San Diego Housing Bubble News and Analysis

Hope I don't kill this thread as I am also interested in the savy opinions of others on this board. My wife and I have good incomes and good FICO's and we also are of the opinions that even though prices have fallen quite a bit, they are still too high. Interest rates are bound to go up and when they do that will affect the bottom investors(people that don't have 100% cash). I could not help but think when viewing the Lisa Ling video about foreclosure alley that she is probably drolling at buying a few of those houses for cash and renting them out. I also noticed that interest rates seem to be instep with unemployment.

At least another year or two where prices are falling to varying extents with only a few exceptions.

Here is my take on this.

Based on this article:
http://money.cnn.com/2008/10/01/real_est...

The new $300 billion Hope for Homeownership program will more than likely be a template for subsequent programs.

It states these criteria for eligibility:

- have taken out their mortgages on or before Jan. 1, 2008 and have made at least six payments.

- be unable to afford their current loan, but did not intentionally miss payments.

- have a debt-to-income ratio of at least 31%.

- live in the house and not own other homes.

- have provided accurate information on their loan documents and not been convicted of fraud in the past decade.

Under the program, borrowers will get:

- a 30-year, fixed rate mortgage of up to $550,440.

- a new appraisal and loan for no more than 90% of the home's value.

- released from second mortgages and prepayment penalties.

- But homeowners must pay a premium of 3% of the loan's value upfront, and 1.5% of the outstanding mortgage amount annually. Also, they must share any appreciation in the home's value with the FHA when they sell.

But, based on MR. Mortgages analysis of the banks and modeling of RE values:
http://mrmortgage.ml-implode.com/2008/09...

I can't see how this convinces SoCal owners to use the program(s), considering how upside down most are. I would personally rather walk away than pay 10% down (based on the new loan only being 90% of appraised value), 3% premium, a 1.5% annual fee plus appreciation sharing w/ FHA.

I would much rather walk away, take the credit hit, save money while renting, let values decline more, then try again in five years.

Additionally, without the exotic loan programs there still aren't enough buyers on the fence to soak up all of the coming inventory. This is backed up by MM analysis of how the bailout doesn't even scratch the surface of the defaults in the pipeline:
http://mrmortgage.ml-implode.com/2008/09...

And again, I can guarantee many won't even qualify for this program, as they will be proven to have fraudulently acquired their original loans.

So Piggs, what are your thoughts on this? I would also like to hear some opinions...

peterb and temeculaguy, what are your thoughts? You guys usually have good insight to these topics...

Is the 700 Billion based on the 300 billion Hope project. I thought it was going to instantly reduce loans 20%.

Actually, I think the bailout is going to accelerate a decline in home prices.

My thinking is that the point of all this is to 'unstick' the credit markets and get banks lending again. Remember its sales that set the comps and push the prices down. Given tightening lending requirements and the fact that the 'bloom is off the rose' regarding RE as an investment, I can't see anywhere to go but down.

The scary thing is that the bailout is probably going to force bigger future bailouts, as tumbling house prices will cause more folks to toss the keys.

There are only a few key people really driving the bailout bus. They include Barney Frank, Chris Dodd, Chuck Schumer, Paulson, and Bernanke. Each of them has made very clear that they will not be satisfied with the bailouts until they make home prices stop falling.

Will the particular programs put in place so far achieve that goal? I don't know and it's irrelevant. What matters is whether the govt has the ability, using all its powers now and in the future, to prevent a quick return to historical norms for house prices.

I know which way I'd bet on that.

http://www.bloomberg.com/apps/news?pid=2...

How many hundreds of millions of dollars of this bailout are going to be funneled to administration cronies and Paulsen's buddies on Wall St.?

What a freaking sham!!!!!

VOTE THE CROOKS OUT!!!!

If any of you vote for a single person in the next election who voted for this craptastic bailout bill you are part of the problem.

If you were to ask me the future of home prices will not be determined on the extent of the bailouts as much as the employment picture. For the past few years I have been on the fence of what the real economy ramifications of this housing/credit bubble were going to be, leaning towards a garden variety recession. That may have been a little naive. The recent data on the economy as far as job loss, auto sales, ISM index etc shows a profound decline hitting right now. Goldman Sachs has revised their projections for a much deeper recession (this will be revised again) and on a smaller note I am seeing this decline first hand in my own business.

Up to this point the underlying economy in S. California has actually been somewhat resilient all things being considered. I don't see that continuing. I liken this to residents along the Gulf coast preparing for hurricanes. The last couple of recessions we have had have been maybe a weaker Cat 3 in the early 90's at least in CA and a strong Cat 1 in 2001. The financial crisis we are in the midst of is like a Cat 5 (Camille) with 200 mph sustained winds and a 25 ft storm surge that is just now approaching land. Ask people who have experienced a Cat 5 hurricane how much different of an experience that is from a week Cat 3. The next 12 to 24 months are simply going to be horrible and the total tally of the bailouts could possibly reach $2 Trillion. I really hope that I am being extreme here but the data is coming in and it does not look good. So again the employment picture will be a strong variable on where home prices bottom.

LA Renter beat me to the post, but here is what I had to say anyway...

Oh, and don't forget the HUGE factor of unemployment. It is rising at it's fastest pace in 10 years. This variable alone will take a significant percentage of potential "sideline" or future buyers out of the market.

I just don't see any way they can stop the home price decline freight train! It's going to keep rolling until prices reach their intrinsic value, which IMO will be somewhere in the late 90's price ranges, back where incomes could actually support prices.

If you look at the last few RE cycles in CA, you'll see that by far the strongest correlation is in unemployment. Anything above 6% spells a shut down for the RE market. We're at 7.7% in CA and rising with no bottom in sight yet.

The failout package is about containing a collapse. not stopping the trend. It's a delaying tactic at best and who knows how long or well it will really work. SD county has had a median price of about 5 times median income as a historic std for the last 30 years. That could easily over correct in a housing bear market and go more towards the national ratio of 3:1.

Thanks everyone for your insightful replies.

are there any benefits at all in the bill for homebuyers? tax credits? if yes, what are the income limits?

I have a somewhat alternate viewpoint. I fully expect home prices to continue to decline in real terms. The important word here is "real", which opens the quesion, "what will prices do in nominal terms?" That's anybody's guess, and it depends on how aggressive Helicopter Ben gets, and how unwilling to continue holding and absorbing dollars our creditors become. Unfortunately, I feel stuck between a rock and a hard place in this scenario. I don't want to rent because I could see inflation pushing rents up dramatically. I don't want to own because, although a 30 yr fixed keeps a big part of my monthly outflows constant nominally and potentially shrinking in real terms, my downpayment will shrink in real terms and my equity will underperform inflation. I may turn out to be wrong in my inflation expectations, or it may take a long time to materialize (that is, it may take months or years of money printing for the new money to ripple through home prices). But I agree with the above post that Bernanke is unlikely to stop printing until home prices resume going upwards. He'll declare victory, even if milk is $50 per gallon by then...

It does nothing. Most of the defaults are occuring due to stated income/IO/NegAm type mortgages. Those don't exist and any program that is started by the goverment (Hope Now etc.) requires full doc qualification which means it excludes pretty much everyone who is in trouble.

Very few buyers qualify full doc for houses at these prices and the bottom line is to generate sufficient demand to clear inventory house prices have to come down substantially, there is nothing that can stop that except the readmission of exotic lending which of course is never going to happen!

The government giving these people 30 yr fixed mortgages is one thing, whether they are going to be able to qualify is highly doubtful so the program is pretty much irrelevant.

It has been argued on many blogs that this "Hope whatever" program is useless because it requires lenders to voluntarily take a loss. Which lender is going to voluntarily take losses in this climate if it means taking more red ink on their books, putting downward pressure on their stock price and jeopordizing the CEOs bonus?

Regardless of what housing prices are going to do, my advice is that it is not a good time to make huge commitments. There is a tremendous uncertainty in the market going forward and being in a flexible position give you an edge.

When the economic situation is so bad that congress needs to vote in favor of a $700 billion bailout even though constituents were 200-1 against, it is unlikely that the economy is strong enough to sustain the housing market at its current level.

I agree with peterb, that the bailout is an exercise in containment, but I disagree with patientrenter that Bernanke et al won't be satisfied until it stops prices falling. I don't think anyone expects that to happen. They may attribute foreclosures and subsequent problems within the banking sector to declining prices, but the root cause is over-pricing, and affordability, and as others have mentioned the momentum downwards is being intensified by the flailing economy. I don't think that means the bailout has no effect, but it's not clear (to me at least) how its going to impact the housing market directly.

At best this will only serve to stem the flood of foreclosure inventory. As previously stated I cannot see how this will not eventually lead us to a 1990's Japan style real estate market over the next decade or so. If indeed distressed homeowners are allowed to stay in homes because they have principal reductions along with fixed rate loans that make payments more affordable, it will be interesting to see which ones take the bait. So it then becomes a tradeoff of living with bad credit as you walk away verses staying. Running the numbers for each individual case may indeed point to a better decision to stay rather then go for distressed homeowners regardless of forfeiting future appreciation. Who cares right? What happens for those who stay, get a principal reduction, then sell the home at a lower cost so they didn't have to short sell it. Basically the effectively walked away without getting hammered on thier credit. Can this happen? Don't know. I do not know the details of the new socialist policy our government has decided to implement against the popular will of the constituents it supposedly represents.

In the long run to me this policy will hurt everyone, even patient buyers on the sidelines who have waited and waited. It will simply serve to delay the free market process of the much needed price correction, it will burden my kids, it will reward failure, and ultimately I look for another bailout before the year is out.

If you watch some of the Congressional hearings with banks & various players in the financial industry (not the bailout hearings, but other ones that occurred before those) you'll see that the banks/lenders place the H4H (Hope for Homeowners) plan at the very bottom of their preferred list. They have also admitted to holding off on foreclosures as they await more action from the government. Yes, they actually admitted that...saw them with my very own eyes.

The H4H program forces them to reduce principal amounts on the loans. They said they'd rather monkey around with rates and terms than write-down the principal amounts. They were VERY opposed to this plan, which makes me think it's the best plan out there.

BTW, it's not the borrower that would have to come in with the 10%, it's the lenders. The lending industry already had this reduced from the original proposal which required 15% below current market price.

In my cynical view, the bailout was enacted because nobody was willing to do this. Best for the govt to buy the loans from the lenders, then the GOVERNMENT will be writing-down the principal amounts (and the taxpayers are stuck with the losses, not the banks). IMHO, this was one of the main components of this plan, and it's written-in the bailout that the govt will do this.

President, I am not sure we disagree. This bailout alone will not prevent home prices from continuing to decline significantly, in my opinion. My point is that this isn't all that important. What is important is that getting home prices to stop falling is a top priority for the most influential people in power, and they are determined to do whatever is within their combined power to achieve that. This bailout is just a first step. When the bailout alone doesn't work, they will take progressively stronger actions.

So the real question is, I think, do the power brokers from both parties in Congress and the White House, and from the media and amongst intellectuals have the combined power to get home prices to stop falling? That's a lot of power.

(Oh, and of course persistently high inflation would be the only practical way to achieve this.)

PR I think that there are 2 ways the empire can try to stop falling prices. The first would be to stem inventory. Effectively that means eating all of the distress balances and letting people stay in the distress homes at new valuations of those homes. The second would be to provide incentives to possible buyers. These incentives could take the form of tax credits, direct financing, or other subsidies.

Does this will exist? Could it happen? Well I think it is absolutely possible. We passed the point of no return long long ago so those who think that it could not are just as much in denial as cheerleader realtors.

I absolutely hope it will not happen but nothing surprises me anymore.

Yes, these are the two primary ways they may try to stop the decline, but there are WAY to many market forces working against them to be successful.

Values will continue to decline no matter what they try...

Huckleberry,

Why can't govt intervention permanently change a major economic activity? If the govt imposes a high tax on gasoline and diesel fuel, and stays with it for 30 years, why wouldn't that lead to an entire economy based on shorter commuting distances, fewer trips, smaller cars, more fuel-efficient technology etc? (Think Europe, if you say that can't happen.)

I am not saying it's good, I am just saying it's conceivable.

Paulson has already admitted to this. In a Congressional hearing a few months ago Paulson said there were two ways out of this: The U.S. could inflate its way out of this by bringing house prices up to the price of the mortgage on the house or the U.S. could crunch the mortgages down to the price of the house.

It's pretty clear they would like to choose the inflation route. However, I don't think $700 billion is going to do it.

TheBreeze wrote: "It's pretty clear they would like to choose the inflation route. However, I don't think $700 billion is going to do it."

Yes. We should expect lots more where that $700 billion came from.

I may not watch all the trends but one trend that I've noticed is the growing popularity of the Dave Ramsey philosophy. I've also been on his web site and been amongst those forum participants. I see more and more people getting on the bandwagon of paying their debts off 100%, paying off their mortgages and planning to buy a house with the least amount of borrowed money.

I think that your average citizen, middle class America, doesn't want to finance the American dream anymore. With lending already tightened and people getting smarter about not wanting to be a slave to the lender I think that demand for credit in general is going to decrease. With that in mind people will not want to pay the recently ridiculous high prices for houses and will not want ridiculous mortgages in the 300's and 400's of thousands that we saw during the last 10-15 years. Prices will continue to drop.

This is a paradigm shifting of values in America. A realization that having money in the bank is more important than behaving as if you had money in the bank.

But this realization is important not because it is being realized by isolated individuals but that it is morphing into group-think, into a new (virtual) demographic with its own mantras for getting out and staying out of debt.

Harry I may go to Ramseys site and check it out. I like his show alot just because it is nice to hear about people getting out of debt rather then in debt.

Huckleberry I agree I do not think the governments efforts will halt price declines but the efforts could indeed change the rate of decline, possibly substantially.

One thing I think is true is that in a highly regulatory/socialized environment, those that are well connected tend to do much better then the average consumer.

Buying a house>

OK, go ahead read my opinion below and LAUGH as you're all probably thinking about year 2012-2014 for your next home purchase.

Here is why my wife and I plan to buy a home within nine months.

1a) In Silicon Valley home prices are dropping so fast and rents rising so fast that MANY properties are now cash flow positive for renting (based on say 20% down with 30-year fixed)

If your renter is paying off your mortgage, what difference does it make if the value of the home drops a bit more in the few years following your purchase?

1b) We are currently sending our landlord $31,000/year in rent, which I prefer to be using to pay off a mortgage. I also prefer to be getting those tax benefits of paying mortgage interest.

2) This recession and its deflationary forces will push the CPI down near zero, or into negative territory within 9-12 months. With recession going deeper the Fed will again and again lower rates. CONCLUSION: the coming year will offer great opportunity to get much lower mortgage rates.

3) Housing lobby will be successful in passing bill loaded with bonuses for anyone who buys home. We're talking $15,000 tax credits...etc.

4) As we move out of this recession/depression, inflation and mortgage rates will skyrocket above 10% (yes, actually getting to 10% could take a few years). So buy your home with a fixed rate and then pay the banker back in ever more worthless dollars. We are not buying cash-only so we gotta think about housing bottoms more in terms of actual mortgage payment.

5) Within nine months, housing price declines will be reaching the point of diminishing declines. My theory is that the next nine months will show home prices declining another big step down as unemployment soars (Roubini predicts unemployment rates MIN 8% countrywide and at least 10% in CA). Yet, beyond nine months the additional home price decline will be moderate (5%?)

However, for those able to make their next home purchase as cash-only, then I agree you should wait until the bottom which I expect in 2012-2014

To stop this mess, my idea is to change from non-recourse state back to recourse state (not sure about the term). Only when that happens, flippers and investors will not walk away that easily and they will hold on to their properties as long as they can. That will slow down the foreclosure rate.