Well, as has already been stated, the train has left the station and there's no stopping it. I'm sorry for the kids who will be forced to leave their homes, other than that, I'm not sorry at all.
Honestly, as I know people who got greedy and got hurt in this, I feel bad for the people affected. But, it is part of the cycle. Bad debt needs to be flushed out of the system. Houses have to become affordable again. It sucks that people will have to go through foreclosure, but that's the only way things will get back to normal imo.
Submitted by patientrenter on February 2, 2008 - 12:18am.
It'll be interesting to see how this plays out.
In any reasonably free-market system, house prices in So Cal would go down by 50%. But govt reps, desperate to please the majority of voters, will be pulling every lever in the govt control room to prevent big price decreases.
The govt. "nuclear option" is to just lend unlimited amounts of govt money directly to homeowners. By dialing down the downpayment and income and repayment and other requirements, home prices could be pushed up a lot in the short term, and by a significant amount permanently. Of course the program would eventually take large losses, but dumping future losses on the biggest taxpayers (a small minority of the population) is much preferable to most voters than a current loss in their housing ATM/retirement plan.
Think the nuclear option is just a pipedream? People are already working on it: http://www.bloomberg.com/apps/news?pid=2.... We're on a knife-edge between 50% drops and a renewal of the madness of the past 10 years.
The big boys have already said that they will do whatever it takes to clean up the aftermath of the party.
Think about Times Square on New Years Day. The party was fun, but what a mess to clean up.
Even if they lower rates to 0%, (which won't happen)
Joe6pack still owes $500K on a house worth $350 today.
The 100% financing that they bought with is no longer available. The pool of potential buyers has disappeared from the horizon, like cockroaches that scramble when the lights go on. They are nowhere in sight.
The house is unsaleable for more than 65% of what they owe.
It's only a matter of time until walking away becomes the only option, regardless of what the DC clan is saying about wanting to help homeowners save their piece of the American dream.
Like a bottle of milk well past its expiration date, the American dream has soured for many, and will never taste the same. You can't restore the flavor after it has curdled.
Submitted by patientrenter on February 2, 2008 - 12:42am.
HLS, what happens if a newly empowered govt agency offers to lend $600K to anyone who wants to pay that much for that $350K house, on which the current owner owes $500K?
Submitted by marion on February 2, 2008 - 12:58am.
What are the chances of the above happening? Please somebody tell me close to 0. I'm sick of the hair-brained schemes, one right after the other. The above sounds like something out of the "twilight zone". When will the government back off and just let this thing play out on its own??
I live on small culdesac in Murrieta of about 8 houses. Two are bank owned, another is in default (renter just moved out because owner is being foreclosed on). Another one was for sale for a ridiculous price and is now inactive (don't know what happened with it). Anyway, this street looks like a mini ghost town. Sign of the times, of course.
They already tried that in 2002-2006. It didn't work, and it won't happen again.
Someone/somewhere has to pony up cash to float that instrument, and there aren't people standing in line to buy MBS these days, regardless of bond ratings.
The party is over, the easy girls have all left.
It's time to pay the piper. Lots of people are going to have a hangover in the morning, and their headache isn't going away anytime soon, in fact it's going to get worse.
Submitted by bsrsharma on February 2, 2008 - 5:59pm.
0% interest, 600K "free money" are all fun to talk of; but the way the cookie will crumble, in my opinion, is through a robust and sustained inflation (helped on with robust and sustained devaluation of $). By eventually creating a perception that US $ has doubtful value, people will be forced to go back and buy up real estate to lock in whatever wealth they may have. This is Bernanke's monetary philosophy and he has been truthful to his belief so far. His mantra - "Full steam ahead, inflation be damned".
BTW, if anyone thinks I am cynical etc., I completely agree with BB on this! The most rational solution to our national problem now is a dose of robust and sustained inflation so that our debts, public and private, become lower in real value. This will also make our products and factors of production internationally competitive. Just ask yourself - how many of you will buy a Honda or Toyota when it costs $50K, $100K .... How many will buy a BMW or MB when it costs 100K, 200K ....
Submitted by BuyerWillEPB on February 2, 2008 - 7:28pm.
"I'm sorry for the kids who will be forced to leave their homes, other than that, I'm not sorry at all."
--------------------------------------------------
Marion, don't let anyone fool you with that line of "they'll be homeless." The parents will find tons of other places to rent that are just as good, and for half the cost.
In fact, this housing bust forcing people to rent again will end up saving their skins. They could never afford to pay 80% of gross to live above their means. The crazy lenders just loaned them so much money they "thought" they were rich. Going back to renting at a cost they can actually afford will relieve a lot of stress in their future.
Submitted by patientrenter on February 3, 2008 - 12:06am.
BuyerWill is exactly correct. There is no reason for a collapse in home prices to create any net increase in homelessness. If all home prices dropped by 90% tomorrow, there would be exactly the same number of houses as there are today. All that would happen is that people would pay different amounts to live in them, and maybe some people would buy more houses (investors), and others would rent more (residents-to-be without downpayments).
Submitted by JWM in SD on February 3, 2008 - 12:51am.
JWM in SD
"The most rational solution to our national problem now is a dose of robust and sustained inflation so that our debts, public and private, become lower in real value. This will also make our products and factors of production internationally competitive. Just ask yourself - how many of you will buy a Honda or Toyota when it costs $50K, $100K .... How many will buy a BMW or MB when it costs 100K, 200K ...."
This is so f**king stupid it is beyond on belief. How many times do I have to explain this people? Inflation is increase in money supply not prices. In order for it to make a difference, it must make its way into your wages or it will not help sustain inflated asset prices. that is why every credit bubble in history ends up in deflation because the debt grows beyond the ability to be serviced.
Get your head out of your ass Bsharma...the Fed and the Govt can't save your SD house anymore. Deflation psychology has set in.
Submitted by 4plexowner on February 3, 2008 - 7:46am.
bsharma - I'll agree with you that the powers that be are attempting to implement the hyper-inflation that you appear to be hoping for
if they succeed, bread will be about $12 to $15 per loaf and a gallon of milk will probably run about the same
these prices will clearly be unacceptable so the government will have to subsidize food costs for a large percentage of the population
these new food subsidy programs will require money so the govt will have to run the printing presses even faster thereby creating more inflation
this new inflation causes the real price of bread and milk to rise to $20 per loaf and gallon
it is still unacceptable for poor people to starve in the streets so the govt increases the size of the food subsidy programs
the expansion of the food subsidy program costs money so the govt runs the printing presses even faster which causes more inflation which causes the cost of bread and milk to go up which causes .....
~
it is intuitively obvious to the most casual observer that Keynesian economics is logically flawed - it is fortunate for the powers that be that most Americans choose not to use the grey matter inside their skulls
Submitted by bsrsharma on February 3, 2008 - 11:43am.
JWM & 4Plex,
I didn't mean Weimar Germany style hyperinflation - more like Nixon-Ford-Carter style (1973-1982) that ended in revalueing $ to a new lower value (relative to asset classes). That helped real estate recovery (and because of that, general perception of prosperity) in the 1980s.
Also, all expensive wars are eventually paid by devaluation of currency and increased inflation. Inflation is the natural involuntary universal tax.
We, as a nation, wasted a lot of wealth building unneeded homes (and waging a profitless war). We, as a nation, are going to pay the price with a lower standard of living. That is what inflation does.
Money supply vs. price is technicality. Reality is simpler - we wasted money and have to live poor.
Submitted by 4plexowner on February 4, 2008 - 7:00am.
Now I'm really confused, bsharma - in your first post the Fed and govt is going to save the world with inflation but in your second post we are all going to suffer a reduced lifestyle because of inflation
could it be that Keynesian economics is a load of crap so you have to keep changing your answer?
to think that anyone can direct where printing press money gets spent is ludicrous - and to talk about good inflation and bad inflation truly shows the inanity of the Keynesian philosophy
here are two simple realities for you:
THERE IS NO SUCH THING AS A FREE LUNCH
A NATION CAN NOT PRINT ITS WAY TO ECONOMIC HEALTH AND PROSPERITY
Submitted by bsrsharma on February 4, 2008 - 9:02am.
4Plex: I see no confusion. Fed & Govt are going to save US (mainly) and Global economic system (secondarily) with inflation. It is also true, a majority of us, particularly Americans will become poorer.
There is no contradiction; we will have to amputate legs to save life. To prevent 1930s style depression, we have to accept 1970s style inflation. I am sure everybody will agree we would rather have a replay of painful 1970s than even more painful 1930s.
Submitted by sdrealtor on February 4, 2008 - 9:21am.
Enough with the 50% drop callers. Look at esmith's January HPI which anecdotally makes sense with what I see along the coast regarding values.
His graph shows prices are about 70 to 80% above pre-bubble pricing in most parts of the county. A drop of 50% would put prices well below pre-bubble prices on a nominal basis. Factor in wage increases (which JWM and ex-SD do so often) of easily 20 to 30% in the nicer areas among professionals and a 25% decline from here looks like alot to expect.
Throw in lower interest rates and affordability is only about 30% above the pre-bubble prices adjusted for interest rates. Factor in the rise in wages and we are already pretty close. Sorry folks but I just dont see much more than 20% downside from here.
Sure you may get more than that in Da' Hood but do you really want to live in Da' Hood?
If you really want a nice home, get your ass off the computer, work harder, start a business and make more money. Dont expect life to hand it to you on a silver platter.
Submitted by JWM in SD on February 4, 2008 - 9:54am.
JWM in SD
It's called Reversion to Mean Sd realtor. It typically overshoots. Second of all, you really have no idea how serious this situation is in the financial system of this country.
You are sounding very desperate to convince people that the damage is not going to be that bad. A year ago you didn't think it would be as bad as it is now.
Submitted by Aecetia on February 4, 2008 - 10:26am.
SDR-
I don't know if you noticed the article in the UT by Lew Sichelman or not, but it mentioned a program developed during the depression called the Home Owners' Loan Corp. (HOLC). Do you think if the slump continues the Feds. will try something similar to save the economy? To quote the article, "Back then, about half of all mortgage debt was in default. Unemployment had reached 25%, thousands of banks and savings and loans had failed and annual mortgage lending had fallen by some 80%." So we are not even close to those times currently, but we were not in a war in the 30's either.... Just curious as to what an expert thinks will happen to speed the recovery. Thanks.
Submitted by sdrealtor on February 4, 2008 - 11:25am.
To the contrary JWM, I was spot on. I called to 5 to 10% decline in my market (North County Coastal which is all I am really qualified to comment on) with a bias toward the high side and most of the decline coming between September and December. Its all there in the archives for you to verify and I said this many times.
As for sounding desparate, it is you who sounds desparate. I'm locked into a home my family loves with a mortgage 1X my annual income (most of which does not come from RE but rather very recession proof sectors). I could pay it off if I wanted to today. A crash would benefit me more than you as it would allow me to pick up the 5 to 10 prime investment properties I am hoping to accumulate over the next 15 to 20 years.
As for how bad this is, I have every idea of how serious the situation is and it is exactly for that reason that I prepared my household for this beginning in 2002.
Submitted by sdrealtor on February 4, 2008 - 11:29am.
Aecetia,
I am hardly an expert, just a regular guy watching the RE market from inside the game at the street level. If anything I have the benefit of being a conservative guy (former CPA) who possesses good analytical skills and lots of education in finance and economics. I dont know what will happen but both SD R and myself called it a couple months back when we said to expect attempts at heroic measures from the gubment. Nothing has surprised me and nothing will.
Submitted by Aecetia on February 4, 2008 - 5:47pm.
I suspect it will depend on which party prevails in the elections on what kind of bail out we get. With the Dems., maybe another WPA for the unemployed and who knows what the other guys will do to stay in office. I guess they can always start another war somewhere... to distract the populace.
Submitted by patientrenter on February 4, 2008 - 8:20pm.
Aecetia, most republican voters are homeowners.... and most democratic voters are also homeowners. I wouldn't assume a big difference between the rescue programs from the parties. Both parties will fight tooth and nail to keep home prices as inflated as all the tricks in the book, and a few outside, will allow.
Well, as has already been stated, the train has left the station and there's no stopping it. I'm sorry for the kids who will be forced to leave their homes, other than that, I'm not sorry at all.
Honestly, as I know people who got greedy and got hurt in this, I feel bad for the people affected. But, it is part of the cycle. Bad debt needs to be flushed out of the system. Houses have to become affordable again. It sucks that people will have to go through foreclosure, but that's the only way things will get back to normal imo.
Actually, I think watching your parents lose their shirts on RE is going to turn out to be a great life lesson.
I wonder if watching your parents lose on RE after voting for hyperderegulatory Republicans might be the better lesson.
http://www.youtube.com/watch?v=z-on2j12c84
link didn't work for me, here it is on youtube
Bob Shiller said that housing will always, over the long term, represent about the same proportion of income (even as housing stock improves).
I agree with this type of "reversion to the mean."
The country needs an enema, and it's coming.
There needs to be a cycle to get people back to reality, without falling victim to marketing and supporting the economy.
1960's wasnt that long ago, but WOW have attitudes changed.
The expectations and insisting on immediate gratification of several generations needs to be dealt with.
Psychology changed quickly about buying houses, wait until it changes about "investing" in stocks. Watch out below.
It'll be interesting to see how this plays out.
In any reasonably free-market system, house prices in So Cal would go down by 50%. But govt reps, desperate to please the majority of voters, will be pulling every lever in the govt control room to prevent big price decreases.
The govt. "nuclear option" is to just lend unlimited amounts of govt money directly to homeowners. By dialing down the downpayment and income and repayment and other requirements, home prices could be pushed up a lot in the short term, and by a significant amount permanently. Of course the program would eventually take large losses, but dumping future losses on the biggest taxpayers (a small minority of the population) is much preferable to most voters than a current loss in their housing ATM/retirement plan.
Think the nuclear option is just a pipedream? People are already working on it: http://www.bloomberg.com/apps/news?pid=2.... We're on a knife-edge between 50% drops and a renewal of the madness of the past 10 years.
Patient renter in OC
The big boys have already said that they will do whatever it takes to clean up the aftermath of the party.
Think about Times Square on New Years Day. The party was fun, but what a mess to clean up.
Even if they lower rates to 0%, (which won't happen)
Joe6pack still owes $500K on a house worth $350 today.
The 100% financing that they bought with is no longer available. The pool of potential buyers has disappeared from the horizon, like cockroaches that scramble when the lights go on. They are nowhere in sight.
The house is unsaleable for more than 65% of what they owe.
It's only a matter of time until walking away becomes the only option, regardless of what the DC clan is saying about wanting to help homeowners save their piece of the American dream.
Like a bottle of milk well past its expiration date, the American dream has soured for many, and will never taste the same. You can't restore the flavor after it has curdled.
HLS, what happens if a newly empowered govt agency offers to lend $600K to anyone who wants to pay that much for that $350K house, on which the current owner owes $500K?
Patient renter in OC
What are the chances of the above happening? Please somebody tell me close to 0. I'm sick of the hair-brained schemes, one right after the other. The above sounds like something out of the "twilight zone". When will the government back off and just let this thing play out on its own??
I live on small culdesac in Murrieta of about 8 houses. Two are bank owned, another is in default (renter just moved out because owner is being foreclosed on). Another one was for sale for a ridiculous price and is now inactive (don't know what happened with it). Anyway, this street looks like a mini ghost town. Sign of the times, of course.
I'm ready for this train to crash into the wall!
They already tried that in 2002-2006. It didn't work, and it won't happen again.
Someone/somewhere has to pony up cash to float that instrument, and there aren't people standing in line to buy MBS these days, regardless of bond ratings.
The party is over, the easy girls have all left.
It's time to pay the piper. Lots of people are going to have a hangover in the morning, and their headache isn't going away anytime soon, in fact it's going to get worse.
0% interest, 600K "free money" are all fun to talk of; but the way the cookie will crumble, in my opinion, is through a robust and sustained inflation (helped on with robust and sustained devaluation of $). By eventually creating a perception that US $ has doubtful value, people will be forced to go back and buy up real estate to lock in whatever wealth they may have. This is Bernanke's monetary philosophy and he has been truthful to his belief so far. His mantra - "Full steam ahead, inflation be damned".
BTW, if anyone thinks I am cynical etc., I completely agree with BB on this! The most rational solution to our national problem now is a dose of robust and sustained inflation so that our debts, public and private, become lower in real value. This will also make our products and factors of production internationally competitive. Just ask yourself - how many of you will buy a Honda or Toyota when it costs $50K, $100K .... How many will buy a BMW or MB when it costs 100K, 200K ....
"I'm sorry for the kids who will be forced to leave their homes, other than that, I'm not sorry at all."
--------------------------------------------------
Marion, don't let anyone fool you with that line of "they'll be homeless." The parents will find tons of other places to rent that are just as good, and for half the cost.
In fact, this housing bust forcing people to rent again will end up saving their skins. They could never afford to pay 80% of gross to live above their means. The crazy lenders just loaned them so much money they "thought" they were rich. Going back to renting at a cost they can actually afford will relieve a lot of stress in their future.
BuyerWill is exactly correct. There is no reason for a collapse in home prices to create any net increase in homelessness. If all home prices dropped by 90% tomorrow, there would be exactly the same number of houses as there are today. All that would happen is that people would pay different amounts to live in them, and maybe some people would buy more houses (investors), and others would rent more (residents-to-be without downpayments).
Patient renter in OC
JWM in SD
"The most rational solution to our national problem now is a dose of robust and sustained inflation so that our debts, public and private, become lower in real value. This will also make our products and factors of production internationally competitive. Just ask yourself - how many of you will buy a Honda or Toyota when it costs $50K, $100K .... How many will buy a BMW or MB when it costs 100K, 200K ...."
This is so f**king stupid it is beyond on belief. How many times do I have to explain this people? Inflation is increase in money supply not prices. In order for it to make a difference, it must make its way into your wages or it will not help sustain inflated asset prices. that is why every credit bubble in history ends up in deflation because the debt grows beyond the ability to be serviced.
Get your head out of your ass Bsharma...the Fed and the Govt can't save your SD house anymore. Deflation psychology has set in.
bsharma - I'll agree with you that the powers that be are attempting to implement the hyper-inflation that you appear to be hoping for
if they succeed, bread will be about $12 to $15 per loaf and a gallon of milk will probably run about the same
these prices will clearly be unacceptable so the government will have to subsidize food costs for a large percentage of the population
these new food subsidy programs will require money so the govt will have to run the printing presses even faster thereby creating more inflation
this new inflation causes the real price of bread and milk to rise to $20 per loaf and gallon
it is still unacceptable for poor people to starve in the streets so the govt increases the size of the food subsidy programs
the expansion of the food subsidy program costs money so the govt runs the printing presses even faster which causes more inflation which causes the cost of bread and milk to go up which causes .....
~
it is intuitively obvious to the most casual observer that Keynesian economics is logically flawed - it is fortunate for the powers that be that most Americans choose not to use the grey matter inside their skulls
JWM & 4Plex,
I didn't mean Weimar Germany style hyperinflation - more like Nixon-Ford-Carter style (1973-1982) that ended in revalueing $ to a new lower value (relative to asset classes). That helped real estate recovery (and because of that, general perception of prosperity) in the 1980s.
Also, all expensive wars are eventually paid by devaluation of currency and increased inflation. Inflation is the natural involuntary universal tax.
We, as a nation, wasted a lot of wealth building unneeded homes (and waging a profitless war). We, as a nation, are going to pay the price with a lower standard of living. That is what inflation does.
Money supply vs. price is technicality. Reality is simpler - we wasted money and have to live poor.
Now I'm really confused, bsharma - in your first post the Fed and govt is going to save the world with inflation but in your second post we are all going to suffer a reduced lifestyle because of inflation
could it be that Keynesian economics is a load of crap so you have to keep changing your answer?
to think that anyone can direct where printing press money gets spent is ludicrous - and to talk about good inflation and bad inflation truly shows the inanity of the Keynesian philosophy
here are two simple realities for you:
THERE IS NO SUCH THING AS A FREE LUNCH
A NATION CAN NOT PRINT ITS WAY TO ECONOMIC HEALTH AND PROSPERITY
4Plex: I see no confusion. Fed & Govt are going to save US (mainly) and Global economic system (secondarily) with inflation. It is also true, a majority of us, particularly Americans will become poorer.
There is no contradiction; we will have to amputate legs to save life. To prevent 1930s style depression, we have to accept 1970s style inflation. I am sure everybody will agree we would rather have a replay of painful 1970s than even more painful 1930s.
Enough with the 50% drop callers. Look at esmith's January HPI which anecdotally makes sense with what I see along the coast regarding values.
His graph shows prices are about 70 to 80% above pre-bubble pricing in most parts of the county. A drop of 50% would put prices well below pre-bubble prices on a nominal basis. Factor in wage increases (which JWM and ex-SD do so often) of easily 20 to 30% in the nicer areas among professionals and a 25% decline from here looks like alot to expect.
Throw in lower interest rates and affordability is only about 30% above the pre-bubble prices adjusted for interest rates. Factor in the rise in wages and we are already pretty close. Sorry folks but I just dont see much more than 20% downside from here.
Sure you may get more than that in Da' Hood but do you really want to live in Da' Hood?
If you really want a nice home, get your ass off the computer, work harder, start a business and make more money. Dont expect life to hand it to you on a silver platter.
JWM in SD
It's called Reversion to Mean Sd realtor. It typically overshoots. Second of all, you really have no idea how serious this situation is in the financial system of this country.
You are sounding very desperate to convince people that the damage is not going to be that bad. A year ago you didn't think it would be as bad as it is now.
Who turned out to be right???
It wasn't you.
SDR-
I don't know if you noticed the article in the UT by Lew Sichelman or not, but it mentioned a program developed during the depression called the Home Owners' Loan Corp. (HOLC). Do you think if the slump continues the Feds. will try something similar to save the economy? To quote the article, "Back then, about half of all mortgage debt was in default. Unemployment had reached 25%, thousands of banks and savings and loans had failed and annual mortgage lending had fallen by some 80%." So we are not even close to those times currently, but we were not in a war in the 30's either.... Just curious as to what an expert thinks will happen to speed the recovery. Thanks.
To the contrary JWM, I was spot on. I called to 5 to 10% decline in my market (North County Coastal which is all I am really qualified to comment on) with a bias toward the high side and most of the decline coming between September and December. Its all there in the archives for you to verify and I said this many times.
As for sounding desparate, it is you who sounds desparate. I'm locked into a home my family loves with a mortgage 1X my annual income (most of which does not come from RE but rather very recession proof sectors). I could pay it off if I wanted to today. A crash would benefit me more than you as it would allow me to pick up the 5 to 10 prime investment properties I am hoping to accumulate over the next 15 to 20 years.
As for how bad this is, I have every idea of how serious the situation is and it is exactly for that reason that I prepared my household for this beginning in 2002.
Aecetia,
I am hardly an expert, just a regular guy watching the RE market from inside the game at the street level. If anything I have the benefit of being a conservative guy (former CPA) who possesses good analytical skills and lots of education in finance and economics. I dont know what will happen but both SD R and myself called it a couple months back when we said to expect attempts at heroic measures from the gubment. Nothing has surprised me and nothing will.
Aw, come on sdrealtor, I'm sure the Giant's winning the superbowl was a bit of a surprise?
Yep that was surprise and a very unpleasant one at that.
I suspect it will depend on which party prevails in the elections on what kind of bail out we get. With the Dems., maybe another WPA for the unemployed and who knows what the other guys will do to stay in office. I guess they can always start another war somewhere... to distract the populace.
Aecetia, most republican voters are homeowners.... and most democratic voters are also homeowners. I wouldn't assume a big difference between the rescue programs from the parties. Both parties will fight tooth and nail to keep home prices as inflated as all the tricks in the book, and a few outside, will allow.
Patient renter in OC
You have made an excellent point.