[FormerOwner]

One of the comments at the bottom of that newspaper article says it all as far as what the fallout will be:

P.D. Asilomar wrote on Jun 2, 2007 11:40 PM:
” When the full magnitude of the REAL problem becomes evident, the air is going to rush out of this inflated real estate market like gas out of the Hindenberg, with similar results. Southern California is the only place where you can pay five times what a house is worth, and then watch it burn down five times or collapse in an earthquake twice before it’s paid for.”

[FormerOwner]

It sounds like the cash back at closing was probabably substantial since that house can’t be worth anywhere near that much – unless it’s a custom home on acreage.

As far as I know, there are legit ways for a buyer to borrow more than the purchase price of a house at closing but it’s pretty rare. If the buyer wants to put in a pool, he can build that extra $$ into the purchase price as long as the escrow documents clearly spell that out in writing. The bank will hold that $$ in escrow and release it to the pool contractor in a few payments – as the work is completed and invoices are submitted. I’ve heard of this being done but it’s pretty rare I think. The key to making it legal is that the lender has to be informed of it in writing as part of the escrow papers. In no case that I can think of would it be legit for cash to go back to the buyer at closing.

Whether legal or not, these types of transactions skew the comps and mislead homeowners into thinking their homes are worth more than they really are. Prices are actually dropping but it doesn’t look that way because of all the cash back that’s built in to a lot of the sales. The sellers received substantially less than what the comps are showing.

[FormerOwner]

It sounds like the cash back at closing was probabably substantial since that house can’t be worth anywhere near that much – unless it’s a custom home on acreage.

As far as I know, there are legit ways for a buyer to borrow more than the purchase price of a house at closing but it’s pretty rare. If the buyer wants to put in a pool, he can build that extra $$ into the purchase price as long as the escrow documents clearly spell that out in writing. The bank will hold that $$ in escrow and release it to the pool contractor in a few payments – as the work is completed and invoices are submitted. I’ve heard of this being done but it’s pretty rare I think. The key to making it legal is that the lender has to be informed of it in writing as part of the escrow papers. In no case that I can think of would it be legit for cash to go back to the buyer at closing.

Whether legal or not, these types of transactions skew the comps and mislead homeowners into thinking their homes are worth more than they really are. Prices are actually dropping but it doesn’t look that way because of all the cash back that’s built in to a lot of the sales. The sellers received substantially less than what the comps are showing.

[FormerOwner]

Inflation isn’t something that causes all prices to rise at the same rate.

Over that last few years, housing and stock prices have inflated much faster than any other types of assets. Energy, health care, education, and gold prices have also seen a lot of price inflation. HOWEVER, salaries for the lower and middle classes have inflated at MUCH lower rates, making it IMPOSSIBLE for them to afford to buy the houses at anywhere near today’s inflated prices without resorting to suicide loans (which will end in foreclosure). I don’t see anything that will cause wages to rise substantially for most people. This is not like the 70’s where wages inflated along with almost everything else. If people try to demand higher wages, companies will just fire them and send the jobs to China, India, Mexico or a host of other countries. So yes, I feel the Dollar will keep losing value and we’ll have to pay more for a lot of imported goods as well as energy and other commodities but people’s wages will NOT increase much, so they will have to either (1) cut down their spending to the bare necessities and not buy an overpriced house or (2) keep running up debt until they go broke and end up doing #1 eventually.

I have no emotional issues against renting and I may never buy a house again but IF I do, it probably won’t be for a least a few more years. The price declines are just BEGINNING to get serious and it’s still much cheaper to rent vs buy. My preference is to invest in stocks in foreign countries with stable currencies and to invest in commodities or related stocks/funds. I believe these will yield higher real returns than houses. Housing to me has way more downside risk than upside potential right now. I like to keep most of my $$ in FDIC insured CD’s but I put some of it in inflation-hedge type investments as noted above.

Another problem with using your house as an inflation hedge is that it’s very illiquid. What if you get laid off and have to move to get a decent job? You can’t predict the timing of something like that and you may be stuck in a log-jam. What if you get a great job offer in another city but it comes at I time when house prices have fallen below what you paid? Would you take a triple digit loss or forgo the job opportunity? The house could become a noose around your neck in these cases. I see no benefit to buying in a declining market. You’d have to be pretty DARNED sure you could ride out the entire downturn in that house and I think very few people in our economy are that sure of anything.

[FormerOwner]

Inflation isn’t something that causes all prices to rise at the same rate.

Over that last few years, housing and stock prices have inflated much faster than any other types of assets. Energy, health care, education, and gold prices have also seen a lot of price inflation. HOWEVER, salaries for the lower and middle classes have inflated at MUCH lower rates, making it IMPOSSIBLE for them to afford to buy the houses at anywhere near today’s inflated prices without resorting to suicide loans (which will end in foreclosure). I don’t see anything that will cause wages to rise substantially for most people. This is not like the 70’s where wages inflated along with almost everything else. If people try to demand higher wages, companies will just fire them and send the jobs to China, India, Mexico or a host of other countries. So yes, I feel the Dollar will keep losing value and we’ll have to pay more for a lot of imported goods as well as energy and other commodities but people’s wages will NOT increase much, so they will have to either (1) cut down their spending to the bare necessities and not buy an overpriced house or (2) keep running up debt until they go broke and end up doing #1 eventually.

I have no emotional issues against renting and I may never buy a house again but IF I do, it probably won’t be for a least a few more years. The price declines are just BEGINNING to get serious and it’s still much cheaper to rent vs buy. My preference is to invest in stocks in foreign countries with stable currencies and to invest in commodities or related stocks/funds. I believe these will yield higher real returns than houses. Housing to me has way more downside risk than upside potential right now. I like to keep most of my $$ in FDIC insured CD’s but I put some of it in inflation-hedge type investments as noted above.

Another problem with using your house as an inflation hedge is that it’s very illiquid. What if you get laid off and have to move to get a decent job? You can’t predict the timing of something like that and you may be stuck in a log-jam. What if you get a great job offer in another city but it comes at I time when house prices have fallen below what you paid? Would you take a triple digit loss or forgo the job opportunity? The house could become a noose around your neck in these cases. I see no benefit to buying in a declining market. You’d have to be pretty DARNED sure you could ride out the entire downturn in that house and I think very few people in our economy are that sure of anything.

[FormerOwner]

I googled “Mapleton Murrieta” and found this article from March 31, 2005:

Parents picket against sex offender

Angry residents hold signs Wednesday morning protesting convicted sex offender Edison Mercado who lives in their Mapleton neighborhood in Murrieta.

…

A homeowner living on Mercado’s street said that she recently put her home up for sale.

“Now, I’m stuck, because nobody’s going to want to buy my home,” said the woman, who declined to give her name. The woman’s real estate agent said she shares the concern.

“No one is going to want to live up the street from a sex offender,” said Alma Rodriguez, a real estate agent with Century 21 Tri-Valley in Murrieta. “Homes are going to be going down in value until he moves out of here.”

Rodriguez said that sex offenders can be anywhere. So rather than drawing a lot of negative attention to the neighborhood by picketing and putting up signs, “parents should just start taking care of their kids; then they wouldn’t have to worry about who is living next door.”

http://www.nctimes.com/articles/2005/03/31/news/californian/0_41_013_31_05.txt

———————————
This seems like a moot point now!

[FormerOwner]

I googled “Mapleton Murrieta” and found this article from March 31, 2005:

Parents picket against sex offender

Angry residents hold signs Wednesday morning protesting convicted sex offender Edison Mercado who lives in their Mapleton neighborhood in Murrieta.

…

A homeowner living on Mercado’s street said that she recently put her home up for sale.

“Now, I’m stuck, because nobody’s going to want to buy my home,” said the woman, who declined to give her name. The woman’s real estate agent said she shares the concern.

“No one is going to want to live up the street from a sex offender,” said Alma Rodriguez, a real estate agent with Century 21 Tri-Valley in Murrieta. “Homes are going to be going down in value until he moves out of here.”

Rodriguez said that sex offenders can be anywhere. So rather than drawing a lot of negative attention to the neighborhood by picketing and putting up signs, “parents should just start taking care of their kids; then they wouldn’t have to worry about who is living next door.”

http://www.nctimes.com/articles/2005/03/31/news/californian/0_41_013_31_05.txt

———————————
This seems like a moot point now!

[FormerOwner]

I posted my response before I saw all of newguy’s posts, but it looks like my guess of his buying approximately 200K below the peak was pretty close.

Anyway, here are some things I’ve noticed about the Temecula Valley housing market and I think these have held true since before the boom, during the boom, and even now, after the boom:
1) Most home buyers up here are people moving from San Diego and want a faux riche house without paying SD prices. The vast majority only look at brand new houses and are awed by the faux riche models.
2) The builders set the prices. Resale homes don’t really sell for any more than comparable new ones, regardless of how much the people spent on backyard landscaping, pools, upgrades, decorating, or anything else. I think this is due to #1.
3) I think #1 and #2 are due to the continuous stream of new construction up here. How can houses appreciate when the builders keep popping out new houses at incredible rates? The only reason house prices increased at all up here is purely the speculative bubble fueled by loose lending – that’s it!

That said, the builders now appear to be ratcheting the prices back down the same way they ratcheted them up. Now we also have the additional pressure of massive waves of foreclosures and short sales coming on the market. My guess would be that before too long the builders will pull out once they’ve lowered prices as low as they can and still make a profit. At that point, the only sales happening will be foreclosures, distress sales, and short sales. We’re now about half way to a 50-60% price drop IMHO and I’m starting to see how we’ll get there. This will be of biblical proportions.

[FormerOwner]

I posted my response before I saw all of newguy’s posts, but it looks like my guess of his buying approximately 200K below the peak was pretty close.

Anyway, here are some things I’ve noticed about the Temecula Valley housing market and I think these have held true since before the boom, during the boom, and even now, after the boom:
1) Most home buyers up here are people moving from San Diego and want a faux riche house without paying SD prices. The vast majority only look at brand new houses and are awed by the faux riche models.
2) The builders set the prices. Resale homes don’t really sell for any more than comparable new ones, regardless of how much the people spent on backyard landscaping, pools, upgrades, decorating, or anything else. I think this is due to #1.
3) I think #1 and #2 are due to the continuous stream of new construction up here. How can houses appreciate when the builders keep popping out new houses at incredible rates? The only reason house prices increased at all up here is purely the speculative bubble fueled by loose lending – that’s it!

That said, the builders now appear to be ratcheting the prices back down the same way they ratcheted them up. Now we also have the additional pressure of massive waves of foreclosures and short sales coming on the market. My guess would be that before too long the builders will pull out once they’ve lowered prices as low as they can and still make a profit. At that point, the only sales happening will be foreclosures, distress sales, and short sales. We’re now about half way to a 50-60% price drop IMHO and I’m starting to see how we’ll get there. This will be of biblical proportions.

[FormerOwner]

newguy,

That’s some pretty good shopping you did there and it really shows how desperate the builders have gotten. I’d say your purchase price is about 200K lower than what people were paying for houses that size in Harveston just last year. I’m very bearish on the market but if you’re going to stay there long-term and you like the area, it’s probably not a bad deal. Congratulations and thanks for sharing the info with the rest of us. VERY interesting.

[FormerOwner]

newguy,

That’s some pretty good shopping you did there and it really shows how desperate the builders have gotten. I’d say your purchase price is about 200K lower than what people were paying for houses that size in Harveston just last year. I’m very bearish on the market but if you’re going to stay there long-term and you like the area, it’s probably not a bad deal. Congratulations and thanks for sharing the info with the rest of us. VERY interesting.

[FormerOwner]

jg,

I think that’s probably a worst case scenario but I wouldn’t discount it. I’ve studied the Great Depression to some extent and I find a lot of parallels between the roaring 20’s and the roaring 90’s. We’ll just have to wait and see.

One thing that people don’t talk about a lot is oil prices. If we have any sort of oil price shock that would REALLY spook the housing market at the worst possible time. That could be the “trigger” for a sharp drop off in spending that would cripple the global economy.

[FormerOwner]

jg,

I think that’s probably a worst case scenario but I wouldn’t discount it. I’ve studied the Great Depression to some extent and I find a lot of parallels between the roaring 20’s and the roaring 90’s. We’ll just have to wait and see.

One thing that people don’t talk about a lot is oil prices. If we have any sort of oil price shock that would REALLY spook the housing market at the worst possible time. That could be the “trigger” for a sharp drop off in spending that would cripple the global economy.

[FormerOwner]

I would say 453K for 3586 s.f. in the Northern part of Temecula is 2003 pricing based on my recollection. I will try to find some examples and #’s to give a more accurate answer.

I like using sales of the same model home over time to measure price changes. The median price in a zip code can be VERY misleading due to differences in house sizes and different neighborhoods selling at different prices based on their amenities, etc. You have to compare apples to apples to know what is truly going on.

[FormerOwner]

I would say 453K for 3586 s.f. in the Northern part of Temecula is 2003 pricing based on my recollection. I will try to find some examples and #’s to give a more accurate answer.

I like using sales of the same model home over time to measure price changes. The median price in a zip code can be VERY misleading due to differences in house sizes and different neighborhoods selling at different prices based on their amenities, etc. You have to compare apples to apples to know what is truly going on.

[Author]

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