patrick.net

I think new regulations will hold RE professionals to the same ethical standard as that applied to stock brokers.

They should not be able to say "RE never goes down".

That said, I believe in Caveat Emptor. Sheeple are necessary creatures.

However, nobody gets on me more than my Dad about how I need to buy a home. The emotional pressure is more than any real estate agent has given me.

I understand that feeling. Thankfully all of my immediate relatives believe that the current appreciation is unsustainable.

Sorry bout the rant, but it’s on topic, sort of.

Ranting is accepted here.

Once in his life he actually chose an investment that actually payed off and somehow he’s qualified to give me advice.

It pays off only when the house is sold though.

That would be wrong IMO. We don’t prevent people from being able to buy junk bonds (ala GM or Ford), why should we prevent people from investing in risky MBS’s? You can make an argument for better disclosure or risk assessment, but not for an elimination of MBSs.

I see a critical difference between GM/Ford-issued corporate "junk" bonds and MBS/CMO paper:

If the junk-bond issuer (GM/Ford) defaults on payments, THEY are accountable and can even be sued in some cases. When mortgage lenders issue no-doc NAAVLPs to illegals and dead people, they sell them off as MBSs/CMOs (or sell them to Fannie/Freddie, who then bundle & sell them) and assume NONE of the default risk.

This is unethical, unwise, and is largely what is driving down lending standards overall. What makes this situation even worse, is that most MBS/CMO investors assume that these derivatives are "safe" and --if Fannie/Freddie issued-- that they are fully backed by the U.S. taxpayer. Whether or not this turns out for practical purposes to be correct (technically it's not), investors perceive these to be "low risk" and are not (yet) demanding high enough risk premiums to compensate them for the very real risks.

Force lenders to "eat their own shit" so to speak, and we may actually see a return of sensible lending standards and higher risk premiums (mortgage rates), regardless of how the Fed plays political games with short rates & the CPI.

The MBS mantra: "Privatize profits, socialize risk"

To be clear, I am not against "risky" investments.
I am against risky investments that are falsely presented as low-risk, and which may also force ME against my will (as a taxpayer) to bail out some bloated government-sponsored behemoth to the tune of several $TRILLION dollars.

@Fewlesh,

Yeah, but "this time it's different". :lol: :roll:

Harm,

I see a lucrative book deal in your future and I want to be your agent!

HOW FANNIE AND FREDDIE FAILED AMERICA!

Privatizing Profits and Soclializing Risks

(And why you should be MAD as hell!)

Forward by: Surfer X

Can it be put any better than that?

I see a lucrative book deal in your future and I want to be your agent!

Privatizing Profits and Soclializing Risks

How about a movie?

Realtors: The smartest guys in the room

Scott,

There's an element of truth to what you're sharing and prior to GSE's it would have been 100% true. There has been considerable consolidation in the banking arena over the last few years. The days of local lenders that actually looked at the loan application and truly felt accountable to their depositors are a distant memory. Defaults were dealt with on a local level. Since the inception of GSE's the defaults would be HIGHLY concentrated and that much more devastating. As is, high profile bank mergers are subject to the FED, OCC and FDIC scrutiny. Why? If there are only say 5 banks in the country and one of them goes under can FDIC cover 1/5 of the nations deposits. Not likely.

Peter P,

With Vin Diesel playing the part of Heli-Ben!

@DinOR,

OK, you can be my agent. Of course that means you'll want a commission. Hmmm... let me guess --6%!

One question though — why will FNM/FRE necessarily fail? If they rebundle a bunch of loans as MBS’s, and the loans default, won’t the MBS’s simply default, leaving FNM/FRE right where they started? Where’s the risk to the taxpayer (other than the pensions holding MBS’s that will suddenly find themselves landlords foreclosing on their tenants)?

This isn't a bad question, actually. If the hedge/pension funds, asian central banks, etc. who own Fannie/Freddie-issued paper have no legal recourse to hold them financially responsible for making good on large-scale defaults (improbable?), then no, you could say that technically there's not much risk. I am no expert on the legal fine print of MBS/CMO paper --perhaps some investment guru/rugu out there can enlighten us?

Aside from the hedge/pension/foreign owned paper, last I heard the GSEs themselves held a substantial portion of their own stuff on the books (at least several hundred $billion worth). This would mean substantial risk exposure by itself. Another question: if enough pensioneers and investors of voting age get screwed by holding bad paper, will Congress be pressured to act anyway?

This article's a bit dated, but does an excellent job of making the case against the GSEs and their potential for systemic risk for taxpayers:

"Mortgage Market Socialism"
www.mises.org/freemarket_detail.asp?control=391&sortorder=articledate

Harm,

No compensation needed! Anytime someone turns a phrase like Privatize Profits, Socialize Risk it merits no, screams for our attention. Let's try this, if the taxpayer stands to have to pony up for this debacle how about doing this in the form of "flower bonds" more popularly known as "death bonds". Every dollar forked over for the meltdown translates to a dollar credit against your inheritance tax, alternative minimum tax or Oh just the hell with it, the tax of YOUR choosing! To further fund the Viet Nam War bonds were packaged to the wealthy that paid no int. and had no secondary market but were a way for the rich to "buy" their way out of a future tax jam, like death, hence the term death bonds. I realize how ridiculous this must sound but look where were at!

Harm,

Unfortunately this will likely take the form of the "RTC Strips". Sold to the public w/no current int. paid and at a deep discount. Because these things will mature after boomers have gotten all of their benefits it's passing will be a slam dunk. We can just pass the debt on to some future generation, the underwriters make a huge spread and I'll get a modest commission for placing the securities, everyone wins! Well most everybody (unless you're in that future generation). What a mess.

Weird, I'm the thread moderator but my posts keep getting eaten without even showing up in moderation --WTF?? Is WordPress having hiccups today?

DinOR,

Please elaborate --what are "RTC strips"? (hope this is not a dumb question)

Never mind, I figured it out --"RTC" as in Resolution Trust Corporation (RTC), created in the 1989 S&L bailout legislation to be receiver and liquidator for defaulted properties.

How do you tell the difference between a Realtorâ„¢ and an Oreo Cookie?

Ans. Dip in milk for 15 seconds. If it's easier to bite into, it's an Oreo.

Face Reality, honestly *IF* I must buy now, I would probably buy in SF because rent is high and there is more room for rent to go higher. Still, I think the SF market is overvalued.

Why South Beach? It is too close to SBC Park. Also, the view to the Bay Bridge is too threatening, bad Feng Shui.

You should be able tp get a new 2/2 in Snob Hill for around 800K.

1725 WASHINGTON ST #1, Nob Hill, CA 94109
$799,000
MLS#301068

Face,

_shrug_

Prices have leveled off, even in SF. (In fact, I'd bet that a year ago that those lofts were going for the same amount or more.) Inventory is increasing. History suggests that as rates rise, prices will fall. If you feel that credit has eased as much as is possible, then the most likely future is tightening, which would lead to further price declines. All the usual arguments still apply. Of course, things could be different this time. It just seems unlikely.

We are all excitable, of course. But to fit the glacial movements of the housing market, with its lagging indicators, long cycle time and lack of transparency, into the context of internet blog time, we have to have something to talk about, no?

Cheers,
prat

The units will most likely go for a total of at least $12 million. Not a bad profit for the real-estate investor(s) who did this.

Fair enough. But one must keep in mind that fortunes have been lost in real estate as well. Even SF real estate. The last four years have been good. Will the next four?

I view the above example as being akin to a story along the lines of "I know a guy who bought a small biotech when it was nothing, and made millions on it": a moderately interesting story, not particularly relevant for your average investor or person, and probably fostering what is, at the end of the day, an undesirable atmosphere of get-rich-quick-ism.

But then, I'm like that.

Cheers,
prat

I don’t know if you noticed in the news but developers like Centex and Toll do quite a bit of business in bay area...

Taken a look at CTX and TOL stock prices 1/10/06 to present?

You sure you want to bet?

_shrug_

To be honest, I don't follow condo's closely enough to make an informed bet. But I've been occasionally look at the SFH listings in SF in the 600K-1.5M range (mostly via the pac union site), and I'm seeing a lot more listings, and a *bit* more house for that amount of money.

Very qualitative of course, and perhaps I'm viewing things through bear colored glasses.

Cheers,
prat

“Monopoly MLS Post-Mortem…”

Too much jumping the gun here. RE crashed, MLS died, etc. Why live detached from reality? I don’t see how that can be good for anybody.

Jumping the gun? Sure. And yes, our parent site is named "SF Bay Area Housing Crash Continues". And it was named that long before any bearish news hit the MSM. So...?

Just following in the grand forward-looking tradition started by Mr. Killelea, that's all ;-) Hey, call us prognosticators, visionaries or kooks, I don't care. As Prat said, "But to fit the glacial movements of the housing market, with its lagging indicators, long cycle time and lack of transparency, into the context of internet blog time, we have to have something to talk about, no?"

So, Face, what's your take on Realtorâ„¢ commissions & closed MLS? Do you forsee changes on the horizon, or a continuation of the status quo? Do you think 6% is perfectly reasonable in a competitive, open market or an anti-competitive aberration?

I wanted to interject something here for a minute. Albeit, this reply is more of a statement, but I couldn't find anywhere else to post it, so perhaps this could be it's own thread. The subject is what is happening to the rest of the country as a result of the massive diffrences in the cost of living in places like NYC, Boston, DC, SF, LA, and all the other heavily overheated regions and the more tame areas.
I'm sure many of you have heard of a region known as the I-85 development corridor. This stretch goes from Nashville, Atlanta, Raleigh Durahm, NC, and parts of Alabama. The primary focus of the region is biotech, high tech, and education right along with manufactoring,service sector, and lower income type work. It is also the fastest growing region in the country. The reason? Affordable cost of living.
I grew up in Nashville, TN and have been in SF for 7 years. Since I have left, Nashville has almost doubled in size. Most of this growth has been greatly accelerated as prices in the affected bubble areas go higher. Of the families moving in, most are younger middle class individuals and familes along with recently "retired" couples who cashed out in CA and buy in the most expensive areas of Nashville aka- Brentwood, where the "pricey" homes sell for 2-300k.
The fact that all in all, enormous chunks of the country remain highly affordable in relation to local wages makes them all the more appealing not only to families, but business as well. California, NY, and MA rank amoung those at the bottom of the list in hostility towards business. The double tax standard, cost of real estate, and the ever-higher wages their employees demand is causing many of these companies to relocate to other regions. Some of the most spectacular examples I can think of would be Buck Knives, making the move out of el Cajon CA to Idaho. Net savings of 300k just in electric bills, and over 90% off their cost per employee.They went from losing several million a year to making 23 million. A few months ago, Nissan made the decision to move executive offices from LA to Nashville. Countless tech firms are moving either completely, or establishing research and development operations in such places as Raleigh, Boise,ID, and Atlanta.Such firms include Cysco, HP, Microsoft, and Applied Signal. Add to the fact that Silicone Valley already feels a pinch increasingly from Asia, and anyone can see that running operations in the most expensive region of the country is far from wise. With the price of housing having families eye previously ignored regions as very viable, they won't have problems finding the talent to facilitate their needs.
With that said, if you go to the Tenneseean web site and flip through the pages, their outlook is a stark comparison to that of california's. Expected record growth, new addtions for new schools, land being broken for new plants, offices, parks, transportation, housing developments, and so on. Special tax incentives and custom packages for out of state companies as well as foreign ones, and more. As you can see, just this area alone in TN is making the most out of an almost dire situation in some of the bubble stricken states. The message is clear. They can and will provide what CA, NY, and MA cannot provide, which are viable means to support a family in a traditional american way, meaning a house, garage, and a yard, and all at a price that a middle class or even lower middle class working person can afford without taking serious financial risks.
Of course I don't expect CA to simply empty itself into the interior of the country since doing so will surely cause the real estate prices to crash. The 300% increase in baby boomers in 20 years will assure that prices, though perhaps partially deflated somewhat over the next few years, will stay high for years to come. It is the baby boomers that are most responsible for the spectacular gains in places like Florida, CA, and NY. These states with the highest older populations have the highest real estate prices. On the other hand, states like TN, NC, and GA, and TX have some of the youngest, thus the equation is opposite with housing prices within the 120-150k range in many cases.
Anyhow, what was the meaning behind all of this? Well, CA and NY and others are in their own mess. They created it, and they will have to fix it themselves. Meanwhile, many states probably will continue to benefit from the mass outflow of talent and business that come to their "shores" for a new future.If you were to take out a map and see the US in 20 years, you'll probably see a lot of new cities that sprang up overnight. Studies show that the midwest and the southeast will almost double in size, and in some cases like that of Atlanta and Dallas, rival that of those on the east and west coast. Just my 2 cents worth

"Some of these are dual income couples earning 75K-100K each."

You know, as much as that "fact" is tossed around, one still cannot get over the fact that the median household income for Santa Clara County, yes that's HOUSEHOLD, is about $75K year:

http://www.bayareacensus.ca.gov/counties/SantaClaraCounty.htm

So yes you will find dual incomes of well over $100K, but that is still not the "norm" no matter how you spin it. It's like saying housing prices in Salt Lake City should be $1 million because of all the doctors working at the University of Utah hosptital make well over $100K/year.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/02/08/BUGGMH4HN31.DTL

Hmmm....leisure and hospitality? These typically aren't jobs that pay nearly enough to purchase a $500K condo.

Construction? I'll give 'em that. I work in downtown Oakland and haven't seen as much construction in the last 12 years working here as I see going on right now.

Clearly an economy supported by the real estate boom.

Selling commissions should be based on a sliding scale. --HITMAN

Commissions should not be based on value of the transaction at all, but priced per unit, since obviously realtors(tm) are enjoying significant scale of economy, or they'd not be earning outrageous profits on average 2-weeks of work per deal.

"I think you’re missing the point. In a place with tight supply like the Bay Area, house prices can be sustained at levels which are much higher than what is affordable to median-income households. There just need to be enough people with enough financial resources to buy the limited inventory."

Limited inventory? LOL! Maybe a year ago but not anymore my friend! And you have to ask yourself WHY was inventory so limited? Has much more to do with financing (NAAVLPS, rates) than income levels. Now the financing schemes don't look all that attractive anymore.

"I don’t think the people who were standing in line with me at the condo sales offices in SF were median-income. One guy I chatted with there is a partner in a law firm, for example. "

Again what lines I ask? In 2004? I've been to open houses in the East Bay in the past month where realtors are lucky to get 10 people in 4 hours!!

"One guy I chatted with there is a partner in a law firm, for example.”

Again you make my point by assuming everyone buying has highly paid professional jobs - they DON'T ;-)

I might be convinced that there more sustainability/stickiness for the upper strata of homes in the BA. But the problem is that the prices of homes in the middle strata have inflated out of proportion with supporting incomes; primarily because of the credit vehicles. It is definitely true that there are a high number of high income households in the BA (comparatively, that is a bigger top strata than many other areas). *BUT* this doesn't support the conclusion that prices in the middle are sustainable. And *even in the BA*, the middle is the largest segment. Middle income families cannot afford prices that hover in the 3/4~1M range--that is unless they're taking on 50+% of gross income burdens, which is definitely not sustainable.

My gut feel (not supportable directly through any data other than unreliable linear regression kind of stuff) is that a lot of top strata homes will fall by 5%-15% nominally; maybe much more in real terms. Middle homes will take the brunt, falling quite a bit in many areas.

Anecdote: In 1996 we bought a small 2BR in Redwood City for $365K. I thought this was significantly overpriced then, given it was 1.5bath, barely 1000sqft, circa 1950 kitchen and fixtures and in a terrible school district implying private schools. It was a nice neighborhood, though; but bordering a pretty seedy apartment district. We've long since sold and left, but comps are now about $850K in that area; our home sold in 2000 for $700K, and again in 2004 for $815K. I *might* be convinced that $365K~$400K is a fair price now, but only if they've fixed those battlezone schools. And I'll bet that I could move back there for around $400K or so in a year or two, once all the recent wave of homebuyers are chased out by their collapsing debt burdens.

"I don’t see this changing unless there’s some big infusion of new housing, but that’s not in the cards."

It's already changing. Sales volume has declined every month for a year. In San Ramon, for example, converters of 2 complexes are now offering incentives due to lack of demand. Nothing lasts forever. What more anedotes do you want? I've got plenty of them!

The problem with most people is that they look only at the rearview mirror and assume that things will continue the way they have been thus distorting their already high and inflated expectations.

You think incomes don't matter? How low can affordability go? 5% 2%? 1% whaere's the "tipping point"? Have we reached it yet? Arguably, it;s getting very close...

Face Reality:

Here's another anecodate for ya:

Out in Dublin, arguably one of the fastest growing areas in the Bay Area and has a reasonable commute to boot, there is a ton of new development. A year ago lotteries and drawings were the only way one could get their feet in the door. Broker participation was non-existent. They clearly didn't need it.

Now? Developers are begging to pay broker coop fees, offering plasma TVs, offering closing cost incentives, offering $5K to refer a friend, etc.

This isn't Sacramento. This is Dublin. A 45 minute commute to either SF or Silicon Valley.

I'm actually quite shocked how much sentiment has changed so quickly.

As you can see, just this area alone in TN is making the most out of an almost dire situation in some of the bubble stricken states. The message is clear. They can and will provide what CA, NY, and MA cannot provide, which are viable means to support a family in a traditional american way, meaning a house, garage, and a yard, and all at a price that a middle class or even lower middle class working person can afford without taking serious financial risks.

nomadtoons,

You've made some good points here, and I myself am looking to bail from CA, mainly for reasons of overall degraded quality of life and the high population density here. I found myself generally agreeing with you until I came to this part:

Of course I don’t expect CA to simply empty itself into the interior of the country since doing so will surely cause the real estate prices to crash. The 300% increase in baby boomers in 20 years will assure that prices, though perhaps partially deflated somewhat over the next few years, will stay high for years to come. It is the baby boomers that are most responsible for the spectacular gains in places like Florida, CA, and NY.

How will baby boomers "increase 300%" in 20 years? Baby Boomers, by definition, were people born between 1946-1964. All the Boomers that will ever exist have already been born, and as time passes, their numbers can only go one direction: down. Add to that the fact that the oldest Boomers are close to retirement age, and the trend we're most likely to see play out in future years is the "empty nest" syndrome, where Boomers will sell their needlessly large & expensive homes to trade down and move somewhere cheaper. There is some truth to the idea that baby boomers "are most responsible for the spectacular gains" in the big bubble states (because they are such a huge demographic group), but, again, it's not the NEED for housing that's been driving recent purchases --it's low rates, NAAVLPs and speculation.

What makes you think that the current RE bubble is permanent or that prices cannot crash? They have in previous cycles and no doubt will do so again. In fact, as others have pointed out, we are already seeing clear evidence of price reductions and skyrocketing inventory in places like SD & Sacramento. These may well prove to be the "canaries in the coal mine" for the rest of the Bubble coasts. RE moves glacially, and I like most others, fully expect this trough to take years to fully hit bottom.

@PS --fixed it for you!

"Dublin may be a 45-minute commute when there’s no traffic, but it gets much worse than 45 minutes often. It’s on the periphery of the Bay Area, and I agree that there’s some price risk in those locations."

True, but Dublin also has a BART station, the area has a lot of companies in its own right and I would hardly call it the "periphery" of the BA being that it's in Alameda County just over the hill from Castro Valey. Don't kid yourself...Dublin/Pleasanton/San Ramon is a highly sought after area with good schools and low crime.

"By the way, have prices actually dropped there, or are we just talking about a “free” plasma TV?"

Who knows? They don't seem to be selling much! I will say that the Crestview condo conversion in adjacent San Ramon was starting from the high 300Ks in the Fall to now the low 300Ks (1 bedroom condo)

Hi Davis Renter,
Well it is good to know someone else knows about the I-85 area. The ironic part is that the main reason I moved out to CA was that I am a graphic artist and found that jobs were more plentiful here, and the pay was higher. This was true 7 years ago, and even though the houses and cost of living was higher, the wages almost compensated, albeit it was still seemingly substandard to what I was used to paying in TN. So I didn't buy because I didn't see the value at the time. That was 7 years ago, and now the prices are even beyond being a value at all. The whole housing fiasco was a mystery to me until I realized that A: baby boomers had no savings and thus the housing boom provided swift cashflow for their possible relocation to places like AZ, WA, and FL. B: the onset of panic it caused in the younger generations who wanted to get a piece of the pie before " it was too late", at ANY cost. and C: the almost snakeoil salesman business it drummed up for lenders taking advantage of financially irresponsible young couples.
In the meantime, I have friends who either stayed home, or friends who have moved from here to other cities like Austin, Dallas, Nashville, Raleigh, and they seem to be doing better. A few even claimed that they were almost kicking themselves for not jumping at the opportunity before. One of my friends who lives in Chappel Hill NC simply bought his house outright and works at a engineering firm in Raleigh.
The way I see things happening is that for one, CA will NOT be affordable for decades. The same is true for NY. There is already a massive amount of out of staters in these new areas, and I only expect these new areas to grow not only in population, but in intellectual influence as a more diverse population from all over moves in. Interestingly enough, nashville has one of the largest Turkish populations in the country. It is also increasingly becoming a new area of intrest from other recent immigrants from Latin America and Europe.
When I tell Hard-core Californians that the biggest threat to their future isn't Asian competition, but rather other states that can easily take advantage of their unfavorable conditions for young middle class families by offering a more reasonable lifestyle, I get some very strange looks. Whether CA will eventually turn into the state with a 2-tier class system is yet to be seen, but the technoligically inclined, inventive, and educated and diverse CA we know now may not bear that resemblence in the future.
As for me, the odds are looking better all the time in my old home state. Thus I'm teetering on the eddhe of simply moving back and buy a home with what I have saved up for the last 7 years and be done with it so me and my family can enjoy life without the crushing mortgage we would face if we decided to buy here.
By the way, one of my brother's professors at UT Chatanooga was a former UC employee. The guy makes 20k less, but still claims he's coming out ahead and ownd an old victorian in downtown chatanooga.

Hi HARM,
Sorry about the lack of clarity on the part pertaining to the baby boomers. What I meant by that is the number of baby boomers moving into the aera will increase by 300%. Where did I see this? AT my local library in the refrence section. The report was 2 years old. Perhaps it is now out of date. That said. the baby boomer population is the single biggest chunk of the US population. They also have the most money. When they retire, they will have a massive impact on the economy, mainly in the transaction of something like 3 trillion dollars.
Where are they heading? to FL, CA, AZ, and other warm areas. These are the richest of the boomers, and will IMHO flood CA for years to come, and hence keep the prices out of reach for younger generations for years. Perhaps I am wrong, but in every instance that boomers made transitions in their lives, major economic changes occuured, from the massive urban developments of the 50s and the subdivisions it created, to now with most of them retiring in 2-5 years. Batten' Down the hatches!

In order for an actual crash (say a sustained >10% YoY drop), you will need higher mortgage rates in the 8 or 9% range, tighter credit standards, and loss of job-security.

PS,

Why are any of these things so out of the realm of possibility?

RE: mortgage rates in the 8 or 9% range, I guess mortgage rates have been so low for long enough that people are starting to think this is *normal*. I can remember 18-20% rates in the early 80's.

As far as tighter credit standards, we're already seeing this happen. It's mostly just jawboning/saber-rattling by the Fed at this point, but they have the power to put some teeth into their "recommendations" if they so choose.

Loss of job security: Well, when you consider that some 50% of job gains over the past 5 years is directly or indirectly related to the RE boom, I think we can all picture what may happen when that mighty job-creation engine begins to stall. It doesn't take a lot of imagination really.