Nobody knows anything

[murray]

Just about everyone (except housingheads) recognize the r/e market is near (past?) a cycle top.
The future direction of r/e prices will be determined by (in order of significance):
1. unemployment
2. debt service capability
3. consumer psychology

Questions:
1. how low will r/e prices go (using median prices as the metric)?
2. what is the time frame of this down cycle?

Answer:
“Nobody knows anything” (William Goldman -1983)

[powayseller]

The unique factor this time is the exotic lending. About 80% of SD purchases since 2001 are some kind of exotic loans. That is 32,000 sales every year are either 100% financing, option ARM, ARM, I/O, stated income, or some combination. Less than 10% of buyers put 20% down.

Thus, debt service capability will be the prime factor affecting people’s ability to keep their homes.

Plus, you’ve got old time homeowners who got carried away by refinancing all their equity out. I followed some of these on realtytrac.com. You can go through the loan history, and see how the 1980’s home buyer started cashing out equity in the early 2000’s, and has no equity left. If you go on realtytrac.com, look up your own zip code. You have to pay $40/month for this priviledge.

How to quantify this? This is uncharted territory, so we have to make guesses. If 100,000 purchases are due to reset in the next 3 years, that would be 30,000 people every year, which is the current amount of homes sold. That means by next year, every single home on the market will be a forced sale. What will that do to prices? You don’t even need a single job lost to see that prices will go down in a hurry.

Now, add the data from HR Horton slashing forecast, Washington Mutual and others laying off, RE sales are off 30% thus reducing realtor income, and you see that the construction/lending/RE jobs are coming down by 30% this year. Job loss!

By fall, I think psychology will turn. With the anticipated hot spring/summer seling season that turned out to be dog, the motivated sellers have to engage in some serious price cutting to move their properties.

Nobody knows the future, but I bet my own home sale on a big decline. Likewise, I averted the NASDAQ crash, because I saw the bubble. I do not know where to put the money from the sale of my home, and I am not a savvy investor, but I do know how to avoid bubbles. I am an expert in this area. Averting the loss of money is as important as making money, so I got half of it… Now, I need to learn the other half.

[Bugs]

Actually, I think wealth is better defined by what you keep than by what you make.

[powayseller]

I agree with Bugs.

Another point for murray: the median does NOT show that sellers are now paying closing costs, reducing their home prices by 2%.

[sdrealtor]

Price reductions aside, it is probably not accurate to assume that sellers are paying closing costs. While it is occuring in some sales I doubt that it is in anywhere close to the majority.

[Bugs]

I don’t know for sure but my impression is that it happens a lot more often in the higher price ranges and is positively rampant in the new home subdivisions. Depending on what other sales are occurring in the area it could possibly be enough to skew the average a little.

[SDbear]

What would a seller gain by paying closing costs? Won’t he/she be better off taking a price reduction? With a lesser recorded sale price he/she will have less money to claim as capital gain (more as loss) or less money to plough into a new house to save tax.
It wud be understandable if the buyer demands it, so that it could be included in the loan. Or is it the realtors demanding it to keep the comps high?

[sdrealtor]

Agree that it is rampant in the new home tracts but anecdotally I believe it is more prevalent in lower price ranges with 80/20 piggyback 100% financing plus closing costs.

[SD Realtor]

sdrealtor is correct that the closing costs request is generally requested by people that cannot afford to pay them. Nevermind that these people have no business buying a home. So a price reduction does not help them at all, thus they request the credit. The credit is used to pay the closing costs. The buyer then obtains the 80/20 and lives month to month hoping to make the mortgage…. Sad but all to true…

A posting above implied that maybe Realtors discourage discounting the price (as opposed to giving a credit) in order to keep the comps up. In general I disagree with that statement. I always simply recommend to my sellers to discount the price for the reasons listed above, (cap gains, etc)… HOWEVER…I can say I have ran across agents (when I represent the buyers side and they are on the listing side) that REALLY puzzled me. Last week we submitted an offer on a very nice place in Point Loma. As I said I regularly credit back up to a full point of my commission to my buyer. Many times my buyer will ask me to simply ask the seller to reduce the price by that amount and pay me the advertised commission less my credit back. So I generally approach the listing agent and run that by them and they tell the seller, which is what I did in this case. Well this listing agent will tell me that “we don’t like to operate like that” and that I should just credit my client directly.” He is a well known agent in La Jolla. He didn’t even run it by his seller, he just acted on his own.

So yes I have seen some amazing things… that once again saddens me….

Back to the main subject, credit doesn’t have to be for closing costs. Some people want to remodel, there are always some request for repairs… etc… Again the sold prices NEVER take this into account.

[murray]

Maybe the predicted housing crash is primarily a SD / Sacramento phenomena(?)…
– LA resales increased slightly May to June
– SF Bay area sales still generating multiple offers
– Prospective renters in some LA areas bidding up rents on units (fcol!!!!!!!)
– In Burbank houses still selling above last year prices. Past Sunday open house circuit traffic was decent, 1 was just gathering backup offers for an old 1927 $699k house needing tlc that was overbid with multiple offers…
– LA job growth forecast is highest in 6 years

Question: Why are SD / Sacra localities so different?
Answer: overbuilding

[bob007]

Sacramento is surrounded by farmland that can be converted into housing tracts.

[VCJIM]

I think LA is fundamentally different; its quite varied in terms of employment (manufacturing, entertainment, retail, service, distribution, technical, medical, etc.) and I believe it has peaked (or is peaking) later than S.D. or Sacramento. As housing “beliefs” largely travel person-to-person, not necessarily via this website, L.A. has not had quite the word-of-mouth negativity on housing that other areas are experiencing. It is coming, however. All of the above listed employment sectors, and some I didn’t think of, relate to consumer spending and the “wealth effect”.

[murray]

LA Times / Daily News has had more well researched housing articles (as noted on this site) than SDUT so general populance is aware. Also KNX 1070 Money show always has r/e stories.

LA is built out thus holding up housing prices with weakend demand since flippers recently exited market.

[powayseller]

San Diego was the first city in CA to see double digit price gains, and is considered by one national housing analyst the “canary in the coal mine”. I read this in various articles, too, that SD is the city to watch, since it had the run-up in prices first. The thinking is that if other CA cities are overvalued also, they will follow the trail of San Diego. So basically, what is happening here, will happen in LA, SF, OC…, delayed as long as was the run-up. So if your double digit appreciation lagged ours by 1 years, so will your downturn lag by 1 year.

UCLA Anderson Forecast said Orange County will get hit hardest, because of the high employment base of exotic lending, and there will be massive layoffs in that industry.

[VCJIM]

That assumes the general population in LA reads the LA Times / Daily new; moreover it assumes they read the realty section. With the large numbers of people still buying and intending to buy (I run into them all the time), I have to believe the general population in LA is UNAWARE of the housing situation. Certainly they believe prices are high, but there is still the sentiment that now is the time to get in.

[Author]

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