Market Meltdown

[sdrealtor]

You wont ever buy a home in SD unless you buy one in the ‘hood!

3BR/2BA homes in nice areas were that much in 1997 coming off the last bottom when things were undervalued. Dream on….

[ibjames]

You think a 2Bed 1 bath home in PB will ever be that price?

[dontfollowtheherd]

SDrealtor,

We can agree to disagree. If as your name implies you are in the biz then I’d guess you also have a vested interest in hoping I’m not correct. Sorry if I’m being blunt or assuming anything here. More importantly I think we’ll be seeing a few dead cat bounces as we trend down further. If these people who are buying lately haven’t had buyer’s remorse after today they never will. They are stuck in these homes for a decade. I’m sticking by what I said before; “who would buy a home right now that they can get 25-50% cheaper in a year or two? Imagine how much that home has to go back up for them to gain a decent amount of equity. If the market drops 25% you’re talking about a 75% rise in prices for them to build up 50% in equity. People couldn’t get into these homes without some shenanigans so you think they will later?

I don’t see that valuation happening at today’s prices. It will happen again in 15-20 years when all the 15-18 year olds out there have forgotten about this correction. Who do you think (aside from flippers and speculators) has been the largest segment of buyers with low FICO scores? It’s not the 50-60 yr. old with 100-150k in the bank and 50-75 k left on his/her mortgage or paid off for that matter. There is plenty more carnage to come – especially after Black Monday.

There will be A LOT of people out of work soon if they aren’t already. Think I’m exagerrating? Check out this link and see where New Century and Fremont have abruptly closed without warning in many locations and both could be closed for good by Friday:

http://forum.brokeroutpost.com/loans/forum/1/2.htm

Or this one from the same board titled “Who Wants It?”:

http://forum.brokeroutpost.com/loans/forum/2/100024.htm

Loan scenario

Rate and term Refi
Looking for a fixed 5,7,10,30 (would like 30) IO or PI
Stated
SFR-San Diego, Ca OO
Loan amount- $741,640
CLTV-100% (any combo 80/20, 90/10, no MI if possible)
FICO-mid 680
Dti-40%
5 months reserves
Good trades
No BK, FC, lates

SD, this just the second leg down. It is going to cut across a wide employment swath in all sectors who are affiliated with housing/real estate. The “R” word has been floated by Greenspan and Bernanke has no choice for now but to paint a rosier picture in the position he’s in. Dubya would go ballistic if he heard him agree with big Al. The PSYCHOLOGICAL shift is on my friend whether we like it or not.

[Anonymous]

Someone help me out here:

Looking at the rate graph above, I see that in 2004 buyers could get the 1 yr ARM at around 3.75%. Is it a fact that right now you can’t get anything (all types of loans) below around 5.5-6%?

[sdrealtor]

dfth,
Yes I am in the business but that doesnt give me a vested interest in hoping you are not correct. If prices were cheaper my job would be easier. I would love for prices to be lower and for my clients (whom I genereally consider friends) to be able to easily afford the homes they want/deserve. It would also create huge buying opportunities for me personally. Unlike many in the biz my livelihood does not depend upon real estate. I also pride myself in staying ahead of the herd, something you can relate to by your handle.

In genereal, I see housing bulls setting themselves up for disaster, while housing bears are paralyzed by fear and missing out on opportunites to create wealth in other ways. All the while, I continue dramatically improving my financial well being and future every month. It’s a shame my favorite poster (Docteur) was chased away several months ago. He inspired me to pursue opportunities I used to be too afraid to that are now bearing bountiful fruit for me. I guess my point is that I don’t really care what happens to RE as I will be in great shape either way. This allows me to watch and analyze whats happening with an objectivity and a front row seat few enjoy.

With that said, I just dont see the decline you are hoping for. In 1997, housing was definitely undervalued and a decent 3BR/2BA in good neghborhood was around $250,000. That was coming off the absolute bottom of prices in the prior cycle. Throw in roughly 4% inflation for the last 10 years and that raises prices up 50 to 60% from there. I just dont see prices for a decent 3/2 going below $350,000 to $400,000. In 1997, I used to eat at a local Italian joint and my favorite meal was $7.95. I still go there at least once a month and it’s now $13.95. Would I love to pay $7.95 again? Absolutely, but it aint gonna happen!

[Anonymous]

sdrealtor:

You have mentioned your side businesses many times, yet never revealed exactly what they are. Do you mind if I ask you what these sucessful businesses are? Perhaps you have already and I just missed it…

[PerryChase]

sdrealtor, having watched the market out of curiosity for a long time, and more seriously in the last 2 years since I decided to move up, I tend to agree with you.

Houses were selling for $250-$300k in North County beginning in 1988. I don’t see prices dropping to this level. All else remaining the same, those prices would be a real bargains.

But you never know, if mortgages rates jump to 10% then all hell will break loose. Psychologically, the market will be crushed.

I’m at a loss to understand how interest rates will move. Many say that the Fed will lower rates if there’s a recession. But the goal of the Fed is to keep inflation in check.

The dollar is loosing value, the subprime lending business is imploding. Foreigners are taking a bath on their American holdings. Would they not require a higher risk premium to lend more money to us? Would that not lead to higher mortgage rates?

[greekfire]

A former colleague of mine scooped up a foreclosure in the Rancho del Oro area of Oceanside for $189k in 1997. Although this is in Oceanside, it is a family-oriented neighborhood and as nice as any you’d find in other cities.

To say that home values won’t come back down to this level may be correct, but it is not entirely impossible. We’ve been so desensitized by overly high housing prices that we forgot what a regular deal looks like. It’s sort of like gas prices.

This same home, after some improvements, has a Zestimate of $514k…roughly 2.7 times what it was worth 10 years ago. I know that Zestimates aren’t accurate, but it can sometimes be used as a ballpark figure. The point is that things have gotten out of whack and are bound to come back to trend levels.

[PerryChase]

greekfire, your posting made me curious about Rancho Del Oro, so I looked.
This example below is an illustration what what you were saying about Rancho Del Oro. SDlookup does not show the original sale from the developer in 1990 but it think that it was more. Looks like the original owner sold in 1995 at a loss after holding for 5 years. There’re going to be quite a few such cases in the future.

http://www.ziprealty.com/buy_a_home/logged_in/search/home_detail.jsp?listing_num=071017444&page=1&property_type=SFR&mls=mls_sandiego&cKey=bfv5615f&source=SANDICOR
http://sdlookup.com/PropertyDetails/tabid/53/pid/FC387DC8/Default.aspx

783 MOSAIC, Oceanside, CA 92057**
List Price: $545,000 – $545,000
Sale History
08/24/1995 $158,000
1990 ???

Bedrooms: 4
Full Baths: 2
Partial Baths: 1
Square Feet: 1,957
Lot Size: N/A
Year Built: 1990
Listing Date: 03/02/07
On Market: 4 days
Type: SFR
Status: ACTIVE
MLS #: 071017444

[sdrealtor]

Juice,
I really value my privacy and it would be impossible to disclose what they are without giving up that. I mention these kinds of things about my situation for a couple reasons. The first is that people will understand that I am as objective as an insider could be given that RE does not feed my family. The second is hopefully to inspire people to chase their dreams. People succeed and prosper in bad times as well as good times. It was very frustrating for me to listen to others present a doomsday situation several months ago. They were and continue to be guided by fear in their lives. Rest assured, I am as conservative and cautious as a person could be but I am not afraid of failure anymore. I have seen many successful people prosper with this attitude.

In general, when I look at businesses I look for high margins and very simple product lines. Here’s an example. There was a pasta Shop in Encinitas that the owner sold a few months ago called Russo’s Pasta. Some of you may have heard of it. The owner was getting ready to retire and was lloking to sell. He made fresh pasta and sold a ton of it out of a small storefront off El Camino Real. Can you imagine the gross margins on a product that consists of flour and water? It had a good reputation, a loyal clientelle and had been there many years. It sold for about $210,000. It had growth opportunity by adding pizza and opening on Sundays. The new owner has done both. It’s not glam orous but as long as he sticks to the basics, this business will feed his family as long as he’s willing to work at it.

Without dislosing too much, my latest business is in a completely different field but one in which I have plenty of knowledge about and great passion for. It is completely recession proof, rapidly growing and has great margins. I had no idea how great it would be until it opened. If I had known, I would have done it years ago.

[sdcellar]

Regarding 3BR/2BA homes in the $250-$300K range, you could absolutely buy something like that in 2001 and it wasn’t in the ‘hood. In 1997, a property like that probably could have been had for $200K tops.

The issue is clearly what’s being defined as the the ‘hood and I think some might be extending it to anything outside of North County coastal.

[SHILOH]

My first question regarding current home purchases is to know the quality of the loan–if it’s more subprime, it’s more of the same garbage.
Where will the current subprime borrowers find refinancing as lending standards tighten and the $$ dries up?

Considering this NYT article:
http://www.nytimes.com/2007/03/05/business/05lender.html?ex=1330750800&en=8b1c3efaa3457cbc&ei=5088&partner=rssnyt&emc=rss

it is a disgusting and blatant testimony that confirms again that SoCAL was a playground of bogus lending. Maybe newly-made “New Century” millionaires are coming in to buy up all the property —- otherwise, who is going to afford the current prices – especially while standards tighten. Common sense tells you that a $50K median income cannot afford a home 10X that. The subprime lending market will dry up. New Century is one example –facing investigation and not expecting to make a profit for the next 6 mths…how many banks are willing to continue this risk?

[dontfollowtheherd]

SDR,

Like you I have been fortunate enough to have excellent mentors. One of them came up with a business model that will reach 10 billion in sales in a couple of years. He predicted a LONG, LONG time ago that the next really MAJOR recession in the U.S. would be in real estate – for a number of reasons I won’t go into at this point.

I don’t depend on r.e. either but have benefitted from it over the years. I have never been one to follow others over a cliff and I’m not going to start now. I bought my first house when I was 22. I’ve bought a few more since then. I’m very comfortable in analyzing the market objectively. I don’t get married to my positions and that has served me well. Until every speck of land is built on there will never be a housing shortage in the U.S. – you can take that to the bank. Diversification is my business and investment credo.

Just remember at one point up to last year one in every four homes was being bought by a speculator or professional of some sort. They controlled 25 % of the market and to a large degree the prices people were paying in having to compete against them in the market. That is a huge part of the equation removed from today’s buyer. They know there is no one ready to trump them within hours or minutes and can make rational decisions rather than rash ones thinking they will never have a chance to buy a home again. Hogwash.

The cost of gas,insurance,inflation etc. will continue to drive up the cost of your Italian meal over time. At some point it will be $19.95 and by then it may not be the value you thought it was. At least there is a rational explanation for the price increases (ingredients, labor etc.)and not speculation, flipping, interest derivatives, subprime loans or any other manipulative practices. Pretty soon you begin to look at other options. When sales slow or stop at your restaurant their prices may reverse or the business may eventually close. Until then bon appetit.

[mixxalot]

Gas spikes above 3 bucks will definitely hurt all those folks commuting from Temecula and North County to San Diego! That Italian meal will cost 35 bucks.

Best to cook own meals and live close to work.

[sdrealtor]

DHTH,
Thanks for the insight. I’ll watch you posts with a new sense of interest going forward. I know full well that the speculators have left the building and that is a big part of the equation. But so have alot of the opportunistic sellers who took the money and ran which is also a big part of the equation.

I beleive we are going to be left with a smaller market as measured by number of sales) and that the market will increasingly be dominated by distress sales. What I dont know is how many there will be and how motivated the real stakeholders (the bagholders of the toxic loans) will be. I am under no illusions that prices wont fall to some degree. Watching this thing unfold from the street level on a daily basis I just am nowhere near as pessimistic as most others. Either way, I really have very little at stake in this as I could write a check for the balance on my mortgage today, have a few very good income sources and plenty of assets beyond that to carry me through my lifetime. My house is where my family lives, nothing more and I just dont envision any scenarios where I would ever sell it. Hopefully, one of my children will enjoy raising their family in it as much as I am.

[Author]

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