Nobody knows anything

[no_such_reality]

LA is in denial. So is the OC.

Median incomes and interest rates will dictate median sales price and typical property values. Otherwise they simply can’t service the debt.

If two median income earners are making $40K each, combined that’s $80K, they’re affordable house at 6.5% interest is only really $300,000 loan.

[CAwireman]

LA FLASHBACKS,

Why is LA lagging?

LA is larger and slower to adjust. Like turning an oceanliner?

In the 90’s I recall that it went into downturn earlier, went in deeper than most cities, and the downturn lasted longer. ( I have no numbers to back this up, just speaking from memory )

The latest LA symptoms seem different than the ones prior.

Does anyone else have any LA Flashbacks to share?

[murray]

90s r/e downturn was almost entirely due to unemployment resulting from defense industry downsizing from Reagan years. LA r/e indeed was hammered worse b/c of defense industry concentration there. If unemployment stays ok then housing market will experience only moderate declines from here. It’s all about employment.
At this point in the game I think it’s more that SD overshot on the upside than that LA is “lagging”.

Question: Why was SD the leader in the recent r/e runup?
Answers:
– larger businesses moved in and others (ie Qualcomm) finally reached a critical mass in SD (along with its more affluent workforce to bid up homes)
– compared to other major SoCal locales SD prices were lower to begin with so double digit increases were easier to achieve earlier on

[CAwireman]

It hard to get someone to be truthful about something when their job depends upon them not understanding it.

[Bugs]

Just thinking out loud….

I realize this puts me on the wrong side of some of the conventional wisdom, but I disagree that the downturn of the ’90s was due primarily to job losses in the defense industries. Sure, that might have been the trigger, but there wouldn’t have been the big losses if not for the gains that preceded it.

Think about it – if the pricing hadn’t spiked 25% above the long term trend in late 1989 those job losses wouldn’t have resulted in the foreclosure rates we saw because there would have been no fluff (or at least, less fluff) to lose. The loss to -15% was, in part, an overcorrection for a distorted market. Even if you assume that prices would have ended up at the same nominal rate the -15% loss below the long term trend wouldn’t have been enough to hurt that many people.

If a person subscribes to the dominance of the trend (I do) then it follows that they also subscribe to the concept that the farther to an extreme a swing goes, the more gravity is brought to bear to correct to the trend.

What I guess I’m meandering to is that the long term trend itself demonstrates that if there is a distortion it follows that there will eventually be a correction. Exactly what it takes to trigger the correction is irrelevant – literally if it isn’t one thing it will be another. The more irrational the reasoning is for the increase the less it takes to upset the trend.

Look at the Dot-Com blowout. The week that it started was remarkable only for the fact that nothing happened. There was no outside event that triggered that correction. The markets were distorted and when it surpassed an arbitrary reference point that had already been identified by a couple of the big players they started selling.

I don’t think that you can reasonably cite the bust of the 90s unless you also address the reason for the spike in the late ’80s. Same thing as now only to a lesser degree. People were buying out of fear that their window of opportunity was limited and we were going to run out of land. So many people were making so much money some of them were quitting their jobs to work in real estate. This spike is more extreme in magnitude in part because of the easy credit and in part because the stock bubble provided a lot of people with a glimpse of the good life without gainful employment.

Here’s a little reality check: the losses that occurred here in this region were preceded by bank failures on a massive scale in other areas of the nation, brought about by real estate market declines in virtually every other metro area. San Diego was the last stop on that nationwide trend. Other areas of the nation were in decline long before the federal government even started slowing down on their defense spending. This region ultimately followed the rest of the nation not specifically because of the jobs but because the markets are all connected on the macro level.

Here’s a question: why are prices already sliding? What event has turned this trend from positive to negative? Answer: no one thing in particular, just a couple of little things. That’s how little it took to reverse this trend.

[VCJIM]

I agree with you Bugs; it’s been easy to lay the blame on loss of employment but there were many, many people who got in trouble with making payments that had exactly the same job as when they bought the hous. The trouble then, as it is now, is many paid too much for too little house, that had no appreciation and could not be rented out to cover costs. They did not want to wait, or could not afford to wait, the 10 years for the asset to start appreciating again. Negative cash flow is very hard on any investor. Me especially.

As Bugs wrote, it may or may not be a particular event that causes the change, merely critical mass being reached. We’ve reached far beyond critical mass (way further than I would EVER have guessed).

[murray]

No question it was unemployment that drove r/e down in the 90’s. California’s economic downturn was second only to the great depression. While driving to work during the early to mid 90s I recall loaded-up uhauls driving north out of SD because people were leaving due to no jobs. Unemployment was ~ 7.5%. Freeway traffic congestion did not increase during this time. The construction trades moved to Las Vegas.

I noticed a very subtle shift in r/e demand in the summer of 2004.
What happened? Demand equation changed – investors / flippers backed away from the market at that time. Since then the herd late to the market, trade ups and people that had to buy due to job transfers have bought into the market. You are now seeing rising inventory BECAUSE DEMAND HAS BEEN SATISFIED in this cycle.

Up to now sellers have not blinked hoping to obtain top $$ for their house. It’s been estimated that 60% of sellers are just fishing and don’t need to sell though. (SD Realtor pls comment)

What happens next? Will the 60% sellers allow listings to expire thus lowering the inventory? Will the tighter inventory coax sidelined buyers to purchase?

[powayseller]

murray, you don’t need job losses to cause foreclosures. All you need is the borrower’s inability to make the mortgage payment. Economists are so stupid, when they say you need job losses to create foreclosures: ARMs will do the same thing. With $2 trillion of ARMs adjusting in the next 18 months, you’ll see millions of homeowners with mortgage payments increasing 30% – 70%, but mostly 40%. They won’t be able to make the payments, so they will default.

So what is the difference between not being able to make your payment because your mortgage permanently increased 40%, or you lost your job? The outcome is the same: no mortgage payment is made, and foreclosures rise.

The inability of economists to see this, is pathetic. I, as a housewife, have seen this as clear as day. But Chris Thornberg of the UCLA Anderson Forecast, have not figured this out. I sent him an e-mail, explaining all this. I hope he can improve on his future forecast. I am tired of having to educate economists and reporters.

murray, I do not blame you for your faulty conclusion on the foreclosure/job loss relationship. It is the economists who are to blame. Go through the forums and read my analysis of the UCLA Anderson Forecast. I cover this topic of recession/foreclosure/job loss in Part 1.

[JWM in SD]

If you believe that you are dumber than you sound. Comps are created at the fringes…you don’t need 60% of the sellers to be serious.. you only small % to affect the comps and reduce prices.

[JWM in SD]

Employment won’t stay okay. Most of the job growth in the last several years has been related to the housing boom. That boom is slowing rapidly and those jobs will start to dry up. A lot of the major mortgage broker firms in the OC have been laying people off in the past several months (Ameriquest being the most well known). Even the indirect jobs in consumer and retail sectors (nice restaurants, clothing boutiques) will start to close when the Heloc money isn’t flowing anymore.

[powayseller]

ARMs are only .01% of the SD market, but they are 50% of the resale market, and the resale market sets the price for all homes. So the 30,000 homes sold in San Diego this year set the price for the other 1 million homes that are not for sale.

It doesn’t matter if the other 1 million have their homes paid off.

See powayseller’s explanation at this post, 3/4 of the way down.

[MaxedOutMama]

Powayseller wrote:
“…you don’t need job losses to cause foreclosures. All you need is the borrower’s inability to make the mortgage payment.”

That’s correct. The reason that this went up further than anyone expected was because of the explosion of the exotics, and the reason why it’s going to crash out is because of the exotics. The last time you saw financing deals like this was in the 20’s, and we all know what happened next. When large numbers of people buy on margin in an inflating market, it must unwind somehow. The markets in which over 50% of the buyers over the last few years either did not buy with traditional mortgages or bought as investments are similar to the Florida land rush of the 20’s. The bad money has chased out the good.

The bottom line is that buying real estate with less than 10% down and a non-amortizing loan is pure speculation. This is a grossly abnormal market, and no comparisons to post-30’s RE markets are valid for this market.

I work in a banking service firm that provides software and compliance services. Sorry to say, but the national RE market is already shifting. Everyone’s looking to move to guaranteed loans now. BTW, most banks did not participate in the primary mortgage mess, although many did in the HELOC market and will now take major losses from that, causing them to tighten underwriting standards.

The financing for this disaster came primarily in from non-regulated financial companies. In the last five years, the proportion of home loans packaged and sold in the traditional way dropped massively. The vectors controlling this market have not been seen in the US for over 70 years.

[CardiffBaseball]

The bottom line is that buying real estate with less than 10% down and a non-amortizing loan is pure speculation.

I have bought two homes with VA nothing down loans.  In both cases I technically came out ok, though in the second one I just sold in Nov. 2005 I had to bring 9K to the table to help pay for the new Septic I was ordered to install.  So in that case 10% down would have helped. 

[SD Realtor]

Sorry for the late response…

Murray your comment –

“Up to now sellers have not blinked hoping to obtain top $$ for their house. It’s been estimated that 60% of sellers are just fishing and don’t need to sell though. (SD Realtor pls comment)”

I cannot confirm or deny that. I can tell you that those percentages are not true for my personal listings. Here are the profiles for my sellers:

– a couple moving to washington to retire. no rush and they wanted top dollar (against my advice) and are now repriced 50k lower. these guys fit the profile you mentioned Murray.

– a couple who is breaking up and dividing assets.

– a lady who is moving to texas (not listed yet)

– a lady who is moving to orange county (not listed yet)

– a couple who is moving to havasu (listing hits mls tonite)

– a young couple moving to north carolina

– an unfortunate guy who inherited a home and used a high risk loan to buy out his two sisters. his 2 year arm period is up and he cannot afford to make the new payments. he is retired on a fixed income.

– a lady who has already moved to oregon and the house is vacated.

– a guy who bought a new condo on speculation in north county and is flipping it.

– a couple with a home in north county that wants to move to la jolla.

I will say this though… In many of the above cases the price I listed the homes for sale at WAS NOT what I recommended to the client. In most (not all) cases the client asked me to list at what they wanted to get out of the home and I told them I could do that but in my opinion the home would not only not sell, but could get little to no traffic.

[powayseller]

SD Realtor, my neighbor has tried to sell her house for a couple months. She held several Open Houses herself, and I spoke with her once for over an hour during one of these events, and nobody came by. I left her a note last week, explaining that she was priced too high, with the following recommendations from http://www.bubbleinfo.com: if you get no traffic, you are >10% too high, if you get traffic and no offers you are 5-10% high, and if you get offers you are in the right range on pricing. She still has not dropped her price, and she is about 25% too high in my opinion. The other neighbor has dropped twice, by $5K or so each time. That one is an inheritance sale, so they are not in a hurry. I am amazed at how slow sellers are to catch on to the falling market. Now I understand why RE is sticky on the way down; it is stubborn sellers.

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