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Let’s ignore the fact that our economy is tied to the world and a devalued dollar would cause us more problems than it could cure.

Let’s talk about the different between “price” and “value”. Those two terms are related but they aren’t the same. Regardless of the actual price, we have a value imbalance wherein people are spending 50% or more of their gross incomes to debt service their mortgages. If the feds try to inflate their way out of the price imbalance they still won’t make a dent in the value imbalance, except to make it worse. It’s true that the current debt holders won’t have to spend as much of their income to service their debt, but it’s also true that the dollars they net after eventually selling out their positions won’t have as much “value” as the dollars they spent getting in. So they still lose and they lose just as much as if there were no inflation and the market just does it’s thing.

And this is still based on a best case sceanrio that requires making a huge assumption about wages keeping pace with inflation, which they pretty much never do. Think about it. If all their other expenses for living go through the roof but their mortgage payment stays the same, they still need more dollars to make it through to the end of the month. Unless they’re making those big wage gains to match, they’re facing the same kind of dollar deficit that would cause them to default on their house payment. For that matter, if we could count on wage gains of any type to begin with, we wouldn’t be considering the current price structure to be overvalued in the first place.

The inflation alternative would easily prove to be more of a problem than the problems it would be intended to solve. And that doesn’t even begin to address the equity of bailing out the least deserving debtors – who are a minority – to the detriment of those people who had handled their money more responsibly. Think about the people who bought earlier, who did earn some equity; inflation cheats them out of the profits they legitimately acquired. Where’s the social justice for that?

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Oh, there are answers, all right. They just are too unpleasant for most people to entertain. Banks and retirement funds and insurance companies have gone BK over bad investments before. The only difference this time will be the scale of it – there are so many more dollars in play.

I’m wondering if the Alternative Minimum Tax “changes” that are coming up this year will be a significant contributor to some of the defaults. That little gem could end up being the straw that broke the camel’s back.

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With as many listings as are on the market right now, time is on the buyers’ side. The long term interest rates could drop to 2% tomorrow and it would still take a while for the market to absorb that many listings. All a potential buyer has to do is wait it out. There WILL be some forced sales – including foreclosure sales – and each successively lower sale price will set the bar lower.

I think a broker who takes on any listing that is not at least 5% under the rest of its competition is wasting their time right now.

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If the plan is to hold for a long time they probably won’t get burned. It’ll look pretty bad for a while on paper but the overall average will probably still increase as long as they don’t have to sell any time in the next 10 years or so.

I’ve had a lot of people tell me they would consider living downtown. I think there are some empty nesters who at least think they’d enjoy an urban lifestyle once their kids are out of the house. I think there is some demand here for that kind of lifestyle. I’ve just always been skeptical that there was sufficient demand to justify all those high “luxury” rises. There’s definitely demand for affordable housing so the units will sell if they’re priced right for that – but a bunch of people would have to lose a lot of money for that to happen.

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A yr2003 sale at $500k probably wouldn’t sell for $1,000,000 now no matter what, UNLESS the contract was negotiated well in advance of the completion of construction and was not actually a 2003 contract. Mr. London is a well known local RE consultant in the area, so no doubt he has benefitted from both his expertise as well as his personal and professional connections. So yeah, I would anticipate such a person would be making good investment decisions downtown. I would also anticipate that he knows when to hold ’em and when to fold ’em.

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One thing about cap rates: if using a mortgage/equity model, the low interest rates can affect the mortgage side of the cap rate, and the anticipated reversions can affect the equity side – hence the rationale behind some of these <5% cap rates. Increase the commercial interest rate and decrease the anticipated increases and we could be back to 9% cap rates in a flash.

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I am an appraiser, and yes, I’d like to comment. Sales concessions do affect the sale price being sold by the seller and being paid by the buyer. The appraisers are required to review the sales contract as part of the appraisal process and comment on whether it notes “any financial assistance (loan charges, sales concessions, gift or downpayment assistance,etc) to be paid by any party on behalf of the borrower.” If the concessions are offered in the sales contract the appraisers are supposed to catch it. That’s the way its supposed to be done.

Unfortunately the reality is sometimes a bit different. There are some situations where the appraisers aren’t given the sales contracts; others where the contract is provided but is missing all of the addenda to the contracts where such concessions might be hidden; and then there are transactions where there are two contracts – one for the lender and the real contract. Even where all the information is provided there are appraisers who are willing to “overlook” that information in order to avoid bringing the appraisal in lower than the sale price.

I wouldn’t place all the blame on appraisers, who after all do have to work with the information as it is provided – and there are some crafty realty agents out there. However, I will say that an appraiser who is making the effort to run this stuff down should have no trouble doing so in most cases, and to the extent appraisers aren’t doing that they are failing and are contributing to the problem.

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It’s an old chiche in the real estate field. You can’t make a profit when you sell unless you buy well.

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By the way, not only are listings being reduced, but a large percentage of the sales are closing at the bottom of or below the listing ranges.

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There are a couple reasons that not many 2-4s have been converted to condos. First of all, 2-4s are still classfied as residential properties for mortgage purposes, meaning that owner-occupancy is still a likely factor in the purchase and income is secondary. The “residential” status afford these properties access to favorable residential lending rates on the mortgages – the difference between residential lending programs and non-residential (which includes anything other than 1-4s) is substantial. The easier and cheaper credit access has an effect on the sales prices – does that theme ring a bell? So the irony is that 4-unit properties are often priced higher than 5 and sometimes even 6 unit properties with otherwise similar attributes.

Anyways, what I’m getting to here is that in terms of maxing your profit, you would have been better off finding one of the non-residential (5+ units) projects for conversion. You make your money when you buy.

The second thing is that it’s hard to imagine your profit potential as a 4-plex with the condo map being anywhere close to the retail value of the 4 units. You need to take the fact that you’re living in one of the units out of the profitability equation. Selling the other 3 units at a lower retail price right now may not result in your unit being paid off (it might have if your project was 5 or 6 units), but you’ll still come out of it with a nice head start.

The volume of activity for 4-plexes has dropped even more than it has for single family residences, and I see no reason for that trend to turn around any time in the near future. Unless you’re selling at a price where those units can come close to a break-even on the debt service after expenses or you can find some investor who thinks they can succeed where you’ve failed, your property may very well just languish on the market. If the pricing for houses is levelling off or in decline, the same is going to happen with apartments, too.

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You probably sold at a good time. Had you waited any longer your “losses” may well have mounted. You would definitely have faced more competition. If you were selling now I can almost guarantee your agent would be mentioning concessions, if only in casual conversation.

Concessions are indeed showing up now among resales. I’m seeing more houses being sold with furnishings, more flooring and painting allowances, and more offers to pay closing costs. Some of the realty agents are so desperate to hold the line that they’re even including these offers in their MLS listings. Up until now they were kind of keeping it hush-hush.

Their incentive has nothing to do with their share of the commissions. The realtors’ problem is that if they can’t sell the “real estate only goes up in value” illuision to their buyers they won’t be able to keep the volume of sales going. Nobody wants to buy in a declining market unless its at a steep discount. I’m sure most of the smarter agents would be happy to give up a lot more than a measly $400 if it means they don’t have to acknowledge a declining price structure.

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It won’t be a nationwide crash because it wasn’t a nationwide bubble. There are a lot of markets that have barely moved in the last few years. There are still lots of places in the U.S. where you can buy a home outright for less than $100k. Those markets are in no danger of eminent collapse.

The term “bubble” gets overused, too. I don’t think a market that’s 15% over the trendline is in any danger of suffering a catastrophic collapse. At 25% it would be borderline for some markets and probably only a little painful for others. At those prices, local employment and population trends can dampen the impact to a certain degree.

I think there are enough potential losses to cause real problems for the lenders and the government, but I don’t subscribe to the notion that we’ll become a Third World nation as a result of a correction in real estate prices. Look at Japan – they managed to suffer a pretty long and nasty downturn and I notice they didn’t turn to eating each other.

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We had net outmigration last time around. More people leaving the area than coming in. Those weren’t necessarily all homeowners but the folks who left were living here somewhere. Besides, the number of vacant homes at any one time probably won’t be that large. If prices are reduced enough, like down close to rental levels, there will eventually be buyers – and occupants – for those homes.

We did have more rental units at that time, there being a big boom in apartment construction in run-up of the mid-80s. A lot of the apartment units have since been condo-ized, but they’re still there and they can still be rented or re-sold even if at lower prices.

Of course, I say all this within the context of what happened last time when the run up was maybe 25% of what it has done this time. I suppose it could be argued that our exposure this time around is much larger just because of the higher percentage of people who are overextended.

By the way, when there are a lot of vacant apartment units, the property managers offer rent concessions like first month’s rent free and installment plans on deposits. There are rent concessions being offered on apartment units here in SD County right now – that’s been going on in some areas for the last year or so. The lack of a deposit will not necessarily mean a trip to homelessness. Also, there may be some investor types who will offer walking money to owners while they’re still in the foreclosure process. Buying pre-foreclosures is one of the “wealth building systems” that are constantly being hawked by the late-nite infomercial crowd. Those techniques actually work during certain points of an economic cycle, but the mortgage payments have to make some sense compared to the rental rates before that happens.

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We’ll still see a lot more short sales this time arond; that is, sales where the lender has already agreed to take less than the outstanding balance on the loan.

Then too, there will still be people who can’t afford any mortgage payment of any kind, because of job loss or illness. Think of how many people are in the construction and real estate businesses who are going to lose their income as a result of market slowdowns. Nothing is going to help the lender on that sitaution. If the mortgage payments were 30% higher than rent in ’91, they’re more than double the rents now. That’s going to add up pretty fast when considering how many of the buyers are already in trouble as of the next ARM adjustment.

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The other thing that doesn’t show up as a price reduction but which actually is a price reduction is when there are sales concessions. The list price stays a $750k but the seller will offer a $10,000 credit for closing costs or new carpets, etc. Bang – the realty agent gets to keep the recorded sale price at the $750k even though the real price was only $740k. I think we’ve just begun to see sales concessions. By the time we get done I expect those concessions to get quite creative as the realty agents do everything they can to maintain the pricing structure.

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