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powayseller.
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July 15, 2006 at 4:00 AM #6878July 15, 2006 at 8:05 AM #28402
Bugs
ParticipantIn 1996, before this upswing started, if I had allowed my imagination to run totally wild I would never have guessed that pricing would have gone as high as it has or the extent to which it has influenced our society. Based on the information available at the time it was literally beyond my imagination.
If a person allows their imagination to run just a little wild now about how low it can go and what the consequences would be as a result of that decline, they could come up with some truly scary scenarios.
If I am as wrong about the results of this decline as I was about the results of the increase, I’d almost be compelled to ask the question if it’s possible to be too bearish on RE at this time.
July 15, 2006 at 1:07 PM #28447lindismith
ParticipantWell, 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…
July 15, 2006 at 1:36 PM #28449Beach Rat
ParticipantEven 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…
This will be a good source of income for a short period of time. There are two problems going forward… Rising interest rates may make it difficult to qualify people on a fixed rate loan, but the 40 and 50 year mortgages may help with that. The bigger problem is that if prices start dropping to the point were people owe more on the house than it is currently worth. Refinancing gets extremely difficult.
Just curious PS, I’m not trying to attack you, what were you doing up at 3am posting on the forum? Are you that eagerly awaiting the crash? Maybe the time stamp is off?
July 15, 2006 at 2:46 PM #28450North County Jim
ParticipantMaybe the time stamp is off?
The time stamp is in standard time.
July 15, 2006 at 7:07 PM #28460powayseller
ParticipantInsomnia…, sometimes I get up at 4am. (shows up as 3am on the time stamp), but usually at 5am.
July 16, 2006 at 9:46 AM #28485
barnaby33Participant4 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
July 18, 2006 at 4:10 PM #28754DaCounselor
Participant“All hell is going to break loose”….wow. I’m almost as stunned by this brand of “the sky is falling” prognostication as I was by the countless folks who believed the housing market would continue its unprecedented meteoric rise (the same folks who believed they were investing geniuses in the late 90’s because every tech stock they added to their portfolios was up 300%) Fact is, markets move in cycles – always have, always will. They are tied to personal, local, regional, national and international events in varying degrees. Many, many real estate markets have been driven up over the past 5-8 years by speculation, exotic lending, fear-mongering peer pressures, pack mentalities and slick marketing. The inevitable slowdown and outright corrections have started and it is happening in far more markets than just San Diego. So where do we stand now in San Diego? Well, anyone who jumps into this market intending to make a quick buck is probably going to be disappointed. But is the sky falling? Unlikely. San Diego real estate has tremendous appeal. Is anyone betting against San Diego real estate over the long haul?
July 18, 2006 at 5:59 PM #28765ParticipantDepends 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.
July 18, 2006 at 6:17 PM #28773Diego Mamani
ParticipantI agree with DaCounselor. My guess is that prices will not drop too much in nominal terms. However a small nominal drop, followed by 5 or 6 years, or more, of wage and general price increases, will make housing relatively affordable in real terms (i.e., inflation-adjusted house prices will drop considerably).
We can’t compare 2006-2007 with the 1992-93 price drop because we are unlikely to see the job losses that followed the closing of many aerospace employers at the end of the cold war.
Also, technological improvements have resulted in huge gains in labor productivity, which translates into higher incomes, and cheaper consumer goods. Global trade is an even stronger factor in making consumer goods less expensive. All this translates in more disposable income left over for housing. Compare how much typical household items cost at WalMart today(relative to salaries), versus the same ratio 20 years ago. My point is that salaries have a lot more purchasing power than in the past, and it’s natural that some of the slack will go into housing.
Is the housing bubble over? Yes. Will house prices drop? Most likely, but no one can’t tell by how much. Is the sky falling? No way.
July 18, 2006 at 9:33 PM #28788partypup
ParticipantRespectfully, 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.
July 18, 2006 at 9:58 PM #28790ParticipantDiego Mamani, how will we return to historical ratio of per capita income/median house price of 7, unless prices drop about 50% or wages rise? With global low wages, I dont’ see how wages can rise. Wages have been flat for about 7 years now. There has been lots of data on this blog about that fact.
The SD economy is completely dependent on us buying and selling homes to each other. I wrote an analysis of the SD job market and economy, based on my own research and my attendance at the SD May 2006 UCLA Anderson Forecast. I posted on this blog. See here . We are going to see *massive* job losses in San Diego, and unemployment will skyrocket to over 8%, reduced to 6.3% only because of the huge exodus of people leaving.
Today the salesman at the music store told me that 10 of his friends left San Diego in the past year, because of our high cost of living. He mentioned Lake Elsinore as a destination. People are leaving San Diego at the rate of 44,000 annually (Census Bureau data). There is no disposable income left for housing; people are using credit cards to pay utilities and food. Where are you getting your data?
Productivity has grown about 7x faster than wages. So what? We are more productive, but inflation is running at 8%. Forget the government cooked numbers, I am talking about true inflation. Wages are flat. Read the previous threads; it is all here.
Many houses are selling for 2004 prices, or are listed at 2004 prices. It is safe to say that anyone who bought their house in 2004 or later, has lost money on their San Diego home.
July 18, 2006 at 10:24 PM #28797kewp
ParticipantThree 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.
July 18, 2006 at 10:45 PM #28800theplayers
ParticipantWell said, partypup. I believe that this correction will be much worse than the early 90’s, and I remember that correction quite well.
We did lose jobs due to the aerospace industry taking a dive and bases closing in the early 90’s, and that was an important factor in the housing market correction. But just because we don’t have that particular catalyst this time doesn’t mean we won’t have a significant correction.
If anything, I believe that the ARMS and low lending standards are the main catalyst this time, both in extending the bubble on the way up, and ultimately bringing it down. I think that this phenomena will have much more impact than the base closures last time.
And we will have many job losses, as the housing market dies, and many of the new jobs created in the last 6 years due to the housing bubble evaporate.
I think we’ll see lots of people leaving SD and California over the next 5 years, as we saw in the early and mid 90’s. I shudder to think what all this will do to a city that is struggling to avoid bankruptcy (SD), and a state with a huge budget problem.
July 19, 2006 at 11:31 AM #28854Participant“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.
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