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How far would prices in LA/SF drop if FHA 3.5% down loans were eliminated?

By CovfefeButDeadly following x   2012 Jan 13, 1:03pm 27,746 views   102 comments   watch   nsfw   quote     share    


I ask because theres a few desireable areas, and a few up and coming portions of LA where investors are paying cash, fixing the places up, then flipping at huge profits. Almost all final user buyers are using 3.5% down loans(both annecdotally and via realtor info) in these areas because they do not have 20% down.

In my mind, this means that if the fed stepped away from low down payment mortgages, prices would have to fall to a point where people could afford 20% down. Since its clear people can't and won't save the amounts required now, prices would have to meet what people could afford.

Example:

http://www.redfin.com/CA/Burbank/1011-N-Brighton-St-91506/home/5335424

http://www.redfin.com/CA/Burbank/1845-N-Niagara-St-91505/home/5359870

http://www.redfin.com/CA/Los-Angeles/334-Kirby-St-90042/home/7087245

http://www.redfin.com/CA/Los-Angeles/442-N-Avenue-52-90042/home/7077727

As you can see from the links above, the homes sold likely cash for much much less than their resale a few months later. And while the homes were likely in poor condition, clearly the flipper is making bank. On the last one esp...over $200K in profit...a flipper laughing all the way to the bank. And theres also just about no way the flipper even put half that into the upgrades(LOL at the front yard).

And heres the rub....anyone that had the ability to scrape up 20%($100K), would have been able to buy at $290K, and put the rest into fixing up the place, at least part way. Thereby paying $330K, and doing other upgrades at a later point in time. With $40K, easily could have done the roof, plumbing, electric, painting, flooring, some windows, and landscape on the very cheap. Clearly I would think that saving $170K would be high on most peoples lists(not even factoring in the cost of interest).

But thats not whats happening because people don't really have that money. Instead, they are able to STILL purchase with almost entirely funny money. And they do really stupid things like overpay on a house by at least $100K.

So do I have this right? If 20% down became the new norm.....would prices fall as far as I seem to think?

#housing

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63   dunnross   ignore (6)   2012 Jan 15, 2:19pm   ↑ like (1)   ↓ dislike (2)   quote   flag        

SubOink says

so if you are the super smart genius here that can make great predictions, I am surprised you put all your eggs in one basket and became a gold bug.

I wanted to leave some profits for other people. Even the smartest financial genius in the world, cannot predict everything 100%. However, I believe, that in a Kondtratieff Winter, buying Apple, OIH and other stocks, is not diversifying at all, but putting more of your eggs into one basket. Only gold doesn't correlate well with the S&P, but all those other investments do.

64   B.A.C.A.H.   ignore (0)   2012 Jan 15, 2:27pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunross,

the Bay Area is not some podunk backwater sh*thole compared to Chicago. The weather is not better in Chicago than it is here. You are voting with your feet by being here.

SFH's in The Fortress are not going back to 1975 prices.

Gold pays no income. But rentals at $3K per month in San Jose do.

K-12 API do not guarantee any single kid, nor your kids a meal ticket for life.

San Jose at $3000 per month rent is no reasonable valuable proposition.

65   dunnross   ignore (6)   2012 Jan 15, 2:45pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

B.A.C.A.H. says

the Bay Area is not some podunk backwater sh*thole compared to Chicago.


Yes, why don't we compare the main street in Chicago to the main street in San Jose, and let the rest of the members of this blog judge for themselves.

66   dunnross   ignore (6)   2012 Jan 15, 3:04pm   ↑ like (1)   ↓ dislike (1)   quote   flag        

B.A.C.A.H. says

Gold pays no income.

Gold pays no income. But it doesn't call you in the middle of the night and ask you to pay the mortgage, every month, either. Neither, does it leak rain water on your head, when it rains for 3 weeks in a row.

67   thomas.wong1986   ignore (3)   2012 Jan 15, 4:19pm   ↑ like (0)   ↓ dislike (2)   quote   flag        

B.A.C.A.H. says

SFH's in The Fortress are not going back to 1975 prices.

Stops being the Fortress, when others have more to offer.

Santa Clara County school board votes to approve 20 new Rocketship charter schools

http://www.mercurynews.com/education/ci_19550940

"Rocketship has shown what works," San Jose Mayor Chuck Reed told the board. "Let's take it, let's replicate it."

Rocketship operates five schools in San Jose, California, serving 2,500 students and plans to open two additional schools
in San Jose in 2012. Among 2,000 low-income elementary schools in California, these first three Rocketship schools are
all in the top 5% statewide and are the top performing low-income elementary schools in San Jose and Santa Clara
County.

Rocketship schools have results rivaling wealthy school districts (such as Palo Alto) while serving 80%+ lowincome
students and 70%+ English Language Learners. In 2013, Rocketship will open its first school outside of
California in a city to be announced in March, 2012.

BTW - Good luck trying to find a good Pho resturant in the Fortress.

68   thomas.wong1986   ignore (3)   2012 Jan 15, 4:25pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

We tried to put up massive towers in San Jose, but it never worked out... Gold Building in 1987 went belly up, and more recent Sobrato Towers in 2000 has had low occupancy.

http://en.wikipedia.org/wiki/Sobrato_Tower

69   dunnross   ignore (6)   2012 Jan 16, 10:03am   ↑ like (0)   ↓ dislike (1)   quote   flag        

B.A.C.A.H. says

K-12 API do not guarantee any single kid, nor your kids a meal ticket for life.

Then why do we have this concept called "The Fortress" at all?

70   dunnross   ignore (6)   2012 Jan 16, 10:06am   ↑ like (0)   ↓ dislike (2)   quote   flag        

B.A.C.A.H. says

San Jose at $3000 per month rent is no reasonable valuable proposition.

A $3000 per month rent is what keeps the wife from wanting to buy a house.

71   anonymous   ignore (null)   2012 Jan 16, 10:11am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

B.A.C.A.H. says

San Jose at $3000 per month rent is no reasonable valuable proposition.

A $3000 per month rent is what keeps the wife from wanting to buy a house.

Rule #1 : Always do what the wife wants

Rule #2 : Always do what the wife wants

:)

72   B.A.C.A.H.   ignore (0)   2012 Jan 16, 10:50am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

why do we have this concept called "The Fortress" at all?

An immigrant who used to post here with the handle "OO" referred to West County and parts of the Peninsula as a fortress because those neighborhoods were immune from the crash in house prices that the overall region experienced. His "fortress" was a fortress against depreciating home prices.

I like to use Big Names for Big Concepts so I added the "The" and capitalized it to Fortress. Kinda like in The Bible, the people genuflecting to The Lord.

In your society in The Fortress, people are genuflecting to Their Lord, that lord being The Privilege of Being a HomeOwner inside of The Fortress.

73   oliverks1   ignore (0)   2012 Jan 16, 4:39pm   ↑ like (0)   ↓ dislike (2)   quote   flag        

E-man says

Btw, the last person paid all cash for that $500k property or u didn't catch that?

How do you figure this out? Is there a listing of the mortgages somewhere?

Oliver

74   oliverks1   ignore (0)   2012 Jan 17, 2:28am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

Yes, why don't we compare the main street in Chicago to the main street in San Jose, and let the rest of the members of this blog judge for themselves

Having lived in the South bay, I am always entertained at how many people think it is the greatest place on earth. In practice, outside of jobs and decent weather, there is not that much to recommend for it. Or as I joke, never has a place generated so little culture with so much money.

75   m1ckey6   ignore (1)   2012 Jan 17, 3:50am   ↑ like (3)   ↓ dislike (0)   quote   flag        

A lot of people don't even have the 3.5% to put down. I frequently lend to people who are borrowing for their FHA down payment.

Despite what SubOink thinks, when you get into people's actual balance sheets they almost always have close to no cash. If someone tells you "I have over $100k saved" what they mean is that they have $101,000 in their 401k. This money has little relevance because it is usually in at-risk investments and it has very poor liquidity. Unless you are willing to destroy your retirement to buy a house this money does not exist.

If 20% came back in LA the market in the middle to the bottom would almost literally stop.

76   anonymous   ignore (null)   2012 Jan 17, 4:06am   ↑ like (0)   ↓ dislike (1)   quote   flag        

m1ckey6 says

A lot of people don't even have the 3.5% to put down.

And in that case, they shouldn't buy a house. How are they going to afford a mortgage if they can't even save 3.5%?

Once again, not everybody can buy and own a house.

This is little change to the past, as a lot of people have not been able to buy homes in the last 100 years - It took my parents until they were mid 50's to buy their first (and last) house. And this is pre- bubble 1 and 2.

If you don't have $15k saved even, no drop in housing will help you. You are simply not in the market for a house and gotta keep renting cheaply, live below your means and save money - that's how we did it.

77   FunTime   ignore (0)   2012 Jan 17, 4:58am   ↑ like (1)   ↓ dislike (0)   quote   flag        

toothfairy says

You pay 3k per month do you realize you've spent 216k in rent money since you sold in 06?

You do realize that when you buy a house, you spend all that money plus 15 or 30 years of interest in the time it takes to sign the pages?

216k is a downpayment in the Bay Area. Still!

So would you rather spend that money to live somewhere for five or six years, or spend it as the beginning of a lot of other spending over 15 or 30 years on an asset that will barely hold it's value?

78   someone else   ignore (0)   2012 Jan 17, 5:01am   ↑ like (0)   ↓ dislike (1)   quote   flag        

Exactly!

Please use the calculator to see a more detailed comparison of the losses from renting vs owning. It's a loss either way, but usually the loss from renting in the Bay Area is much smaller than the loss from owning.

Here's the calculator:

http://patrick.net/housing/

It's free to use again.

79   LAO   ignore (6)   2012 Jan 17, 5:45am   ↑ like (0)   ↓ dislike (1)   quote   flag        


Exactly!

Please use the calculator to see a more detailed comparison of the losses from renting vs owning. It's a loss either way, but usually the loss from renting in the Bay Area is much smaller than the loss from owning.

Here's the calculator:

http://patrick.net/housing/

It's free to use again.

Love your calculator Patrick.... But it appears to low-ball the MID savings... I punched in the numbers for my MID in turbotax and my savings are more than double this year than your calculator calculates.

Are you not including the state income tax deduction? In a state like CA where income taxes are high.. That's a major portion of the MID savings.

80   someone else   ignore (0)   2012 Jan 17, 8:23am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Ah, I think you're right. I remember leaving that out because each of the 50 states has different income taxes.

But double? That's hard to believe. Do they spell out their calculations?

81   dunnross   ignore (6)   2012 Jan 17, 8:46am   ↑ like (0)   ↓ dislike (1)   quote   flag        

SubOink says

And in that case, they shouldn't buy a house. How are they going to afford a mortgage if they can't even save 3.5%?

Exactly. That's why I said that house prices will need to fall 5 times 80% (20 / 3.5) = 5, if the FHA loans go away. The people who can afford to pay more, but still get an FHA loan, also go into this formula, because, obviously they found a better investment to use their additional money on, so if they had to pay 20%, they wouldn't want to waste their 20% on a falling asset, in the 1st place, and would rather put it into some other investment.

82   tatupu70   ignore (0)   2012 Jan 17, 9:16am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

if they had to pay 20%, they wouldn't want to waste their 20% on a falling asset, in the 1st place, and would rather put it into some other investment.

Another in the string of ridiculous statements from Dunross. That statement makes no sense at all.

83   anonymous   ignore (null)   2012 Jan 17, 9:18am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

SubOink says

And in that case, they shouldn't buy a house. How are they going to afford a mortgage if they can't even save 3.5%?

Exactly. That's why I said that house prices will need to fall 5 times 80% (20 / 3.5) = 5, if the FHA loans go away. The people who can afford to pay more, but still get an FHA loan, also go into this formula, because, obviously they found a better investment to use their additional money on, so if they had to pay 20%, they wouldn't want to waste their 20% on a falling asset, in the 1st place, and would rather put it into some other investment.

I think there is no point discussing/arguing over what would happen IF...because the truth is - we don't know what would really happen. I don't and you certainly don't.

Anyways, FHA isn't going anywhere...

84   LAO   ignore (6)   2012 Jan 17, 9:23am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

Exactly. That's why I said that house prices will need to fall 5 times 80% (20 / 3.5) = 5, if the FHA loans go away. The people who can afford to pay more, but still get an FHA loan, also go into this formula, because, obviously they found a better investment to use their additional money on, so if they had to pay 20%, they wouldn't want to waste their 20% on a falling asset, in the 1st place, and would rather put it into some other investment.

Wouldn't the top 1% buy up all the real estate in the United States long before home prices fall another 80%...

I think it's something like 80% of the US population holds only 7% of the wealth in this country...

I'd say the top 20% could end up owning all property in the United States if prices fell too far.

(I think i'd rather be in the top 20% than bottom 80% in that scenario.. just saying).

85   dunnross   ignore (6)   2012 Jan 17, 9:36am   ↑ like (1)   ↓ dislike (0)   quote   flag        

SubOink says

I think there is no point discussing/arguing over what would happen IF...because the truth is - we don't know what would really happen. I don't and you certainly don't.

I don't agree. Doing the math, which I have done for this (although seemingly rhetorical question), really goes far in demonstrating how much FHA is propping up prices, and with the absence of this evil organization, how much prices will fall. So, this knowledge, alone, should scare anybody into buying a house, with or without the FHA support. Actually, I believe that prices will, eventually fall 5-fold, with or without FHA support, because, all FHA is doing is prolonging the ultimate cure of low prices, which is being dispensed by the bear market, but they are not eliminating the cure. This should now be obvious to all of you, since prices are, in fact, still falling.

86   dunnross   ignore (6)   2012 Jan 17, 9:39am   ↑ like (1)   ↓ dislike (0)   quote   flag        

Los Angeles Owner says

Wouldn't the top 1% buy up all the real estate in the United States long before home prices fall another 80%...

I don't think so. The 1% are not stupid, that's how they got to become 1%, in the first place. Why would they buy before we hit the bottom, if they know, perfectly well, that they would only need to compete with the people in the 1% category, and with nobody else. The 99% would run out of money, by that time, because the other 99% either got stuck on the way up or the way down, but they would be completely out of funds to buy at the bottom.

87   anonymous   ignore (null)   2012 Jan 17, 10:30am   ↑ like (0)   ↓ dislike (1)   quote   flag        

dunnross says

Doing the math, which I have done for this

Unfortunately, the world is more complex than your simple math...

If you are so certain that 1) FHA is going away and 2) as a result we will drop 80% then you should invest appropriately - short all real estate stock with all your money.

After all - its very clear math, you couldn't be wrong, right?

Always cracks me up how some people have the arrogance to think they can predict the future...

Any by the way, we don't need the 1% buying up the real estate...on the way down everybody and their gramma will buy a house until there is no house left to buy. Every single person I know will have bought a house - and by the way...I will have bought at least 3 houses if prices drop 80% - with cash. Such Nonsense!

88   dunnross   ignore (6)   2012 Jan 17, 12:36pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

SubOink says

Any by the way, we don't need the 1% buying up the real estate...on the way down everybody and their gramma will buy a house until there is no house left to buy. Every single person I know will have bought a house - and by the way...I will have bought at least 3 houses if prices drop 80% - with cash. Such Nonsense!

But, reality is quite different from your "leap-of-faith formulation", my friend. The graph here is the reality, which completely eradicates your presumptuous deluge.

As you can clearly see, home ownership rate is going down, not going up, as you would like us to believe, and the bottom will not form, until everybody who bought their house during the boom years (1975-2006), would have either lost their house, or lost all their equity. From the graph, you can clearly see that we are a long way from there.

89   LAO   ignore (6)   2012 Jan 17, 1:14pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

dunnross says

As you can clearly see, home ownership rate is going down, not going up, as you would like us to believe, and the bottom will not form, until everybody who bought their house during the boom years (1975-2006), would have either lost their house, or lost all their equity. From the graph, you can clearly see that we are a long way from there.

I love how your graph makes the homeownership rate gap look ENORMOUS... from peak to trough it's less than 6% difference in homeownership rates from bubble to lows.

90   dunnross   ignore (6)   2012 Jan 17, 1:22pm   ↑ like (0)   ↓ dislike (1)   quote   flag        

Los Angeles Owner says

I love how your graph makes the homeownership rate gap look ENORMOUS... from peak to trough it's less than 6% difference in homeownership rates from bubble to lows.

Well "LA Owner". Another naysayer, ha! Well, what you don't understand, is that a 6% difference in the home-ownership rate is actually GYNORMOUS, because, any kind of a market like this operates at the margins. In fact, this 6% change which you see on this graph, is what caused the unprecedented milenium housing bubble, in the first place, and the 3% drop in the home-ownership rate is the cause of this open bust, which we are in the middle of, right now.

Think of this as a tsunami wave which is only about 2-3 feet off the ocean-level, but what an impact it makes when it strikes the shoreline.

91   Watcher   ignore (0)   2012 Jan 17, 1:22pm   ↑ like (1)   ↓ dislike (0)   quote   flag        

Housing prices in Europe to buy are much higher than in the US, but that's not the whole story. For instance, last year, I rented a place in a central area of a large, expensive Italian city for around $1200. The cost to purchase would have been $500K+. The rent is much cheaper by US standards and reflects market values for rents. The 500K+ price to buy represents what the owner would want in their wildest dreams since the property was paid off, literally, 100 years ago. Also European companies have IMO bad corporate governance so there is a disincentive to invest in equities, and property is seen as a "safe" investment so money pours into property from households. Europeans do not like risk at all in general. That is why you don't see any real versions of Silicon Valley or anything else innovative in Europe a few exceptions aside. The Italian word for real estate is immobiliare which means immovable, which I think reflects well the European thinking about their feelings on this type of investment.

92   KILLERJANE   ignore (1)   2012 Jan 17, 2:44pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

Nomograph says

dunnross says

That's why it's so hard for you to believe that somebody could sell their "HOME" and buy a worthless piece of a "barberous relic" back in '06.

I just don't believe *you* did that. You generally sound like a loon who will say anything to try to prove your ridiculous theory about housing crashing to 1975 nominal prices.

dunnross says

And, as usual, I challenge you to eat your hat, about 10 years from now, when house prices do fall to 1975 levels.

In 10 years I will have blissfully forgotten all about you.

In some areas, not CA, housing prices are around 1980 levels.

93   dunnross   ignore (6)   2012 Jan 17, 2:48pm   ↑ like (0)   ↓ dislike (0)   quote   flag        

KILLERJANE says

In some areas, not CA, housing prices are around 1980 levels.

Yes, and soon we will learn to embrace the fact that these types of price declines are the norms, rather than the outliers. The outliers will be places like the BA Fortress and NYC, which will be the last ones to buckle, but, once they do, it will 1975 across the board.

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