Well, I have a great imagination, and this RE keeps me up at nights!

In late 80s and earyl 90s when I was working at Nordstrom, all these women were spending thousands of dollars with me every month. I knew their size, their taste etc. If an article of clothing arrived that I knew they’d like, I’d simply charge their card, and send it out to them!

Then, about a year before the first Gulf War, things really just came to a complete stop, and literally, we would not see a customer from 6pm to 9pm some nights! All of my customers stopped shopping the way they did, and were forced to cut back. One even broke down one day saying her husband was a contractor, and things were never going to be the same again. But then, the war started, and the economy got the little bit of jolt it needed, and life resumed albeit at a slower pace.

I think we’re in for some tough times ahead, but I go back and forth between thinking it’s going to get horrific vs. just plain bad.

After college I got into selling yellow page ad space, and saw daily how small and medium businesses were marketing themselves and surviving the downturn. The ones who pulled through were the ones who were able to adjust and find new ways to both make money and cut expenses.

Adjustment seems to be the key.

Even this morning I read in the NY Times that all the mortgage brokers are excited by the prospect of refinancing all these scary home loans and earning more money…

http://www.nytimes.com/2006/07/15/business/15money.html

Maybe the time stamp is off?

The time stamp is in standard time.

4 am? Isn’t that when the drill instructor drop kicks the trashcan through the squad bay to wake everyone? I thought I remembered that hour.

Josh

Depends on your definition of “long haul”. Assuming the dollar doesn’t get Canadianized, over the next 5 years I’d totally bet against prices coming back to this level. Over the next 10 years I might not.

I refer you back to the last downcycle. From peak to trough to the same peak (+25% over the long term price trendline) took 11 years. Look at the graphs: 1991 – 1997; 1997 – 2002; and that peak was 1/3 of what this peak is relative to the long term trend.

In other words, after adjusting the prices for inflation, it took 11 years for a buyer in 1991 to break even on that purchase. That’s pretty sobering because if this cycle does what every other cycle has done so far it would probably take a lot longer than 11 years – the distortion is 3 times worse this time.

Respectfully, I must disagree. Adjustment alone will not get us through this time. I think that the crash that is about to hit the real estate market will be absolutely unprecedented — simply because the bubble is equally as unprecedented. As an owner of 3 properties (one of which I am desperately trying to unload), it pains me to say this.

I remember the slump in the 90s — when I bought my first condo and waited nearly 7 years to regain my equity. I recall owners simply walking away from their homes. But as bad as that was, there are many fundamental reasons why the coming downturn will be far, far worse and last far, far longer:

*** ARMs were virtually non-existent prior to 2000, as were interest-only loans and other creative financing. During the 90s, the worst thing that happened was that owners lost their equity; this time, they’ll get the double-punch of falling equity AND higher mortgage payments.

*** In CA, only purchase money loans (the initial loan you take out to buy your home) are non-recourse loans. That means that if you fall behind in your payments, you can simply walk away and drop the keys off at the lender’s office.

Not so when you re-finance or get a home equity line of credit. The lender can and will come after you, your savings, your stocks, your other property, your salary. And don’t think you will be able to seek the shelter of bankruptcy. Thanks to Bush, the most recent round of changes to the bankruptcy laws mean that your only real alternative will be debt re-organization, not liquidation. And since 1 out of every 3 homeowners in CA (perhaps lower in other states) has an ARM, this is a disaster waiting to happen because people will simply never be able to recover from their bad property investments and move on with their lives. Desperate creditors will stalk them relentlessly. Their financial futures will be obliterated for years to come, perhaps forever — and with scarred credit and judgments against them, they will not likely invest in real estate again any time soon. This was simply not the case in the 90s; most had purchase money loans because rates were so high it didn’t make sense to re-fi.

*** The so-called “bubble” of the early 90s pales in comparison to what we have witnessed over the past 7 years. It’s like comparing a condom to a hot weather balloon.

*** When the cracks really start appearing, Fannie Mae is going to bust. It holds only a fraction in actual dollars of the outstanding debt it has loaned. It is fractional reserve banking at its worst. And when Fannie Mae tanks, all hell will break loose.

*** The rest of the economy — and in fact, the global economy — is slowing suddenly and dramatically. In the 90s, the other sectors of the economy were relatively strong. Now we are being hit by skyrocketing fuel prices that simply won’t subside, a potential world war, the ongoing spectre of terrorist attacks and the effects of global warming that are finally manifesting themselves (in the form of more violent and more frequent destructive hurricanes that disrupt oil supply).

All of the above are unprecedented and earth-shaking factors that simply have not existed during any other real estate downturn.

Make no mistake, what is coming is no ordinary downturn; it will change our live’s forever. Many people who lose their homes will simply slip from the middle class and will never return. Sadly, I fear most will not realize what is upon them until it is too late. My advice: get out while you can and get as liquid as you can. Now.

Three things have to happen, in my opinion, before anyone is going to have a solid idea how this will play out.

1. The fact that home prices are dropping in SD reaches the public at large (and sinks in).

2. The speculators jump ship.

3. The folks with exotic financing either sell, foreclose or refinance.

As Rich has said, this is only JUST beginning.

“Make no mistake, what is coming is no ordinary downturn; it will change our live’s forever. Many people who lose their homes will simply slip from the middle class and will never return. Sadly, I fear most will not realize what is upon them until it is too late. My advice: get out while you can and get as liquid as you can. Now.”
___________________________

Who is this advice directed to? The thousands and thousands of San Diego families who love their homes, already have built a cushion of equity, have good jobs, kids are in school, are part of the community, etc etc? The throngs of young executives who love the San Diego lifestyle and have no intention on going anywhere? The masses of older couples who have significant assets? Is the advice for these people to simply pack up and move to Boise? Or sell their homes or condos and rent an apartment? Is this what you are advising them to do? Everybody sell their homes, right now? Surely this cannot be your advice.

My guess – and yes it is a guess – is that the vast majority of homeowners in San Diego will not take such action. My guess is that interest rates will not skyrocket but instead stabilize, property values will not plunge but instead stabilize, the San Diego economy will not collapse and there will not be a mass sell-off of real estate and mass exodus out of San Diego.

The days of the quick buck in the San Diego are clearly over, for now, but if history tells us one thing it is that they will return someday. Until then, I for one am content to enjoy this great, growing area, fabulous weather and lifestyle, and simply hold onto my real estate as a long-term investment. My guess – and yes it is a guess – is that I will be very happy I did so.