San Diego Housing Bubble News and Analysis

If the current rate of decline continues I'm betting that by the end of 2007 we will see a few markets where the decline from peak is 25%. We're already at yr2004 prices in a lot of areas, and they aren't just the less desirable neighborhoods, either.

The mortgage resets haven't really even got going yet and there are already some people getting reset right out of their homes. Gas price increases may hurry that along.

I agree, but many here won't. I think it will be slow, slow, slow for a long, long time. The pain will be substantial, though, especially for those overstretched in "affordability" products.

I beg to disagree Diego. I believe that all new develpment prices will drop 25% within then 18 months. The resale property will follow a little later.

I don't have rigorous analysis but that's exactly what happened in 1990. I expect to see a repeat this time around.

PerryChase,

Did the builders drop prices that fast in the early 90s? I didn't know that. I too expect the builders to be the first to slash prices (can you say "motivated seller"?), but I have no clue as to how agressive they may get. Anybody else with memories of the 90s downturn?

Yes they did. I remember, in 1990, the Pardee development in Sorrento Valley sold starting at $175k for a single story at the low. That area sold, in 1989, in the upper $200k - $350k originally. In Carmel Valley (then called North City West), several developments went bankrupt taking along with them some S&Ls. HomeFed and Imperial Savings were 2 San Diego casualties -- along with S&Ls accross the country.

I remember the 90s vividly. I had a front row seat for it, albeit I was working in the OC at the time. I watched the prices peak in late '89, watched it plateau for 3 months and then start to decline in early-mid 1990. The media finally figured it out in late 1990, about 6 months after it had already been in motion. Does that lag ring a bell with anyone?

From mid-1990 on it dropped at a pace that was only slightly slower than the run-up that had preceded it.

If we extend the same reverse slope to this run-up the decline would be faster and farther because the run-up was both (much) faster and farther than the run-up in the late '80s.

I don't know if the past will repeat this time, but so far it sure looks that way. As far as I can see, 2006 is playing out exactly like 1990.

Perry/Bugs-
Were the conditions the same wrt/ ARM loans, massive speculation, was the glut as great as it appears to be now?

How is 2006 similar to 1990? How is it different?

I was one of the fools who bought a house in 1989 so I should know. You live and learn. :)

At that time, there were ARMs but I had not heard of interest-only loans and all the other exotics we have today.

Loan officers were affiliated with builders but they did not sit in the sales offices running buyers through various iterations to see what maximum monthly payments they could afford. There were no 1%, 2%, or 3% buydown loans. At that time my loan was 9.5% fixed.

Most people would put down 20% or had to pay PMI. Buyers generally did not do 100% loans nor the 80/20 loans we see today.

Loan equity loans were available. But HELOCs were rare.

Today, the marketing machine is much more effective and buyers are not really aware of what they are getting into. They still think that so long as they can afford the monthly payments, they are "investing" in their future (not throwing money away in rent).

I believe that the exotic loans and payment resets will have the effects today that the mass lay-offs had in 1990.

If we have a recession in 2007 then unemployment and loan resets will be double whammys on the real estate market.

There were a number of differences in 1989. For one thing, those buyers were't engaged in what I'd call speculation. There was no real flipping, at least not in the way we saw it this time around. People were mostly paying extra out of fear. I called it "fear-buying" at the time. These buyers were genuinely concerned that if they didn't buy then they would never get in.

I haven't seen much comment about this, but one of the factors driving the fear back then was that there was some political acticity on the so-called "slow-growth" initiatives. Rent controls in various cities and counties were being enacted and pressure was being applied to the cities to curtail growth by downzoning densities, increasing fees and the like. People were literally sold on the idea that we were out of buildable land.

We didn't have people quitting their jobs to dabble in RE flipping, they werent' exporting their equity to other states, and there was no "property ladder" train of thought. People simply wanted a place to live and were afraid their time was running out. Property investment was mostly about generating positive cash flow through rental income, not about holding for a year and expecting a 30% return from price appreciation.

At least, that's how I remember it.

Bugs, it's interesting! Your memory and mine exactly coincide! What happened to PMI anyway? Are all these people that didn't put down 20% paying it? I put down 20% on my first house in 1994, specifically to avoid PMI.

I also wondered what happened to PMI. We bought in 2000, with 3% down, no PMI. I was surprised we could put so little down, and no PMI. We had a 30 year fixed loan. I was also surprised my in-laws bought their home with a piggback loan, an 80/20 to avoid PMI. I had never heard of such a thing before.

The first time I realized the extent of exotic financing is when I read AnotherF*ckedBorrower.com, now called HousingBubbleCasualty.com, in late fall. Before that, I thought everybody made 3x as much money as we did. Now I know it was due to MEW.

ps

what kind of loan did you have with no PMI? You had no 2nd mortgage 3/17?

30 year fixed in 2000. no second, just one loan. I don't recall why we didn't have to pay PMI. After rates dropped and we built a new house after the fire, we got another 30 year fixed, but by then we had enough equity that we didn't need PMI anyway.

Bugs and Perry, thank you for sharing. I was a college graduate in my early 20s when I moved to the USA (and Calif.) in 1989. In the next few years I met a couple of people who told me how they had made money during the late 80s boom. It was essentially buy (preferably new construction), have the landscaping done, then sell at a profit and use the proceeds to buy an even bigger house. The formula worked well, up to a point of course, when they run out of GFs.

I suspect this time, price drops will be more severe in Midwest areas where job losses are severe. Next, price drops will be relatively fast in certain neighborhoods (in bubbly states) where lots of investors and lots of marginally creditworthy buyers purchased a lot of properties.

For instance, now I'm renting a house in an upscale neighborhood in Westlake Village (on the 101 fwy, right on the Ventura-L.A. county line). Most of my neighbors are owners who purchased brand new back in the late 70s/early 80s, most are retired, and they are not at all concerned with what happens to their property values (they've been through many ups and downs over the years, and probably carry very small, if any, mortgages).

It's areas more like Riverside or San Bernardino, where I expect faster price drops, due to the larger number of marginal borrowers and investors.

I agree with Daniels view... a long slide for a long time... Resellers don't get it and won't get it... unlike bad stocks that they finally sold off in the dot come burst they actually can live in thier house assuming they can make the payments. Also I believe the recession will really slow down the NOD rate...People will scrape to get by and the low rates will help them do that... it will be an ugly slow road down.... The developers however get it and will continue to lead the market with lower prices... I only wish resellers had the insights of developers...

Powayseller - To be honest I am confused that you financed 97% of your home without PMI. To be honest I am not sure how you pulled that off... You sure you did not have an impound account for tax and pmi? What kind of loan did you get? Who did you get it through? Anyways, the PMI laws have not changed at all. So you have me stumped on this. Most everyone gets around it with a second or a heloc... if they cannot come up with 20% down.

I think there are more long-term owners in trouble than people think. Every group fell victim to the lure of the home ATM. The 2000s have been big conspicuous consumption years. Many of my mother’s generation have been taking money out of their houses and spending it. I know of a very middle class retirement age couple that refinanced their home to remove over 50k for their daughter’s wedding. Pure foolishness! They probably spent at least 10% of their net worth on a party!

Just saw the numbers yesterday and prices are dropping in many areas already. EG: Median in San Marcos is down 4.7% and the average is down 5% in Vista.

http://rereport.com/sdcnci/

Duplicate

Duplicate

SD Realtor, my apologies for this error. I just reviewed my loan docs from 2000, and I saw we put 20% down. It was a family loan, so although we did finance the entire amount, the 30 year loan was at 80% LTV, thus no PMI.

PD is right. Many people whose homes should be paid off, started riding the MEW wave in 1999 - 2004, to buy new kitchens, college degrees, vacations, cars, business expansions, remodels, 2nd homes, stocks, and more.

While I had my realtytrac.com membership, I could go into the NOD's loan history. In Poway, there were about 6 foreclosures (many more NODs), and half of those (3) were owned by borrowers who made their home purchase in 1980 - 1983. The other 3 bought at the top of the market in 2002 - 204.

So for Poway, although a small sample, 50% of the foreclosures are from people whose homes should have been paid off, the group that Diego Mamani describes as settled in their homes. Far from it! Even my neighbor's mom just took out a HELOC to build her dream kitchen. PD's mom did this too, right? A journalist wrote that her parents refied the equity out to go on a spending spree.

Now for the details: these 3 couples in Poway started taking equity out of their homes around 2000 - 2002. Once, twice, or more. They almost doubled their mortgage amount during that time. The streets are Country Creek, Millards Lane, and Bridlewood. Only 1 of these homes was for sale. The other 2 NOD people were not listed for sale! Why? Were they hoping to come up with the money?

So don't assume you know anything about anybody's finances. "The Millionaire Next Door" should have taught us all that what somebody has in the bank has nothing to do with what they choose to buy. Debt is easy to get. Actually, the more stuff someone has, the more debt they probably have.

This NOD wave is going to hit the retired people, the long-time homeowners, the doctors and lawyers, just as hard as it will hit the lab technician who bought his house with an I/O loan.

Schahrzad Berkland

Diego Mamani,

Did you know we're neighbors? I'm in Moorpark!

The issue of liquidity is the primary discussion here. How liquid can RE be? The argument that this downturn will be long and slow is a good one due to the traditional illiquid nature of RE. The most liquid aspect of RE are the developers, they can dump and may have to dump inventory to keep a positive cash flow. The greatest percentage price declines will be set by the developers. That will be in line with the previous downturn IMO. Now the big difference in this downturn that I see and that has been discussed on this thread is the role of exotic loans. This is where we are in uncharted and untested waters. You are probably looking at the most leveraged housing market in history. As the mania ensued people were buying homes (especially 2004 and 2005) that were 7X to 12X income using exotic loans. The fast appericiation of the home would make the two ends meet when the loan reset. Well it was supposed to work that way. When the two ends don't meet people have to sell or face foreclosure and many will face foreclosure. This dynamic increases the liquidity of RE making steeper and faster price declines possible. IMO we are looking at one of the most liquid RE markets we have ever seen due to credit standards basically evaporating. The good thing is we don't have to wait too long to determine how severe this aspect will be, the majortiy of ARMS are resetting starting about now and peaking in 07 and 08.

duplication

How liquid is a foreclosed house?

Once the default goes to foreclosure, it becomes REO, then goes to trustee sale right? Can the REO and Trustee sit with it on the books vacant instead of taking the loss?

Many homes could be bought while in NOD, never reaching foreclosure. These will remain highly liquid.

Doesn't liquidity mean there is a ready market for buyers and sellers? That is not the case for housing.

We've got sellers who are asking for above-market prices. So, not a ready market for most sellers.

We've got buyers worried about how much further prices could drop, so sales are dropping every day.

This market is getting more illiquid by the day.

Eventually, sellers will get real, and start pricing their homes correctly. But without buyers lining up, liquidity is low.

I was told in the 90's, some people would go for a year without having one showing. That is illiquidity.

I guess I am somewhat expecting that investors will try to pick up NOD properties for a song, but I don't know. If that were to happen, actual foreclosures would not rise rapidly, which is clearly not going to be the case. I'm just thinking this through out loud (in writing); it still doesn't make sense to buy a NOD property if the values are declining rapidly, the profit margin isn't there.

poway,

That is a good point, I was thinking more in reference to the liquidity of actual prices. Developers and distressed properties will HAVE to sell for what the market bears. The market hasn't totally disappeared. The greater the supply of "HAVE to sell" properties the greater pressure there is to lower price. If the majority of sales transactions taking place are dominated by desperate developers and distressed property owners then they have to compete for the limited number of buyers, thats when you could see median and avg prices plummet. The point I was making is that IMO we will have a far greater number of distressed property owners than in the past due to the disintegration of lending standards.

LA_Renter. I'm with you on this. Sellers who need to sell will drive pricing. They will go through the 5 stages of grief... then they'll do whatever it takes to sell.

I anticipate that by fall of 2007, we'll see some drastic adjustments.

Like you said, the disintegration of lending standards will lead to a hard landing.