Will we see a selling panic in housing?

[(former)FormerSanDiegan]

temeculaguy –

I am using Clairemont as a proxy because I actually bought a home in Clairemont in 1996, within a couple months of the absolute bottom. ATtthat time, I figured out that I could buy a house there for about $200 above my rent, after accounting for taxes. Other areas will be different.

Here are some round numbers for example

400K => P&I equal 2600
(interest portion is 2300)
Taxes: 416/mo
INsurance: 75 / month

PITI : ~ 3100 per month

For a couple making 100-120K, they are in the 37% combined state/fed tax bracket, and they pay enough state income tax that they their itemized deductions are about the same as the standard deduction (meaning that any additional deductions are at the marginal rate).

Tax deduction on 2716/mo (interest & taxes) = 1000.

Effective monthly payment : 2100.

I ignored maintenance, but you can throw in a hundred bucks per month or so and it’s still pretty close.

I agree that some areas, such as Temecula, will likely go lower than this value because of the relative desire for some folks to drive less than an hour or two to work. And to pay less than $300 per month for A/C. These other costs IMO would make prices in a place like Temecula likely drop to several hundred dollars below equivalent rent.

So, yeah, I guess I knida agree with you.

Of course, if rates go up to 8% that puts in a lower bottom. Or if rents decline that also lowers the bottom.

[(former)FormerSanDiegan]

temeculaguy –

I am using Clairemont as a proxy because I actually bought a home in Clairemont in 1996, within a couple months of the absolute bottom. ATtthat time, I figured out that I could buy a house there for about $200 above my rent, after accounting for taxes. Other areas will be different.

Here are some round numbers for example

400K => P&I equal 2600
(interest portion is 2300)
Taxes: 416/mo
INsurance: 75 / month

PITI : ~ 3100 per month

For a couple making 100-120K, they are in the 37% combined state/fed tax bracket, and they pay enough state income tax that they their itemized deductions are about the same as the standard deduction (meaning that any additional deductions are at the marginal rate).

Tax deduction on 2716/mo (interest & taxes) = 1000.

Effective monthly payment : 2100.

I ignored maintenance, but you can throw in a hundred bucks per month or so and it’s still pretty close.

I agree that some areas, such as Temecula, will likely go lower than this value because of the relative desire for some folks to drive less than an hour or two to work. And to pay less than $300 per month for A/C. These other costs IMO would make prices in a place like Temecula likely drop to several hundred dollars below equivalent rent.

So, yeah, I guess I knida agree with you.

Of course, if rates go up to 8% that puts in a lower bottom. Or if rents decline that also lowers the bottom.

[one_muggle]

Sadly, I don’t subscribe to the 20 percent by year’s end theory. But, if the market can jump around 10 percent in a month, as it did in some LA foothill towns a few years back, why is a sharp drop impossible?
The run-up was largely due to an abundance of credit and speculation (including fear of being priced-out). The downturn is precipitated by the credit crunch and fear that prices will drop significantly.
I know prices are sticky, but those with a bunch of equity can drop prices hard and fast to pull out, and those without equity might be forced to sell at a loss (short sale or foreclosure).
When you consider $300k homes from 2001 are selling for about $1M, why is a pullback to $800k out of the question?
That is still a very healthy double-digit annual appreciation. (now if I can just convince my neighbors)

-one muggle

[one_muggle]

Sadly, I don’t subscribe to the 20 percent by year’s end theory. But, if the market can jump around 10 percent in a month, as it did in some LA foothill towns a few years back, why is a sharp drop impossible?
The run-up was largely due to an abundance of credit and speculation (including fear of being priced-out). The downturn is precipitated by the credit crunch and fear that prices will drop significantly.
I know prices are sticky, but those with a bunch of equity can drop prices hard and fast to pull out, and those without equity might be forced to sell at a loss (short sale or foreclosure).
When you consider $300k homes from 2001 are selling for about $1M, why is a pullback to $800k out of the question?
That is still a very healthy double-digit annual appreciation. (now if I can just convince my neighbors)

-one muggle

[betting on fall]

one more thought.
Ok, lets say the market prices start of make sense again using the rent v. buy math for owner occupied housing.

Well, who is going to buy? Where are the buyers going to materialize from? Yes, some renters will decide to buy, some piggington’s will take the cash from under their mattresses (err, CD’s) and buy (thats me!)

But will there really be a buyer for every house that gets priced at the “make sense to buy rather than rent” level? It don’t see how given that 1) home ownership is already at record highs 2) foreclosures will flood the market 3) lending standards reduce the pool of buyers and 4) people stop believing in real estate as can’t lose investment.

[betting on fall]

one more thought.
Ok, lets say the market prices start of make sense again using the rent v. buy math for owner occupied housing.

Well, who is going to buy? Where are the buyers going to materialize from? Yes, some renters will decide to buy, some piggington’s will take the cash from under their mattresses (err, CD’s) and buy (thats me!)

But will there really be a buyer for every house that gets priced at the “make sense to buy rather than rent” level? It don’t see how given that 1) home ownership is already at record highs 2) foreclosures will flood the market 3) lending standards reduce the pool of buyers and 4) people stop believing in real estate as can’t lose investment.

[NotCranky]

Submitted by no_such_reality on August 3, 2007 – 11:38am.
“Any meddling to maintain the prices will result in hyperinflation. In also results in punishing anybody that didn’t participate in an irrational market.

The chips need to fall where they fall without an attempt to artificially maintain an unsustainable situation.”

If serious measures are enacted it might be to fix ills as serious or worse than hyper- inflation and stabilize/stimulate or in other words rescue the economy. Punishing smart people won’t have anything to do with it.I don’t underestimate what this bubble can do especially combined with the other weak areas in our national financial picture. I don’t automatically buy that a correction based in rational theories is going to do it.
It could work out real nice as scheduled but it is too early to take that for granted IMO.

If big time “meddling ” comes about it won’t be to save one sinking ship it will be to save the whole fleet or most of it.

I think teasing the Realtors is funny. Even on this blog, we tend to edit and spell worse than the average poster, who tends to be highly literate.Today I have the extra excuse of holding an wiggly 8 month old in my lap and trying to keep my 3&4 year old from putting each other in the hospital.
best wishes

[NotCranky]

Submitted by no_such_reality on August 3, 2007 – 11:38am.
“Any meddling to maintain the prices will result in hyperinflation. In also results in punishing anybody that didn’t participate in an irrational market.

The chips need to fall where they fall without an attempt to artificially maintain an unsustainable situation.”

If serious measures are enacted it might be to fix ills as serious or worse than hyper- inflation and stabilize/stimulate or in other words rescue the economy. Punishing smart people won’t have anything to do with it.I don’t underestimate what this bubble can do especially combined with the other weak areas in our national financial picture. I don’t automatically buy that a correction based in rational theories is going to do it.
It could work out real nice as scheduled but it is too early to take that for granted IMO.

If big time “meddling ” comes about it won’t be to save one sinking ship it will be to save the whole fleet or most of it.

I think teasing the Realtors is funny. Even on this blog, we tend to edit and spell worse than the average poster, who tends to be highly literate.Today I have the extra excuse of holding an wiggly 8 month old in my lap and trying to keep my 3&4 year old from putting each other in the hospital.
best wishes

[Pasadena Broker]

What you’re going to see is a denial in the beginning with the sellers, but here’s the problem…

Homeowners that purchase with no money, little money, borderline credit, and stated wage earner. It’s game over because the loan programs that were available last week are gone. Now you couple that with those buyers in escrow that can’t get funded because the underwriters are asking for impossible conditions (bank statements for a stated wage earner…wtf??), and add to the mix the potential buyers that were looking at homes but can’t find the financing.

Prices sticky on the way down? Highly unlikely unless lenders ease up on their guidelines by next week (nope, everyone is running scared right now).

[Pasadena Broker]

What you’re going to see is a denial in the beginning with the sellers, but here’s the problem…

Homeowners that purchase with no money, little money, borderline credit, and stated wage earner. It’s game over because the loan programs that were available last week are gone. Now you couple that with those buyers in escrow that can’t get funded because the underwriters are asking for impossible conditions (bank statements for a stated wage earner…wtf??), and add to the mix the potential buyers that were looking at homes but can’t find the financing.

Prices sticky on the way down? Highly unlikely unless lenders ease up on their guidelines by next week (nope, everyone is running scared right now).

[SD Realtor]

betting on fall –

Yes I would classify the 91913, 14, and 15 areas in the exact same manner as you have posted. Well overpriced, little to no activity at current pricing, or at previous pricing, exceedingly high foreclosure rate and has been that way for a few months, and a base of buyers that are not the most well qualified people to begin with… and of course way way way overbuilt.

I would agree with your premise that dropping the prices in the amounts you spoke of would be the best way for them to sell. How many sellers will actually heed that advice is another question but I totally agree with your thought process on that entire area…

SD Realtor

[SD Realtor]

betting on fall –

Yes I would classify the 91913, 14, and 15 areas in the exact same manner as you have posted. Well overpriced, little to no activity at current pricing, or at previous pricing, exceedingly high foreclosure rate and has been that way for a few months, and a base of buyers that are not the most well qualified people to begin with… and of course way way way overbuilt.

I would agree with your premise that dropping the prices in the amounts you spoke of would be the best way for them to sell. How many sellers will actually heed that advice is another question but I totally agree with your thought process on that entire area…

SD Realtor

[temeculaguy]

Ok Former, that makes sense, sometimes people over estimate their tax savings because only the top portion is taxed at the higher percentage and there is a law of diminishing returns as you deduct into your lower percentage brackets but I ran my 2006 tax return using your numbers and it was close enough. Here’s where the psychology comes into play. The 100k earner who is renting is netting less than 5k a month after health insurance, 401k, etc. Without the panic over being priced out of the market and no sign of near term appreciation coupled with the real fear of price declines it becomes a bitter pill to swallow to take on a 3100 house payment even if the net payment is 2100, it just looks scary.

Based on your post I was forced to do some calculations and I can now afford what I am looking for but I can’t do it, I have to go with my gut and my research, I think you may find that when other areas find themselves more inline with fundamentals there will still be apprehension on the part of the buyer, or it could just be me.

[temeculaguy]

Ok Former, that makes sense, sometimes people over estimate their tax savings because only the top portion is taxed at the higher percentage and there is a law of diminishing returns as you deduct into your lower percentage brackets but I ran my 2006 tax return using your numbers and it was close enough. Here’s where the psychology comes into play. The 100k earner who is renting is netting less than 5k a month after health insurance, 401k, etc. Without the panic over being priced out of the market and no sign of near term appreciation coupled with the real fear of price declines it becomes a bitter pill to swallow to take on a 3100 house payment even if the net payment is 2100, it just looks scary.

Based on your post I was forced to do some calculations and I can now afford what I am looking for but I can’t do it, I have to go with my gut and my research, I think you may find that when other areas find themselves more inline with fundamentals there will still be apprehension on the part of the buyer, or it could just be me.

[gn]

I think from now on, the behaviour will be "bimodal". Below $500K range, a somewhat disorderly drop, lower $/sqft being covered up by fairly unchanging transaction prices as people get better and more homes for their precious and fewer $. Above $500K is where the fun will be to watch. As the market practically empties out to everyone but cash buyers, there will be quite a scramble for anyone unfortunate enough to sell.

bsrsharma brought up a good point about the "bimodal behavior"

I wonder which will pack more punch:

1. The downward pull on prices from the inability of buyers to move up b/c they cann't sell their old house.

2. The downward push on prices b/c the difficulties of getting non-conforming loans.

Any thought ?

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