa Clause!

Unfortunately for the Bay Area, the impact of SBUX layoffs will be minimal on fortress house prices. Most [strike]waiters[/strike] ...ahem, "baristas" seem to be in the renter demographic, or living with parents demographic.

Besides, the 600 stores that will be shuttered will literally be spread around the world, so the impact on any one area is low (except the headquarters in Seattle, I guess).

[SIBA, I don't know about great minds - my wife would suggest that if you are thinking like me, you should get your head examined. :-)]

Phase 3 - holding pattern. What’s left will be established homeowners, paid-off retirees, or owners who inherited from parents. These people have no reason to sell except for divorce, job moves (but BA is a major job center) or some odd reasons. There will be very few buyers and sellers. Homeowners who can manage it choose to ride it out because RE “always go up in the long term

This time there is a difference . Does not matter whether it goes to phase 4 or not.

The holding pattern breaks down with inflation.

Either you have enough income to pay high housing costs, or you don't.

If you have high enough income, then you have other savings to cover the kids college fund, your retirement and all needs after paying for housing. You don't *depend* on housing prices (although you would like to make the best out of it) to make your life - it is another expense.

If you don't have high enough income, you are depending on your house to do the wealth creation to fund your future needs. That model is bust now, and as inflation (in everything but houses) raves, it will get more bust. You may have put in 1/2 your salary for the last 10 years, (5 years earnings) into your house; when you sell it, will it give you back enough to live on for 5 years? That equation will become more and more depressing with inflation.

Holding, as you say, will be the status quo, but holders will turn will turn poorer and poorer, and they will not realize it as holding is like the presumed boiling frog. Those who can afford to loose some money, will shrug it off, those who cant will be in for a tougher future.

“baristas” seem to be in the renter demographic

They are firmly in the living-with-parents demographic. They cannot possibly afford rent here on their own.

Whaddaya know, maybe there is a Santa Clause!

And unicorns!

Most [strike]waiters[/strike] …ahem, “baristas” seem to be in the renter demographic

You mean to say [Darth Vader voice]rental scum[/Darth Vader voice]? :?