patrick.net

Since I'm already veering towards OT, I'd like to add this New Yorker article on the significance of demography.

http://www.newyorker.com/fact/content/articles/060828fa_fact

I think that prices will drop an average of 65% in SoCal, and probaby 50-60% in the SFBA.

(The lesser drop in the BA is due to the fact that there really is a lot of wealth there. Also, the BA is not as poverty-stricken as Los Angeles, it still has a [small] middle class.)

In my opinion, the declines will be greatest in the nicest neighborhoods. This is something new -- in past crashes, my understanding is that the poor neighborhoods were hit hardest, while the nice neighborhoods with good fundamentals were able to retain their value becuase their residents have greater financial resources. This time, I think the opposite will be true. Your affordable working and middle class 'hoods will crash by 50%, while your uppity 'hoods may fall by as much as 70-75%.

There will be a few arees that see declines of 80, even 90%. I can't think of any in California at the moment, altough some of your more ambitious efforts at gentrification might fall into this category. But I can see a house in Las Vegas that is currently selling for $450,000 to be $90,000 in four or five years. I can see that very easily.

"But I can see a house in Las Vegas that is currently selling for $450,000 to be $90,000 in four or five years. I can see that very easily."

If that happens, the utility costs may overtake mortgage payments. Some of the exurbs of Las Vegas may be abandoned altogether because utility, insurance, and HOA fees are higher than the value of the property.

(The lesser drop in the BA is due to the fact that there really is a lot of wealth there. Also, the BA is not as poverty-stricken as Los Angeles, it still has a [small] middle class.)

In my opinion, the declines will be greatest in the nicest neighborhoods. This is something new — in past crashes, my understanding is that the poor neighborhoods were hit hardest, while the nice neighborhoods with good fundamentals were able to retain their value becuase their residents have greater financial resources. This time, I think the opposite will be true. Your affordable working and middle class ‘hoods will crash by 50%, while your uppity ‘hoods may fall by as much as 70-75%.

The first paragraph seems inconsistent with the second. Isn't SF an "uppity hood"?

My guess is that the areas that will get hit hardest are the commuter burbs. Especially in So Cal and NV, there are a lot of outlying areas where builders have been selling mcmansions in the desert for $400-$800K. No one will want these with high prices for energy and water, poor construction of recent developments, etc..

Comment on rents:

There has been a lot of talk about rents rising as a result of the HB. I don't see it. If we are headed for a recession and HB crash, then the middle class will hold on to their houses. The bubble-sitters with decent incomes which hold up in the recession will be weighing whether it makes more sense to rent or buy as prices fall. Some will buy, increasing supply of upscale rental housing. The young, poor and lower-middle class will move in with their parents or move to lower cost areas (out of state for US citizens, out of the US for immigrants with better prospects and family ties in other countries). Plus, with the huge inventory overhang that already exists, a lot of these houses will be rented out, which will further increase competition among LLs for good tenants.

Most informed people agree that the HB is unwinding, which could well lead to a recession. It is incongruous to think that rents will rise in a recessionary environment. If anything, they should fall.

Claire,

The best way to deal with the AMT is to stay clear of it to begin with. If you even THINK you and your husband are close to flirting with it seek professional help immediately!

Can CG negate the impact of the AMT directly? Is the question posed in such a way that you are only in the AMT slightly and even the smallest of donations will salvage your situation? I wish I could answer that in concrete terms. Anyone here willing to hazard a guess? I'm afraid I'm out of my depth. Randy H? Peter P?

DinOR Says:

Is it the industry or the individual to blame? I don’t really know.

It's like a Dr. Phil episode, a dysfunctional family. The FB's are the "users" and the mtg industry/RE complex are the "enablers," to borrow some pop-psych BS crap terminology...

Conor,
Did you look at the gory stats from the Existing Sales Data?

http://www.realtor.org/Research.nsf/files/EHSreport.XLS/$FILE/EHSreport.XLS

YoY national median price up only 0.9%, WEST is DOWN 0.3%!

Can we say, "national median YoY price decline?" Oh, wait, I thought real estate prices have never declined on a YoY level since WWII. Ooops.

Joe Schmoe,

So I guess we can put you in the "recent gains NOT permanent" camp!

I'd sure love to see some of the LV homes now at 450K down to 90K! Of course at that point they'd be rentals (and none too desirable at that!)

I've already witnessed first hand homes that would have been selling for 650/700K a year ago NOT selling at 450K today! So huge declines already. I must admit though that astrid* has a point. At some juncture it simply may not make sense to even continue services to these farther flung "communities".

There is other shocking news I feel I must now reveal.

I actually think it would be COOL to live in a modern day "ghost town"! No whiney neighbors. No traffic. No nothing. Doing cannon balls off the balcony of a McMansion that would have sold for 750K in 2005 at 3 in the morning? Hey, why not?

That is what we're talking about here, isn't it?

Ghost Towns?

Instead of having names like Lago, Rocky Gulch or Goldfield they'll have names like "The Estates at Willowglen" or "Insert Self Flattering Name Here".

*Lago (from the Spaghetti Western classic "High Plains Drifter")

Who can name the origins of the other two?

SFWoman,

But, but, bu..... Where did the money go? When someone has their retirement ace in the hole (damn it I meant "home") appraised at 1.1 mil and it sells for half of that where did the money go?

Sheesh.

Let's hope she didn't borrow against that "appraisal".

"Vanishing Farms"! LOL!

Absolutely right! It's the Amerikan way! Kill off indigenous peoples, claim land, pave it over in asphalt (then give it an indigenous name!)

By naming our ghost towns of the future after the very features we've destroyed it helps instill a sense of history in our children!

"Daddy, why do they call this place Whispering Pines?"

Well you see back in the day when money was cheap........

DinOR,

Thanks for the reply - I did talk to an accountant, but he never suggested anything but paying it (and of course we don't know yet how much we are dealing with) and letting us know how much we would likely have to pay the IRS should the situation arise - I wondered if I brought it up to him, he might think it's a good idea. However, I'm still holding out for the slim hope that the sale won't go through until a year and a day has passed, although that seems increasingly unlikely. I like to have some knowledge about what I want when I talk to him though - and I feel like I have gaping holes in my knowledge which is why we use him.

Giving some money to the IRS is better than not having any gains though - which will go towards a house eventually........after they have dropped.......

I look forward to even more ignorant application of inexplicable sounding names like:

Posto del Ivy del Veleno

Ruelle Folle de Merde de Batte

and

Sudden Valley Development

I don't think my "fascination" with ghost towns is as perverse as say a pyromaniac's connection to fire but isn't there some kind of primal appeal to walk alone where a civilization once stood?

Why do people still visit ancient ruins? To "understand" how or where these ancients or forefathers went wrong? To make sure we don't replicate their errors?

I suggest no. It is not for understanding. Deep down we know that you're dead and we're not. We just thought this might be an amusing way to kill an afternoon.

Didn't anybody else "get off" on breaking into the HS gym and having the place to yourself? Throwing up half court shots without having a PE teacher dead up your @ss? Walking down abandoned hallways littered with book reports forming like snow drifts up against row after row of empty lockers? Come on, you dug it.

DinOR,

Wasn't it you --or SHTF-- who originally suggested (a few months back) to build entire towns/subdivisions specifically FOR flippers? As in, they would not be intended for actual habitation. They would be specifically for flippers to sell to each other and would be designed for fast, easy modifications.

No money would be wasted on needless crap like functioning plumbing or wiring. These homes would be built like Leggo houses --with snap on/off customizable accessories like countertops (want corian this week? granite the next? how about tile tomorrow?), astro-turf lawns, fake portable shrubs/hedges, lightweight foam/cardboard staging "furniture, etc.

Called 'em "Flippervilles" I think.

SFWoman,

astrid* once suggested that McMansions could be divided up into quadplexes for aging seniors. Lord knows there's enough room!

I hate to beat this to death but charitable giving doesn't have to be complicated or expensive. They are now turn key, no hassle undertakings.

Glad to hear you're not in the AMT (for now). No one there is having any fun.

Why build real homes at all? Lets just trade Sims homes on eBay. That way you don't even have to pay property taxes or insurance.

SFWoman,

Alas, our normal salary is barely into 6 figures (don't I wish it was in the high 6 or low 7's), this is going to be a one hit wonder for us, but if there's something out there that will benefit us long-term and avoid a ton of extra taxes then I want to at least explore the idea.

HARM,

Boy I'd love to take credit for that but I believe that ingenius invention is the sole property of the one and only SHTF (formerly willywhoppers2, formerly nomadtoons)!

Just think of the money and resources we could save! Don't forget the portable pallet mounted koi ponds and inflatable gazeebos!

Housing bulls love to warn us that we “should never underestimate the power of human greed” in trying to convince us that real estate can never crash.

Never underestimate the power of human fear. It is the most powerful of all.

George,

The problem doesn't lie in shifty appraisals and questionable financing. Entire subdivisions of uninsured property are not the problem.

YOU'RE the problem! Now quit feeling sorry for yourself, stop messin' around with the damn computer, sprout a "pair" and get out there and sell these FB's some damn houses! That's what we do here people, SELL HOUSES!

There has been a lot of talk about rents rising as a result of the HB. I don’t see it... Most informed people agree that the HB is unwinding, which could well lead to a recession. It is incongruous to think that rents will rise in a recessionary environment. If anything, they should fall.

Glen,

You probably weren't reading the blog back when we had our big discussions/debates on the subject some months back, but pretty much nobody here is expecting rents to permanently start spiking up in a recessionary environment. However, it is entirely plausible that they would spike some in the near term, just as housing market demand (and buyer psychology) is slowly beginning to turn. My own first-hand observations here in the L.A. area renters market reinforces this perception.

For years now, condo conversions in CA have removed significant rental inventory (supply) at a time when there was little surplus capacity to begin with --largely thanks to CA's punitive anti-development, anti-rental economic policies and tax structure. Even though I expect this trend to reverse soon ("Repartments"), this is having a negative impact on renters in the short run.

Randy H has also discussed the phenomenon of FB "Escalation of Committment" in depth before. Basically, most of these asshats will try to do almost anything to hold on to their money-draining alligators as long as possible, vs. cutting their losses now. This means trying (note "trying") to rent out their million-dollar $hitboxes for as much rent as possible. This has the effect of skewing asking prices upward for the present and near future.

In no way do I think this trend is sustainable long-term, anymore than house prices are sustainable. Eventually, RE industry related layoffs are going to start working their way through the economy and unemployment rates are going to start climbing. Foreclosures --while up from all time lows-- are still not high enough to really start the panic and cause blood in the streets ---YET. When all these things come to pass, CA may actually begin to lose population, as it did in the early 90s, and rents will likely fall (or at least not rise) in real terms.

Even so, this will take considerable time. Remember: the housing market compared to other assets is incredibly sticky and has very long cycles --even before lawsuits and reactive politicians are considered.

SFWoman,

I can't take credit for "Sudden Valley". That came from Arrested Development, the Fox sitcom. It's depicted as an OC development of shoddily built start McMansions (that shares blueprints with some of Saddam's palaces).

DinOR,

I don't think I came up with the senior quadplex idea. That sounds like a SP or OO idea. My feeling is that McMansions make pretty terrible housing all around, since they're badly designed and poorly insulated. They actually make horrible multifamily housing, since there's no sound insulation or much privacy within the houses.

My McMansion usage idea was to build rock climbing gyms in the 2 floor great rooms.

Don’t forget portable pallet mounted koi ponds and inflatable gazeebos!

@DinOR/SHTF,

Wow --how could I forget those! I will properly credit this concept to SHTF from now on.

Why build real homes at all? Lets just trade Sims homes on eBay. That way you don’t even have to pay property taxes or insurance.

@astrid,

My guess is a computer sim just doesn't "do it" for your typical SDCIA flopper. They want to trade real, tangible assets. Besides, there's no real PROFIT potential in a game. Take "Jeff" for example. He's going to make that hardest "first million" or get carried out in a "pine box" tryin'! Can't do THAT with Sim City. ;-)

I wonder how "Jeff" is doing, did you guys pick up the fact that he was actually fired from his Taco job? So he doen't even have that income to help.

At least as I recall he owned up to having being fired - if he quit - then my apologies for saying he was fired.

@alien,

Sounds cool --Bendover Bernie & DL should jump on this. Personally, I like the idea of bringing back debtor's prison and making children responsible for their parents' debts by default.

astrid,

My bad. Rock climbing in the vaulted living room it is!

It's so funny to see the same C/L posting week after week and you always feel like a doofus for being tricked into clicking on the same un-sellable listing time and again. After awhile you even recognize the tracks the vacuum cleaner left in the carpet.

NOTE TO C/L SELLERS!

Now that we are on month EIGHT of having to shuffle through your lame @ss listing kindly reduce the price substantially or consider other means to unload your overpriced sh@tbox! (Apparently C/L is not cutting it for you).

Thank you.

The C/L community.

Oh - thanks Peter P for the Kaygetsu reccomendation

Please try not to tell other people. It is getting difficult to make reservations.

Following onto HARM's comments,

We are in the teeth of downward price stickiness and escalation of commitment (from BOTH buyers and sellers). Pretty much everyone except for the out and out clueless has now heard that the ride is over.

Sellers don't want to sell below the last "legitimate" comparable, within reason. They are quick to discount other sellers who take lower prices so long as there are only a few of them.

I wouldn't be so quick to assume that masses of sellers will be forced out of their homes anytime soon. As with everything, there is a distribution of desperate to overly conservative, with most in between. I expect the average seller to be capable of maneuvering into staying in their house for a long time if prices start falling too fast.

The best situation may be slower price declines, because it allows sellers to break from their mental-accounting, and reset their expectations on the way down.

I've thought alot about the notion that prices of homes are set marginally (the last home sold determines the price for all homes). I have concluded this is false in reality. It is true as an economic abstraction, but it ignores behavioral psychology. What happens in reality is sellers look for any and every reason they can to disqualify lower prices as aberrations. "He was greedy, she was impatient, they were desperate". So although the purely mathematical analysis will show prices went down because "they were desperate", it is false to conclude that supply & demand really meet where the math says they should. Instead there are really two supply curves. One with people willing to take the marginal price -- to be price takers. At first (now) there are very few sellers on this curve. The other curve is all the sellers who ignore the marginal price and refuse to sell except at a much higher price.

The problem is that the second supply curve misses most of the demand, which itself is shifting in (because most price-taking buyers are now gone).

Yes, I know - I didn’t see your follow up about reservations until after my first attempt to eat there! I had to wait until the following week…Worth it though!

If you LOVE fish you can also try Sawa Sushi in Sunnyvale. You will be overwhelmed by sashimi.

Randy H,

I agree. There are two seperate and distinct supply curves. The differences can be stark.

In SFWoman's WSJ article about the gal in Northern VA she had her home appraised at 1.1 mil. in 2005. She tried for months to sell it. Lowered it to 899K? with no takers. Put it up for auction and declined on bid of 475K. High bidder finally offered 530K and she accepted.

I realize this is an extreme example but whatever other sellers are thinking about this person, was she desperate, greedy or impatient really doesn't matter now. What's done is done.

alien,

Seriously? 900 bucks for A/C? Good for you! I hope your pets were in the lap of luxury as the central air hummed away continuously during your lengthy and numerous trips.

What are these FB LL's thinking?

Uh, o.k sure sounds good to me!

What does WSJ stand for? Excuse my ignorance :-)

At least I know about the housing bubble - or is it officially a housing crash now?

Instead there are really two supply curves. One with people willing to take the marginal price — to be price takers.

Randy, I buy most of your econ, but isn't this nonsense? Of course, houses aren't identical widgets, but consider a tract of identical houses with 500 on the market. All you're saying is that the supply curve rises late and steeply (lots of folks willing to sell for $800K but only a few at $650K) and that the demand curve falls fast and steeply (lots willing at $400-500K but only a few at $650).

The marginal price is still in the middle at $650, it just happens to be at a really low sale/month figure.

Our thesis is that buyers are more stubborn now than sellers, so the supply curve should shift in favor of lower prices.

Our thesis is that buyers are more stubborn now than sellers, so the supply curve should shift in favor of lower prices.

Now that the fear of being priced out is gone, buyers operate on greed.

The greed within sellers are slowly turning into fear. Forget about fundamentals.

However, will buyers soon fear of missing the opportunity to buy on the dip?

According to some it's going to be a long time until the bottom of the dip is reached. It's way to early to worry about missing the opportunity of buying on the dip. I guess maybe the uninformed might think that's it's a temporary dip and go for it, but surely not after all the news coverage has finally started?

George - do you think it's hit rock bottom in Florida? Is that why you're looking to buy properties now?

Peter P,

I think that pretty much sums up the mindset right now. With so many "potential buyers" just now hearing horror stories from co-workers etc. I'm not too worried about people running out to jump all over the dips. While we here have tracked this meltdown in the making for what feels like a lifetime, the general public is just now learning that 20% appreciation per year is NOT the norm?

Even if they had the inclination to throw money at an attempt to bottom feed they're tapped out. Their DTI is barely hanging in there now. They'd have to sell one or all of their properties (in most cases). We ran into this last year with the auto mfrs. Great deals! Sure, but each incentive just seemed to lower their trade-in that much more.

Oh, would you care to venture an opinion on Claire's charitable giving quandry. Seems there's a tax bill waiting for her and she wondered how big an impact "giving" would have on her bill?