Why are new California homes so expensive?

[Nancy_s soothsayer]

Word problems in Math deal with context. Context such as:
100% OF THE INCREASE in price will be wiped out such that it will go back down to BASE price. If a price increased 170%, in order to go back to base price, you need to get rid of the 170% increase. That was the context meant by Powayseller.

[powayseller]

sdr,

“According to a recent survey by the National Association of Realtors, in fact, 25 percent of all buyers financed 100 percent of the purchase price, and 42 percent of first-time home buyers bought with no money down.” link

This is nationwide data, and I know the figures are much higher in San Diego. After all, the prices are much higher here. Did you know that 25% of all loan in Wyoming are adjustable? Now why would people in Wyoming need to get into such a loan while we have the lowest interest rates in decades?

Keep in mind this is a survey done at purchase, and not updated when those same buyers refinance or take on a HELOC.

[PerryChase]

Yeah, I don’t understand why people took on ARMs in 2003-2005 when interest rates where at their lowest.

It doesn’t make sense unless the ARMs (most specifically interest only ARMs) were the only things they could afford.

If that’s the reason, then any upward adjustment in monthly payments will cause real hardship.

Another point to consider is that buyers took on ARMs because they never planned on holding that debt beyond the initial “sweet” period. That means they were counting on appreciation to sell at a profit of refinance later.

Now that the market is down, all those buyers will be facing trouble.

Last year, I visited a project and the loan officer told me that nearly 100% of the buyers were 0% down ARM borrowers.

[powayseller]

Let’s add to that the 30% of all sales which were to investors. How much did those investors put down? They could buy one or more investment properties with no money down, so why would they put anything down? Those who put money down probably used their home equity from their other home. That’s not money down, if it’s just debt moved from one place to another. Money down is money you earn and save.

I remember reading a voice of san diego article that said 68% of buyers in San Diego in 2004-2006 used ARMs and I/Os. Now if you are that desperate and priced out that you have to resort to funny money loans while interest rates are at 5% (!), then you probably couldn’t scrape up $10K – $50K to put 1-5% down.

Mostly I say this because our savings rate is negative, and people have moved from earning and saving to living paycheck to paycheck, using debt from foreigners to fund the excess that the paycheck cannot cover. Stupid people!

[sdrealtor]

So basically the half of all buyers bought with 100% financing was a figure conveniently pulled from thin air with real hard no data behind it. If you really intend to run a credible economic forecasting website you really need to lose that bad habit.

In God we trust, Everyone else birng data

[powayseller]

You’re the realtor, you should be the one who knows this stuff. By your gut, as you like to say…

As for me, I am going on the information reported by GSEs, NAR, and private companies like First American Real Estate Solutions. None are forthcoming in looking at the data in the form I would like to see. They have a vested interest in downplaying the problem, so they report partial statistics, like the number of first time buyers who put zero down, or the number of all buyers who have less than 15% equity if home prices decline more than x%, etc.

In your defense, not even the mortgage broker interviewed by Kelly Bennett has a clue about how many people put zero down . So I don’t blame you for not knowing either. And frankly, I don’t know either. If I had a source, I would quote it, as I always do. But if you understand the larger picture of our economy and the negative savings rate, the conclusion I draw is obvious.

Last year, 68% of all home loans in San Diego were negative amortization or interest only. 68% of all loans made are not even paying principal! All loans means purchases and refinances. So you’ve got people who bought before 2005, in 1980 or 1990, who refinanced, and out of that group 68% refinanced into a loan where they are paying only interest or only part of the interest.

Fannie Mae reported that 88% of their refinancings are at a higher interest rate, so people are refinancing just to pull money out of their homes. The only time my family refinanced, was to lower the interest rate. If 88% of conventional loans are refinancing at a higher rate, then they need the cash out more than they want the lower interest rate. What conclusion can you draw from such desperate behavior?

Back to our San Diego borrowers from last year. Even if they put 10% down, they could easily be at zero equity. If people were financially capable and responsible, they wouldn’t be buying a home at negative amortization and increasing their principal.

“There are two categories of people who take out these loans said, Craig Bramlett, president of Cal Pacific Mortgage in San Diego. The first is those who could feasibly make higher payments, but choose interest-only for a while to invest their money in other ways. The other category: those who can afford only interest-only or negative-amortization payments, and who rely on the “promise” of home appreciation to help them when the reset comes. Those are the people Bramlett and others worry about, and there aren’t just a few of them.

“From what we hear, there’s a lot of people in that boat,” Bramlett said. “They’ve chosen to do those loans, and they can’t afford them.” – VoiceofSanDiego

[barnaby33]

And yet JG you pray at the temple of monetary self-indulgence. You live in La Jolla. Hello pot, this is kettle.

Josh

[powayseller]

Here’s a great article from SoCalMtgGuy explaining why the I/O borrower won’t be able to refinance. Read his blog for his view on why this housing market is going to utterly collapse and implode when the biggest credit bubble in history pops. If anyone disagrees with me on the extent to which savvy borrowers were able to buy with no money down, (sdr, I mean you), then just read this guy’s blog. Why would anybody put any money down when effective interest rates were negative, when you could lie about your income, and you could buy a house at 10x your salary with exotic loans? Of course people were doing that, and just because Fannie Mae won’t release the numbers to prove it, means nothing!

Back to refinancing. The key point is that they can’t pay the lender costs to refinance: “…So unless this borrower (which can’t afford a higher monthly payment) has several thousand in savings to pay the fees, they will need to use the equity to pay for the refinance.”

Other problems: don’t meet lender’s qualification of “benefit to the borrower”, negative equity, LTV too high, potential new debt lowering income ratio or credit score.

He concludes, “All and all, on paper it looks like there is going to be a massive refi-boom coming again in 2007 for sure. The problem is that many of those borrowers don’t intent to refi, they intend to sell. They knew they couldn’t make those payment for more than the introductory time period…but they wanted to make the money on appreciation, and then cash out. Even if only 15-20% of the people had that idea, that is still a ton of inventory that will be dumped on the market. Nobody knows for sure what will happen…as there is no precedent for the way money has been lent out these past few years.”

[sdrealtor]

PS,
You are barking up the wrong tree. I don’t know what the numbers are nor do I care. I am not putting my self out as a person who is going to deliver economic and statistical clarity that is missing. You really need to think through what you say better if you aim to do this.

For example, you say “Last year, 68% of all home loans in San Diego were negative amortization or interest only. 68% of all loans made are not even paying principal.” I personally know many people with loans that could be neg am but who are paying fully amortized payments. How big a percentage they make up is irrelevant as the point is that 68% of all loans are not paying principal is an untrue statement if only for the the dozen or so that I know.

As for SocalMtgguy, I’ve read his blog for a very long time and enjoy it immensely. He has some good points and is a good writer. But my impression is that he was in the business 2 to 4 years at most which certainly doesnt make him an expert that I would relie on as THE source of reliable info. You have a bad habit of relieing on inexperienced RE professionals as experts.

[powayseller]

sdr, you are at heart a guy who hopes that prices will not fall too much, and I am at heart a gal who believes we are headed for a great housing crash leading to big recession, possibly a recession. So we are wearing different colored glasses, that’s for sure. I believe that in 2008, 3/4 of all realtors will be in the unemployment line, and their homes will be on the foreclosure block. Yours possibly included.

You say you know people with neg-am loans who are paying off their principal. Give me some examples, and explain why they got a neg-am loan, how much interest they pay, and how much principal. Why did they get a neg-am loan if they plan on paying principal. Why pay principal and not all the interest? And here’s the biggie question: Why are those people not refinancing into a fixed rate loan right about now?

SoCalMtgGuy was a witness to this big credit bubble, and to dismiss him is an an “inexperienced professional” just because you don’t like what he says, is unprofessional of you. As a realtor, you’ve got a fiduciary duty to understand this market, whether you like it or not. I like to align myself with intelligent, insightful, honest people, and I don’t care if they’ve worked in their industry for 3 years or 25. I learned more from Bob Casagrand about real estate earlier this year, than I ever learned from you. I’ve also learned a lot from Jim Klinge. Recently, I had the honor of meeting a realtor at the piggington meet-up, who’s been in the business since the 1970’s, who is very smart, a go-getter, intuitive, and very interesting. A savvy investor too. Her stories from the last downturn make me shudder. When I showed her my graph projecting the bottom for this market, she said I was too optimistic. When someone who’s been through 3 market cycles says this is going to be the worst downturn ever, I sit up and listen.

As far as bringing data, that is Rich’s quote, not mine. In context, his intent was to leave out the RE spin, and to focus on the truth about this market. His use of data strips away the BS that real estate only goes up, that our economy is diverse, etc. As we know, the data can also be misleading. Who actually believes the latest OFHEO index which shows prices in SD are down less than 1%, or the median was still rising until a few months ago, or that inflation is under 3%? The data often lags, or is tortured.

As far as my website, I am not holding myself out to be an economist, but you are welcome to come and visit. And if you pay the subscription fee, you can see my data and forecast and question it, and have another outlet for your “doggie doo doo” juvenile jokes.

What’s your new business? Something related to foreclosures, would be a smart move!

[sdrealtor]

PS,
I’m laughing pretty hard right now. I really don’t care what prices do. The truth is I hope they fall even further than you do. I would be as happy as you if not happier if they fall drastically. I probably have double if not triple or more times the assets as you do to take advantage of any decline.

Unemployment line in 2008, I suspect not but I do know 2007 is going to be huge for me. I already have more under contract set to close by next Summer than I did in each of the last 3 years. Don’t send your buddy Bob snooping because he won’t find any of these transactions in the MLS. As far as my house in foreclosure goes, that won’t happen as I could pay off my small mortgage in cash if I wanted.

SCMG, has a lot of great insight and I didn’t dismiss him. I said that I wouldnt relie on him as THE source of all things mortgage. I personally like what he has to say alot but I know there is alot more to complete the picture. I have very good friends in the secondary market, private financing market (Hard Money), wholesale lending who have been in the business 20+ years and who have different insights that add to the situation.

An example of someone with an option ARM is a friend involved in capital equipment sales that closes deals which generate 7 figure commissions. For him, it is a great cash flow device as he might earn nothing for months then BANG! a $1M+ check.

You are right in that Rich’s quote is to leave out the RE spin when analyzing the market. However that goes both ways. You have alot of good skills that you apply to the market but you wear your heart on your sleeve which slants your analysis in only one direction. As far sa the data goes, you klnow my feelings there.

As for the new businesses, both have absolutely nothing to do with RE. One is up and running already out of state as has been very profitably from day one. The other is 45 to 60 days out and should be even better.

I wish you the best of luck in your business and hope you someday find it through getting launched. I won’t be a customer though.

Peace to you

SDR

[Anonymous]

Hey, kettle, I live in California, too, but that doesn’t mean I, in particular, am a flake, like the rest of Californians.

We rent a modest home to be close (1-2 miles) to school. That’s why we live where we live.

I’d love to live elsewhere and pay lower rent, but, in marriage, one must bow to the one who has the bigger vote on these matters, The Wife.

[powayseller]

Ok, let me make sure I get it right this time. I’m kind of dense, you know. You hope that your own home loses more than 50% of its value. You’ve got 2-3x as much money as I do, even though you don’t even know how much my assets are, since I never told you. Your mortgage is almost paid off, and you have enough cash to pay it outright today. When the market crashes, you will buy lots of cheap real estate. But that’s not all. Despite a gloomy sales environment, your sales are actually up. But don’t bother checking because it is not recorded anywhere. All your sales are off the MLS, so nobody can verify them.

Your lender friends have different insights than SoCalMtgGuy, but we’re not told what those insights are. However, your list of friends who have option ARMs but pay off the principal includes a guy who gets $1 mil commission checks. That’s very impressive, and in your mind, proves that if there is one guy like that, there must be hundreds like him, even thousands.

Although the majority of businesses fail in their first year and don’t turn a profit for many months, yours is booming and profitable from day one. Although the economy is slowing, and capital spending is declining and companies are cutting back, your businesses are booming from day one.

It sounds like a charmed life, sdr. Peace to you too.

[sdrealtor]

YES TO ALL! It truly is a wonderful life!

May you all be so blessed.

SDR

[cowboy]

I have noticed that the quality of a home here in SD in poor. Some homes don’t even come with rain gutters. $1M for a home and no rain gutters? Poor construction. The homes in Texas are made much better in my opinion. Built of stone, etc. Other homes in colder areas of the country also built much better than SD homes. Out here the wind blows through the homes. Pathetic.

[Author]

Posts