patrick.net

typo in previous post: "paind" = "paid"

>i>Old sellers lose in a big way, if they were counting on their house to fund their retirement. If they don’t have to sell though, lower prices don’t hurt them, and may help by giving them property tax reductions.

Local governments hate lower prices, because lower prices mean lower property taxes.

In responce to rising assesments, many local gov lowered the actual rate. They will just have to restore the rate to the pre runup era. Hoprfully the local govs did not blow the windfall while they had it.

Lenders hate lower prices, because they live off of the interest on debt. More debt is better for banks.

They hate forclosures more. Better for them to spread the risk by having many smaller loans than a few bigger loans.

There just is very little downside to lower house prices. Even some major banks, like DeutchBank AG, are still turning a profit after writing off the billions in non performing loans from the US market.

Lower prices are good in the long term.
In the short term, our fractional banking system will have to unwind the 10-20x multiplier of credit in the system from the old home valuations in favor of the new home valuations. That will be unbelieveably painful. Who is our securities guy? I know you stated you are not afraid. I think you should be.
If we mispriced home prices by 1T, then we may have to take 10T-20T out of the system. THAT is going to mean an aweful recession.
The governement will have to increase taxes, reduce spending, and watch as job loss and inflation rise. In the end, I think Mr. Bernanke will do the right thing, and he will be hated for it.
I wonder if the Democrates will stump on the misery index again.

The governement will have to increase taxes, reduce spending, and watch as job loss and inflation rise.

Why would inflation rise? If we take 10-20T out, wouldn't that be more deflationary than inflationary?

Under a recession scenario, it would seem people with cash saved would benefit from lower prices. Rising interest rates would compound the benefit by giving a better return and lowering the prices of autos and houses.

Right now, the people that want lower prices the most are.... sellers! Yes, believe this or not. Many now realize they are quite toasty and see the error of their ways.

A few (usually documented in those USAToday articles) we're able to attain a new, lower cost basis while free money still flowed. Typically in FL, VA etc. where they went right ahead (while their credit rating was still intact) and bought that nicer, newer home). Some even got free BMW leases along with a pool and STILL lowered their cost basis by over 100K!

Now of course the home they put on the market back in '06 when they started this little game of "3 Card Monte" (The Sidewalk Shuffle if you prefer) is on an irreversible slide toward foreclosure as it sits.. and sits...

At some level you've gotta believe that sellers (more than anyone) right now, want lower prices! For them the trick is, how do they access them before their credit rating falls apart?

Duke Says:
In the short term, our fractional banking system will have to unwind the 10-20x multiplier of credit
:
:
If we mispriced home prices by 1T, then we may have to take 10T-20T out of the system.

Since housing is a consumption item usually purchased with credit, doesn't it follow that if we mispriced houses by 1T, then only 1T will have to be taken out, and the fraction will actually be on the _other_ side of the equation?

SP

>> Capitalism without failures is socialism.

Yes, US is a socialist country for rich and home debtors ...

I can not vote for Democrats in 2008 because of their socialist agenda for home debtors.

OT - yesterday, I called a realtor who listed a home in the Foothill side of the fortress to ask some questions about an 8 year old property (Google Maps showed an empty lot at the address). It is already "reduced" by 2% (not a typo, two percent) from the original asking price.

He asked me what timeframe I had for buying - just like a car salesman does :-). So I told him I was willing to make an offer right now at 15% below asking price, would they be interested in the offer? He didn't laugh - said he would present it to the owners for their consideration. Fair enough.

It would actually have to be more like 30% off to get me even remotely interested, but I had been flat out refused by a smug realtor earlier this year when I mentioned a 5% low-ball on a property on the same block...

SP

I had been flat out refused by a smug realtor earlier this year when I mentioned a 5% low-ball on a property on the same block…

Did that house sell yet?

Headset
The strong inflationary pressures of a weak dollar, the world's much lowered appetitie for buying US debt, and other coutries exporting inflation (most notably China) are larger then the deflationary side. I think. Hmmmm.

SP
The whole rub with CDOs is that American housing formed the collateral for Hedge funds (and foreign investors) to borrow money. As those forms of collateral devalue the Hedge funds must bring more collateral to the table. I believe the leverage is on the order of 10-20 times. About the only thing temporarily holding this at bay is the Fed taking CDOs as payment and extendnig the overight window to 30 days. We *need* to start princing thes instruments correctly or housing will be unacceptable as collateral at any price. This means loans are just up to banks and S&Ls (and not Wall Street) and those guys are already failing. With no loans, housing will freeze even more than it already has. And it just gets ugly from there. The political upheaval due to how crushed families become will be striking.

@Headset,

Good one. That is after all, the acid test.

I should add that sellers want prices to come down (after one last GF buys their place at wishing price). This way they'll be flush w/ Big Fat Stacks O' Cash when they are now on the "buy side".

Btw, great stories from the tail end of the last thread on all the "creative investors". Anyone checked in on the SDCIA lately?

HeadSet Says:
Did that house sell yet?

It is not on the market, so I am assuming it sold. Since I wasn't buying it, I didn't check to see what happened - though I am now curious to figure out what it sold for...

The strong inflationary pressures of a weak dollar, the world’s much lowered appetitie for buying US debt, and other coutries exporting inflation (most notably China) are larger then the deflationary side. I think. Hmmmm.

A weak dollar will inflate the costs of imports, but have little effect on the 80% of our consumption that we produce here, especially my main interest, houses. If foreigners have little appetite for US debt, I presume the interest rates on gov debt will rise, affect interest rates in general, and put more downward pressure on house prices. China has not been willing to "export inflation" so far, it seems they are more interested in preserving market share.

General inflation may occur as you say, but I think houses and domestic cars will fall in price. For me, I think the savings on the big ticket items (were talking 10's of thousands) will more than make up for price increases in common items like consumer electronics, toys, lawnmowers, etc.

Duke Says:
The whole rub with CDOs is that American housing formed the collateral for Hedge funds (and foreign investors) to borrow money.

Aah, I now see you were referring to the additional leverage on the CDO side of these mortgages. I was thinking about reserve requirements in front of the mortgages, which is the other direction.

HeadSet,

Yea. I think that a strong cash position will allow bargain hunting in the housing market to come. Many here at this site have asked when that will come. If real job loss (not just the loss of min wage jobs due to the $2 increase by June '09) follows the recession (annonced 2nd Q '08) then the last leg proping up housing prices will be kicked out from under the market.

@DinOR,
I read over at SDCIA once in a while. There bears now appear to outnumber the koolaid drinkers. Total reverse from a year ago.

Its a weird site in that there are kids who post 'I want buy a buncha of out of state rentals, looking for mentor/credit partner' and at the same time there are some grizzled veterans with solid advice. The kids cant get zero down out of state NINJA loans anymore or theyd get eaten by sharks IMO. So they get some ok advice (wait and its really hard and the market is tanking, etc)

HelloKitty,

Thanks for the update. They are about as good of a contrarian indicator (what you *shouldn't be doing) as anything out there! I am serious though about sellers wanting lower prices as much as buyers.

The World "wants a new cost basis" right now and everyone that owns sees more profitability from being able to "reach backwards" and establish a 2003, 2002, 1997 cost basis going forward than the one they have now! So.. in ways, we HAVE learned something from the last bubble!

...unless the federal government tries to “fix” the situation once again.

Which they are half-way to accomplishing. If this bill's income tax provisions passes, everyone who cashed out refi'd then walked away via a foreclosure is laughing all the way to the bank, while taxpayers are left to pick up the tab with increased taxes and inflation to fund bailouts for the banks.

In fact, if you can find a compliant mortgage broker and appraiser, this is a great way to draw income tax-free. Put houses on your paper for the smallest up front cash possible, regardless of how toxic the loans are. Make sure you get enough so that X months down the line, you and your accomplices have enough to live on for 7 years from cash out refi's on all the properties, then let foreclosure take the properties.

If this bill has to pass because of realpolitik, then at least tighten up the income tax provision to only apply to short sold paper that was not part of any cash out. Give the investors holding that paper lots of reasons to help the IRS identify paper written with a cash out. If a mortgagee short sales on paper that delivered a cash out, the income tax assessed is split 50-50, half to the investors holding the paper, half to the Federal Government. Have the IRS publish an electronic directory that holds the legal description, address, and amount of the short sale for all properties claimed under the provision. The investors have an incentive to check this directory every day against their databases, and register any claims that the liens on the property cannot be extinquished in a short sale unless their cash out refi loan is partially repaid through the income tax.

The Congress and IRS will know that any relief provided will only be to short sales of properties where no income from capital gains was realized. As a investor/saver/citizen, I'll be satisfied that there was no bailout involving taxpayer funds. Keep the second home changes to fund the budget shortfall, though I suspect grandfathering in properties purchased before 2008 is a bad idea, because it sets up CA Prop. 13 dynamics all over again, just on a national scale. I would rather see a rapid phase out of grandfathered properties, such that all properties fall under the new rules within 4 years.

So is this the DinOr evil plan?:

FB lives in 1800 sqft home in average area, owing a $600k mortgage

FB is still making payments (no reset yet), so he qualifies to buy a 2500 sqft home in upscale area, post bubble price from builder only $500k

FB moves to upscale house, lets other house go into default

@apostasy,
the Refi and walk crowd is VERY LARGE at least in CA.

I saw one home the guy took out 1 m heloc (he paid 2m for it) and they it went to foreclosure. The 'Dont 1099 me, Bro' law is gonna be HUGE for him, possibly 300k savings. Probably he fled the country with his winnings anyway and would never pay the taxes.

The government forgiving debt is huge because they are the ONLY entity that can reliably collect on debt at least if you are living and in the US. The IRS will put you in jail, take your crap and sell it, garnish wages, anything they want to do they can.

In college i was a bill collector part time on credit cards and phone bills. crummy job. We used to be in awe at what the IRS would do to these people, swoop in with agents and snatch em up and sell their luxury cars at auction. The people with guns (gov) always win.

@Headset,

Well it is evil and a "plan" of sorts but I can't take credit. There were several articles from FL, VA etc. where couples were (on one hand) cryin' da' blues yet at the same time VERY excited about their new digs.

Before credit shut down, lenders were still living in a cloud so they let people that from all appearances seemed "creditworthy" go ahead and buy that bigger, cheaper home (without selling their 1st ) and didn't realize they were being set up for some very heavy bag holding!

The interviews were hilarious! "Our new home is bigger and we needed the 3,800 sq. ft. with a child on the way! We didn't want to be cramped into our 2,950 s/f place now that we're having a family. The agent said there were no offers on our old home that we'd bought in 2003 and HELOC'd the living hell out of but I know we can't afford to make TWO mortgage payments so....

Skibum and I started calling them the SSOTW (Sob Story of the Week) they were just that common.

aposty,

I agree. Letting people walk away with 500k once in a lifetime is plenty generous where I'm concerned but again with my "Right on Red" driving analogy people have grown accustomed to this sense of entitlement.

I wouldn't lose any sleep over who and who ain't "grandfathered". The point is that whomever buys your "vacation home" WON'T be grandfathered and less likely to want to be part of your "momentum play". What's really great (again assuming it passes) is that a lot of people with raw land won't be able to finish a structure this late in the year to have an actual residence to claim prior to 1 January 2008! Ha!

SP,

Lower prices do not necessarily hurt Realtors (tm). as they rely on transaction volume as much if not more than % of the sales price. If volume remains high, they would be more than willing to accept significantly lower prices. I know you are sorta saying the same thing, but the difference is that we are at an inflexion point in prices right now (in the Bay Area), so volume is low due to several reasons, including "sidelined" knife-catchers, er, buyers. If prices were continuing to head down predictably and the we got to the point where volume increases again, that would be a different story.

The other subgroup hurt by lowering prices are obviously RECENT buyers. Their margin from "profit" to cutting a check to bring to the closing table is razor thin, especially with high LTV. They perhaps are the truly screwed by lower prices.

I saw a house for sale in my neighbourhood.

4821 Deep Creek Rd Fremont CA 94555
4 beds, 3.0 baths, 1,750 sq ft
lot 4,692 sq ft

Sale History
09/29/2006: $800,000
06/27/2005: $720,000
11/02/1993: $250,000

I can see signs of another short sale.

This guy bought this house a year ago, now wants to sell it. I bet this guy does not remember the .com bust in 2001, nice timing to buy. The guy before had this for a year 2005-06. See Greenspan's free money in play...

I thought the average time to be in a house was 7 years? Has this changed? :=) Who said buying/selling house is not like trading stocks??

:-)

If the tax liability on forgiveness debt is taken away, that is one less reason for people to even try to stay in their houses. Back in the early 90's, it was not at all uncommon for people to just walk away from their homes if being upside down was brought into the equation. We had negative valuation then as we do now. Different causes, but it was an ugly time none the less. I wonder if people will just walk away, take the hit and get on with their lives. If that happens, the correction will accelerate.

skibum Says:
If volume remains high, they would be more than willing to accept significantly lower prices.

But volume WILL remain low during a period of visibly falling prices. This is because the ONLY person bringing money (the buyer) has no incentive to complete the transaction quickly. Whether prices are low or high, it is in their interest to minimize the duration for which prices are falling.

In the short term, the realtwhore strategy is to try and cover up falling prices through tactics ranging from statistical spin (median) to outright denial (it will never go down) to plain old lying (bottom-calling).

When falling prices can no longer be covered up, their strategy will shift to making prices fall as fas as possible.

The combination of these two tactical moves will achieve the strategic goal of minimizing the duration of low-volume drift.

SP

Oh, by the way, when I said:
"Whether prices are low or high, it is in their interest to minimize the duration for which prices are falling",
I meant:
"it is in the realtors' interest"

If I had to choose between making $100.00 once and making $50.00 twenty five times, I know which one I would take.

"See Greenspan's free money in play..." LOL!

Given the way you've dissected that little gem it really is like one of those glass sided ant farms or clear plastic V-8 engine models! Great for minutes of entertainment!

Yeah, the "7 Year Hold" is now nothing more than an urban myth. What in God's creation would be the purpose of "owning" a house for what, 15 months? 15 months! (My wife and I have had grudge matches that lasted longer)

Any more when you buy a house it should have a "rip cord" installed that automatically pops up a spring loaded "For Sale" sign in the front yard (complete with color flyers) and complimentary "Buy it NOW before I list with an agent" Craigslist posting!

"In the event of of Negative Equity Break Glass and Pull Down Hard"

When falling prices can no longer be covered up, their strategy will shift to making prices fall as fas as possible.

Like inducing labor instead of waiting for nature to deliver?
If you can't accurately call the bottom, you can act to cause it.

SP,

I think we are saying the same thing.

I do think I am seeing more and more "Realtor (tm) capitulation", admitting prices have fallen and taking the strategy of trying to convince sellers to lower prices while trying to convince buyers that it's a good time to buy now that prices have dropped. Even in the "Fortress."

"When falling prices can no longer be covered up, their strategy will shift"

It certainly will! The protracted downturn in the tech wreck (that didn't want to end) is why so many people left the business, and haven't so much as entertained the notion of coming back!

Had the correction been largely over in 2 or 3 qtrs. most would have stayed. Given it was more like 39 months I don't know how many people can weather that duration of a down market?

Steveoh,

Exactly like induced labor! In this case not so much for the health of mother and child but because dad has court-side seats.

Makes sense, but its still hard to imagine a Realtor(R) uttering what amounts to "its the price stupid" to a seller.

Makes sense, but its still hard to imagine a Realtor(R) uttering what amounts to “its the price stupid” to a seller.

Desperate times call for desperate measures...

"it's the price stupid" will come in time (depending on that particular market). I've been hearing realtors saying things like:

"If you're really serious about selling you have to trust me on setting the price. I've seen a lot of homes that "show" really well and never get a call back, let alone an offer when the sellers priced too high. So I'm going to ask you again, are you serious about selling?"

It's hard for them to quantify the seller's motivations at this point. In the past what made seller's tick was pretty much by the book. Job, Divorce, Retirement, Death. Life events. Well what's motivating seller's NOW!? Realtors aren't very used to dealing with frantic sellers yet frantic sellers that don't want to lower the price a dime? It's a tough situation for NAR and that might be why the offered HR 3648 to get people off the fence?

@Richmond
I wonder if people will just walk away, take the hit and get on with their lives.

...and if this happens, I wonder how so many newly damaged credit histories will affect lender decisions. Can we assume that the pool of potential buyers will suddenly shrink if lenders keep tight lending practices from here on out? Or will the number of consumers with new lower Fico scores, be small enough to have little effect?

Also, "getting on with their lives" may mean using cash only for a while. Surely, something they have not done for some time.

@Steveoh,
Sorry it took so long to respond, had lunch.
Good point. I think that there may be a large pool of people that could qualify for home loans under traditional lending standards if prices moderated enough. Although, that would mean a price slaughter not a price reduction. Is it possible? I don't know. We can break out the calculators and do the math, but human nature always seems to add that unexpected twist.

"The U.S. subprime housing crisis will not peak until 2009, rating agency Standard and Poor’s said on Tuesday, adding it had underestimated the extent of fraud in the industry.”
Ahhh, the Fourth Horseman of the Housing Apocalypse has been unleashed. I have been getting tired of the MSMs SSOTW. Now that S&P has put the bottom off at least a year and a half and officially recognized "fraud" as a problem (really do ya think?), we may finally get some reporters digging around and coming up with some doozies. Straw buyers and first payment defaults will start getting more coverage than the poor sap who just wanted a slice of the American Dream (as opposed to the whole pie). I imagine this may dampen the bailout enthusiasm a bit. At any rate, hats off to blogging sites that specialized in this type of material before it was in the public eye. I imagine they will be a starting point for intrepid reporters trying to get a handle on the situation.