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Bay Area housing crash continues


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2006 Jan 2, 6:15am   23,980 views  215 comments

by Peter P   ➕follow (2)   💰tip   ignore  

Let's try again.

#housing

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1   Peter P   2006 Jan 2, 6:38am  

This year will be interest times for recent homedebtors.

Psychology is changing fast. The exit is tiny.

2006 - Sheeple Stampede.

2   Peter P   2006 Jan 2, 6:43am  

Paul McCulley from PIMCO:

A key characteristic of the property market is that it’s very momentum-driven. This is sometimes called a "reflexive" market, meaning that people are more excited when prices go up even though there is less value, and less excited when prices go down even though there is more value.

Because of reflexivity, once momentum turns and home price appreciation slows, we should see a rather dramatic slowdown in volumes. Home prices don’t have to actually fall for you to have a sharp slowing in the volume of transactions. That is a key analytical aspect of our forecast that a slowdown in home price appreciation will have a bigger impact on the household’s ability to withdraw equity than the consensus probably thinks.

3   Peter P   2006 Jan 2, 6:44am  

Reflexivity! I have been talking about this for ages.

4   surfer-x   2006 Jan 2, 6:49am  

that a slowdown in home price appreciation will have a bigger impact on the household’s ability to withdraw equity

Now this is why I love the English language, so what you are saying is that the McDebtor won't be able to extract more money from their $hitbox because there is none? Nice. Is he angling for the Fed job when HeliBen crashes and burns?

It's not that housing is crashing, it's that the market is "moderating". Not crashing but equity building is slowing.

5   Peter P   2006 Jan 2, 6:54am  

Surfer-X, reflexivity will further infer that a "moderating" market will have impact on liquidity and will then feed back into the market. Soon enough, prices will have to correct. Later, lenders will be unwilling to expose themselves to falling value. As a result, prices collapse. Finally, regulators will be pointing fingers at each other regarding loose credit standards. Rules will be implemented. Prices will not be revived for quite a while.

Only then we have the "landing".

Those who are saying that we have already soft-landed are likely to walk off from a still-flying plane.

6   San Francisco RENTER   2006 Jan 2, 8:02am  

"This year will be interest times for recent homedebtors." -PeterP

Yeah, what sucks is the recent buyers are the ones who are going to get killed--probably mostly first-timers who stretched to get in. I feel pretty bad about this, because most of these people didn't know better and felt like they had to get on the housing train before it left the station. Yes they SHOULD have known better, but too bad too bad. I have three friends who streched into Bay Area condos over the past 8 months, 2 of the 3 are basically realizing right now that they are screwed. Try as I might, I coudn't convicnce them not to buy--after all, I'm just a finance professional with a vested interest in not wanting to see my friends get screwed, what the Hell do I know? Too bad, too bad.

7   surfer-x   2006 Jan 2, 11:35am  

All the Real Estate agents tell me so.

Well then it must be true. I met Superman and he told me he was afraid of kyptonite, I didn't question him either.

8   DinOR   2006 Jan 2, 11:56pm  

Until this past long weekend I had never actually seen the show "Flip this House". The Discovery Channel was having a marathon. Now, I'd heard quite a bit, but this is just something you have to see for yourself. Talk about garbage-in/garbage-out! Most of the episodes aired appeared to be from So Cal in the spring of "05" complete with the usual assortment of unemployed and unemployable following their vision of, well, EASY MONEY! One episode showed some guy that used his friends on the weekends to schlock together a home that didn't look all that bad to begin with. To further cut corners the guy used meth addicts to do the roof and they slopped gobs of roofing tar down through to the open garage door below. The garage door should have been replaced, that stuff leaves a residue FOREVER! So what did my wife and I learn?

Novice; lacking the skills of a stoned high school shop class:

Enlists reluctant help from even more novice soon to be ex-friends:

79 trips to Home Despot:

Pay roofing crew in meth:

Find Realtor TM (also on meth) to list low to start bidding war = ?

EASY MONEY! People, if that doesn't spell CRASH I don't know what does.

9   frank649   2006 Jan 3, 4:14am  

Very interesting read:

http://www.mises.org/story/1994

10   KurtS   2006 Jan 3, 4:55am  

we met some flippers at an event a couple of moths ago boasting of how they were going to “clean up” in the Spring..well…they’re cleaning up a little early..only it’s mud.

LOL...yeah. First comes the mud, then possibly a bath.
Especially given recent events, will buyers flock to Sonoma co. this spring?
And how many will overleverage to buy in Napa?

11   Peter P   2006 Jan 3, 5:13am  

Fed seems to indicate that the tightening cycle is nearing its end. Be prepared for trolls.

I maintain that market psychology is the most important factor. Interest rate controls real price level, not real price changes, which is affected by interest rate changes.

12   Peter P   2006 Jan 3, 5:16am  

Gold is on a rally today. It may soon retest its December peak.

13   KurtS   2006 Jan 3, 5:26am  

I maintain that market psychology is the most important factor. Interest rate controls real price level, not real price changes, which is affected by interest rate changes.

And, perhaps there are fewer willing fools out there in '06, since many already bought in? What will happen to market psychology when those exotic loans convert? There's also a bit of euphoria spilling over from credit-fueled consumerism into real estate. Spend->feel confident->spend more. Of course, this isn't news. Has equity extraction slowed? If '02-03 was the "big bang" for real estate, the "big crunch" may inevitably follow.

14   KurtS   2006 Jan 3, 5:53am  

that the tightening is over are RE Bulls going to come out of the woodwork the NEXT DAY and say; “We’ve taken the worst you could throw at us and we’re still standing”!
DinOr, PeterP-

At this point, wouldn't revived liquidity be moot, since the banks have pumped most of the loan volume already, and their margins are growing increasingly thin?

Driving that (debt) train, high on cocaine,
Casey jones is ready, watch your speed.
Trouble ahead, trouble behind,
And you know that notion (oh sh!t) just crossed my mind.

At this point, the cheerleaders sound just like addicts of their own delusions.

15   losstotheworld   2006 Jan 3, 5:58am  

dear peter
gold is on rally, oil is upand guess what even the dow is up 130 points. Dollar is down
Someone is buying or it might be the fed injecting liquidity in the market. I am starting to beleive david yu more and more. you can access his thoughts on www.davidyu.com.

BTW: the talking heads on CNBS think that 6%realtors fees is too high and they were airing a segment called "sale by owner".
Only one crook can recognize the other crook. May be the realtors association should retaliate and talk about the options that wall street stock brokers and their elk get.

16   laverty   2006 Jan 3, 6:05am  

Letter to inman.com today pretty much sums up the sentiment of this website:

LETTERS TO THE EDITOR

Renters not losing out in all markets

Re: ''Normal' real estate market creates new winners, losers' (Dec. 28)

Dear Editor:

I am one of those people living here in Los Angeles, but I don't think I am that much of a loser. To make my point, I rent in L.A. at the beach for $2,000 (out of pocket). If I were to buy an $850,000 home, which is a step down from what I live in today (roughly valued at $1 million) with a 20 percent down payment, my property tax: $566 ($885 per month at 1.25 percent before deduction, $566 lost after deduction) plus interest: $2,097 ($3,277 per month at 5.9 percent before deduction, $2,097 lost after deduction) plus other costs: $350 (insurance, maintenance, etc) gives me a total: $3,013 (out of pocket).

The equity gained from my payment is awash with the loss of interest I could have gotten on my down payment of $170,000. So I can rent a dwelling for $2,000 or rent money to own that dwelling for $3,000. This is not an exaggerated story. Here in L.A., home prices are 10 to 15 times average incomes. Traditionally, five times incomes indicates the top end of the market due for correction. Also, home prices are 300 times rents. I rent because I have a nicer dwelling on the beach with a full ocean view for $1,000 a month less after tax deductions than owning an actual house. The only thing that substantiates the value of that home is the assumption that it will continue to appreciate. When that stops, and it will, there will be absolutely no financial reason to pay that price for that home in relation to rents.

I don't see rents skyrocketing, so where does that leave home prices? In the past, home prices would stay flat in many markets after a boom because inflation pushed up rents and incomes until they caught up with home prices. Today we have about 2.5 percent inflation. If Southern California home prices remained flat it would take 16 to 20 years for rents to catch up. When you have fundamentals like these, the benefits of home ownership literally evaporate.

Right now the loser is the person buying a home at a price they can't afford with an interest-only loan at the top of one the largest run-ups in real estate this country has ever experienced.

John Butler

17   losstotheworld   2006 Jan 3, 6:21am  

hai bloggers
i want to know more about argentina.
actually i will be visiting buenosaires for 2 weeks. Is it a gold loving country? When the argentinian financial crisis happened did the government seal off all the bank safety vaults.

did the argentinian govt confiscate all the gold of the private
citizens?

18   Jimbo   2006 Jan 3, 6:41am  

I think homes are overvalued, too and looking for a correction, but I think it will be a moderate one initially (10-15% yoy from now) and then a decade or so of stagnant nominal prices, which means the real, inflation adjusted, values will slowly go down.

That is what happened after the last boom and the one before that and things really aren't that different this time.

I am pretty happy to be locked into a 30 year mortgage at 5.25%. If nothing else, it is a great hedge against inflation, which I suspect will be picking up pretty soon.

Glad you found happiness elsewhere Need 2 Leave, but I am personally quite happy with where I am now. I think San Francisco is a great place to live, probably the best place if you are one half of a mixed race couple. I would hate having to commute on the freeways here though. Both my wife and I work downtown and take MUNI to work. The only time we use a car is for shopping on the weekends.

19   Peter P   2006 Jan 3, 6:54am  

Friggin awesome site. I’ve got a mortgage broker friend who is trying to tell me that it’s still wise to buy now, and that the house I buy will never be worth less than I paid for it. I just sent him your article.

I sent my friend the link to this web site and he said that it is completely stupid.

This is a friend who is always wrong. He bought gold at $800 and sold after it crashed to a new low.

20   laverty   2006 Jan 3, 7:00am  

"Maybe John Butler is lucky that he can rent $1mil home for 2000. Archstone apts here rent at 1600 for a 2 bedroom"

Perhaps, but that 2 bedroom Archstone apartment, if it went condo, would likely go for $500K minimum, correct?

21   Peter P   2006 Jan 3, 7:04am  

Perhaps, but that 2 bedroom Archstone apartment, if it went condo, would likely go for $500K minimum, correct?

Apartments can command higher rent because

1) leases can usually be extended over many years
2) there are more services and amenities (e.g. pools, package signing)
3) maintenance and management are usually on-site

22   laverty   2006 Jan 3, 7:40am  

"Apartments can command higher rent because

1) leases can usually be extended over many years
2) there are more services and amenities (e.g. pools, package signing)
3) maintenance and management are usually on-site"

Very true...my newly divorced aunt just rented a 3 bedroom SFR on a 0.25 acre lot in Clayton, an upper middle class Contra Costa town, for $1700/month.

23   Peter P   2006 Jan 3, 7:55am  

Very true…my newly divorced aunt just rented a 3 bedroom SFR on a 0.25 acre lot in Clayton, an upper middle class Contra Costa town, for $1700/month.

I am trying to move out of San Jose when our lease is up. Then we will have to go through looking for an apartment again.

(It is not bad considering that we would be stuck if we had bought)

I do not want to rent from a private landlord because many homes will be put on the market very soon.

There are many choices but finding a good apartment is always a challenge because I am quite picky and have strange requirements/preferences.

24   Peter P   2006 Jan 3, 8:51am  

In other news, again streight off of my little superheterodyne mindrot machine, renters are being evicted at rates not seen since the dot-bomb in SF, as owners are converting apartments under the Ellis Law, to condos etc. “This will create a whole new class of homeowners” lol.

They are just converting them into future affordable housing. This is fine with me. :)

25   Peter P   2006 Jan 3, 9:32am  

Since this thing is about BA RE, with all the earthquakes happening around the world and around the US, what size of one would it take to turn the SF RE market around, maybe a 7?

Let's not hope for one.

For instance, I’d not buy this place I’m in, no matter how cheap - it’s a $hitbox.

But they will drag down values of other places too. :)

26   Peter P   2006 Jan 3, 9:46am  

Somehow, that story is no longer interesting to the mainstream media, anyone else notice how the Vegas RE collapse is no longer news?

How about San Diego?

When the burst hits more people, media sensationalism will come in and spread the news. When suffering becomes personal, fear will reign among leveraged homedebtors.

27   HARM   2006 Jan 3, 9:50am  

Yet another f@cked borrower anecdote...

I've acquired something of a reputation as RE bear/Bubble theorist at work (shocking, I know :-) ). Despite this, occasionally people I've known for years will come up to me out of the blue and start talking shop about RE "investing" --as though this is something I would think is a great idea (under the current circumstances).

Just today, a colleague I've worked with some 4 years told me all about some great opportunities (through his local chapter of Marshall E. Reddick investment club). He recently bought two out-of-state rental properties --one near SLC, Utah, the other in Dallas. Naturally (on the sage advice of his investment club), he used 5/1 I/O ARM hybrids.

I asked him why he did that given rising rates, and relatively still cheap fixed-rate loans (he had good credit). What else?: negative cash flow. He could not afford the "burn rate" of conventional amortizing loans on these two properties --"affordability" was based on the I/O teaser rate only. Plus, he "can always refinance" when the I/O fixed period is up and "cash out my equity gains".

*Sigh*...

So, once again, I found myself congratulating another clueless friend and f@cked borrower on his great "deal", while politely suggesting that (a) RE prices don't necessarily always go up, (b) if they don't, he may have a tough time with the re-fi, and (c) he consider converting his I/O hybrid ARMs to amortizing fixed-rates, or sell if this isn't possible. He politely nodded while this went in one ear and out the other, while asking me if I'd like to come to the next club meeting.

Such is life in Bubbleville.

28   Peter P   2006 Jan 3, 9:55am  

Just today, a colleague I’ve worked with some 4 years told me all about some great opportunities (through his local chapter of Marshall E. Reddick investment club). He recently bought two out-of-state rental properties –one near SLC, Utah, the other in Dallas. Naturally (on the sage advice of his investment club), he used 5/1 I/O ARM hybrids.

SLC does not look as bad. If one does not want negative cashflow, she can always "buy" positive cashflow with more downpayment. It is fine to use a hybrid loan so long as a hedge plan exists. Relying on future refinancing is a dangerous move.

People never learn. I stopped advising friends. They will have to learn it the hard way.

29   Peter P   2006 Jan 3, 10:33am  

What happened to the Housing Bubble News Links? They seemed to have stopped on 12/30. I look forward to reading them as my morning pick me ups!

Perhaps Patrick is busy. It is good to know that the news of bubble bursting is going more mainstream every day. The psychology is changing. The sheeple are scared.

30   HARM   2006 Jan 3, 10:37am  

@Peter P,
I know --it's just hard watching it happen to nice (but financially clueless) friends. Hopefully, since these aren't major bubble markets he will get out with minimal damage --and a new outlook on the fundamentals of RE "investing".

@BustBubbleBust,
Patrick's probably taking a much deserved rest for the holidays. I'm sure he'll pick it up again soon.

31   Peter P   2006 Jan 3, 10:38am  

I know –it’s just hard watching it happen to nice (but financially clueless) friends.

Yes, it upsets me a lot. But there is only so much one can do.

32   Peter P   2006 Jan 3, 11:04am  

Another useless restriction from a useless group:

http://tinyurl.com/chsfr

Perhaps they should convert the UN HQ in NY to condos.

33   KurtS   2006 Jan 3, 2:43pm  

KurtS..right now a great deal of Napa is flooded.

Yes, we just spoke to friends in St. Helena. Luckily they were on higher ground.

34   San Francisco RENTER   2006 Jan 3, 2:55pm  

"Question to all you wonderful RE Bubble posters, what kind of a % down cut do you see for SF, and is SF the epicenter bubble?" -- Seenthisb4

I personally do not see SF as the epicenter of the bubble at all. I think SF will drop 20 to 25% TOPS when this thing stars to deflate over the next few years. What SF IS the epicenter of is the strongest economic region in America. This of course is a HUGE driver of our current housing boom. Easy cheap money from the FED was almost an equal driver, but we never would have seen the crazy bull run we've had if the Bay Area didn't have such a strong economy with so much money to throw around locally.

If I was going to call a bubble epicenter of the whole country it would be SoCal: San Diego and then LA. And then all these boondock NorCal little towns that blew up just because they're within commuting distance of SF: Modesto, Madera, Sacto, Vallejo, etc. Those places I think are going to blow up big time.

35   San Francisco RENTER   2006 Jan 3, 3:08pm  

"I am pretty happy to be locked into a 30 year mortgage at 5.25%." -- Jimbo

As well you should be. If you can afford to own here in SF with a 30 year fixed on a great rate, you're all set. You are definitely in the minority though!

"I would hate having to commute on the freeways here though. Both my wife and I work downtown and take MUNI to work." -- Jimbo

Me too, and the great public transportation here is one of my favorite things about this city. I only drive my car on the weekends when I want to leave town and explore the rest of the NorCal wilderness!

36   Peter P   2006 Jan 3, 3:10pm  

In the visions of looking for the perfect dream home, and investment opportunities, this may be the new mecca…

http://www.burjdubai.com/

I did "looked" at some Dubai website. Nice condos they have.

One crucial thing: can I get bacon there?

I will not live in a place that restricts my diet. I am already pissed about the restricted caviar export.

37   San Francisco RENTER   2006 Jan 3, 3:16pm  

"In other news, again streight off of my little superheterodyne mindrot machine, renters are being evicted at rates not seen since the dot-bomb in SF, as owners are converting apartments under the Ellis Law, to condos etc." -- SunnyVale_Renter

Hey, that's funny, I just read that article in the Chronicle an hour ago on BART on my way back from SFO. They put in a nice little bar graph showing that Ellis Act evictions are at the second highest level they've ever been--first highest was 2000, just before the tech crash. I would put good money on the line that this will be the last big year for Ellis Act condo conversions for quite some time. Lots of my SF friends and neighbors are going to rediscover the "joy" of renting!

38   San Francisco RENTER   2006 Jan 3, 3:27pm  

"Hmmm….according to whom or what is SF “the strongest economic region in America”??? Top or close to top in income levels perhaps, but that’s nothing new. In terms of overall economic heealth, the unemployment rate, for example, is reasonably low..."

According to ME of course, for many of the reasons you just cited! I think we have the 2nd highest American median income to NYC here (I could be wrong of course, I'm just pulling that out of my ass), as you said low unemployment, and a very diverse economy that has everything from super high tech computer stuff to International finance hub to agricultural breadbasket to Dungeness crab fishery! There's no denying that the economic strength of this region is a HUGE factor in the run-up in our real estate. Anyway, if you've read any of my prior posts, I think we've shot way past any sustainable RE level and will have a nasty fall.

39   Peter P   2006 Jan 3, 4:07pm  

If yu are really serious, I can get you a connection for Chilean caviar that makes Russian stuff look paltry. I will have to charge you my caviarrealtor â„¢ commision though. Let me know.

I am sure Chilean caviar is very good, but I prefer FSBO caviar at this point. ;) You know, I need to save the commission money.

For now, there is farmed caviar from good old USA. It is not bad for the price. I just do not like the UN. It cannot prevent human suffering in the world. Yet it worries about fish!

40   Peter P   2006 Jan 3, 5:39pm  

But my point is, the US’s population overall could be much better off under the type of moderate Islam the US could end up under, than under the Jewish/Christian regime they suffer under now.

Huh?

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