patrick.net

hrhjuliet says

When do you think the next real estate downturn will occur? Why?

They're goosing all asset prices in order to create wealth effect, which, in a FIRE economy, is the only medicine available. Once this gambit peters out some, and it will, (they say ZIRP til 2014, but after that, it will be NIRP), you will see a lot of the froth boil away.

As an aside, my compliments to all involved on this thread. It's all so insightful and reasonable, I almost forgot where I was.

Nice work.

Call it Crazy says

My first decision is around which one will provide financial and overall security when things crash and burn in the economy. Do I want the flexibility of renting, where I can move quickly or own so I can't be kicked out.

Do I want to tie up money in a depreciating asset or keep my money in my pocket and hope my landlord doesn't do something stupid.

Do I steal a foreclosure at a good price below market and have to do renovations but then know I'm set in place as long as I pay the mortgage.

Such good and valid questions. I think this is what we are all wondering. The economic crash is going to happen and the president can't fix it, like some people on this forum seem to think, whoever he or she may be. The president doesn't have the power and it's too big of a mess for any one group or person to fix. Yes, your questions are the hard ones, and I wish I had an answer too.

everything says

Still, with how low they've had to drop rates to battle deflationary pressure, cheap borrowing makes a person wonder what lies ahead.

Another concern of mine.

I live in South Florida and prices are back down to about 2003 levels. Meaning they are still 100% higher than they were in the late 1990's, even after falling 50%. Meanwhile property taxes are triple what they were back in 2003. Insurance as well. In fact, the majority of daily basics like food, gas, etc have tripled. Yet our incomes are stagnant. Prices are not cheap by any measure.

Something I don't see mentioned much is the Federal Reserve promising to keep interest rates near zero through 2015. They claim to be fearful of deflation. Real estate is supposed to go down with deflation. When I see prices that have gone up 50% in places like Phoenix and Miami in just the last six months, I question if it is not proof of speculation. It sure isn't rising on fundamentals. If fundamentals supported the increases the Fed would be jacking rates, not printing money....

Goran_K says

Fly over states:

Are you referring to those states with non-parasitic economies? You know, states that actually produce goods of tangible value instead of just RE speculation and banking?

Just checking. ;-)

Goran_K says

Prime areas of California: Probably a 20% drop to come.

Are you sure about that? The top 0.1% are doing very well, as we all know.

You could be right, but waterfront and downtown locations are always desirable. There is plenty of money out there (among the wealthy) that is looking to find a "home," no pun intended.

Full disclosure: We bought 2 months ago so even though I am trying to not be biased, that might ultimately have an effect on my opinion.

We waited out the bubble and saved for almost 12 years. So yes- I fully know the frustration and annoyance of the OP. We make pretty good money- as in we're probably within the upper 10% of the median income bracket. But even still, it took us a long time to save up because we're frugal and wanted to make sure what we bought was well within easy affordability and something that wouldn't become a liability.

As far as what I think- and again- this is my opinion- is that at least for immediate Bay Area the bust is probably over. We live in a fairly desirable East Bay city and between winter and spring it was like the faucets were turned on full-blast. It went from houses sitting and sitting forever to suddenly selling almost as soon as they hit the market. All of the inventory quickly dried up. We simply got lucky on ours. I spoke with our Realtor lately and she said its gotten worse since we bought. I can't speak for the rest of the Bay Area but I suspect its probably similar.

We're in this weird gray area right now. The limited supply has put a higher demand on real estate. Now what will happen if suddenly everyone puts their home on the market is another question. But if the supply stays limited then prices will likely go up. Its simple mathematics.

But even so, I seriously doubt there is going to be any sort of substantial downturn in prices. Even if there were the outcome would probably be the same as the first downturn: Any homes that were at all reasonably priced would get bought by investors and thus keep those out of the hands of "ordinary" buyers.

Note that I have no interest on what home values do. We bought a house to live in and hopefully do so until we're old. I could care less what its worth. I also would actually welcome a more normal housing market because that's better for everyone-including me.

"....Something seems odd about the way it suddenly jumped, we've been looking for a long time and I've never seen it shift that fast in any direction, which makes me nervous and highly suspicious....."

Bear market rallies are usually fast and furious. In my neck of the woods I am seeing properties on the low end selling for 100% more than they did six months ago. That to me smacks of a bear market rally. Real estate traditonally hits bottom and flattens out for years before the next rally. Maybe this time is different because the inventory has been kept from the market for 2.5 years. Interest rates are being kept low while the real inflation rate is being hidden. Government is backing 90% of all new mortgages. Subprime is back with fhfa 3.5% down and easy credit. We will see.... History and fundamentals don't support this spike. Only extreme speculation does.

hrhjuliet says

We used that calculator before. A fantastic tool, but I forget where "it lives" on this site. Do you have a link? Thanks. (:

It's at the very bottom of Patnet. Click the "House Value Calculator" link. Be sure to "change assumtions" to adjust for your personal situation, but make *conservative* assumptions. Also do a "worst case" analysis.

There have been spikes. Late 2006 to mid-2007. 2008.2009. The first time buyers tax credit. Almost every spring. So far they have all been follwed by declines. Can we really even debate statistics when foreclosures have basically been frozen for over two years?

Yes, this will be a bottom in some areas. In others it will be another bear market rally.

Calling this a bottom when we are still 100% higher than the start of the bubble is simply wrong too. Crashes usually dip lower than the prices the bubble started at. With government manipulation, perhaps we avoid that fate. Fundamentals say we go back to the mid-90's prices. Factor in property taxes, insurance, upkeep, etc are triple from that time and we could overshoot it even more just to get back to affordable levels...

Ive lived in the Bay Area long enough to know that trying to apply any sort of mathematical, sensible logic to the way the housing market behaves here is a lost cause. It simply doesn't act as "It should".

edvard2 says

Note that I have no interest on what home values do. We bought a house to live in and hopefully do so until we're old. I could care less what its worth. I also would actually welcome a more normal housing market because that's better for everyone-including me.

Absolutely agreed. Home is not an investment - it's a consumable good. You need to eat. You need to drive places. You need to live somewhere. Roof will deteriorate, basement will crack, new building technology will obsolete your home, etc.

When times were normal people would work and save to buy a house. Then things went nuts and people would buy a house to use it to get money.

What can't continue has a tendency to stop...

Banks have been stalling for years, even in California. That state has had local politicians creating laws to stall the process too. California is still in the top ten for deliquent mortgages. There is shadow inventory. However, with the current spikes, many of these owners now have equity. Whether they can refi or sell for a profit is unknown. If not, the banks may stop stalling and foreclose on these....

"....Fundamentals say the cost of housing is RIGHT NOW far below the mid 1990s......."

In 1998 I could buy a brand new 3/2/2 on an acre of land for $110k in my area. Taxes were $1300. Gas about $1. A 15oz bag of dorittos for $1.69. Today, that 15yo home sells for $160k. Taxes are $4000. Gas almost $4. A 10oz bag of dorittos for $4.39. Insurance, hoa, upkeep all triple. Back then savers were making billions from interest that went into the economy. Debtors could actually get credit. Yeah, we have low interest rates today. It is because our economy is so low. I'll take the mid-90's with 7% mortgage rates and costs that were 1/3 what they are today. Those were affordable times compared to today. Still not as affordable to what we had before the Federal Reserve destroyed our dollar.....

"....If you're claiming we're 100% higher than the bottom, then you're also claiming housing has to lose another 50%...."

I am claiming that prices simply lost their gains back to 2003 levels. And in the decade before 2003 many areas saw prices go up by 100% and greater. Meaning we are still overpriced. Walmart can jack up the price of milk to $10 today. Mark it down to $7 next week. Is it a great deal now that they marked it down 30%? Or do you remember that just last week it was selling for $3?

Real estate has fallen much more than this recent disinflation. Japan is an example. We saw it too last century.... And can we compare rents when they too have risen so much?

"...never been a 2-year moratorium on new foreclosures in any state......."

You can find charts all over showing inventory levels and finalized foreclosures. Going into 2010 they were ramping foreclosures. Then something happened towards late summer. You then see inventory falling. That was when robo-signing was exposed. The banks stopped most of their foreclosures until the recent settlement this year. Even today they have to try and work out refis and short sales. You can look at the charts and line the decline of inventory up with the dates of robo-signing....

The chart also shows that areas with high-paying jobs are holding up better. Not surprising. DC won't go down since it has the power to tax. The NYC financial sector owns DC. Movie stars in LA still make lots of money. Boston and SF have high-tech industry. Vegas? Atlanta? Not so much.

edvard2 says

trying to apply any sort of mathematical, sensible logic to the way the housing market behaves here is a lost cause. It simply doesn't act as "It should".

I have heard stories of those who would risk life in prison to own a pair of sneakers.

Value is simply a measure of the number of people standing in line, ready, willing & able to complete a purchase. Supply in the Bay area is restricted by water and steep hillsides. That shortage in supply restricts ownership of subservient peasants.

Cheeseus Sonofdog says

Real estate has fallen much more than this recent disinflation. Japan is an example.

Of course. Japan had a much bigger bubble.

Look at the graphs. The bubble is over. Sure there could still be some slow deflation. But the exteme movements are over.

The USA is relatively stable. We have the worst economy, except for all the others. Europe is a clusterfuck, as we all know. China has a massive RE bubble and ghost cities. Nations supplying China with metals (like Australia and Brazil) will get hit when China goes down.

"..I'm not sure where you live, but property taxes are not generally 3% ......"

I live in Palm Beach County Florida. Our budget was $1b a decade ago. They jacked up impact fees by 450%. Then we had the housing boom. The budget went to $4b within five years. When the crash brought home prices down 50%, the county just jacked up our milage rates by 40% over a three year period. Maening they still get $4b every year, even though that should have been a one time windfall due to the bubble.

In 1998, mortgages and subprime were availble to most. Todays 3.5% you mention is not. Hence, the majority of homes being bought are by cash investors. Hence, most overpriced fannie mae homes are coming back on the market when the buyer can't get a mortgage or the appraisal comes in.

Upkeep costs can certainly be triple. I would love to replace my roof for what it cost me 15 years ago. I would love to buy a gallon of paint for $8 again.....

Cheeseus Sonofdog says

Upkeep costs can certainly be triple. I would love to replace my roof for what it cost me 15 years ago. I would love to buy a gallon of paint for $8 again.....

I would love to buy gas at 89 cents a gallon as it was back when I was in college in 1998-1999.

edvard2 says

Ive lived in the Bay Area long enough to know that trying to apply any sort of mathematical, sensible logic to the way the housing market behaves here is a lost cause. It simply doesn't act as "It should".

I have not been interested / paying attention nearly as long as you have (not calling you old or anything), but this looks like all anyone needs to know. The BA has a very limited supply of housing, NIMBY and enviro craziness preventing new development, high paying jobs and more people that want to live here than available space.

The whole thing resembles an unstable, spring-loaded machine that that defies the second law of thermodynamics* by re-compressing some springs when others come loose, keeping the thing in a constant state of volatile tension. You don't know what it will do next, or why.

*For those not familiar, it is basically the law that says that perpetual motion machines are impossible.

".blind assertions and actually present some data."

You have the internet. Charts are a plenty. Just note that robo-signing became exposed late summer of 2010 and the settlement was this spring. Note that most foreclosures were being done by gse's like fannie/freddie/hud, and they pretty much stopped in all states, judicial and non-judicial. Note that many states saw foreclosures go up 50%, 100% this spring compared to last. Even California saw a 20% spike last month....

Going into 2010 we had rocket docket. Many states ramping foreclosures. That is the spike you see. Mid 2010 rumors of robo-signing. By late summer most banks froze foreclosures. GSE's kept them stalled in judicial and non-judicial. Inventory starts crashing by 2011.

Rocket docket was exposing factual shadow inventory. It was coming out. Robo-signing stopped it. Let's pretend this is March of 2010. Looking at the chart, would you be buying here? No. You would see that inventory is spiking. Did inventory come down because everyone decided it was a great time to buy, or because foreclosures were stalled. To buy now, one is assuming that all past foreclosures have been cleared.

I didn't say foreclosures were stopped. I said they were stalled. Banks canceling most, but not all, courthouse sales. Freezing current cases. Not filing new notice of defaults. The increase after the settlement clearly proves they were doing this. Past press releases from Fannie, etc, shows they were slowing down to a trickle.

Cheesus,

I am with you in hoping that the shadow inventory gets liquidated and we all get cheap houses. There are mountains of logical reasons for why housing prices should go lower and the shadow inventory should be released to individual buyers for the long-term health of the nation.

However, I am not counting on it, at all. Most underwater government loan owners will be given no-doc refinancing opportunities, and I am more than willing to bet that the government will do some number principal write-downs for people with government loans. If there is a large sell-off of foreclosures, most of which are held by the GSEs, they will be sold to large institutional investors that will work them to maximize their own profit. Reality is dictated by the government and big banks, and regardless of how abhorrent or unsustainable it may prove in the long run, it is and will be the case for a very long time as far as you & I are concerned.

My advice is to stop searching for the light at the end of the tunnel and focus on learning to live IN the tunnel. The next decade is going to be interesting.

You guys fret, but low interest rates, or easy money juiced the RE market back to life, just like it did the equities market. Now RE is getting more expensive just like it is supposed to when you've got to much easy money chasing fewer goods.

The next downturn will come when the easy money runs out.

Also, regarding property taxes.., states are all different regarding that so you can't really argue over it without differentiating them individually. In my state, I can rent for less than twice what I would pay just in property taxes on your everyday 3 bedroom home.

bmwman91 says

Reality is dictated by the government and big banks, and regardless of how abhorrent or unsustainable it may prove in the long run, it is and will be the case for a very long time as far as you & I are concerned.

Sick, isn't it? But as my late grandmother always said, "don't fight city hall."

Cheeseus Sonofdog says

In 1998 I could buy a brand new 3/2/2 on an acre of land for $110k in my area.... Today, that 15yo home sells for $160k.

If you go by the notoriously conservative CPI inflation calculator, 110K in 1998 is equal to 155K today. Is the 5K discrepancy (155K vs 160K) much more than a rouding error? What do you think that 3/2/2 going for 110K 14 years ago "should be" today?

freak80 says

Sick, isn't it? But as my late grandmother always said, "don't fight city hall."

Yup. You can't beat the system. All you can do is understand it and either operate within it as best you can, or be clever and find ways to operate outside of it.

We're still in the downturn. Just bouncing along in it.

bmwman91 says

The whole thing resembles an unstable, spring-loaded machine that that defies the second law of thermodynamics

It's only because of your USA-oriented frame of reference. For immigrants from crowded parts of the world, The Fortress prices are Bargain Prices.

bmwman91 says

or be clever and find ways to operate outside of it.

That's what the Mexican drug cartels did.

Of course, by now, the ARE the system. ;-)

B.A.C.A.H. says

It's only because of your USA-oriented frame of reference. For immigrants from crowded parts of the world, The Fortress prices are Bargain Prices.

It may be a bargain for *wealthy* immigrants. How many Chinese peasants do you know who can afford to live in San Jose?

bmwman91 says

I have not been interested / paying attention nearly as long as you have (not calling you old or anything), but this looks like all anyone needs to know. The BA has a very limited supply of housing, NIMBY and enviro craziness preventing new development, high paying jobs and more people that want to live here than available space.

LOL! Its ok. I'm actually in my 30's, which I guess is sorta... "old"
But anyway, The only reason I waited as long is because when I first moved here I didn't make much money and so buying was totally out of the question anyway. When I started making more dough the housing bubble was going like mad and so the more I made, the more the prices went up and by that time I said the heck with it and waited it out.

So in reality the bubble more or less forced me into saving and waiting out of necessity. In the end I sort of got tired of trying to make sense out of something that will never make sense: Bay Area housing.

Inventory came down because existing inventory was being bought while new inventory was being kept from entering the market. If walmart sets out a dozen TV's for sale and doesn't add more, the inventory on the shelf will become depleted. But if they have a hundred more TVs in the warehouse, did inventory fall?

freak80 says

How many Chinese peasants do you know who can afford to live in San Jose?

I don't know any.

But that's not who it is. It's the kids of their 1%'ers (in a poor country of a billion, there's millions of them), their parents sending them to the top universities in North America to get'em out of Dodge before the coming next Great Unraveling.

And it's not San Jose. Except for a tiny polyp of amaeba-shaped San Jose that protrudes into the school district of a coveted Fortress Community, they are not interested in San Jose.

And yes, considering what you get, and how many hours of your engineering salary you have to trade each month for the mortgage payment and property tax bill, compared to where they came from housing in the coveted Fortress Communities in the big urban areas along the Left Coast are Bargain Prices.

B.A.C.A.H. says

But that's not who it is. It's the kids of their 1%'ers (in a poor country of a billion, there's millions of them), their parents sending them to the top universities in North America to get'em out of Dodge before the coming next Great Unraveling.

I get it now. That makes sense.

B.A.C.A.H. says

And it's not San Jose. Except for a tiny polyp of amaeba-shaped San Jose that protrudes into the school district of a coveted Fortress Community, they are not interested in San Jose.

I guess I misunderstood what "The Fortress" was. I thought it was just a synonym for Silicon Valley and/or San Jose.

B.A.C.A.H. says

And yes, considering what you get, and how many hours of your engineering salary you have to trade each month for the mortgage payment and property tax bill, compared to where they came from housing in the coveted Fortress Communities in the big urban areas along the Left Coast are Bargain Prices.

True that. I've heard it takes 50 years of an average Chinese salary to buy an apartment/condo in Shanghai and other coastal cities.

Maybe part of the Chinese coastal RE bubble is being "imported" to the Bay Area, Vancouver BC, and other West Coast areas.