patrick.net

Isn't that just going to cause the underwriting cost to surge upwards? How will the lenders deal with new fixed costs in an obviously cyclical market?

ex renter,

Probably about minus 4% year before last, about 20% this year. Don't forget, we had some insane year-over-year appreciation 1998 - 2006.

Yes, minus 20% this year. But not exactly " minus 20% per year".

sybrib: Comparing a decline after a gain is better done with absolute numbers instead of a percentage. If there was a +50% gain from the bottom, and then a -20% loss from the top, that really removes 30 of 50%.

Right now I'm seeing condos that sold for $150-160K in 2002/2003 go for $125K now (they were built in 2001-2003). Most of the big price drops are from REO; I suspect that the builder had a pocket mortgage broker for "creative" financing. The owner-occupied comps are creeping down as well, but it's the REO that really seems to shove things down hard. SFH's are holding up better, but the $/sqft is slowing descending after a long plateau at $100.

-slowing +slowly

TOB: Um, yeah. Hence the question. If their revenue stream is cyclical, but their fixed costs have increased due to legislation, that will put them further underwater during bad times.

Brand,

Appreciation since I bought that property as compounded annual appreciation between 5 to 5.5%. If we still had 2005 prices now it'd be just about 7%.

I'm not cool and hip enough to calculate the exact appreciation of the equity because of the rental equivalency cost. I'd say, the first 5 years or so I paid a premium for owning which would include time value of downpayment money, then the next decade and a half has been below market "rent equivalency", even including property tax, insurance, maintenance, etc. And for "rent equivalency" I'm comparing to the kind of rental I lived in before, a 2 BR/ 2 BA apartment in a 1960's genre building, not the 4BR 2 BA 1970's s*box where I live.

Suppose the ownership premium and time value of downpayment money roughly cancelled out the "ownership discount" since then, the appreciation of the downpayment money has compounded annual increase of about 13 to 14%. If we still had 2005 prices it'd be about 17%.

I've tracked the sales prices in my zip code going back to the middle 1960's: the regression line to the log plot, with very good fit, is in the 8 to 9% per year range. But mine's only been 5%. That's what happens when you buy in a housing bubble like I was so stupid to do last time we had a housing bubble.

Tim Iacono of http://themessthatgreenspanmade.blogspot.com/ is meeting Patrick Killea:

.....
.....

One of the highlights of the trip will be sitting down for a cup of coffee with Patrick Killea of the world famous housing crash site Patrick.net.

Oh yeah, gotta pick up some sourdough bread too.

Bap, I think that graph was normalized for inflation. And I thought recent CPI is oft-cited in the 3-3.5% range.

Brand Says:

> sybrib: Comparing a decline after a gain is better
> done with absolute numbers instead of a percentage.
> If there was a +50% gain from the bottom, and then
> a -20% loss from the top, that really removes
> 30 of 50%.

It is a 200% loss (before any cost of sale or the extra cost for the year to "own"/"rent money from a bank") with a 10% down payment and 100% loss with a 20% down payment...

P.S. I have heard from friends that are Commercial leasign brokers in the Bay Area that things are slowing down (except around Google and in SF SOMA where a lot of social networking stuff is going on)...

FAB, although I obviously am not fond of percentages, you made an interesting point. A 200% loss is obviously negative equity. I have often noticed that people in the Bay Area don't have much more saved than folks elsewhere. With 5x the home prices, their survivability is tremendously lower than the rest of the country.

In Colorado, a 10% downpayment on a $200,000 loan is $20,000. Most established homeowners could handle losing $20,000. It would be severely painful for many people, but it's financially survivable.

In California, that same $20,000 would only be a 2.5% downpayment on an $800,000 loan. All it takes is a tiny drop in home values to put that loanowner way into the red. In fact, you've got a 6% realtor commission built in along with all the origination fees, taxes and other purchase costs.

So my question is, are California homeowners actually more likely to embrace foreclosure, simply because a sale would immediately bankrupt them? That really becomes the ultimate sticky behavior, since there is absolutely no option to accept anything less than the precise price (without bank approval, and even then there's a 1099). At least in other areas of the country people can still eat the difference and move on.

Lenners CEO will lose his job. Once prices go down further they will be forced by their auditors to write down their unsold inventory. Mark to Market!!! Once that happens they will miss their numbers issued to Wall Street. This is all pretty simple stuff! We saw this plenty of times in Silicon Valley during the tech downturn. This will be different. CEO will get his walking papers and walk out in disgrace.

Appreciation is more close to inflation since 1975...

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

BTW Sue McAllister and her kind have a political agenda. I often meet people in the heart High Tech whose job is X however after over a period
of time you often see them as with other non-work objectives. Sometimes
it promoting women in the workforce or other Social Engineering changes.
Sue is no different. Another Business writer for the Merc stated Enron or Tyco fruad could never happen in SV because because because... its was
as totally joke what he wrote.. Total Joke! right before the stock option scandal hit nailing over 100 local companies and several criminal charges.
The Merc business writes are cheerleaders and are clueless about the real business and real estate in SV. The Business section has degraded to wholesale advertising... it was great reading years back but worthless today.

Bap33,

The s*boxes in my tract were built in 1968, sold new for 20K-ish.
I bought in the peak of the last bubble, 190K, going price at the time in 1989.
Have some other other landmarks over the years in the 70's and 80's as I grew up in the same tract that I live in now.
2005 going price for those s*boxes was 700K
2006 one sold on my street for 630K.
Yesterday's SJMN listed two recent sales in the 500-550 K range.

Anything in the 470K to 650K ish range would stay in the regression range >8%,

con't

hmmm the last part didn't get in the post, I musta goofed on the keypad.

Anything in the range about about 470K to 650K -ish would be in the longtime regression range of 8-9%, noise really in the big overall picture.

But it might not feel that way to you if you bought on the high end of the noise like my 630K neighbor did last year. Been there and done that myself in 1989, it's not a fun place to be.

Now if anyone was realy motivated to lower the value of homes in Irvine all they would need to do is get a few busses up to skid row and help the homeless find a decent place to squat.

Brand,

It sounds like you don't live in the coolandhip bay area. Here's a couple of things to consider inside the minds of Bay Areans. Mind you, I'm not referring to the recent tsunami of well-heeled immigrants who have a different perspective, but more from the perspective of the few workaday locals who take the plunge.

As you pointed out, a lot of us who are not the dotcom hipsters, are house poor when we take the plunge. THere's probably as many different attitudes and perspectives as there are buyers, but some of us can fall into one of two groups:

One group is OK with no personal savings, because they know that they'll just make it all up in appreciation, retire on it, and when they retire, cash out and quit the B.A. for greener pastures. Say what you want to, this has worked out well in the long term for folks if they have with stamina and determination (and income) to stick it out. I personally know lotsa people who did this. Having said that, like many on this website, I am also skeptical that past results don't guarantee future returns.

Another group keeps their housing cost closer to normalcy of income ratio by doing whatever it takes, selling their soul to a high paying job, or taking in boarders for years to defray the cost, working a second job, having multiple adult wage earners (extended family or otherwise) live in the house and share the monthly cost, or buying in an accommodation or location, below their social caste, whatever. Any way you look at it, sacrificing their standard of living. With this approach, they make it work withing reasonable normalcy of housing cost, but with a lower standard of living.

Goddamnit Sybrib, you're not going to have any credibility until you learn to spell it right, it's Bay Aryans.

And India Cash And Carry is the best place to get your boxes of candy with the swastika all over 'em, still overpriced but worth it because the Bay Area is Special (tm).

PS your 2nd example reminds me of an old buddy of mine, got his house in Hell-A but slept in a sleeping bag, furnished a'la Garage Sale for years, and I think is OK. As long as he realizes how worthless his house REALLY is and all those grumpy old farmers who came into his father's hardware store were right........

you know, those stucco spanish villas don't have good shading over the windows or good natural shading from tree plantings... not good passive cooing design for a hot climate...

I would love someone to take a crack at the real development cost of the homes that are the title of this thread.

Materials
labor
permits
land
preparing the land (grating, packing, roads, sewar, electrical)
financial costs

My belief is still that these developers are nowhere near only asking a 10% markup unless they let labor, materials, AND land costs run amok.

Duke,

I have no idea but the SDC (sys. dev. charges) can be considerable. Major, public builders know that local governments create one of the biggest hurdles to mom and pop builders so they view it as the cost of doing business and pass it on to the consumer.

When developers "frame" the conversation by advertising:

"View lots starting in the Low 200's"

they establish several things. Firstly, if you have to ask what is meant by "Low 200's" (you obviously don't belong here!) Secondly, it tends to imply that there IS a particular value or exclusiveness to the area and thirdly, it allows them to sell lots to smaller builders and make a very respectable profit and have them take over the risk.

I have watched SO many people over the last several years scrimp, save and cut corners to cargo-ize their dream home even doing much of the labor themselves (thinking they were getting a deal) yet not realizing their actual failing was in overpaying for the lot to begin with! Way more times than I can count. Now, not only are they every bit as under water as their neighbor but the misspent time they'll never get back.

China loan balance freeze: I read over the weekend that China is directing banks to limit their outstanding loan balances to current levels for the rest of the year (link lost). That ought to put areal crimp on the domestic real estate market for a while...

Here's the link to the China banking freeze news story:

http://www.bloomberg.com/apps/news?pid=20601080&sid=aXxs1Lap3vcU&refer=asia

FB's turning to a life of crime in Cleveland...

http://money.cnn.com/2007/11/16/real_estate/suprime_and_crime/index.htm?cnn=yes

House Approves Bill to Restrict Mortgages

"With home foreclosures skyrocketing, the House on Thursday voted to crack down on mortgage lenders by forcing them to get licenses, making them responsible for discovering whether borrowers can really repay and fining them for steering people toward risky subprime loans,"

Amen, and about bloody time. Of course, Congress is great at shutting the barn door after all the horses have bolted and the barn is on fire.

Oh, and while they're at it with all the "day late and dollar short" attempts at common sense regulation, they might also acknowledge their own responsibility in creating the bubble by enacting "any two will do" & 1031 capital gains rewards for specuvestors & flippers, not to mention growing Fannie & Freddie into the needlessly gigantic moral hazards they are today.

Getting licenses and making sure borrowers can pay back the loan?

I don't know HARM, sounds kind of anti-competitive to me?

You know, I'd never really thought about the impacts from 1031's but everyone I know that talked about it described doing it like you'd expect to hear about a bank heist? Again, after they got out of control (developers etc.) the IRS is vowing to take a closer look. About time.

I heard NPR talking about the decline in Starbucks revenues as related to the increase in gas prices. How bloody close to the edge are people living when they are forced to stop drinking coffee drinks? I knew Applebie's customers came and went with the price of gas, but coffee?

I also had to explain to a Realtor friend that the median price of houses went up in San Francisco, but it didn't mean that the value of her house necessarily went up. I explained how it could be the mix of houses that changed, that she really needed to look at the price per square foot in her particular area of her zip code to see what was happening. She would have none of it, the median price was up so her house was worth more.

Interestingly, the first house she bought (in 1989) declined in value for so long it was years before she could sell it and move, but she still tells me the Bay Area is different, prices don't go down here. Flat-earther.

Bap,
You gotta be careful about infrastructure. . .
Most builders carry the cost themselves and have a back-out clause that no-one reads. Namely, if the builder does not sell enough homes the infrastructure bill can be pushed back onto the neighborhood residents. Lennar pulled this stunt in Florida and man, some people were steamed.
Historically in Colorado, cities have asked developers to carry the cost of infrastructure in their busness plan. However, developers there were famous for stiffing the city by simply overpaying themselves then disolving their companies in bankruptcy. This is why there are so many special assessment districts in Colorado - people are carrying the costs of their own infrastructure.
Locally, we have a Windemere that is charging an arm and a leg for infrastructure in massive taxes, 1.7% prperty tax. But we also have some smaller builders that carry their own infrastrucutre cost and pass it on to the consumer. I guess it just pays to be aware of what costs go into the cost of the home YOU want.
I suppose one of the things I find annoying is that if the cost for a new home were fully specified that marketing and realtor fees appear. Of course your property tax assessment is levieid as the purchase price which effectively means you are paying for realtors and marketing, at an increeasing 2% rate, FOREVER!
Grrrrrrr.

I heard NPR talking about the decline in Starbucks revenues as related to the increase in gas prices. How bloody close to the edge are people living when they are forced to stop drinking coffee drinks? I knew Applebie’s customers came and went with the price of gas, but coffee?

On the other hand, it makes sense if you think about it this way. $4-5/pop for starbucks coffee's? Two drinks is the price of a whole pound of coffee beans from Starbucks. I'm a cheap bastard, so in my mind, that's the calculus I use, so I brew at home or work, and take a travel mug. Maybe FBs are starting to do the same.

skibum,

I never drink coffee, so Starbucks is where I get a cup of tea when I need a clean public restroom. There seem to be a lot of people who are really, really into their weird coffee drinks, however, so it just seems odd to me that you'd keep driving your Escalade to work and then fret about your $4 coffee. People seem to be cutting back on their smaller luxuries and not on their Leviathan cars or their mega-can't-heat-or-cool it houses. Oh well, if they want to be slaves to Saudi oilmen because they want to be seen in a giant car or house of some sort that's not my problem. (Well, maybe at some point in the future another oil war or global warming will be my problem....)

I also heard on NPR that those little PT Cruisers only get about 14 miles to the gallon (heard it on Car Talk). What's with that?

I don't know if Howard Schultz made use of that "crutch" but it does seem in character with so many CEO's. If you think back to the 2nd and 3rd qtrs. of 2000 many tech CEO's were boasting and then out of the corner of their mouth tempering expectations for the upcoming quarter.

We should expect to see the validity of that connection severely strained as we go forward. I'd heard GE claim that when people buy single light bulbs for replacements (vice the 4 pack) it's also a sign of consumers tightening the belt. Trust me, we'll get tired of hearing those.

SBUX has been publicly traded long enough to have been through several bus. cycles. I always thought their spin was that people will do without other things before they do without their coffee?

Guess not. Most pay with c/c and since they've been MEW fed for the last 7 years...?

@SFWoman,

I think your theory about cutting back on the smaller luxuries is true. But on the other hand, there's already evidence in the harder-hit places of big-ticket items getting hit. You might have seen this piece in over the weekend in the Chronicle:

"Fairfield balances on the edge as housing prices plunge"

Sam Zuckerman, Chronicle Staff Writer

Until recently, the spillover from housing was confined mainly to businesses directly linked to the residential market - real estate firms, construction companies, building materials suppliers and the like. But now there are ominous signs that the pain is spreading to businesses further afield, such as furniture and home-improvement retailers, and even restaurants and car dealers.

"Our customers appear to have less disposable cash," said Thomason president Pancho Redfern.

The WSJ also reports that SBUX is going to use national TV ads for the first time in its history. Seems like lean times ahead to me.

Quote of the Day

"I've been advising builders, in general, (to) do whatever it takes to get rid of inventory now because the prospects for house prices in the coming year don't look good. I'm afraid that '08 may be a year of pretty systematic price erosion, at least in many markets." – National Association of Home Builders.chief economist David Seiders. (BusinessWeek, Nov. 16th)

pshawn,

Actually that is. David Seiders is probably one of the few original REIC Cartel (TM) members still in the same job he held "pre-bubble".

Systematic price erosion. That's bad isn't it?

On the other hand, it makes sense if you think about it this way. $4-5/pop for starbucks coffee’s? Two drinks is the price of a whole pound of coffee beans from Starbucks. I’m a cheap bastard, so in my mind, that’s the calculus I use, so I brew at home or work

Hey you can buy 3 lbs. of good "SF Bay" French Roast beans for $10 at Costco, and it has a less burnt taste than the Starbucks FR. But then again I'm a world-class cheapskate.

The reason people cut out small luxuries and keep the gas-guzzler is that it's much more of an expense to sell one car and buy another. Try the math sometime...it takes a long time to amortize the loss of selling a low-miles used Escalade and buying a Prius even with $3 / gal. gas. Where these people were stupid was buying the Escalade in the first place.

SUVs weigh much more than the pickup truck on whose chassis they are designed and therefore get much much worse mileage. My 2001 F-150 XLT gets 17 city / 20 hwy observed, whereas the Expedition built on the same chassis weighs 900 lbs more and gets 5 - 7 fewer mpg.

Where these people were stupid was buying the Escalade in the first place.

O, Peter P, where art thou? ;-)

Dennis N.,

I agree that the people were stupid in the first place buying a vehicle that was larger than they needed.

A couple of the people I know who have showy lifestyles but are living paycheck to paycheck never seem to learn, however. They just lease a new Range Rover or Mercedes when the lease on the old one is up and then gripe about the price of gas. If the price of gas really bothered them they'd just buy a Honda Civic or lease a Camry. I think what really bothers them is that they can't afford their lifestyles, and the gas is eating into that.

I buy a car every 10-15 years. I'll get my next car when they fly.