By Patrick follow 2007 Oct 3, 2:43am 2 links 9,647 views 108 comments
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From a patrick.net reader:
I believe this housing market will decline further. I have an interesting story to offer and give you an idea how bad things have been in Sacramento area. About 3 years ago my wife and I decided to purchase a second house and keep our starter house as an investment. What was happening in the market at the time was really strange. After we bought our first starter home for $150k in 2001, prices began to spike. By the time we bought our second home 2 years later it was worth $80k more (a lot of money back then). Then prices stabilized for a year. In 2003 we bought a slightly bigger home because our family was growing. We paid $223k for the 1441 sq foot home which was I believed overpriced by about $40k at the time. We went ahead and bought it because it was a long term investment. In a matter of 3 short years the price of the house nearly doubled. I was in disbelief. I would see the same homes in my area (I have a cookie cutter house so I had a close idea the value) rise by nearly $10k a month during that period. I tried to research why this was happening. It just did not make sense. As a home owner, you love it when your home appreciates in value, but this was almost unrealistic and made me very nervous. It took my parents 30 years to pay off there home which was worth 300k, while it took my wife and I a little more than 3 years roughly to accumulate that much in equity (on both homes including the rental). I knew something was unnatural and this is when I came across your blog trying to find an explanation on the internet.
My neighbor sold his house (same as mine) for $430K the same day he put it on the market, $30k over asking in late summer of ‘05. A friend of mine in the real estate industry bought multiple homes with little or no money down, a family member bought a 350k home and we was not even working at the time of purchase. How is this possible? At this point I told my wife that it was time to bail out of real estate and sell one of our homes. The market was starting to decline in Jan of 06 in Sacramento and we priced it lower to sell fast. I would much rather price ahead of the curve than follow the market on the way down. So we sold for $400k, 30k less than all time high. We struggled because it took 2 months to sell. Remember my neighbor sold his for $430 three months earlier. So it took a lot longer than we had anticipated. I was about to lower the price to $379K when we found a buyer. To make a long story short, a similar home I saw listed on MLS just earlier this week is selling for $219k. I feel vindicated. Thanks to doing my research and reading your blog, I feel I made a very good decision.
I do feel bad for all the people that losing their homes, but when you work as a janitor (no offense to janitors) and you can own half a million dollar home, it just does not make sense. Both my wife and I are working professionals earning six figures salaries and we live in what many folks consider a starter home. Now with the fallout of the housing industry, I had no idea how widespread and prevalent all these exotic toxic, ninja, liar loans were. I have coworkers who are clerical, custodians and blue collar workers who own half million to $720,000 homes (at the height of the boom). I have to admit but I was very jealous and confused. Both my wife and I have advance degrees and we can barely make ends meet. We have very little left for luxuries. It is sad to see this generation being robbed from an opportunity to buy a home. I see folks driving Escalades and Hummers, and I know for a fact that they are not professionals. Now I know how they did it. It’s all funny money that will have to be paid back. I strongly feel that we will return to 2002 or even to 2001 prices. In the mean time I am just saving the money that I made on the sale of my house.
Ironically even real estate agents are conceding that real estate will further decline. When I talked to my real estate agent about a nice large (3000 sq ft) home 2 blocks from us that has come down from 630k to 419K, he simply told me to wait. He said I would be able to get the same house next year for $300k.
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The proper way to remove this unfair playing field would be to remove the business deduction of the cost of debt on residential land.
And how far down the slippery slope of tax dodge v. SFR investment v. REIC v. residential rental business v. apratment owner/operator v. "work at home" are you willing to slide?
If the cost of doing business in the business of housing people is no longer deductible you invite the inevitable consequence of fewer people being housed. I don't need historical precedent mirroring the exact circumstances of removing the HMID to justify the claim that millions of current owners would not be owners under those conditions.
Presumably ‘rich’ people would start setting up corporations as fast as possible whose purpose is the buying of homes then renting them (or allowing exec’s the perc of living in them, wink, wink) and classifying the mortgage on the home as business debt.
The "rich" who are in a position to use corporations to pay perks already use them to pay the costs of executive housing (principle and interest), cars, and even jets. I am talking about bona fide, profit making corporations giving perks. Perks which are most likely taxable to the beneficiary. A rich guy who creates a sham company to "own" his house and deduct interest without that sham company collecting rent will most likely get dinged in an audit and may even be hit for fraud.
The concept sounds like a page out of "RichDad, Poor Dad."
I went short on my bank again today. Seems they are having some, uhhh, trouble "managing their inventory".
House in Cleveland Demolished As Part of Anti-Blight Campaign, Despite Bank's Repair Effort
CLEVELAND (AP) -- A house that had recently undergone more than $19,000 in repairs was torn down last month as part of a city campaign against urban blight. All that's left is a vacant lot.
The house had been painted and repairs had been made to the roof, gutters and foundation. But city officials said they had no idea it was being fixed up because the owner, Wells Fargo Bank of Minnesota, had not filed permits for the renovation.
As far as the comment 'fewer people are being housed' if the cost of doing business housing people increases. I can only through the following quote,
"Housing costs, particularly for rental housing which disproportionately affect lower income households, are rising drastically. In the five years 1999 through 2004, rental price of primary residences rose by 19% and the consumer price index (CPI-U) rose by only 13%--the price of housing, in other words, is outpacing the rate of inflation. There is not a single jurisdiction in the country where a person working 40 hours a week, 52 weeks a year at the prevailing minimum wage can afford a one-bedroom apartment. Aside from just low wage earners, many workers cannot afford to live where they work, and even in moderately priced communities housing costs continually require a larger portion of a household’s annual income."
To be sure, we are not debating homelessness here, but I think your 2 step argument of 1) Rich people will find shell tax abuses, and 2) the elimination of corporate deductions on the dedt paid to house people will cause additional homelessness is pretty wild. The high cost of housing is causing homelessness and the negative vs positive assessment of tax abuse versus barrier to entry (high cost of housing) favors fixing the high cost of housing.
Believe it or not there WAS a time when itemizing didn't make sense for me either! We had just bought a $67,500 home in OR and our payments (all in) were about $450 a month. So no, it didn't warrant the extra hassle. I can see why a lot of couples (in the south/mid-west) don't bother either.
Sadly now after a lot of really great legislation and heli-drops that wouldn't cover your HOA's.
If in fact it turns out that... "fewer people are being housed" then so be it. It also leads to "fewer people being HOSED"!
...rental housing which disproportionately affect lower income households, are rising drastically. In the five years 1999 through 2004,..
Exactly. This was an impetus to "buy now or be priced out forever" among other sales pitches. What we see is fewer opportunities for ownership and higher costs for renting which in turn lowers savings for future purchases.
Admin: I wasn't picking on the "not a great speller .... chunck of change..." guy, I was picking on the original poster, the author of the article that has us all talking here ..... hehe. And I picked on him only because he DOES seem to look down on janitors, mentions jealousy, etc.
I can understand a guy being disconcerted that a $50k/year household has a 1/2-million $ or more house and 2 new SUVs, it's like seeing a pig fly. But saying they "shouldn't" not because it's financially insane but because he's jealous, shows a very poor attitude.
As for the debate over names ending with Z, who cares? The RealtWhores are selling woops "selling" houses to everyone they can, no matter what letter their names end with.
I guess we'll just see what we shall see. I don't have an opinion on particular BA neighborhoods anyway but after the wheels fell off in August I say all bets are off.
Btw some great articles over at Ben's about BA residents with respectable FICO's and 150K+ salaries being unable to refinance. Story after story about people that have been to (and I kid you not) 10 to 15 lenders trying to jump through hoops to re-qualify and get their payments down!
Like I say; "Oh if I had to buy my house today, I couldn't qualify!"
I was not making poking fun at janitors. My mother was a custodian for many years and I would help her after school when I was growing up. My point is that my parents bought within their means and managed to own there home out right before they turned 50. The only time they refinanced was actually to lower the life of the loan and pay the house off 5 years earlier. The blue collar workers that I mentioned that have such expensive homes are the folks that had a lot of equity biult into there previous homes and cashed out or sold to buy andeven bigger more expensive home. More power to them, but when you are in your late 40's or 50's or 60's and to start over a 30 year loan, is that sane? I think not. Many folks did this during the boom years. Sadly many of them have lost there homes and all the equity that they had in it.
DinOR - have been reading over there too - if the East Bay is in trouble then I cannot see how it will not have repercussions for "The Fortress".
If prices don't come down here, then I would seriously consider moving that way if price differences are extreme enough - of course I still want a good school district! Anectdotally - I have been receiving a lot of price reduced house listings for San Jose and Sunnyvale AND Mountain View (but still ridiculous prices) - so the price reductions are creeping closer and getting bigger!
Neighborhood composition may be an interesting thread.
In the years I have lived in my house I have seen a half a dozen moves. Of thosemoves, mostly it was single families moving out (to take advanatge of *really* cashing out of the market) and a telling mix on newcomers. 2 homes have gone to rental where the renters are 2 or 3 working professionals per home. 2 homes have gone to extended famileis where up to 5 people are working (with a shocking number of cars) and 2 have gone to retirees. And all of this occured very close to a school. I would have to say families, especially single earner families, have been very badly hit by the bubble. And I still do not think the correct solution to the affordability problem is to have additional wage earners. I think the better approach is to foster affordability by removing incentives for real estate speculation, removing tax favorability (I am sorry, I really feel that paying less for a home and then being taxed is better then paying more for a home and getting a tax break), and removing traditional premiums for housing like 'good schools' and proximity to work through programs like school chits and better mass transit.
Just to clarify. It was not me. Someone wlse posted with the "stuck_in_BA" handle.
And what was REALLY funny was that these people are STILL getting all kinds of solicitations from mortgage brokers! I mean, that HAS to be frustrating. Especially when it's from a company that's already turned you down? There seemed to be a lot of common threads like "I was told I could always re-finance down the road" etc.
Again I can't speak to the BA but the OR "loft" market has come to a standstill. One recent project "The Wyatt" canned their meager sales, refunded deposits and turned it into.... well basically a really fancy apartment building. Now, I know that ain't da' Fortress but this is RIGHT downtown PDX and no one could qualify (or was afraid to buy). So it can and does happen. Hang in there Claire!
"The only time they refinanced was actually to lower the life of the loan"
No one can say *alex didn't have a decent upbringing!
(Where are all of "those" Americans?) We need ya' now and we need ya' bad!
In that story the guy from Tracy made exactly 160K ! Could it be our HaHa ? ;-) Just kidding.
But the Fortress will have its share of problems way down the road. Prices have not gone down in most and gone up in many cases. Many I know won't need to refinance for next 3-5 years. Who knows what the situation in credit industry would be or what would be the prime rate etc.
The effect of 8% jumbo rates are not fully known in the numbers yet. Fortress cannot stay immune unlike what it's residents believe, but won't get affected as much as other areas.
Can you point me to "Ben's?" I would love to read the same articles.
DinOR - have actually bothered to look at the listings that were sent to me although I'm not really interested in the area they cover anymore (hoping I will be able to get a bit of a better area now in a year's time or maybe a bit longer) - it used to be they listed them as price reductions - and there weren't many of them, now it just lists them as "new matches" - also interesting is that quite a few are listed as short sales (one listed as "bank does not want ANY MORE foreclosured properties on their hands - all offers considered"); one listed as bank owned (will look at ALL offers) - unheard of a year ago! I am getting sent a list of 56 properties where as before it would be 20 - 30 at most - admittedly the ones I am seeing are not in the best locations - i.e. fairly close to freeways - but even so - what a 180.
As to that guy in the East Bay article - I wonder how many other people with decent credit scores and jobs will find they are in trouble because they now have no equity/negative equity - everybody was buying into the "you can refinance later" - and for those that did refinance - did they realize they lost their no-recourse loan status? I wonder how many loan companies might offer FB's the chance to refinance to a slightly better deal just so that they can go after them later when they still default? Or maybe that hasn't been realized by the banks yet?
Thanks, I was just going to have Duke scroll down to it but you're much more efficient!
I'm not a regular at socketsite etc. but the Jumbo cap has got to be a factor at some point and my guess is more sooner than later. SFWoman has given us countless instances where many of her neighbors/friends have WAY over extended themselves. What I have to wonder is (even w/homes that are fully paid) how long will those well heeled folks want to continue to hold an asset that simply is no longer appreciating?
StuckInBA - I'm thinking the ones that bought in the last couple of years (unless they had Google funny money) and/or re-modelled their house to keep up with their neighbors are the ones that are going to be in trouble.
And all the people that just had to stretch that litle bit more to get that house in the better school districts - mind you - you couldn't pay me to buy a house in Cupertino!
Good points. I too have wondered how long REIC parasites will sit there and watch the market "stall out" due to a lack of financing? Will this necessitate a whole new round of "piggy back" type financial products?
I mean there isn't a derivative form yet they haven't exploited?
"Can't Re-Fi? Try our 60-20-10-5-5 Loan with GREAT rates!"
Wasn't there a BA firm awhile back that was willing to basically make part of your payment in exchange for a part of the appreciation? Who knows? It's limited only to the imagination.
DinOR - I think there was such a firm, whether they are still in business is another question.
I think that mortgage products are going to be hampered now as people slowly realize that it is not worth "any old terms available" in order to "own" a home. In the UK they started doing 100 year loans etc - but really what is the point - you are then just paying a bank rent money instead of a landlord.
It would be interesting to see the effects of ARM resets in the Fortress. Based on my friends circle, they can definitely handle the ARM reset at current LIBOR. But they would be stretched too thin. The job market in the valley is quite fine. So unless one of these facts change, higher rates or job loss, it would get pretty bad pretty quickly.
Note that the East Bay problems are without any economic downturn in the tech industry. That's the most remarkable thing about this bubble. It is just collapsing under its own weight. The loans were bad right from the signing day. Not all will lead to foreclosures, but the mortgages are suffocating the money-renter.
So even if there is no foreclosure tsunami in the Fortress, after a few years these people are suddenly going to realize that they are not that rich. They just never could save a lot of money in spite of earning high salaries. When your annual expenses for shelter are over 60K after tax advantages, you just cannot compete with a renter spending less than 30K.
It's not that all these buyers are stupid. Some of them know this very well. It's a big gamble - solely based on the firm belief that it always goes up. Unfortunately the margin for error is zero. Interesting times ahead.
I agree. I'll add that the likelihood of national recession that also affects the tech industry is high. Many economists are arguing that either chances of recession are 50/50 or greater, or that we may in fact already be in recession, but the economic indicators lag enough that it won't show up for another Q or 2. The primary possible saving grace for the tech industry is exports, especially given a weakening dollar.
Rob Dawg, thank you for this interesting perspective on the MID, it's an eyeopener. I've long thought the MID should be abolished, and yet it troubled me that landlords are able to deduct it, as well as property taxes (which owners can't deduct against state income tax and which they get dinged on by the AMT), HOA/condo fees/maintenance (which owners can't deduct at all), and to boot they get to take depreciation (in effect slowly converting the initial purchase price from ordinary income to long-term cap gains). The logically absurd endgame for this would be for everyone to buy a house to rent out, and live themselves in a rental.
Having disposed of my last investment property in Apr '-06 and havong paid regular federal and state taxes on the proceeds thereon I accept your offer to provide me with either a Lexus and Toyota or the cash equivalents thereof seeing as in your opinion the taxes I paid Apr 17th ''07 were somehow unnecessary.
he can wait for a “real” buyer after the initial flock of “vultures” like you are done swooping in on his listing.
Someone should clue him in on what happens in the Okavango _after_ the vultures are done and gone. (hint: ain't pretty)
I never googled 'realtors+suck' before ,so much fun. The word suck truly has a new and useful purpose to identify that which you want to disparage on the internet. Its more useful than the F word! whata shock.
"ALL REALTORS SUCK!!!! I have a hard time believing that they can all be liars, but they are slowly but surely proving to be. I am trying to sell a ranch (3.5 Years now) and every one wants the listing,,because they all have a "client looking for exactly this". After you commit to the contract,,,,,,,nothing,,no buyer,,no more contact. Liars,,,,,they are simply crooks that are too lazy to steal."
"With $200,000+ income, a nice profit from that starter home, and with little house expense, why are you so broke?"
To me, the letter seemed fake. He claims to be poor with $$$$ in the bank...
Jeeez, I can't believe all the grief everyone is giving the author of this letter. I live in the area and his story is totally credible. The fact that he claims he and the wife live modestly despite good incomes doesn't mean anything without knowing the whole situation, and it has nothing to do with the housing market anyway.
The prices he gives on the home in Natomas is totally in line with what the market has been doing. I think he is dead on with what the market has done and where it's going. Whether or not he has a few typos in his post doesn't mean a thing. And believe me, I've known the people who've made modest salaries, bought a home at 10 times their income and bought the flashy car. It never made any sense and having to listen to these people brag everyday about their home appreciation was maddening. Alex has the right to feel vindicated now. Our market, I personally believe, swung in even greater extremes than the B.A. based on income and the number of new homes being built. Give the guy a break already.
"And believe me, I’ve known the people who’ve made modest salaries, bought a home at 10 times their income and bought the flashy car."
that situation wasn't the storyline that was presented...
"Give the guy a break already."
if it seems "fake," what's wrong with saying so? I could care less about the spelling, grammer and lake of sophistication but too many of his facts contradict themselves.
I can't figure why it seems fake. I live in the area and it jibes with what I'm seeing every day.
And as for his personal situation, he may have kids, student loans or any number of things that eat into an income; even a good one.
Going after the guy just smacks of killing the messenger and I'm wondering why so many are bothered by the message.
"a janitor (no offense to janitors) owns half a million dollar home"
"I’ve known the people who’ve made modest salaries, bought a home at 10 times their income and bought the flashy car.”"
This explains why so many people want to move into CA. They must have some secret ways to become rich quick.
Let me add some.
I have lived in the Midwest and South. The true income (60k per family) is about right. I don't think they have secret income.
Nah, just less common sense. I know way too many people who are going into foreclosure right now (including my parents). It seems in Ca keeping up with the Joneses is a way of life.
The thread is not closed yet, let me add my story.
First to say hello to every one. Many thanks to Patrick for running such a website. I am among many of those who learned a thing or two reading the posts here. Best source of housing knowledge.
My wife and I live in Ventura county. We are making slightly over 200 yearly before tax. We are paying $1400 a month for rent in a small two bedroom in a nice and quiet area (nice and quiet is in my opinion).
At this moment, the company my wife works for has early retirement and layoff going. Some of her co-workers came here late and bought a house in 05 and 06. Three examples, between 700k to 900k, all talking about 15% - 20% price went down. That's about the amount the company lent to them as a part of the sign-in package. (3% interest only for the first five years, then 3% with principle in the second 5 years. Balance is due anytime they leave the company.)
This company hired about eight thousand people from 03 to 06. Most of the new hires had this 20% low interest rate loan, and used it. What happens is from 02 to early 06, house price in this area doubled, some nearly tripled. And then spring of 06 was the tipping point. Nine hundred k’s in 05 and early 06 are now listing for seven hundred k’s.
"One possibility is a winter war with Iran. That will provide a breather at least for the falling US dollar, and also bring down the Euro, and restore back the Greenback as the most favorable currency."
Is that like the fall fashion collection being presented?
Mass murder for currency speculators.
Yeah, we are watching the Conejo Valley very closely. With 635 average $160k salary jobs "going away" so far admitted there's a lot of surplus high end housing about to hit the market. Then there's the "other" company who is trying to avoid insolvency. They haven't even begun to total how many of the nationwide 20% force reduction will be local.