I think buying into an area that has held up thus far is far worse than one which is playing out. Ultimately it will trickle up but as it holds the disparity increases and creates a greater loss potential. If zip code A is traditionally worth double zip code B but zip code A is holding even and zip code B falls 25%, the worst investment today is zip code A. Despite the desirablility the multoples are getting out of whack and will eventually come in line.

BTW and off topic, now that the patriots have been caught cheating in the first game and are awaiting sanctions, who has last years playoff game still on tivo and will we find the mystery video guy/assistant coach decoding charger defensive calls on that tape. It’s going to be the “grassy knoll” of our time. I want every scrap of film analyzed from the past seasons, I want asterisks in the record books, I want rings taken back. How will this affect Sunday when the Chargers play the Cheaters. LT is going to go off Sunday and after the game he is going to mention to a reporter on the sideline that the Cheaters, cheated him out of his shot at the superbowl last year. My prediction, Brady gets a season ending “theisman like” injury at the hands of the Shawns and Belechick is arrested in a nightclub/stripclub scuffle/gunplay incident. They f&*#%@ with Karma and she f*&$#%’s back.

My theory is that older and desirable areas won’t be pull down by distress sales, but more of calibration to the other area in the county that people cross shop it with. Every area will have people wanting to sell. But people areas like Cardiff, Solana Beach, etc, can choose not to sell. So there won’t be too much distress sale to drastically pull down the price. However, it has x% premium over 4S, Carmel Valley, La Costa, Scripps Ranch, etc. When those newer areas drop due to distress sales because there were more speculations, etc. Eventually, buyers might dry up for Cardiff/Solana Beach to a point where the few distress seller might make a different in price. That’s why I think area like Cardiff/Solana Beach might have a semi-soft landing?

If the banks continue to hold property the distress levels will be delayed. Think of how many ways they can push the reo’s off balance sheet for more time. (start another shell company? Brown Lawn, Inc.) but then again the crazy financing that created this mess was justified and continued for over four years. So yes, much patience is needed here.

Distressed properties in 92009 (Carlsbad).

[img_assist|nid=4762|title=92009|desc=|link=node|align=left|width=466|height=396]

We haven’t had a recession yet, we have only seen the froth come out of the real estate market. Prices were still jumping like crazy in 2005, 2006 still had lots of high prices paid, 2007 has been a bust, but the level of transactions has dimmed, there are huge numbers of homes which were pulled, are not going on the market, despite it making economic sense for the seller, etc.

I think the problem is that we haven’t really had a downturn in real estate, just a quick reversal of the excesses. The rats are still in the ship, the ship is taking on water but the rats haven’t fled. It took years and years of price increases to fuel the insanity which has become the housing market here in San Diego (and California and to a much lesser extent the US).

[img_assist|nid=4763|title=housing costs as a percentage of wages|desc=|link=node|align=left|width=466|height=466]

Hey folks… This is the AVERAGE! It includes all the these people have lived in their home for years…. It is the average for the state. The number of people who pay 50% is huge as well. So for each dollar earned, there are lots of people out there paying .40 cents of it on housing. This is unsustainable

When prices went up, and up, and up, the market turned over, people cashed out and left, others picked up the high costs. We are now experiencing a huge shift in employment and there are no places to pick up that employment.

The Fed is claiming a 1 in 3 chance of recession. They are always wrong to the optimistic side. Most of the markets believe that the number is 1 in 2. The folks with a real understanding of risk think it is inevitable.

We will look back at this period and laugh (or cry). The risk has just been shifted with lots of the players jumping ship. The mortgage brokers, banks, wall street, Realtors, construction companies, and all the ancillary businesses have just realized that the game is over. The economy is just starting to shift from it. Inflation is out of control (but not according to the government). Health care, oil, commodities (milk & wheat especially) are raising like crazy. Our engine is sputtering, the world is replacing our growth vehicle, and they will suffer along with us, but prices are high, job prospects are low, and the housing market will go down accordingly.

To go back to the original point. Did I have an original point?! It will take years of unwinding, huge job losses, a recession, pricing pressures, and an unwinding of the US dominance in many markets.

Not the least of our problems:
– A hugely expensive war which shows no signs of letting down.
– Recession in jobs and wages.
– Housing costs which will have to deflate significantly and will keep a huge brake against the ability to get out of recession.
– A negative savings rate (it’s only the savings of Asia which has propped us up so far – it is unsustainable) as per the Fed.
– Loss of manufacturing base.

As it gets worse, and it will get worse, the way our society is set up will accelerate the pain for the vast portion of our society. Just as in the depression, the folks with real money will hunker down, and the others will starve. It’s called capitalism and while we have all been taught that it is the best system, it really is the best system for the folks with significant money, and brutal for most others.

During the excessive downturn the following will happen:
– Our farmers will ship goods to where they can maximize profits.
– Our jobs will be / have been outsourced for the 5% of our population’s benefit.
– Job security which has never been strong will be non-existant.
– Wage deflation will be rampant along with downsizing.
– Our politicians support the wealthy vs. the middle class / lower class.
– The world will move to a better hedge than the US economy, while it suffers as well.

Oh well – sorry for the rant. I have to go to the gym now, personal defense and strong muscles will be critical for the bad times!!! Hope I’m just kidding!