patrick.net

As the RE crumbles, we will move our speculation to Tulip Bulbs. They will appreciate YOY at 10000% for 10 years and become worthless overnight. At that moment, all of those FBs who started Tulip farms on the properties that they paid too much for will be ruined. I can then buy a good home, Tulips and all, with a McDonalds Happy Meal containing a Beenie Baby toy.

When enough people can't afford basic rent and the tent cities spring up like during the Hoover administration the goverment won't be able to ignore the problem. We have to many rich elitist and politicians who like ostriches have thier heads in the sand. If they don't see it firsthand it must not exist... In fact alot of the country has that kind of thinking.

I'm in the "Or another example" crowd.

Post Election? All bets are off.

Care for an accident? No thanks, just had one. I was talking to a SoCal mortgage broker last week and he puts 07's foreclosure rate at 10-14%. Uh, that's not for sub-prime loans, that's across the board!

Toasty.

If anyone (bull or bear) can devise an exit script, please feel free to share. Outside of "re-negotiating" purchase price (then "refinancin") show me how we're going to contend w/gushing negative equity? Uh...... let's see, I bought in August 2005 w/zilcho down at 475K, I'd be lucky to get 375k, I'm two months behind and my teaser period is set to expire next month! Other than that I'm in good shape. Here at Patrick.net we love to toss ideas around and I'm fine w/that but could someone please explain to me how "lenders" are going to deal w/this and still have some semblance of dignity? Some semblance of "standards"?

I got no where to go and all day to get there.

An unidentified threadmaster posted What’s Next?
> 1. Rents go up = Wages go up. Wage inflation slows
> job growth. Puts brakes on population-driven rent
> increases. Rent vs. Buy adjusts a little, not a lot.

For the last 300 years (going back 100 years before the US was founded using records from GB) the cost to rent has always been close to the cost to buy (after making a down payment). Like all things this will revert to the mean (the cost to buy should actually drop after a few years of the media hammering us with stories of people that lost it all owning RE).

> 2. Higher rents = People move out of area. Rents
> stabilize, maybe fall. Rent vs. Buy doesn’t change a
> lot, and demand for both rental and for-sale housing
> softens. Prices continue to slide.

Rents are related to one thing… “supply and demand” (I grew up hearing my parents talk about how to rent apartments and homes every night). We have had an apartment bubble just like a residential bubble and we will have a lot of apartments go through foreclosure and the new owners will “lower” rents to fill them (this happened in TX and AZ in the early 90’s and CA in the mid 90’s and it will happen again this time).

> 3. Higher rents + refis = help to bail out a few homeowners,
> reducing the overhang of potential FB’s. Could cushion
> the landing a little.

Rising rents are not going to help the people that barely qualified for the $1mm loan at 3% interest only when the payments were $2.5K a month when their loan resets and the payment jumps to $7K a month…

> 4. Rents keep going up 10% per year = Creative renting
> strategies (home sharing, warm-bedding, etc.) become
> common, but overall renting becomes an expensive
> proposition. People continue to do whatever they can
> to buy, keeping nominal prices high. Rent vs. Buy is
>mainly adjusted by higher rents.

Nothing “keeps going up by 10% a year”… Sure rents are up (some by more than 10% for the year) but rents are still lower than they were whey you could still by pets.com and webvan stock. Unless you have a huge growth in high paying jobs (like we did in the dot com boom) rents go up very slowly since when rents go up more and more people get roommates or move back in with their parents. In the real estate boom the number of mortgage brokers, loan processors and real estate agents in California doubled and today there are about 500,000 MORE real estate agents, mortgage brokers and loan processors than we had back in 2001. There are also about another 500,000 people involved with real estate construction, staging, inspection and rehab that we don’t need any more (I was recently talking to a bunch of illegals outside the Home Depot in Sacramento in Spanish before I hired a couple to help me build a fence at the Sac. apt.) and they said that it has become a lot harder to get work and many were thinking about going home to Mexico…

@allah,
I love how that forclosure "article" uses the perspective of a RENTER getting screwed by his landlord's foreclosure. Couldn't they have just kept the story to foreclosures screwing FB's? NOOOOO. The MSM has to throw in the "despite all this, it still sucks to rent."

Let's not forget that yes, that renter dude has to move, but at least his credit rating is still intact.

Threadmaster for this thread is SP. Threadmasters should try to remember to sign their articles as many readers like to know who the author is.

We have had an apartment bubble just like a residential bubble and we will have a lot of apartments go through foreclosure and the new owners will “lower” rents to fill them (this happened in TX and AZ in the early 90’s and CA in the mid 90’s and it will happen again this time).

@FAB,
You bring up a good point. I think many people are not considering the possibility that this apparent increase in rents is likely transient. If demand is up b/c of "bubble sitters", when many of the sellers trying to sell can't cut it and put there places on the market, supply will go up, putting new downward pressure on rents.

The exception to your postulate that "nothing ever goes up by 10% a year" is if we enter a period of hyperinflation. Then all bets are off.

Unfortunately the data directly refutes previous statements.

For the last 300 years (going back 100 years before the US was founded using records from GB) the cost to rent has always been close to the cost to buy (after making a down payment). Like all things this will revert to the mean (the cost to buy should actually drop after a few years of the media hammering us with stories of people that lost it all owning RE).

The fact: once adjusting for regional inflation factors, owning has *always* been significantly more expensive than renting, especially when plotted against income-affordability. The notable exceptions are *always* during periods of sustained credit-crunches, which are rare, not common.

Rents are related to one thing… “supply and demand”

This statement is *always* false as a practical matter. That is because there are no *perfect* markets, which are the only types of markets in which supply & demand are the *only* factor. In reality, things like apartments are affected by a dizzying array of macro and micro variables, barriers, frictions, convenience tariffs, discriminatory pricing, and asymmetric information. Invocations to supply & demand must also invoke all the other economics related to that generalized model, or they are nothing more than hollow cliches.

As of today, every single home we were tracking in South Marin, without exception, is either in escrow, sold or pulled from the market.

No idea what they're getting for these homes, but I will tell you at least half a dozen of them are at least above 25-30% below asking, as those were the general range of my lowballs. At least in the +1.5M range in MV/TB/CM/LS there is a sudden surge of strength in buying.

Any way we can get data on how these purchases are financed?

Not for a targeted area/range/demo. Loan data is only available in aggregate buckets, mostly grouped by credit worthiness/loan quality. You could try to cross correlate credit worthiness to income levels for a target area, but that won't be very reliable for predictions.

As anecdotal observations, none of the folks I know who've bought in S Marin in the past couple of months have used anything but standard loans, usually 15 year, and always with somewhere north of 50% in downpayment. But the couple dozen cases I know of do not the median make.

The most distressing case I know of came about 3 weeks ago. I was at a BBQ over in Strawberry with a guy who's a VC, his good neighbor buddy VC guy, and families. One of these guys' wives was essentially running a casual flipping biz for the past couple years; mostly SF condos. She's the one who started renting her inventory rather than sell for a loss a few months back.

Anyway, both of the wives know have joined forces and are running around buying up beater condos in the Marina and other prime SF neighborhoods, and a few neglected SFHs in good S Marin neighborhoods. They're making all cash, instant close offers for 25%+ off asking, and apparently have over a dozen now. I'm not completely sure what the plan is, but something along the lines of rent them out (all managed of course) and put zero into them. After some time -- they think 1-3 years -- they'll kick out the tenants, do major rehabs and sell them for a premium.

All that aside, the distressing part is all this involves NO debt. All cash. If nothing else, there's one source of demand, and these aren't FBs and even if they lose everything on these amateur investments they're not going to experience any financial distress. And they won't lose everything. I predict they'll lose about 20% net, which will all help offset their hubby's passive carried-interest income come AMT tax time.

Randy H,
Clearly the example of your friends' wives is not typical. VC types are in a different income category from the "masses" of BA buyers/sellers. At least the way you describe it, it sounds almost like this is all play money for them ("casual flipping" on the side) and keeps them from getting too bored. Otherwise, they might be "flipping" or "rehabbing" with the pool boy...

thenuttyneutron,

The FBs wish! North America is unsuited for tulip reproduction (wet summers, deer, moles, whatnot) and any effort at tulipmania will end very quickly.

I guess it might work for the dutch...