[Bugs]

If their money came from RE then I think it’s fair to say that it isn’t how much they made that counts, but how much of it they can keep.

[Bugs]

I find it perfectly amazing that the author of that piece was able to talk about San Diego millionaires and not connect any of them to the RE market. Unless my understanding of it is in error, “net worth” would include RE equity, and between 2003-2006 a lot of people “earned” a lot of RE equity.

That doesn’t even count the individuals in SD County who work in the RE business.

He has no data to suggest all or most of those new millionaires moved into town.

At any rate, the initial assertion – prices won’t go down in those neighborhoods because there are plenty of buyers to isolate them even as everything else crumbles also displays a dazzling lack of of understanding of how the RE markets work. Rancho Santa Fe homes don’t sell for $3mm plus because they’re intrinsically worth that much; they sell for those prices because they are that much better than the $2mm homes, which in turn are percieved to be that much better than the $1mm homes, and so on.

When the $2mm home declines back down to $1.2mm, the more expensive $3mm home will also decline to reflect that still-present premium for the differences between them.

If anything, the last RE recession demonstrated price compression, wherein the gaps between the different price ranges narrowed. This basically means that on a percentage basis the expensive homes lost even more than the cheaper homes.

Here’s a little factoid that belies the assertion made by the author of that piece. In the wannabe areas surrounding Rancho Santa Fe (92130 and 92128 zip areas) the MLS shows 6 sales in excess of $3,500,000 in the last year. Of the 6, there were 2 sales above $5,500,000.

There are currently 37 active listings in $3,5mm+ price range; of which 15 are listed for $5.5mm and above. At this pace that indicates to a 6-year supply of homes in the $3.5mm ranges and a 7.5 year supply for the $5.5mm and up range. That doesn’t count the other homes in these price ranges that the specuvestors are still building, of which there are quite a few.

Apparently we’ve been adding McMansions a lot faster than we’ve added Millionaires. So tell me one more time how the upper price ranges are isolated from the laws of supply and demand.

[Bugs]

With the sub-primes and Alt-A programs in retreat I wonder how many of the pendings will fall out because of financing, and further, how many upleg transactions will fall out because the downleg transaction fell out.

A move-up buyer can’t move up unless they sell their starter home at their price.

[Bugs]

The high desert areas are especially prone to losses because they are farther away from major employment. That means that these areas will be the first to suffer from declines and the last to recover when the trends turn.

During the last real estate recession (1990-1996) the Lancaster/Palmdale areas got nailed worse that almost any other area in L.A. County, and that’s really saying something. I fully expect the same to happen this time too. Those areas now have more service-type businesses than last time, but those aren’t the kinds of income that pay mortgages.

Rent a house and let the landlord worry about maintenance, decorating, yard improvements, resale value, and such. Then you can spend that time and effort on your job and your family. You won’t be missing out on any upside to real estate values because there won’t be any.

[Bugs]

I sincerely doubt that Ohio ever became a bubble market or that those borrowers all paid so much for their properties they are underwater in terms of price. So at least part of the “prolonging the inevitable” argument is going to be different there than here.

There probably are some borrowers who wouldn’t have qualified under conventional terms, but when they go to sell they shouldn’t cause huge losses for those lenders beyond what normally happens when a lender lets a house sit vacant for a couple months. It may not even have much of an effect on pricing for everyone else there.

Of course, that doesn’t speak to the inequity of forcing the many to pay for the mistakes of the few.

[Bugs]

Lots of the residential appraisers are struggling and a few have already moved on. The number of would-be appraisers taking the qualifying education courses for their licenses has almost ceased entirely.

The number of fully licensed/certified residential appraisers in California increased by 60% between 2001 – 2006. The number of trainee licenses tripled during that same time frame. I predict this coming downswing will reduce our numbers by about the same number by the time it’s all over.

[Bugs]

I’ve been saying all along that the wider availability of the information would influence the pace – and possibly the extent – of the extremes in which these trends develop.

In a truly rational and well informed market the market psychology would be a minor influence at most. Prices would be based primarily on the other economic fundamentals.

If you want an example of what happens with a well informed market, look at groceries. That’s a commodity class that is widely traded by everyone, and yet the prices vary more based on the underlying supply/demand than anything else. The availability of the relevant information and the ability and willingness of the buyers and sellers to analyze that information is such that there is very little irrationality in those markets. Now obviously as a consumable commodity these groceries don’t present any investment upside per se, but irrationality in the market isn’t caused by the true investor who has and analyzes their own data. It’s caused by the people who rely on their “experts” to tell them what to do.

When I compare what’s happening today vs. what happened in the early ’90s, several things really stand out. Unlike in the last peak/trough cycle, this time we had some people predicting this downswing absolutely would occur – last time there was hardly anyone who was committing to such a position. This time some of those property owners who are money-minded were well enough informed to decide to actually sell their properties and move into rentals – that didn’t happen at all last time. This time we have people who are actively planning on the market losing enough pricing that they’ll be able to get a good deal whereas last time there were so few of these people that it almost wasn’t worth mentioning.

All of these more recent developments are tied to both the increased availability of the raw data and the ability of the people at street level to analyze it. We are seeing more rams and fewer sheep this time, and I expect that trend to increase dramatically as a result of the losses that rack up during this downswing.

The beauty of blogpower is that everyone who participates – even those who lurk – can pull in data and commentary from all over. These various sources of information can then be compared to one another for accuracy and reasonableness, and the people can make their own decisions about which way to go and how to get there. The masses will increasingly be less dependent on the “experts” – many of whom have hidden aggendas – to tell them how to think or what decisions to make. Those experts who are being honest and objective will gain the most influence. Those who play the game as advocates for the special interests will be ridiculed. It’s already happening that way.

Look at how Zillow and some of the other info sites are already influencing people’s opinions about full service RE brokerage and commission structures. As with stocks even those players who do gravitate toward using the experts to work their transactions will be operating from a higher level of knowledge of the market in which they are participating. The number of people who can be misled by a broker who may not be working in their best interests will decline, especially as more people come to understand the benefits of doing their own research prior to making these decisions.

There are already reports in the mainstream media about how bloggers had foreseen the direction and extent of this downturn well in advance of it happening. As time goes by, more and more people are connecting up with these blogs. While it’s true that some of these newcomers are sheep and some of these blogs are hormonally bearish in their orientation, there are also some people who are analytical and some blogs (like this one) that are data driven and analysis heavy.

Blogs like this one are not bearish because their principals are bitter, but because they are following the data and comparing the trends to the fundamentals. When those price trends come more in line with these fundamentals, the focus of Piggington’s will evolve to looking for the best time and the best areas to invest in RE again. Some of the same people who have been calling out the declines all along will eventually reverse course and call for increases, possibly at a time when the mainstream still thinks of RE as a loser.

I think the next big test of the blogpower in the RE markets will come when the markets turn again. If the correction to trend doesn’t overshoot the trendline into “undervalued” territory – as has happened in every other cycle prior to this, like during 1994-1996 – it will be in part because a lot of people will have learned what to look for and will have both the means and the will to get back in at the fair price rather than at the best price. If that happens, it’s possible the big swings we’ve been seeing will flatten out.

The more well informed the majority of players in the market are, the more rational the market will become. Because RE is not a very liquid asset, a rational RE market will flatten out and will move more slowly in concert with the underlying fundamentals rather than by manipulation.

Unlike with stocks, an opinion of value of real property can be developed by an outsider without relying solely on any information or misinformation provided by the seller. An RE seller cannot cook their books or overstate earnings and get away with it for even the one transaction unless the buyer is lazy and doesn’t bother trying to verify anything. That’s why I think the RE markets can flatten out and become more rational in the long run.

[Bugs]

The taxpayers moving out of state include those who would have been in a position to buy properties. The non-taxpayers entering the population (including births) are almost irrelevant to the pricing of homes because they don’t participate in the sales market.

[Bugs]

The advantage to a short sale strategy is that it limits the lender’s losses. The borrower doesn’t trash the house out of vindictiveness, the house doesn’t sit vacant for several months and the listing agent doesn’t call label the property “bank-owned foreclosure”, thereby automatically encouraging the uber-lowball offers. The problem with a short sale strategy for a lender is that they’re still under a tremendous amount of pressure to clear that loan and they can’t wait for a borrower who’s anything less than committed to getting out.

I could see a lender entering into an approval for short sale process in lieu of foreclosure, but only if they can exercise some control over the marketing of the property. For instance, if they could designate or approve of the listing agent, the list price, arbitrary price reductions at specified intervals, availability of access, etc.. The same controls they’d have if they had foreclosed and had become the sellers themselves. A lender couldn’t allow a borrower enough freedom to stay indefinitely or otherwise obstruct the marketing or conveyance of the property.

[Bugs]

A property that is being sold short is still part of the must-sell inventory and those sellers don’t have the luxury of waiting for their price. They have to discount it enough to move it.

[Bugs]

If you like that house at $550k you’ll probably really like it at $350k.

I don’t think San Elijo is going to get more congested than it is right now without the connecting roads. It’s not like outsiders are going to use those roads to cut through that area on their way to somewhere else.

4S is a little closer to the employment centers in San Diego – that’s the factor that will drive the difference in value between these areas more than anything else.

In my opinion, the proximity to employment as an influence on value is highly underrated and the quality of the schools is overrated. $4/gallon gas is a factor that could tip the scales on prices in the more distant areas.

[Bugs]

Russ Valone & Co is anything but an unbiased observer in the SD market. They are bought and paid for by their clients.

Unlike the sales market, rents are closely tied to income. It is counterintuitive that rents would go up in a stable wage market and when vacancies are stable; and that goes double for projecting increases to outpace CPI inflation.

I think it’s disingenuous to lay the apartment vacancy rate on the condo market. Their real problem is that some of the people who earn those average wages that pay for the apartments they’re tracking are leaving town.

However, even if you buy the “condo gambit” there’s still the problem of more units coming online and not enough buyers.

[Bugs]

If they’re serious about moving those lots they mght be able to come up with some smaller floorplans, more stock finishes, and fewer doodads. By all rights there should be a few suckers willing to buy strictly on price and there’s nothing wrong with building an average quality/average appeal home. The neighbors in their prior phases will be mad but they have bigger problems to worry about right now.

I’ll bet 2,100 SqFt @ $550k would probably find a few buyers right now.

[Bugs]

Sorry, I didn’t mean to mess up your experiment; I just wanted you to consider another variable.

I think if you go up into some areas of Point Loma or Mission Hills or Kensington you’ll see some destination neighborhoods that are older than 20 years. It’s kind of interesting that most of the high dollar neighborhoods farther out have higher turnover rates.

[Bugs]

In February 2007, 13 out of the 113 SFR/Condo properties that sold through the MLS in Oceanside had some reference to “bank owned” , “subject to short sale approval” or similar language in their MLS listings. That doesn’t include the probate sales, the divorce sales, the “second home, must sell” sales etc. That also doesn’t include the properties that might have been forced sales but were not marketed that way. A number of the 113 were new homes or condos that wouldn’t have even been marketed in the MLS prior to 01/2006.

In Vista it was 4 sales out of 54; in San Marcos it was 6 out of 72; in Carlsbad it was 4 out of 82. I didn’t look in Encinitas, but I imagine the trend there would be similar to Carlsbad.

Needless to say, “must sell” is where the action on pricing is; and the more that segment grows right now the more action there’ll be.

[Author]

Posts