August 27, 2006 at 9:48 AM #7340powaysellerParticipant
If anybody thinks the worst drops are here, and it will level off, you are way wrong!
In the last downturn in California, per Calculated Risk, prices dropped the most in years 3-5. I wish I could find the link.
This thing is just getting started.
I am anxiously awaiting the biggest drops, which will occur in 2008 and 2009, as $1.8 trillion of loans nationwide reset, unemployment rises as housing and retail related jobs shrivel up, and buyer psychology turns to fear. Making it worse, lending standards could return, making it impossible for today’s San Diego wage earner to qualify for a median pricedhome even he wants to. Imagine the plight of the home industry if you can only borrow up to 3.5x income.
By 2008, the median loan will be 3.5x the median family income of $70K, so $184K. The median priced home in San Diego will be $184K, purely due to lender’s underwriting guidelines. That will put a lot of downward pressure on prices.
We probably saw a 5-10% drop in the past year. In 2008 and 2009, we will definitely see 15-20% drops. After that, we will probably level off.
Anyone wanting to sell, needs to do so before the FDIC gets those new underwriting guidelines in place, and before investors stop buying up MBS packaged with 0% down loans. Because even if the buyer is willing to spend $400K for your house, it won’t matter if he can’t get the loan to do it.
Schahrzad BerklandAugust 27, 2006 at 11:32 AM #33510LABenParticipant
I agree that the worst drops are yet to come. Investor psychology is slow to change and will require a much longer period of time to manifest itself than in the stock market. However, I think the amount of leverage, new exotic mortgage products and level of speculation will increase the speed at which this bubble deflates relative to the early 1990s. Blogs and websites like this improve the transparency of the market and will increase the speed at which prices change.
I have a question regarding the FDIC guidelines. I think this is probably one of the most important variables that will determine how rapidly this cycle plays out, but I always have difficulty finding reseach on the topic. Does anyone have a website that is tracking this piece of regulation? I am curious to hear a lenders candid assessment of what this will do to their business. I know several “professional” MBS/ABS/CMBS investors who know almost nothing about these guidelines. Kind of scary when people responsible for a multi-billion $ portfolio of MBS don’t have this on their radar screen. It’s not suprising then when you look at MBS spreads and realize they are trading near multi-year tights. Granted vol is low, but the MBS market as a whole does not seem concerned about a deterioration in credit quality.August 27, 2006 at 11:39 AM #33514sdrealtorParticipant
“If anybody thinks the worst drops are here, and it will level off, you are way wrong!In the last downturn in California, per Calculated Risk, prices dropped the most in years 3-5. I wish I could find the link. This thing is just getting started.”
But it’s different this time;)August 27, 2006 at 11:40 AM #33515Stu949Participant
I also agree that the worst is yet to come; however, I’ve been surprised at how quickly things have changed just recently. Quotes from the CEOs of Countrywide, DR Horton, Toll Brothers, etc. have surprised me. The fact that these guys are making references to “this is worst I’ve seen it in 30+ years”, should make people step back and think. Part of me thinks this may accelerate down more quickly than the last downturn. Do I know for sure? Nope, but we just witnessed probably the biggest world wide real estate bubble ever! This time it is different – however, I think the fallout will be quicker and more painful.
The Fed will try to do something to stop this, but I don’t know what rabbit they’ll pull out of there hat. They may be able to stall it, in which case I will be wrong, but they will just make the coming correction that much worse!August 27, 2006 at 11:46 AM #33517carlislematthewParticipant
But it’s different this time;)
Exactly! It’s different, in that it’s the same and not different – this time. Reversion to the mean!August 27, 2006 at 11:58 AM #33521sdrealtorParticipant
BTW, I dont think we are close to done either. I just belive the declines will be more front loaded this time around. I could be wrong but that is my sense of things right now from what I see on the streets.August 27, 2006 at 11:58 AM #33522AnonymousGuest
I too have been taken back by how many references I have seen by (big) builders and (big) lenders about how quickly things have turned and how extensively they have turned and their overall concern moving forward.
The exotic loan programs could be affected in one hour’s time simply by the rating agencies making or announcing a change in the way they rate the cdo’s and such that so many of the loans end up in. The other thing that can and has already started to impact some of the exotics are the repurchases some of the aggregators of these loans are running into.August 27, 2006 at 11:59 AM #33526L_Thek_onomicsParticipant
I’m not really familiar with the San Diego market, I live on the coast of Long Beach and work in commercial construction. I’m sure there is lots of similarity between the two markets, so my observations may make sense. Including the 1999 – 2004 acceleration of home appreciations the median home value in California gained 339% between 1980 and 2004. This is slightly under 7% per year. If I substitute the unprecedented recent gains with the acceptable 7%, the median home price in Long Beach should be around $292,000 by mid 2007. (The median price was $485,500 in May 2006 after a 6.3% drop from April.) If we see a moderate average drop of 3% per month, the long Beach median home price will meet with the $292.000 acceptable median by the end of next year. It can happen without crash landing, without creating a major recession with high unemployment and many other negative consequences.
L ThekAugust 27, 2006 at 1:25 PM #33536no_such_realityParticipant
7% is an unrealistic high average gain for housing. I’d guess that the extraordinary gains of 2000-2005 have distorted your average.
Second item, a 3% monthly loss would be absolutely devastating, that’s a 30% annual loss. Which is abolutely unprecedented. In previous downtowns, the revision to mean typically as zero to 4% loss during which inflation over-run the price driving the “real” price down.
We’re in uncharted territory. Real estate has not seen nominal losses in double digits, that are obvious to everybody. When the median starts to buckle and the median starts reporting 5% below last year, people will worry. When it goes month after month reporting 5% or more annual loss, people will really worry. If, and that’s a big if, annual median lost starts to show the kinds of dramatic price cutting that is showing up in CV, and the median shows 10% or more annual losses, buyers and investors will flee.
Simple question for all of use on the board, we may say will buy, but what will be our trigger? If the market enters freefall, what will you buy with? Is your money parked in cash? Will the local encomony belly up on the loss of RE jobs?August 27, 2006 at 1:47 PM #33539AnonymousGuest
Here’s the proposed regulation:
It doesn’t appear to be finalized yet. Sorry about the bad link job. Although a long-time lurker on this forum, I just signed-up so I could get you this FDIC website.
OCBAugust 27, 2006 at 2:50 PM #33551socalarmParticipant
powayseller, i really appreciate posts like these. i firmly believe so many lenders will be in a pickle next year. keep it up.
if i had a choice we would’ve sold in may 06 (peak in LA). as a current seller i’m glad i managed to convince my wife to do this slightly late but infinitely better than waiting it out. it took a few months of convincing but she was really happy to see the solid data and basis everyone here has used to forming the argument.
i like your polemical approach. “If anybody thinks the worst drops are here, and it will level off, you are way wrong!” lol. makes you think.
i just hope i don’t get caught in the vortex as i sell. i will be honest about the situation as it unfolds. just for the record, i never doubted the bubble, i just had to wait patiently to make a joint decision…here goes wish me luckAugust 27, 2006 at 4:16 PM #33558AnonymousGuest
Access and Rates are the keys
PS, I think you’re dead-on right! Folks talk all day about rates, but I think with the scary number of foreclosures that are going to happen with the coming rate resets, we’re definitely going to see some serious federal legislation or rulemakings by the FDIC that will significantly restrict or even eliminate most “exotic” mortgage products. Once those restrictions take effect, lowering rates won’t be nearly as effective, because the specuvestors and low-FICO folks just simply won’t be able to get financing.August 27, 2006 at 5:41 PM #33571SD RealtorParticipant
PS I would have to agree with you as well. I think 07 and 08 will see equivalent or more drops then we have seen here in 06.
However I am still somewhat bothered by the fact that at “some point” prior to the 50% drop, there will be a positive cash flow potential for investors due to higher rental costs. Doesn’t it seem logical to think that? Say there is a home that is 500k but can return 7% assuming you put 20% down once it gets to 320k. Assume this rate also was valid after your property tax and other fees to maintain the property. Wouldn’t an astute person start to buy properties at that point? Even with the bottom still not reached, you still have shook out more of the risk and now have more upside so while most people would say I am gonna wait, some will not and they will park the money and take the 7%. Yes they will experience some depreciation but the lionshare will have been digested already.
So again, I think some zip codes could have maybe even MORE then 50% depreciation but others will not.
Also I do believe some zips this year have already seen as much as 20% depending on location and housing type.
Not a bad start.August 27, 2006 at 6:18 PM #33574AnonymousGuest
I have followed your posts on this site as a lurker for quite a while and am a great admirer of your market knowledge and your candor.
I am primarily a business litigation attorney, but am also a licensed real estate broker with a small real estate business and I therefore have MLS access. Because real estate is my main hobby I tend to spend a lot of time (probably way too much) analyzing trends, price changes, etc., and I agree with you that some neighborhoods have already seen as much as 20% depreciation. In particular, the less desirable condos such as those in Mission Valley built in the 1970s, and those in outlying areas (as opposed to Hillcrest/Mission Hills, which seems to be down but not as much) have really plummeted like rocks. For some reason, Kensington/Normal Heights (92116) single-family houses seem to have declined a bit, with really long market times, but for the most part, I think the big drops in SFR prices have only just begun.
Given what you are describing and what I am seeing myself, and given that the monthly median price statistics we get from DataQuick and NAR lag by several months, where do you see the year-to-year median by the end of this year? From what I can tell, this market is slowing dramatically NOW both in terms of sales numbers and price. We didn’t have the huge sales spike in the summer that usually happens, and now we’re headed into the fall with huge and growing inventory levels. I wouldn’t be surprised to see year-over-year median price declines well above 5% overall, and in some areas around 10%, by early 2007, with the pace picking up fast from there. Do you agree?August 27, 2006 at 6:46 PM #33578SD RealtorParticipant
Sdjd I do agree with what you are saying. Will post later tonite… number 1 toddler is fed and number 2 infant is just waking up… Mom is giving me the look so I have to shut off the laptop… darn….
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