I believe we are now at what will be seen as the inflexion point. It took a long time to get here, but the housing bubble is finally recognized as a passé concept. The real debate now is how much and how long of a correction.
There's a lot going on. None of us knows the future with any useful accuracy. I know I have been wrong about as much as I've been right about the past 2-3 years. Hopefully we've all learned something. Hopefully there's more yet to be learned. My question is, what do you think is going to play out now? I'm hoping we can take a moment to contemplate a bit and lay off the utter despair, doomsday or deep conspiracies and instead discuss with a tad more rigor. This blog has an amazing share of very smart people; let's put something down now that might serve as a reference point for the next twelve months.
As always, I don't moderate any comments, regardless of opinion, so long as the commenter make an effort to support their position.
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Yes Your right Randy...
Out with Soft Landing... anyone even talking Soft Landing hasnt any credibility given the events of just the past few weeks now...
lets focus on how deep is the fall ?
I've watched about a -10% price/sqft slide YoY in Fort Collins, CO. As the prices in the middle class areas of zip code 80525 dip back towards $95/sqft, they are approaching reversion to mean with 1995 projected forward at 4% per annum (which has a long history for Ft. C). Since there was about a 15-20% overshoot, I am looking for a 10-15% correction overshoot as well, giving me a shot at a nice SFH for about $200K while the interest rates are still low. I have noticed that a lot of properties list for $110/sqft, but are closing around $100/sqft for all but the nicest properties.
The job situation here is actually getting a lot better since 2003. HP, Agilent, Advanced Energy, Intel, AMD and other big tech employers are reviving the southeast section of town (80525). They tend to establish the middle class baseline here. However, there is a huge amount of construction still underway. Builders are offering incentives worth $20K on a $250K house, but prices are also eroding. Inventory is climbing steadily. I think what especially hurts is the Fort Collins law that a certain mix of all new developments must be high density housing. There is a glut of townhomes and condos on the market right now, and most are less than four years old. The counter-force to price declines is that 80525 continues to evolve as a bedroom community with Denver, and this specific zip code gets more traffic because of direct access to I-25 with few lights in between. If that trend surges, it could prop up prices in 80525 desipte the continued construction projects.
The foreclosures in 80525 are concentrated in several new developments built circa 2001-2002, like Provincetown, the Antigua townhomes, and Huntingdon Hills (the last is older but experienced numerous sales in the boom). The other, more unusual foreclosure area is in the very high-end neighborhoods like Greenstone. I suspect those NODs are probably thanks to people who had a lot of paper wealth during the tech boom but then suddenly had that paper gain vaporize in the tech bust. For such a small "estate lot" neighborhood, there's a lot of stuff getting hit with NODs down there.
The north part of town near Colorado State University is also undergoing a construction boom. The lofts are going at extraordinary rates ($300-400K for a 1100 sqft luxury loft). You can still buy in Old Town (just north of campus) for about $200/sqft, but prices vary wildly based on the specific block and neighborhood. Foreclosures happen but most get digested fast by investors for conversion into student rentals. One thing that jumps out at me is that the rentals for sale appear to be cash positive from Day One. That just seems bizarre and is cause for concern. Are the sellers trying to avoid price declines in their asset, or are they thinking that some kind of rent price fall will happen in the next few years? I have to believe that more and more people will go to CSU as the state's population continues to climb. So why are so many landlords trying to unload their properties?
FollowBefriend1 threads3,248 comments
without the privileged access to the MLS database, how can one monitor the # of NODs in a particular neighborhood? The best thing I can come up with is the pre-foreclosure listings on foreclosure.com, if you have better ways, please do tell.
I think the market sentiment changed last week, but it will take a few more months for the down trend to be established in the fortress. I don't know anything about Marin, but the usual suspects of the fortress, or even average neighborhoods in Peninsula (west of 280, 85) are still quite low in inventory, and the listing price seems to be climbing, mildly.
FollowBefriend (4)44 threads4,602 comments Los Altos, CA
If you're in LA County or NYC you can use PropertyShark.com, which I like for it's data and interface, and you can get some reasonable title data. If you're in covered Bay Area counties you can use RealtyTrac.com, but it's a bit more expensive.
Prime Marin and Prime San Francisco, both covered by my good friend and insider at one of the firms that covers a huge section of the $2mm+ market, have seen a big reduction in inventory. Her take was that everyone who can either has or is yanking their listings. I noticed our neighbors ended up dropping price right back to what they paid 2 years ago, then yanked it and rented it out, for example. The guy up the street trying to pawn a $4.8mm he paid $3.6mm for 3 years ago actually went to $3.4mm, then yanked it. She also said that sales that are going through have been for 10%-20% below asking, although they've been strictly warned to not talk about that and to give the impression that prices are rising. We all saw the PR bullshit about Marin up 6% a couple weeks ago. That's an example of the spin. Same thing is going on in SF. We saw TOS doing that a couple months ago. We'll see more of it until it's undeniable. Then they'll switch to "you have to think long term" arguments.
Her take was if the market stays flat or declines even a tiny bit between now and next spring there will be a huge influx of sellers aggressively and competitively pricing to sell. Not quite panic, but "oh shit, I don't want to wait 5 years to sell this thing". These aren't people who're going to go default anytime soon, but they maybe need to sell for life reasons. I know one couple which just had twins, mom's going to stay home for a while, and dad got a new job with Google, but they're in Tiburon. They yanked, but I doubt they'll be willing to deal with that even 2-3 years let along 4-5 before they give in and sell below what they think they should get.
This is a huge mess. I am amazed to see Cramer the Bull turn into such a Bear live on CNBC last Friday. I believe the government will pass some laws regarding unwriting standards and regulate the industry more. At the same time I think Ben will inflate the money supply to "erase" past sins.
There is no good way out of this. People like me, young (27 years old) renters with a good positive cash flow, will be the ones getting screwed the most. In the last year I have only managed to save 10k in a bank account for a downpayment. This is no where close to what I need for 20% down. Inflation will destroy it over time, I may have to go buy more useless $hit from Walmart to get any useful marginal utility out of it. The credit crunch may be worst than using inflation as a tool to help the FBs. Don't forget that the US government could use inflation to finance its own money problems. They did it to finance the Vietnam War, why would they not do it again?
FollowBefriend (13)108 threads487 comments
Things are finally starting to unravel. If you compare the selling prices at the peak in 2005 to the asking prices now, prices have already decreased 15% to 20% in the Northeast. It’s more difficult to gauge the selling price, since homes are sitting on the market longer.
There are various factors at play that will influence where we go from here and how far prices will drop. I think there will be a rise in upside-down homeowners trying to short sell in the next 6 months. If they are successful, prices will drop accordingly. This is quite the microeconomic view, and really can only be applied on a neighborhood by neighborhood basis. The collective effect on a countywide, statewide, or nationwide scale will be slow to be seen. Less desirable areas will drop the furthest the quickest.
This is counter balanced by the fact that many have their notes held by investors and not the originally banks. Therefore short sales might be harder to negotiate as investors will want their money. I think the rise in foreclosures is evidence of this.
With houses not selling, and foreclosures rising, something has got to give.
Therefore expect the federal government to step in the following manner
1) Offer some form of a monetary bail out.
2) Increase regulation of the associated industries
And, since any money on a bail out increases deficit spending
3) Inflate their way out of the mess
With ’08 being an election year, and the media finally having picked up on the enormity of the problem, I’d be surprised not to see a bail out, since the problem can no longer be swept under the rug or put in the corner and ignored. Not that I’m for a bailout, I’d just be surprise not to see one.
In my estimation inflation is the only way out, as inflation will help keep prices from dropping too far down.
The value of a hold can be split into to parts – the value of the structure and the value of the land. The land cost is highly subjective, and is only worth what someone is willing to pay. The cost of the house itself is less subjective. If the cost of raw material goes up. (Copper, Wood, Nails, etc.) . Then the cost to build a new house (or repair an old one) goes up. Thus, as inflation takes hold, prices can only drop so far.
Just my two cents.
NOBODY BREATH! This house of cards is starting to shake. My borther is trying to unload a home he bought in Dec of 2006! He has only had the home 7 months and is trying to get out and just take the hit. Do you remember the guy in Oklahoma that got his arm caught between a boulder and a rock face? That cut off his own arm to get free and save his life. This is the picture I get when seeing my brother's situation and what he is trying to do.
I agree that the US is set to inflate its way out of this mess. In many ways it is the most responsible course they can hope to take. Call it a way to do a "soft default" on US debt.
Assuming overall rising inflation coupled with a flat-to-falling housing price market, winners and losers will depend upon your financial structure and position:
* Home owners who bought prior to 2002 -- the earlier the better -- who have fixed rate, standard amortizing loans with reasonable payments (no more than 28% of their gross salary, considering taxes and insurance) will do well. Their loan acts as a shield against inflation losses and helps to offset the decreases in their home price induced by inflation.
* Renters with well diversified and inflation-minded investment/savings will also do well. Renters who *could* have bought pre 2002 and didn't won't do as well as if they'd bought. Renters who waited after house prices skyrocketed will do better than if they had bought. Remember that you can use tax-exempt vehicles for saving as a way to offset a good portion of inflation, especially if you think that rates will fall and savings returns will be low. Use taxes as your return.
* Don't worry about the dollar unless you're in the 1% of folks who have some direct income or expense tie to foreign business operations. Lots of folks will moan and groan about the dollar, especially here on Patrick.net, but it really doesn't matter all that much to most Americans. Indeed, the irony is the weak dollar will continue to help strengthen US manufacturing employment, which many of the fleeting "middle class" will see as a positive.
Folks good news, American Home Mortgage(AHM) filed bankruptcy.
I am waiting for CountryWide Financial(CFC) to follow suit.
I have a question.
Many people state that ENRON debacle would not have happened if they paid regular dividends.....
American Home Mortgage paid dividends and still imploded faster than ENRON.
Can anybody please explain what is the difference between ENRON scam and AHM scam?
I clearly have an incomplete understanding of the ways an economy can be inflated. Doesn't it require both a willingness to borrow and the ability to qualify?
If people are in debt and have little in the way of savings or investments, and if credit is more restrictive - harder to qualify for and at a higher interest figure - then how is such an economy inflated.
I realize there are a number of parallels between conditions today and the those in the 1970s, and certainly there was inflation then. But how was it done. Or is it significantly 'different this time'?
- the those
FollowBefriend15 threads1,255 comments
Randy H Says:
[Prime Marin and Prime San Francisco... $2mm+ market], have seen a big reduction in inventory.
if the market stays flat or declines even a tiny bit between now and next spring there will be a huge influx of sellers aggressively and competitively pricing to sell.
Here in the south bay, the $2mm+ market (still some pretty crappy property) has been very slow for a long time. Many properties have been sitting on the market for weeks, until massive price reduction(s) finally generate a buyer. Even so, they are so overpriced that I haven't felt very tempted to make a bid. Properties in this price range were always tough to sell - it was only the dot-com bubble that pushed a lot of working stiffs up.
As for the bomb-sitters (tm) who pull the listing in the hope of getting a better price in a few months - I think they are in for a scare. Jumbo loans are going up to 8% (eg. wells fargo) and downpayment requirements are going to 90% LTV (eg. indymac), and sheeple are scared of a recession. Who is going to finance these 2M purchases?
FollowBefriend1 threads6,749 comments
Near as I can figure, these mortgage shops have zero assets. Their sole purpose for even existing is to pump loan volume. Enron on the other hand "had" considerable assets.
FollowBefriend2 threads2,498 comments
I agree with your observations. The underlying question in my mind is how much of the buying power of Fortress Home Shoppers (TM) is dependent on stocks, mortgage rates, and the loss of buyers in the lower price ranges who keep the real estate "ladder" moving.
Brand, or whoever it was, sorry the conversation is back to the Fortress...however, I'm always interested in discussing European women!
Enron was a fraud because it lied about its assets, revenue, expenses and operations.
The failing mortgage shops do not appear to be frauds. They relied -- openly and obviously -- upon continuing liquidity in the MBS market. Everyone knew that declining liquidity would cause losses and severe loss of liquidity would cause failure. While they could have reduced their exposure, their investors didn't want that -- they wanted them to run highly leveraged / highly dependent upon MBS liquidity, but because high leverage = high returns as long as market conditions are favorable.
FollowBefriend15 threads5,071 comments astrid's website
If it makes you feel any better, I'll try to take some pictures of attractive Icelandic women, whenever I get there.
The assumption in monetary inflation is that nominal rates are set low by the central banker. Even if real rates are much higher -- for example mortgage rates -- the fact that the Federal Reserve is effectively giving away risk-free money for little to no charge will tend to keep rates lower than the market would have them in a large, open economy like the US. During much of the 70s it wasn't so much consumer debt that inflated as it was corporate debt. I would guess that the real risk of another Fed induced round of inflation would be to promote the "boom" in private equity leverage buyouts (and the associated billions in corporate debt) to a full fledged megabubble. A warning sign of this would be something like one of the DOW going private, for example.
I don't think dividends would have done anything to prevent the fraud at Enron. I'm not sure what the theory is behind that except to say they'd have to pay out more in hard cash on a quarterly basis.
Dividends have 2 big problems.
1. (and the biggest), dividends are double taxed. I personally think no dividends should ever be paid until the double taxation is removed. It is unconscionable.
2. Dividends are just distribution of earnings to shareholders. For a growth phase company (as Enron was supposed to be) I don't want earnings paid back. I want them reinvested for growth as a shareholder. My goal owning a growth stock is growth, not income.
"Lots of folks will moan and groan about the dollar, especially here on Patrick.net"
I bought a memory chip for my digital camera yesterday, the prices have really dropped!! Woot!! Woot!! Last time I purchased one was earlier this year. THEN we went by the food store, the price of milk is going through the roof (it's almost as much per gallon as gasoline!). But we buy memory chips once a year and milk once a week.
FollowBefriend4 threads1,056 comments Boise, ID
propertyshark.com does have records for the BA now.
Thanks. I'd rather not pay the price for RealtyTrac given it doesn't even have title data.
Try lightly grilled memory chip, it tastes exactly like chicken.
How does the exchange rate of euros to dollar affect how much you pay for milk? Maybe lay off the fancy imported frothy and try some of our home-grown dairy extrordinaire.
Seriously, the price of [real] Gouda and fine Brie will probably keep going up. That will hurt many o consumer right in the pocketbook.
And memory chips would be more expensive but for the fact the producing nation pegs their currency to ours by buying all our dead presidents as fast as we can print them.
Probably true. Hence the name of Mr. Devaney's fabulous (and now up for sale) yacht "Positive Carry"? There was a time (as incredible as it may now seem) when Enron was a legitimate company.
Where I'm willing to consider the mortgage shops frauds is in the underwriting, approval and appraisal process.
I believe there are a few firms offering QDI ( qualified dividend income) which are taxed at a much lower rate or not at all after.... (and I don't want to get into trouble here... 2003 EGTRA?)
They are shown on your 1099 under block 10 (b)?
You may be correct. I haven't claimed any dividends that weren't automatically reinvested since '03. In that case, then I would modify my statement to say #2 is my concern.
What constitutes the Q in QDI? I'd be curious to find out.
(I hate tax code and tax related minutia, so I try my hardest to ignore such things when possible.)
The ethanol in our gas tanks has much to do with the higher food prices. Stupid congress critters!
My limited understanding is that the "Q" resides primarily in the 'holding period' on common (and some pfd's). By holding for at least 60 days including through the "ex-date" the legislation reduced the tax bill from 39.6% to 15% for upper brackets and to 5% for the 10-15% brackets.
If I understand correctly this should move to 0% in 2008 for the 10-15% brackets (mom and pop). REIT's don't qualify for the exemption. After 2010 the coach turns back into a pumpkin.
RE: reaching an inflexion (or is it inflection?) point, I gather from the original post that you mean there has been a relatively marked and distinct change in housing market sentiment. I would expand that somewhat - there are clearly multiple constituencies that are at different points along the whole process.
Of course housing bears recognized the housing bubble long ago, and many of them have truly been overzealous in their doom-and-gloom predictions. Many of them have clearly been wrong about the velocity of this turnaround, and it's not clear to me if the magnitude fail to live up to vs. live up to vs. exceed their expectations at this point. I still predict this will be very sticky on the way down.
Then there is the investor class - fund managers, those working in Wall Street and the like. They seem to have been genuinely surprised (god knows why!) by the swift turnaround in overall sentiment re: the secondary mortgage market, credit availability, etc. That's where I think the true inflexion point has just occurred. Clearly, there has been a sea change in sentiment on wall street just in the past month or so. There, I think things are only going to get worse, as more funds revalue or are forced to revalue their MBS-related holdings and find out that they've lost lots of money. This was suggested in a recent WSJ (aka "The Murdoch Times") article, but it's been noted that these funds are in between a rock and a hard place right now. Revalue now, and they risk not only having losses reveal themselves early on, but they may risk a perception that the information they tell their investors is not to be trusted, as they would've been misleading them up to now if it turns out all of a sudden these illiquid securities are devalued (as I think is becoming the consensus re: Cioffi and his 2 Bear Stearns funds that implode). On the other hand, they risk holding onto these securities and riding them all the way down. Add on top of that the "stampede for the exits" phenomenon, and as everyone panics and cashes out, these securities will continue to lose value as everyone sells at the same time - a classic market panic. Of course, another wild card here will be what the Fed eventually decides about rates.
Then there are the average homedebtors. They have been very slow on the uptake. I think a few more savvy sellers (and buyers) have recognized the situation, but I still think a majority across all market segments are still overall clueless. To end on some personal anecdotes, I have at least 3 coworkers who just purchased within the last 3-4 months, as recently as this month for one of them, who are still talking about how prices continue to go up, the market is strong in the Bay Area, etc etc. Granted, that may be true in pockets, but I would have thought even the typical clueless Bay Area buyer would by now be able to smell that something stinky has been brewing.
I've wasted so much time worrying about inflation.......for no good reason..
I hate when that happens!!
I think one of the things I was the most wrong about was that there was virtually NO price correction in most markets until credit availability had become an issue. Or as others have said "hit the wall doing 100 m.p.h".
I guess it was just wishful thinking on my part to believe that any meaningful correction would take place FIRST (as sales volumes tapered off) and leveraging yourself no longer made sense, no matter HOW MUCH credit was still available! In that regard, I suppose... I was delusional.
The underlying question in my mind is how much of the buying power of Fortress Home Shoppers (TM) is dependent on stocks, mortgage rates, and the loss of buyers in the lower price ranges who keep the real estate “ladder” moving.
That's an interesting line of thought. It would be useful to 'deconstruct' the bubble in various regions (SillyValley, Fortress, Bend, Florida, IE, SAC, PHX, Vegas, FortCollins, etc.) because different factors contributed to it in varying degrees.
For the Fortress (deal with it, Brand :-) ) specifically, tech stocks play a disproportionately large role in the 1M to 1.5M range. Even without huge lottery wins, even plodders who were just putting a decent chunk of money into ESPP for the past five years at a large employer like CSCO or NVDA or NTAP would have a respectable amount of appreciation - to say nothing of high-fliers like AAPL or The G. This is why I think a stock market downturn and/or layoff news will be a body blow to this area.
Mortgage rates (and more importantly the lack of risk premium on Jumbo loans) were a factor in the Fortress, but not to the same extent as in someplace like South San Jose where the rates and easy-credit were the most important thing.
As with any Ponzi scheme, the entry-level suckers are absolutely indispensable, but in many cases, the 900K crowd was the entry-level since many of them were first-time buyers liquidating their combined 250K ESPP hoard and pouring it all into a stucco sh*tbox.
Anyway, just IMO.
FollowBefriend23 threads2,038 comments surfer-x's website
My limited understanding is that “Q” resides primarily in
DinOR that would be either London or The Continuum
Thanks, yes I see. And what a prospect. I suppose we'll see, one way or another.
So if inflation is a likely prospect in the future, how will we see it coming? Can we just read the government numbers and react to them, or will it be too late at that point? Or can we just follow interest rates, or are they an unreliable indicator of inflation?
Secondly, I don't see how investing in inflation-indexed securities could ever be as effective as having bought (leveraged) fixed-rate debt. Given that the debt option is too late for those of us who are still renters, I don't see how renter/savers can avoid being screwed.
Randy, a tutorial?
The rate I've been quoted for a 30 year fixed loan (taking out 500K assuming 20% down on a house) has gone from under 6 (with 2 points) to 7.6 with 2 points in just 1.5 weeks.
It will be interesting to see what sort of pressure this puts on prices even in sticky areas.
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