patrick.net

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]? :?

cranker says :
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.

Many homeowners are (incorrectly) banking on this same inflation to bail them out when retirement comes. Because inflation generally boosts asset prices. Problem is we do not have a plain vanilla inflation due to expansion of money supply. What we have is commodity price inflation due to supply/demand imbalance and currency devaluation. Increasing interest rates will cure it only so far.

Now that easy credit is gone forever, and cheap credit might follow the suit, there is only one thing that can save housing prices. And that is wage inflation. But wage inflation almost guarantees higher interest rates. That will hurt ARM holders and even others by increased opportunity costs. But why go there ? I can bet my $20 that wage inflation is far far away.

No matter how you look at it, most people who purchased their homes in last 4-5 years will continue to get poorer as measured by purchasing power. At a faster rate than today's renters, who are also losing purchasing power.

As tracked by HousingTracker, the BA median asking price is down from 750K at the peak to 550K today. That's more than 25% decline.

And like some smug elites we are worrying about the Fortress ;-)

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

Or...

Take your stinking hands off me you damn dirty renters!

(Planet of the Apes)

DennisN Says:

> 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.

With small “tear down” condition homes in the area I grew up in selling for ~$2mm we don’t see a lot of cash buyers “downsizing” to the area…

With Prop. 13 keeping taxes low it is often expensive to “downsize”. Some friends of my parents sold their home in Ross (Marin County) to buy a small home on a lot of land in the (Sonoma County) Wine Country and they saw their property taxes rise from ~$200 a month to about $3K a month.

P.S. If you downsize in most California counties you can keep your Prop 13 tax basis, but if you move to a new county most (but not all) will base your taxes on the new purchase price.

P.P.S. I drove through Boise last summer on the way from Sun Valley to Tamarack and had the feeling that the entire place was just a real estate bubble ponzi scheme. Any news on what is happening to home, condo and timeshare values up the road in Tamarack?

Nice to have SP and StuckinBA back posting. If you listened to Christopher Thornberg on Forum yesterday, he says prices are falling not because of the mortgage market, not because of foreclosures, but because prices "had gone up to levels that were simply completely unaffordable", though, he does say that the removal of the funny lending triggered the price declines. He says "prices are coming down, they continue to come down and when they finally do hit bottom they'll sit ther for a long time". He has no doubts whatsoever that prices in the "coastal areas" (i.e. Fortress) will continue to fall. In fact, Andrew Page of Dataquick agrees that coastal California prices will continue to drop. Like Skibum says, they both agree that the inland areas will stabilize first.

stuckinba,

so many homeowners are banking on inflation to dahdahdahdahdah?

There's lotsa homeowners who just slog along from day to day, doin the dailies, it might be stretch to psychoanalyze them.

meant to say “prices are coming down, they WILL continue to come down and when they finally do hit bottom they’ll sit there for a long time”. His idea of a long time is 2 to 3 years.

I feel we'll see some pretty steady drops the rest of this year as the spring selling season has gone by the wayside. How would you like to be someone who sat on the fence for a few years, and to buy in March or April of this year because prices dropped 5 or 10%; these buyers will be down 20% within their first year of ownership - that's a lot of lost equity.

FAB,

You wrote about a realtor's wealthy clients needing real estate loans.

Remember the Google effect and dot com spillover into real estate? Did all (or mostly all) of that overnight IPO wealth go into downpayments or into cash purchases?

sybrib :

Maybe I generalized it too much. But I was writing based on actual conversations with people who bought during the boom. Owning a house - especially outright - provides great protection from inflation because rents go up as wages go up with inflation. Like many other "facts" about Real Estate, people believed in this one too without understanding that this was no garden variety RE cycle and what lies ahead is not garden variety inflation.

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

Seriously, no, not at all. I have nothing against renters - just saying that a coffee-shop waiter's barista's income in the bay area was not likely to be enough for them to be home-owners...

Most layoffs will begin with the consulting firms, many of which employ H1B and L1 visa holders. The big guys cut down on consulting resources/contractors (from my experience) before laying off FTEs.

The Original Bankster Says:
go visit ‘Fashion Square’ in Scottsdale

OT, but any mall that has "Fashion" in its name seems to have a surplus of fat women in sweatpants, stuffing Cinnabons into the painted piehole above their double-chins...

Maybe it is because I was spoiled by a recent six weeks in Omotesando, but American malls seem to depress me even more these days than they used to before.

Snotsdale indeed thinks highly of itself. Over-priced spas, stiffling heat, dust, and a myriad of chain restaurants as far as you can see (through the dust)...yeah, it's really special.

I heard recently that Cinnabon actually pumps scented air into the malls.

yes, and the people of Scottsdale think they’re part of some elite. A very fashionable elite. But they’re really just white trash with credit cards.

The true wealth of a region can be measured by the amount of private jet movements at its airport.

http://flightaware.com/live/airport/KSDL

Judging from the number of visiting Gulfstreams, Falcons, and Challengers, I would not say that the people of Scottsdale are just white trash with credit cards.

sybrib Says:

> FAB, You wrote about a realtor’s wealthy clients
> needing real estate loans. Remember the Google
> effect and dot com spillover into real estate? Did all
> (or mostly all) of that overnight IPO wealth go into
> down payments or into cash purchases?

There is always a lot of pressure for insiders to hang on to stock after the IPO and most people will not sell millions of stock to buy a home so they get loans. I know many many people that hung on to tech stock and watched it drop to almost nothing around 2001. I also have a friend who sold every penny of his stock on the day the lock out ended to pay off his home in Palo Alto and all his car loans. That friend soon lost his job (I forget the “official” reason he was let go, but other insiders told him it was because many of the execs blamed the stock price decline on his dumping of every one of his pre IPO shares).

I drove through Boise last summer on the way from Sun Valley to Tamarack and had the feeling that the entire place was just a real estate bubble ponzi scheme. Any news on what is happening to home, condo and timeshare values up the road in Tamarack?

FAB,
Tamarack is in the news a lot lately. The developer Jean-Pierre Buttplug (sp) has been hauled into civil and criminal courts on related and unreleated (hit and run) charges. Tamarack is in some form of insolvency and no further work is going on at the unfinished condo complexes IIRC.

From 21 Feb 2008, "Tamarack Resort won't fail, even though the two investors who own 75 percent of the resort filed bankruptcy last week. Experts say the Chapter 11 filings by Tamarack CEO Jean-Pierre Boespflug ..."

Idaho is hit and miss about RE bubble stuff. Well-planned subs around established cities like Boise appear to be OK. Fancy-pants bubble resorts like Tamarack are in the hole. The same is true with "start from scratch" places, the most notable around here is the town of Star. Star was a one-horse town that the developers were touting as "the next Eagle" (comparison to say Saratoga or Palo Alto). But bubble developers platted several thousand homesites, buldozed the place, roughed out the lots.....and then VANISHED leaving Star holding the bag. No property tax dollars - lots of expenses. Dozens of developers just vanished without even going through the process of bankruptcy. Sort of like "jingle mail" but on the developer's side.

@DennisN

I had to see it for myself...

The images of Star, ID on Google Maps tell the tale pretty well. It looks like the StreetView photo car has been through there recently, too.

They say that in crisis you have a chance to re-invent yourself.

What will emerge from this recession? I am hoping that:
1. The US starts spending more on R&D then tort defence
2. That the best minds are once again in fields like engineering and medicine instead of Wall Street (since the St was the ONLY place to make money)
3. That social conduct once again becomes everyone's business
4. That the US stops sending trillions of dollars out of the country to buy oil
5. That Congress no longer cuts a check to everyone with a hard-luck story (we privatize gains AS WELL AS RISK)

Looks like congress is going ahead with a Starbucks bailout....

www.scrappleface.com/?p=3014

Star only had a population of something like 2,000 until the bubble developers showed up. Now it has a population of 2,000 plus a few thousand vacant lots.

cranker,

not many people are familiar with the term stagflation. They are counting on inflation to bail them out on the housing debt. Stagflation is the game of this stage, to be followed by deflation (my belief).

In both cases, asset (houses and stocks) will drop, some faster some slower. Until recent homeowners wake up to this fact, they will still see their house as a good store of value.

Re: IPO money. Almost 100% of the wage earners in BA who can quite comfortably afford a desirable home have already bought. What we have left are either
1) qualified buyers who have been holding out (very small and dwindling population)
2) prospective buyers who cannot afford at the current price at all. In fact, they can't even afford it if the current price drops by 25%.

Just put the toilet in and don’t bill ‘em for the upgrade.
Peter P Says:
But they will bill me for having to put the crappy toilet back in.
Besides, I think the rental agreement does not allow that.

The Tenancy Act in my state allows various changes to fixtures and fittings with the agreement of the landlord -- who then owns it -- and the Act also says you have to leave behind any of the agreed modifications! as they're capital improvements. I made a few reversible changes/improvements at one place, and took them all out again when I left, because the landlord was a scumdogger... plumbed and certified toilets are another matter however...

My goodness. GM's tanking almost as hard as CFC. I heard on KCBS that they are calling for a bottom of $7. That friggin' stings, but you have to admit that they earned it.

C'mon.......$50,000 for a pickup truck ain't bad. Just take some cash out of your house and you can write of the interest. Totally painless. Excellent example of putting all of your eggs in one basket. They relied on Joe HELOC & co. for their profits and when Joe got cut off so did they. And have you noticed, they are putting all of the auto makers' woes on the high fuel prices. High gas ain't helpin'-but let's be fair.

Hey BAP,

Did you hear that Merced County has a 10% property tax default. Out of $221,704,000.00, 8,700 properties are late for a tax loss of $22,194,000.00. Stanislaus and San Joaquin are not much better.

More and more pressure is being brought to bear on that market. How low wiil it go? Heh..Heh.

I've been looking at older threads....is there a reason that all the "troll" posts have vanished? A lot of posts reference and rebut phantom troll posts.

Face Reality Says:

For example, suppose you own a typical $1.2 million 4-bedroom house in a good area in the Bay Area and you’re 40 years old. Even assuming an average annual appreciation of just 3% over the next 20 years, the house will be worth close to $2.2 million when you’re 60. That could certainly come in handy for retirement. It may not be the best investment in the world, and it may not cover the whole retirement, but there’s nothing wrong with relying pretty heavily on it.

Speaking of Merced....
Face Reality Says:

Yes, real estate can still be a good investment. For long-term gains, I would buy in places which are undergoing some fundamental change for the better. Such places can still be found, even in CA. For example, Merced where you can still get cash flow with not too much down and where a new UC campus is being built. There are some interesting possibilities in Oregon as well.

Peter,

You can pick up an elongated toilet and seat for $150 at Home Despot. Believe me there are few things easier than swapping out a toilet. Just make sure you use a new wax ring.

More on GM’s market cap.— Stuart Benjamin notes that the market capitalization of all of General Motors' stock has dropped below $5.7 billion. When last week it dropped below $7 billion, CNBC noted:

http://www.spiegel.de/international/world/0,1518,562291,00.html

This is what you get from all the fraud, unethical and criminal behavior of our banking system.

I am almost at the point where I want Congress to reinstate their powers under the constitution and issue our money/currency. I trust 100 senators more than I do any number of wallstreet bankers.

The future is rushing towards us.......

Via: Local6:

Families in a crime-ridden Central Florida neighborhood are arming themselves with shotguns and talking about adding electric barbed wire to stop thieves targeting their homes.

“Somebody is going to end up getting hurt,” resident Andrea Fine said. “The homeowners are tense. We are all on edge. For the first time in my life I’m really scared to live in my home.”

Homeowners living near and on Sanford Avenue in Sanford said crime is so bad that some of them have been robbed three times.

“We were told they would come back and they came back,” homeowner Pat Doughty said.

She is one of several residents who have armed themselves and plan to go to extremes to protect their property.

“My next thing is to put electric and probably some barbed wire or something,” Doughty said. “I’m shooting the next person who comes in. Don’t come on my property anymore.”

Doughty said she is moving because of the crime.

“My kids call every day to make sure we are safe,” Doughty said. “They want us to move and we are going to move because we can’t put up with the crime.”

Families said they want more police patrolling. But plans to add 10 more Sanford police officers could be in jeopardy because of budget cuts, Local 6’s Erik von Ancken reported.

The city’s police chief said he is working on a solution.