patrick.net

Oh, and as for that stickiness - YOY Santa Clara appreciation is 1.7%. Prices have been essentially flat for over a year. Know that point in the rollercoaster where you hit the top, and time seems to drag as the descent starts? We're there. By next year, the only stickiness will be all the blood on the streets.

I believe we will soon start to see a rapid decline in home prices (that is much faster than the declines we had in the past) due to the lack of creative financing. The crazy loans have been the engine that kept the boom going and once the buyers of the junk loans go away the companies originating the loans will go away

FAB,
I agree completely. There's been an insidious feedback loop here. All this creative financing was initially pushed to allow marginal buyers to afford homes. Mid-level (prime and alt-a) buyers took advantage of these to get a home or to get a bigger home, and just like the global stock market, when you inject extra liquidity (free cash), prices go up. As your average BA buyer gets cut off from this extra liquidity, one of THE major pillars supporting this bubble will collapse. The high number of BA homes purchased using creative financing in the last 3 years speaks to the magnitude of this phenomenon here.

I agree with FAB's assessment. I think once the decline starts in earnest, it will go down very quickly. There are many people out there who can't afford their homes without property appreciation and regular refinancing. These people can be as emotional about their homes, but they will be foreclosed upon soon enough. Once decline occurs in earnest, even people with ready cash will be hesitant to buy.

A "home" might be an emotional subject, but the emotions can be both positive and negative. I know people who lived through the 1990 NE RE decline and the 1980s Oklahoma RE decline - and they saw a mortgage as a giant albatross.

***

I have removed the inappropriate comments from earlier in the thread, and edited the quoted responses to them.

On my threads, as is true of other authors, I will not tolerate any implied or explicit threats towards violence or encouragement of violence. Encouraging violence against children simply because of their race or country of origin is unconscionable in any context. Those who would spew such hatred, well hidden behind a mask of cowardly anonymity, are worse than cowards, for cowards at least are deserving of our pity, cowardice as it is being a basic human emotion.

Yesterday Larry Kudlow was interviewing a spokesperson for FDIC and for the most part it was a reasonable discussion. The FDIC ind. felt that the subprime meltdown was "an earnings event" *not a "regulatory event". So far, I'm "o.k" with that description but after what had happened with NEW it's going to get harder to spin that way.

I thought it was a little disingenuous for Larry to have claimed that he was unaware that people were getting cash back at closing?

I agree with FAB as well. I believe the longer the stickiness lasts in the BA, the greater the shock will be when prices do start moving. That's the problem with stickiness -- it is inefficiency. In fact, I see absolutely no reason to doubt that the longer the correction waits, the greater overcorrection will be.

It could be that the Redwood City home I wrote about on my blog falls all the way back to inflation adjusted 1998/9 price levels whereas a less sticky correction may have bottomed more around 2001/2.

Even the HSBC historical data I use, which FAB and I have argued about before, shows previous corrections (despite all our disagreements about interpreting them) suffered from overcorrection. And this overcorrection may well be a whopper.

The real key here is the economy. The difference between the contraction today and any other contraction we’ve ever had is that the economy is healthy.

Hi There,

That's funny, because in fact, many signs point to a slowdown in the economy later this year. The economic indicators that keep coming out look negative month after month, who knows where the stock market is headed, and if you believe Greenspan's CYA comments last week, recession is looming. In fact, I recall some data suggesting that housing boom/bust cycles have tracked quite well with periods of economic growth and recession. It may not be clear which is the chicken vs. the egg, but the correlation is clearly there. I don't see why it should be different this time around.

Bifurcation of US income & wealth distribution may well indeed an emerging paradigm shift. If it is, the outcomes are unpredictable. This is because rationality has little bearing on how shifts in fundamentals play out. Politics and democracy (or lack thereof) start to weigh more heavily than mid-term economic forces when new winners and losers are being minted.

As a digression, this is why I am very certain that Peter Schiff has got it very wrong. His analysis assumes a "neutered world environment", or more pointedly, ignores geopolitical military forces. I witnessed just this type of analytical error all through business school. A professor or guest expert would drone on and on about trends and macro direction while stubbornly ignoring the three letter word "war". I always found this incredibly interesting. I concluded that the ever present threat of it, and the inseparability of it from human history is so unpleasant that it's just easier to ignore it and pretend it doesn't exist.

What Schiff never addresses is that no modern (or for that fact organized pre-modern) credible military power with the ability to project their military on other nations has ever suffered from hyperinflation or other sundry wealth evaporating mechanisms. Until this changes the US' assets will not "evaporated into worthlessness" as I heard Schiff say on CNBC yesterday.

It may be unfortunate, but the ability to kill the other guy looms large in determining economic equilibriums and threshold limits.

Jon,

If all the realtors, mortgage brokers, construction workers and Home Depot night managers lose their jobs, the economy will already be in trouble. We can add to that the unemployed retail clerks and waiters due to the end of refi monopoly money.

Randy H,

That's a great analysis! I don't know much about *real world economists* but find that most academic economists I encounter ignore anything without a dollar sign in front. There's a strong tendency to ignore difficult to quantify values such as national security or rule of law.

anonymous_renter,

Yahtzee! I actually got tired of that ON THE WAY UP! Gainfully employed people w/great jobs and even better fico scores leveraging them to the 9's! Even though the use of subprime has exploded just since 2001 much of that has got to be due to the fact that many of these people were "A" paper on the primary residence, "Alt-A" on their 2nd home and subprime on their specuvestment home!

I can get plenty insulting about that without getting into flat panels and tummy tucks! :)

astrid,

I've got to be honest, many of those you describe will just go back to being part of the "black market" undergound economy from whence they came. Most people that have a spouse that work as a realtor or Home Despot employee have real jobs!

For those where this individual is THE bread winner, look out! A solid percentage are just migratory anyway. No offense to dedicated HD employees.

Randy H,

A little late to the topic, but you have my support as well.

@Jon,

I commented on your post re: rent control in the previous thread.

Randy, academics think inside their own little bubbles. To them, it is all about what ought to be rather than what is.

It may be unfortunate, but the ability to kill the other guy looms large in determining economic equilibriums and threshold limits.

Very true. Not even unfortunate. Just real.

If it is, the outcomes are unpredictable.

But with a magic 8-ball from the previous thread...

What is a "job" anyway? To me, it is a labor transaction. So long as the payoff (wage) is real (cold, hard cash), the job is real.

newsfreak,

My bad. I've just gotten a little hyper-sensitive any time I hear someone (here or elsewhere) draw an immediate parallel to HD employees and the global economy. I realize they get regular paychecks w/taxes deducted but every time I go into a dinner or HD it seems like there are few familiar faces. So I should have placed more emphasis on their transitory nature than the "underground economy" aspect.

(Most people working at HD would prefer to get unemployment) and getting "let go" is not only their fantasy, it's GOOD for them! :)

I agree with FAB about the prices dropping quickly once the stickiness is overcome. Perhaps if we entered massive inflationary pressures the prices won't come down too far nominally, but in real terms I believe it is inevitable.

I think that the housing prices here are merely experiencing a little friction. Once gravity/mass overcome that bit of stickiness the ball will roll down the hill.

For people interested in local (SF) housing policy decisions:

Event: Middle-Income Housing – How Can We Build It?

Plan C members are invited to a public forum and panel discussion to address San Francisco’s Middle Class Housing Crisis. Date: Wednesday, March 28, 2007, from 11:30 a.m. to 1:00 p.m. Location: Koret Auditorium, San Francisco Public Library, 100 Larkin Street (at Grove). Registration starts at 11; a hosted lunch follows from 1-2 p.m.

One of the glaring weaknesses of the housing market in San Francisco is our seeming inability to build homes for the middle class. These are families that cannot afford most new market-rate housing, but are not eligible for subsidized housing. The San Francisco Housing Action Coalition (SFHAC) is hosting a panel discussion to hear how other cities are tackling this problem and whether those solutions can be applied here.

The featured speaker will be Henry Cisneros, former Secretary of the U.S. Department of Housing and Urban Development under President Clinton and currently the Chairman of City View, a firm that provides project financing and other support to build middle class housing. To give a local perspective, the panel will include noted Bay Area developer Art Evans and Matt Franklin, Director of the Mayor's Office of Housing.

We know that government subsidies can’t solve the affordability problem alone. Come hear participants in the housing marketplace talk about potential solutions to middle-class housing!

Complimentary lunch and refreshments follow the program in the Latino/Hispanic Community Meeting Room located across the lobby from the Koret Auditorium. Koret Auditorium is located on the Library’s lower level. Enter at 30 Grove Street and proceed downstairs.

Please RSVP to Tim Colen, Executive Director of SFHAC at 415.541.9001 or annie@sfhac.org.

I never could do Top Ramen, always pasta and mac ‘n cheez.

I just ate a cup of ramen noodle.

I have to say–housing is no more a Ponzi scheme than the stock market or the lottery, it is just what you are willing to risk.

newsfreak,

If all the damage from housing bubble risk could be contained to the ACTIVE AND WILLING MARKET PARTICIPANTS, then I would totally agree with you here. Unfortunately --even absent a federal FB/MBS bailout-- this will not be the case.

Some of the more prominent faces of HB "collateral damage" already include":

--Responsible borrowers/savers who have been outbid/priced out of the housing market for years, thanks to reckless lenders and specuvestors (Randy H, Peter P, Patrick & myself included).

--Naive, ignorant but otherwise well intentioned buyers who trusted their MB or Realtor's advice and bought with an NAAVLP, to avoid "being priced-out forever" (not completely blameless, true, but hardly malevolent greedbags either).

--People who, through no fault of their own, will lose their jobs in the unfolding bubble crash/correction --especially if it triggers a full blown recession.

--Defrauded penion & mutual fund investors who may get burnt by supposedly "safe" AA/AAA-tranche MBSs/CDOs, as the sub-prime & Alt-A fallout cascades into the upper tranches.

Jon,

That's kind of my point. What do construction guys do when there's no work? Oh let's see... there's drinkin' and huntin' and drinkin' OH! and fishin'...

I mean any realtor that's "banking" on making regular commissions obviously hasn't been around very long so in ways I see these folks more as having an "augmenting" income than a "core" income that the other spouse usually provides.

True, there will be impacts but this "massive spillover" effect has been greatly exagerated.

Maybe this is the problem in Randy's hood of choice:
Between January 2006 and January 2007, every Bay Area county except Marin saw a rise in foreclosure actions, according to RealtyTrac. Solano County had the highest foreclosure rate in the state in January.
Alameda and Contra Costa counties also had rates that were above the state and national averages. Rates in Marin, Sonoma and San Francisco counties were well below average.
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/03/06/BUG9DOFRGV1.DTL

Plan C members are invited to a public forum and panel discussion to address San Francisco’s Middle Class Housing Crisis.

The solution: scrap the BMR program and allow building without restrictions.

NV, a house is "worth" whatever a buyer is willing to pay. It is just that this "worth" can change quickly.

I also do not think it is necessary to enfore the 20% downpayment rule. It would be nice but artificial. When the trend changes direction potential buyers will quickly learn that over-leveraging is counterproductive.

HARM,

Funny to note that all of the "secondary casualties" you mention probably had reasonable objections and sensible questions going in? Of course when you're knocking down the big bucks the REIC simply doesn't have time to address petty issues like having loans actually re-paid!

in any crime there are victims

There are many victimless crimes.

A 800K+ in Sunnyvale WITHOUT cooling?

NV,

I like your ANGER! Embrace the dark side! :)

I would not even contemplate buying something for $800K that did not have land and more land.

That house has some land by BA standard though. 1/8 acre is better than 1/20.

I think cooling is necessary pretty much anywhere in the Bay Area, especially in Sunnyvale. You know, sunny-vale.

Not enough land for 4 cats and 2 dogs.

Perhaps. My 2 cats would like some grass, some flowers, and a butterfly.

OK, my friend who bought the $2.1 million house last October told me she is having trouble keeping up with her bills. It is really going outside the sub-prime market, right here, in my 'hood.

Joe_renter,

As aggravating as it can be you really need to get over to flippersintrouble! It's just listing after listing of game playin' s.o.b's! I realize that it's the SAC area but you get the idea pretty quick. The author posts the sales history and it's just incredible. Homes that aren't even 3 years old on their 4th owner? Many are not old enough to have required any work.

good sweet water

It does not exist in the Bay Area.

We have a choice of bad water or awful water.

Even that seems like a crime.

Honestly, that area is relatively safe and crime-free as a ghetto.

Joe_renter,

If it's abandoned and overpriced homes you're after you've simply got to get over there! You know in time we should be able to piggy back off of his model. With SAC being the epicenter for the NorCal meltdown it was only logical it start there first. Give it time......

Oh and boycotthousing has really picked up where Mr. Overpriced Blogspot left off! Simply hilarious overpriced POS postings complete with "colorful" commentary!

SFWoman said:
OK, my friend who bought the $2.1 million house last October told me she is having trouble keeping up with her bills. It is really going outside the sub-prime market, right here, in my ‘hood.
Do you think they'll try to sell?
What goes on the chopping block first -- the kids private schools?
This is too bad... if they can hang on by their fingernails they should be okay in 30+ years. You might want to refresh folks on their LTV (I believe they put down a sizeable downpayment).

Lower LTV is not necessarily helpful. The final T and I in PITI do not change even if you put 100% down.

Look what heli-ben has to say:

Fed officials have often argued that the combined $1.4 trillion investment portfolios held by government-sponsored enterprises, or GSEs, such as Fannie and Freddie, are so large and unwieldy that they present a systemic risk to the broader economy and so should be curtailed.

Really?

"The size and the potentially rapid growth of GSE portfolios, combined with the lack of market discipline faced by GSEs, raise substantial systemic risk concerns," Bernanke said in a speech via satellite to the Independent Community Bankers of America bankers' conference in Hawaii.

No kidding!