can anything save this sinking ship?

[hipmatt]

Not that I want to see it saved, because, I hope it crashes to all hell(stupid emotional buyers willing to do ANYTHING to “own a home”, and no, I don’t feel sorry for them) and it needs to come back to reality. But, can lowering rates again, or more stupid loan products like the 40 year loan, or some other dumb idea save the crashing RE market, or is it doomed no matter what due to too much supply and not enough demand? I just want your thoughts, thanks, Matt

[calidesigner]

The basic psychology has changed somewhat, and is continuing to change. It is getting more and more negative, and I don’t see any gushing positiviy around (save for the NAR, who can manage to see a positive in a market that couldn’t stop increasing to the stratosphere, no wait, okay, would increase a bit more slowly, no wait, would land “softly” with stable prices, no wait, would dip just slightly cuz that’s a good thing for buyers, no wait..on and on and on, the rubbish factory churns steadily!!!)

What else explains the lack of buyers, and the still large inventory? The continuing decrease in Mean price/sq. foot as Rich pointed out in the charts? Most of all, when all is said and done, despite the mix of wishful thinking and facts that we use to guide us, I believe firmly that recent history is rock solid, and for the most part, indisputable. History tells us that this ship is sinking. My folks bought property in Southern California in 1991, not doing there homework, and they didn’t recover their original purchase price till 1997 or 1998. And that was typical, not an isolated case! I can tell you for a fact that a decrease in interest rates doesnt make a $500,000 piece of rubbish property and more endearing or attractive to me (I’m a renter), I want that damn price to come down, period, to something fair based on fundamentals, such as comparing what it would cost to rent that property vs. a 30-year mortgage with 10-20% down…

Also, I did a quick comparison on Excel, looking at the monthly payment on a $500,000 mortgage with 0% down (typ. these days), 7% interest with 2% prop taxes, between a 30-year and 40-year loan. the 30-year payment is $4,159/month and the 40-year payment is $3,940/month, a difference of $219. That is something, yes, but it’s not going to make a tremendous difference, it won’t bail out people who already have negative equity in there homes! Who will refinance them anyways? I believe in history and facts, so far, both lead me and others to an increasingly glaring conclusion: this ship is going to sink, who knows how deep, and how long it will take, but sink it will.

calidesigner

[LookoutBelow]

I believe that it may be "delayed" for a while with various tricks, smoke and mirrors, but no, I dont think this train can be stopped from the derailing its headed for….its gonna get ugly……..

[sdrealtor]

A couple things could help to save the ship including lowered Interest rates, continuing strength in the economy and lender bailouts of over leveraged homeowners but the bottom line is there is nothing more important than supply and demand. Demand is holding up surprisingly well and so far the inventory is suprisingly low as well this year. Inventory in my area is actually lower than last year which stuns me. I’m not betting one way or the other but if you made me guess I would think we will end up a stagnant market where a very high percentage of sales are distressed. In that case good deals will be easier to locate then good properties.

[no_such_reality]

Only one thing can save the ship, the return of double digit appreciation.

Cheap money and the current price drop may get some buyers off the fence, but it won’t do any good if the buyers are buying at 20% below fall 2005 numbers.

[sdrealtor]

If that is the only thing that can save the ship (and I don’t believe it is), start inflating the liferafts!

[no_such_reality]

Okay, when it takes on enough water and is just about ready swamp… (another 20-30%)

It’ll land on top of the reef of fundamentals and sit there until it gets patched back up.

[sdrealtor]

Check out what has been happening with inventory on The Short Sale Monitor thread. So far we have seen a real lack of new inventory this year. last year we were already piling on by January. Still way too early to say anyhting though.

[PerryChase]

calidesigner, I remember the 1990s very well. How soon people forget. 1999 was like yesterday to me.

I feel this time around will be twice to three times as bad.

I’m betting that prices will drop to 2001-2002 prices (possibly 2000 prices) then we’ll have a decade of stagnation. I don’t necessarily advise that for everyone, but I’m planning to time the absolute bottom. I’m not planning to buy anything anytime soon. That’s easier for me to say because I already own a house and I’m fairly happy there. But I’d be happier in a better house/location.

I’m taking this opportunity to get to know the market.

[(former)FormerSanDiegan]

Perry –
Can you elaborate on expectation of 2001-2002 prices, followed by a decade of stagnation ? What scenario are you assuming for inflation.

If I read you correctly this means that you expect to see the same prices in about 2018 that we had in 2001 (assuming 2 years from now to initially hit bottom). Do you really expect this ? I find this not only implausible, but bordering on ridiculous.

According to Rich’s charts, the median home price to income ratio was BELOW the long-term average in 2001. If they are at that level 17 years later they would be off the charts, assuming any inflation at all.

[PerryChase]

FormerSanDiegan, I should proof what I type. I meant to say a decade after the trough before prices get back to the peak.
I believe that the last time around, the peak in SD was 1989. Prices droped 30% in some cases and rebounded and stagnated and didn’t get back to 1989 levels until 1997 (8 years).

As far as inflation, I think that we’ll be facing a conumdrum where we need higher interest rates to keep foreigners invested in America, but consumer prices and wages may not rise because of excess capacity in Asia. Wage stagnation will act to hold housing prices down.

[Diego Mamani]

Perry: I can’t believe you’re long on real estate. Your RE pricing projections make sense to me, especially in real terms (inflation-adjusted dollars, that is). So, when you buy your new house, at a future price that will be lower than today’s, your existing house also will have depreciated. Of course, if you’re saving very aggressively now, your high down payment/equity in your next house will more than offset what you lose in your current house (which has been depreciating since 2005).

[jrock]

Lower interest rates will not necessarily have a moderating effect on the decline in housing values. During the deflation of the last SoCal housing bubble, interest rates declined significantly. However, there apparently was no significant mitigating effect on the collapse of housing values. Similarly, Fed action to bail out the collapsing economy during the great depression did little to mitigate the damage done by rampant speculation and loose credit. I think lower interest rates may result in a secondary equity bubble somewhere else in the economy, but the psychology of the real estate market has changed and I don’t think anything the Fed does can save it. It will run its course.

[PerryChase]

Diego, yes, I realize that my house is depreciating. But if I sell and pay rent on a similar house, then my monthly housing costs would subtantially increase.

I’m not home that often because I spend time at a my girlfriend’s who has a really nice place. If my house were an investment, I would have cashed-out. But it’s home and I have elderly relatives who love to visit SD so they use my house as their vacation home in California. I’d hate to change that on them. Plus the house is just the way I like it. I also have a fairly low property tax basis that I’ll like to keep.

The only (big) problem is that I now find suburbia very oppressive (just my opinion) so aside from living there, I have little connection to the people around me. Who knows, maybe I’ll end up regretting not selling in 2005.

[no_such_reality]

PC, I doubt it. If you have a pre-2001 purchase, transaction and opportunity costs are high. As you point out, many in that boat are cheaper than renting.

The other side is to cash out and invest, deal with renting, and hope the deflation that we’re predicting infects the housing market doesn’t infect other investments where you could easily watch your equity vaporize anyway. Or worse, you lock it in safe CDs because of deflationary concerns and housing slow lands with the markets performing to historical averages.

There’s a whole bunch of ways to be wrong. In the end, being 15 years into a 30 year fixed loan on a house that was originally purchased for what the future bottom is likely to be close to, probaby isn’t going to be a bad place to be.

[Author]

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