patrick.net

I want to say something to him and tell him he should stop putting his interests ahead of his neighbors.

Actually, what he is doing is very neighborly! The buyer will have less negative equity than he would if he paid full overinflated price....and if he is selling, he is leaving so he is no longer a neighbor...besides, his neighbors may be the reason he is leaving in the first place!

Good idea! Be an Equity Superhero!

It would be the "neighborly" thing to do. And, he'll have 2 wonderful "investments."

It would be the “neighborly” thing to do. And, he’ll have 2 wonderful “investments.”

To save the world from the housing bubble, an evil JBR conspiracy, this superhero should offer pre-reduction prices for all "reduced" properties throughout the entire nation.

Maybe they can form a consortium to buy at those pre-reduction prices to save the market. We know how well that works in the equity and currency markets.

What can I do to stop him?

Voodoo? It may harm karma though.

hahaha - nice topic HARM.

Gotta love it.

I'm allowed to gloat, right, since I'm not financially invested in this drama, it's all just street theatre to me!

Braaak, 20% in the bag, braaak, 15% in the bag, braaak, 10% in the bag, braaak 5% in the bag, braaak, breaking even in the bag, braaak, buy and hold in the bag, braaak, oh fuck. braaak, neighbors greedy, i'm still a fiancial genius.

Bottom of the same WP article: http://tinyurl.com/hofs5

Germantown, Md.: We live in a townhouse with a neighbor who is selling a "handyman's special" almost 10 percent under what we just bought our place for, which also needed some work. Should I start kicking myself for buying too high, or talk to the neighbor about their low price. I don't think their agent is very knowledgeable since they've been on the market for over a month without an open house and are showing by appointment only.

10% below what the caller paid, and still no offers and no interest in his neighbour's place. And the caller is concerned about it being priced too low! Hilarious. I guess pricing it more "knowledgeably" would help.

LOL!

skibum Says:
I love the “Roof Farms” - it may deserve consideration for the hosing bubble dictionary. The observation of an increasing number of abandoned construction projects seems to be happening much earlier in the cycle than I would have thought. Someone posted earlier about all the abandoned sites in LV, I’ve read about a few in Boston, too. I would think that with financing secure, land purchased, etc., the financially smart thing to do would be to go ahead and finish the project. I wonder if it’s flippers bailing (and probably eating the deposit)?

DinOR Says:
A couple of months ago I would agonized over just who got stuck with unfinished condos/projects. Not that it’s unimportant. It’s certainly important to whom ever had to eat it, it’s just not important to me! F’d is f’d. I must admit though that I hadn’t heard about “derailments” in Boston! And yes, I didn’t think this phase would occur so damn early. But in the end this WAS the world’s biggest game of musical chairs so as flippers re-invested their “profits” into a bigger better, nicer newer project they and their cash were bound to part company. All that raw lumber just sitting there is ugly and someone here mentioned what will become of all these vacant and un-airconditioned homes after year+ in 120 degree heat? That IS a good question!

this is actually very interesting. putting aside the fact that the places were being built 'on spec' i.e. specuvestors were convinced they were going to triple their money overnight, etc, one of the points put across here by many posters is that "if only they would build [millions]/[billions]/[trillions] of new places in [location] and get rid of all this [restrictive zoning]/[urban consolidation]/[smart growth] thinking, then prices would come down. read my lips -- it's an [under-supply] problem." well, they are building the extra places, and no-one's coming... does this mean there is not an 'undersupply' of housing, it's actually a market price-fixing problem? and it's not even viable to finish these places off, as the speculative losses would only compound. why not rescue the projects and make them affordable housing? (because there would be too much negative equity involved.) so what's wrong with this picture?

Some people at Ben's blog thought that this person from Ashburn was acting soo funny that it might be a renter making a joke. Difficult to find the truth.

When will bargaining come in?

Oh, maybe the bargaining will come after they've been foreclosed upon and start begging the IRS go easy on them.

M. Holiday, how's Tucson?

Do you see how well educated people are these days about how real estate works? They understand what comps mean. Thats why they only lower their prices modestly. Thats why this is so unlike previous RE bubbles. People know exactly how much they, and their neighbors, can loose. Until it gets, dog eat dog.

"The problem is my neighbor is trying to sell his house (very similar to mine) right now and he keeps lowering his asking price. Each time he lowers his price, I see my potential profits next year getting squashed. Doesn't he realize he’s hurting the comps for all of his neighbors by doing this?"

I sold my house 2 years ago, made 75g's no capital gains tax. I win, you loose sucker. But wait a minute. I owned for 8 years prior. You just want to get rich quick, just like they told you, you could on the get rich quick infomercial; paid 500$ for the tapes and all. What a mind fuck people have bought about RE.

The government should change the 2 year no capital gains exemption to 7 years.

Good call on the angry stage of the market.

I don't think there should be any kind of capital gain exception. We don't get them for our regular stock investments or when we cash out a business. A house is a place to live in, not a way for people to cash in. Every time a government subsidy goes into housing, the preexisting owners gets a bump on their networth, some of the early buyers get a benefit, later buyers get the benefit priced in and receive marginal benefits in the form of slightly increased supplies (probably not even an issue in CA's NIMBY laws), and the taxpayers (including renters) get stuck with an ever more fucked up system.

Driving report from Gilroy and Morgan Hill, it is OUT OF CONTROL.

I was going down to South San Jose for dinner tonight, since we were in the hoods, we decided to take a ride down Morgan Hill and Gilroy to take a look since we hadn't been there for a long time.

Morgan Hill turned out to be so built up that we could hardly recognize the place, all the nice orchards around 101, especially to the west were gone, giving way to identical-looking, cookie-cutter houses on an roughly 5000 sf lot, they must have mushroomed in the last couple of years, hence the mushroom capital of California. At every junction, there would be a sign for some new development, the dotcom billboards we saw in 2000 along 101 up north must have migrated down south, only to have the text changed to "your dream home", "come live your dream" and so forth. For sale signs were alarmingly abundant.

We didn't come to a full grasp of the word "bubble" until we arrived in Gilroy. Gilroy was built SOLID along Santa Teresa Boulevard, houses all the way to the horizon, so much farmland and open space were now occupied by houses that were clearly built within last 5 years, and they are still building, non-stop. There were rows and rows and rows of houses at various stages of finish, just based on what I saw by driving along Santa Teresa, there must be at least 1,000 houses in the pipeline. I haven't even started counting the condos.

There were some nice communities on the west side of Gilroy, but every street has a for-sale sign, some of them with a "price reduction" sign on the bottom, one even spelt: "Big Price Reduction". When I came back and looked on MLS, it only showed 300+ SFHs, but based on the for-sale signs and finished new developments that are left vacant, I'd say there are at least 600 houses readily available for sale in Gilroy alone.

The drive in Gilroy was like waking up in a nightmare. You wake up in this Niceville with newly finished roads, freshly erected housing structure, more houses than any communist country could fathom for their population, but unoccupied. Everywhere you look, there are houses being built or just built, so you start to think whether you've been transformed to a character in the latest Sim City, someone playing the game just twisted all the parameters so that this spot glides into a full building mode, in a uniformly Sim architectural style.

I've never seen such a building craze in the Bay Area since I moved here 16 years ago, maybe I have not lived here long enough.

The world is looking more like the "Hitchhiker's Guide to the Galaxy" everyday.

OO,

The suckiest part of all this construction south of San Jose is what it'll do to our strawberry and artichoke supply. That area is uniquely suited to certain crops and I just hope enough farmers don't sell out before the end of the cycle.

OO:
The drive in Gilroy was like waking up in a nightmare. You wake up in this Niceville with newly finished roads, freshly erected housing structure, more houses than any communist country could fathom for their population, but unoccupied. Everywhere you look, there are houses being built or just built, so you start to think whether you’ve been transformed to a character in the latest Sim City, someone playing the game just twisted all the parameters so that this spot glides into a full building mode, in a uniformly Sim architectural style.

potential affordable housing? refer it to Carol Galante at Bridge Housing as a business opportunity...

Personally, I can't wait to become the object of the homedebtor's anger. And I will...when I start making lowball offers!

They're pissed at the neighbors now, for adversely affecting the comps. But in the future, they'll be pissed at us, for making "unreasonably low" offers! We'll be "greedy" buyers who want "something for nothing," etc.

In fact, I am so excited about this possibility that I think I'll start making some lowball offers this weekend! REAL lowball offers -- 40 to 50% off of the asking price, not a lousy 5% or 10%. The probability that they will be accepted is obvioulsy quite low -- but I'll enjoy making them! And I do think there is a chance -- albeit a very, very slim chance -- that an RE agent or owner who knows which way the wind is blowing may bite. A sufficiently desperate RE agent might even pressure the buyer to accept the offer! After all, those commission checks have been few and far between lately.

Now may actually be a good time to start lowballing. My wife attended an open house a couple of weeks ago. It ran from 9-5. She arrived at 4:30, and there were only three names on the sign-in sheet! The RE agent lookewd ashen faced. I doubt that a homeowner would accept a real (i.e. 50%) lowball offer (I would think that they'd be virtually guaranteed to accept a 10% lowball, however) but an RE agent, OTOH -- I bet they wouldn't turn you down flat.

surfer-x Says:

"M. Holiday, how’s Tucson?"

The real estate market or living there?

The real estate market is overpriced for the area, bubble-icious!

As for living there, I've only visited. But I can give the following observations: Parts look ramshackle & like Mexicali Mexico. Other areas are very nice. So, it's a mixed bag. Like Phoenix it has its niches.

What I like about Tucson is that it's about 5-7 degrees cooler than Phoenix at all times and maybe even colder in the winter. It's still hot as hell, but even 5-7 degrees or so makes it noticably cooler.

If you like that dusty, Southwest Americana feel, Tucson's the place. The Phoenix metroplex area is much more built up, windswept and modern.
I like all of the amenities of a top-10 metro area (Phoenix is 5th largest city in the USA).

Like anything, if you can make it past the first year living there, you will survive. Probably a Californian might only want two years time there, max.

I've met Californians that were desert dwellers at heart and never knew it. They moved to Arizona and never looked back. It's either in your blood or it's not.

I'm half Arizona half California. But Cali is still my dream.

'Nuff said!

I wish I had Warren Buffets money so I can buy that house and sell it for 50% of what I paid, just to be neighborly! :lol:

They’re pissed at the neighbors now, for adversely affecting the comps. But in the future, they’ll be pissed at us, for making “unreasonably low” offers!

You mean "reasonably low" 50% off or more! Unreasonably low would be 90-95% off.

OO Says:

"Driving report from Gilroy and Morgan Hill, it is OUT OF CONTROL.
...I’ve never seen such a building craze in the Bay Area since I moved here 16 years ago, maybe I have not lived here long enough."

1968-'74 was the last South San Jose building craze. I was a baby, moved into our house off Snell Ave., by the Foothills.

My high school, Santa Teresa High, was built in 1974.

So, yeah, all that Morgan Hill explosion harkens back to the old days. But, damn. They're gonna kill a lot of Garlic to make those ugly-ass McMansions.

When will the insanity end?

DS,

I fear the transportation infrastructure and the coming high gas prices will soon make the Gilroy area rather undesireable. Affordable housing you're thinking about is based on a static comprehension of a recent phenomena. If the real price of BA houses retrench back 15 years, very few people who want houses will have trouble getting them. I'd advise the affordable housing people to wait this one out to save themselves from paying inflated prices for housing stock, land, and building costs.

It's sticky, soft landing now. I increasingly expect it to get stickier and softer, especially with the behavior of interest rates and bond spreads. The current environment will allow lenders to invent a new breed of "creative mortgage products" that will help to prolong the overextended debtors' reign. Namely, they'll be able to market low-payment products to those escaping ARM resets. In fact, there is plenty of evidence that this is already happening.

Homedebtors will believe that they can wait out any correction in prices so long as they can make payments. They'll psychologically justify this (mental accounting) with rising rents and general inflation. In fact, there will be some who do manage to hold on through the correction and end up 15 years later ahead of both those who sell on the way down and those who buy near the bottom.

Michael,

I do give Utah the edge in beauty and possibly the weather. It's too bad the wages there are low and the prices have been pushed up by ex-Californians. Slickrock is a heck of a lot more fun to hike than soft sand.

Randy,

I don't think it'll stay sticky and soft for long. There's a lot of people out there already stretched to the limit and on the brink of foreclosure. Once they're crushed down by their burdens, the prices will fall some what. Some of those properties will be bought by those waiting on the sidelines, thus reducing the pool of buyers even more. Then the next wave of defaults happen, rinse and repeat.

Stickiness can only come if buyers can be found and most owners have the means to survive. I think the last ten years have drastically cut down the buyer side while many owners will be forced to sell or foreclosed upon.

Astrid,

As I've argued here a lot, I think that is a bit of wishful thinking, even if I am also wishing it. I find that in general people tend to overestimate the likely rate of foreclosures. Even if we assume that foreclosure rates will be double or even triple the rates of past corrections, we're still not talking about a very high number. That means a rise from a .07% today to .21%, not even one quarter of a percent.

The thing that keeps RE prices stable is the time-dimension. Not everyone in homes bought their home recently. Not everyone of those used ARMs. Not all long-time owners HELOC'd or refi'd ARMS. Not all HELOCers took out all their equity, or even half their equity.

Even if we assume that the range of "owner positions" is normally distributed, we're talking about a pretty slow, sticky price movement. In reality, I suspect the distribution is skewed conservatively, so the more rapid price movement may well be front-loaded, not rear-loaded.

I think this is what we're seeing now. Prices falling quickly in different categories/neighborhoods. But "quickly" doesn't mean 80%, or 50% or even 30% as we hope. It means maybe 25% or less, depending on locality. What I expect is slow losses YoY for a few years here on out. Most of the correction will take place as real-prices fall due to inflation, especially as wages inflate which they are definitely doing now as yesterday's data further solidified.

Randy,

That may be true in desireable core areas, where demand could stabilize the selling price at relatively high levels. But in most other areas, new houses have been built, high proportions of the current owners are stretched, and sellers will not find ready buyers.

As to the proportion of price decline, we're less than a year in. The price drops are only exposing the most overexposed FB. Most people are still holding on to the belief that this is a temporary setback. We haven't reached the psychological or the economic tipping points.

House prices in much of the country has doubled to tripled in the last 5 years, with no accompanying wage increases and with big increases in food, energy, education, and health costs. Houses will be squeezed, definitely in real dollars and likely in nominal dollars. I think enough people will be squeezed at the margins (and be the stones from which you can't squeeze more money from) that they will impact prices.

I think the current bust is likely to dwarf what happened in NYC and CA and DC in the early 90s. I'm not sure it's a good thing and I'm not antsy to buy, but I think the big price drops and the ensuing pain is pretty much inevitable.

I don't think so. The areas with the fastest rate of price increases are the built out or NIMBY obstructed areas. It's just a scheme to pay off baby boomers. The voters get some money and feel wealthy for a couple years, and who cares if the grandkids are screwed? They can't vote yet.

Mike/a.k.a Sage,

Thank you! I've advocated that for years and it just makes sense. That way we at least have some assurance that homeowners are exactly that AND have "some skin in the game"! I realize I can get to sounding like a broken record but this "flipper" it seems to me was very aware of the "24 Month Clock". Yes Mr. Sage 7 years sounds most reasonable (with exceptions for transfers, med. reasons and death by debt)!

The thing that keeps RE prices stable is the time-dimension. Not everyone in homes bought their home recently. Not everyone of those used ARMs. Not all long-time owners HELOC’d or refi’d ARMS. Not all HELOCers took out all their equity, or even half their equity.

Also, those with ARM resetting next year bought (or last refinanced) a few years ago when prices were a lot lower. They should be able to refinance and stay in the game for a while.

Those who bought last year will not face ARM reset for a few years.

It is going to be sticky. At least in the beginning.

Psychology will bring down the bubble. The _expectation_ of ARM reset will be a trigger. The actual ARM reset may be a non-event.

Unlike the stock-market or currency markets, real estate affects pretty much everyone. Some very interesting social dramas are going to unfold in the next few years. Scares me a little bit.

what exactly do you mean sriram and what social gramas do u expect
thanks

I'm not so sure about the "re-set" being a non-issue at all! We've already seen a rash of Ameriquest and Di-tech commercials imploring FB's to "get out from under" the ARM they sold them like uh...... two years ago? Something like 78% of CA's went ARM last year? Moody's and S+P, Fitches are chomping at the bit to downgrade the 80/20 paper and Wall St. is sweating bullets. An article from Bankrate was pretty clear that over HALF of mortgages in America today are UNDER two years old. We can pooh pooh the "re-set" and it's impacts all we want but it seems to me plenty of firms are quite concerned.

SQT,

Thanks for the heads up! But it seems the author offers no explanation for his hiatus? Well, whatever! Just good to have 'em back!

SQT,

That's great news! I emailed the author to ask him exactly what happened --I agree it's very curious he offered no explanation. You have to wonder if it's even the same guy.

As to the sticky/soft landing, I agree it's likely to play out slowly over several years (as RE bubbles tend to do). But that doesn't mean prices won't come down --in real terms-- by a lot, until they are closer to historic ratios vs. supporting rents/incomes. The only question for me is how much of the correction will be in the form of nominal price drops vs. non-RE price & income inflation.

RE: option-ARM rate resets, you don't need a huge number to make a significant impact on the market. Market RE prices are after all, set at the margins, right? With an average turn-over of only 5-6% of all homes in a given year, it really doesn't take too much of a spike in foreclosures, short sales & bailing specuvestors to make an impact on the supply-side. Add to that plummeting demand due to specuvestors going elsewhere (or getting out of the game altogether).

Wasn't it Peter P who used to say there was no need for a specific one-time "trigger", such as interest rates hitting a tipping point, a bad recession, or foreclosures hitting a critical-mass level? All you really need is the cumulative, gradual impact of some of these things to change mass psychology. Once people are disabused of the notion that residential RE "always goes up", stop seeing their houses as investments, and back to seeing them as a sunk cost & a roof over their head, seller & buyer psychology will change very quickly. As Peter P used to say, the feedback loop works in both directions.

If prices (however you prefer to measure them) haven't corrected significantly in real inflation-adjusted terms (say 30-50%) by no later than 2011, then I will have to reconsider my whole outlook. Until then, I see plenty of sales and inventory evidence (& price in some areas) that the correction --though in its infancy-- is already under way.

HARM,

If prices (however you prefer to measure them) haven’t corrected significantly in real inflation-adjusted terms (say 30-50%) by no later than 2011

The only problem applying that planning horizon is that, if you expect significant inflation as you imply, then an asset drop of 30% still might be enough to overcome the present value of the alternate use of funds. In particular, if you can afford a fixed payment on even a 30% overpriced modest asset--ie a home--then you come out materially ahead aver 5 years of inflation even with that real-price drop (implying an even bigger nominal drop).

The real culprit here isn't the cap-gains tax exemptions everyone likes to beat up on, but which I contend only marginally affect behaviors (like that of 2-year specuvestors). The real evil is mortgage interest deductibility. When you add that iteratively into a fixed rate amortization, it seriously leverages against inflation and offset a good portion of asset depreciation. It's basically the government subsidizing your inflation losses with tax deductions.

Of course when I mention this line of reasoning it pisses people here off. But I can prove it mathematically, and have made those calculations freely available and open to criticism on my blog. I would be happy to be proven wrong as it would help confirm my personal choice to rent in the interim. But I do so knowing that I am risking potential inflation losses over a term of 5 or more years.

Hard or soft landing in the next 5 years will depend on whether Fed will tighten or relax lending standard. Interest rate doesn't really matter if one is allowed to borrow 120%, or even 150%, interest-only, or even partial interest-only. We have yet to test the limit of the lending standard.

Of course this game will come to an end. But I don't see the resolve of the Fed to really tighten money, it is doing exactly the opposite. I have been seeing banks handing out even more toxic loans as we speak. So the party will go on longer than people think. Fed is showing with its action that it is very wary about popping the housing bubble. If anything, it wants a flattened housing market.

That is why I am very bullish on gold and commodities. Stagflation, and rampant stagflation, may I add, is here to stay.

Randy H,

Not being a finance type (perhaps astrid or DinOR can weigh in here), I'm flying a little blind here. However, assuming I'm reading you correctly, by "present value of the alternate use of funds", you mean the opportunity costs of investing the money (used to buy a house) elsewhere. If this is correct, then I can't say I completely agree with you here.

I just don't see how, if everything else rises in price 30-50% in 5 years while my house value stays flat or even dips a bit, this puts me ahead --even taking the mtg. interest deduction into account. After all, it's a federal income tax deduction --not a credit. It also does not apply to state income tax, sales tax, special assessments (Mello-Roos, etc.). The most I can ever get back is whatever my federal tax rate is (28%, 33%, etc.) x my taxable income --that's all. I don't a get a dollar for dollar credit for 100% of my mtg. interest. Obviously, this benefit is greater the larger your income (and tax bracket), so wealthy high-income households stand to benefit the most. It's moderately regressive (and unfair) towards low-income people in this regard. Even factoring in the MID, most people can still rent for half or less than half the monthly cost of PITI + HOA/maintenance - tax deduction.

If I were to invest this money into relatively conservative investments (MM, CD, T-Bill, etc.), which I'm already doing, I can still come out ahead of the typical Mr. Homedebtor. It's not that hard to get 5% or better today on short-term federally insured CDs, and rates are only likely to go up from here, thanks to Fed hikes, expected rate hikes from BOJ/ECB, etc.

Another one of your assumptions isn't even realistic for CA or other severly bubble-impacted regions: "if you can afford a fixed payment on even a 30% overpriced modest asset". How many CA buyers have opted for amortizing fixed-rate mortgages in the past 2 years? 5 years? Easily less than half. If people had been using traditional amortizing mortgage products vs. NAAVLPs all along, then we probably wouldn't even be having this discussion.

Randy H Says:

> I use the 90s as a specific case of sticky prices.
> Prices were in fact very sticky then on the way
> down,

In 1992 the price of new spec. homes were dropping $100K a month in Hillsborough and Atherton before they went REO (my cousin a developer went BK) and San Diego Apartments that sold for $65K a unit in 1990 were not selling for 30K in 1992 (I gave a couple buildings back to my partners), it that “sticky on the way down”…

> and it was a soft landing, at least by economic definition.

The Bay Area never had even a 10% annual decline for homes under $500K (90%+ of the Bay Area homes 15 years ago) but in S. Cal it was UGLY…

> All I’m saying (again) is that all previous corrections
> analyzed ex-post have been downward price-sticky.
> I don’t believe in new paradigms proclaiming but it’s
> different this time.

Reasons it “is different this time”

1. Last time interest rates fell from 1990 to 1994 (This time they are on the way up)
2. Last time most people made at least a 20% down payment (This time almost no one made a 20% down payment or if they did they pulled it out with a HELOC).
3. Last time huge numbers of long time owners were not refinancing to increase leverage since they were happy with their low interest loan (This time with rates falling as the bubble got bigger most people increased their leverage).
4. Last time most people had fixed rate loans (This time most people have adjustable).
5. Last time we didn’t have an internet (This time a company can move an entire division out of CA and with e-mail and video conferencing no one will notice the difference).
6. Last time almost every loan was amortizing (This time most loans are IO).
7. Last time China was a backward communist country (This time everyone that manufactures something in California is trying to increase profits buy using inexpensive Chinese labor).
8. Last time India was a poor country with cows walking past starving people (This time is a source if hard working engineers).
9. Last time everyone working in Retail in CA had a fairly safe job (This time with internet shopping and big box categories killers we will probably have half the people in retail looking for a new job soon….

Honestly, Randy, I think you and Peter P are suffering from BBF (Bubble Battle Fatigue) ;-). Sure, it's very difficult and frustrating to watch this insanity play out so long from the sidelines, while almost everyone around you is telling you you're crazy (or stupid) for not getting in before you're priced out forever, etc. We've had whole threads about this before --being pressured and taunted by co-workers, impatient spouses, etc.

It's very hard, but I really think it would help to keep a cool head, relax and maybe even step away from the blogs once in a while (hope Patrick's not reading this :-) ). I know that the only thing worse than being a FB in the last couple of years would be to become an 11th-hour capitulating bear who loses his cool and jumps in too soon. I refuse to catch a falling knife and end up the greatest fool of all: a hypocrite and the guy who has no one else to blame because he actually knew better.

LILLL said:
Lefantome
Thanks for the story. It was a great pick me up.

Ditto from me.