[powayseller]

You bring up an important point. For decades, the homeownership rate has stood at 65%. With lax lending, where everyone except an insolvent arsonist qualified for a morgage (I read that somewhere yesterday), we’ve raised the homeownership rate to almost 70%.

What surprises me is that with the lowest interest rates and loosest lending standards since the Great Depression, our homeownership rate is not higher.

Nonetheless, what should trouble us all is the creditworthiness of the new group of homeowners. There’s a reason that they couldn’t qualify before. The data clearly show that the greatest risk of default occurs in the first 3 years of a loan. This new group of homeowners is still in that risky period. They not only have a financial responsibility they probably cannot handle, but they also are in for a surprise when their exotic loan adjusts.

If 5/70 (the people between 65% and 70%) people are in this new group, that would be 7%. Does it seem reasonable that 7% of people will default simply because they are not creditworthy, and should not have been given loans to begin with?

What would a 7% default rate do to home prices?

[powayseller]

If you’ve ever been to Phoenix, you’d wonder how they ever got into bubble territory in the first place. The only reason the whole city doesn’t blow away in a dust storm is because they’ve diverted the Colorado River to bring water to their pools (which you need in 115 degree heat) and landscaping.

When I lived in Phoenix, one day it was so hot, the planes couldn’t take off for a several hours from Sky Harbor Airport. The reason was that the jet’s engines had never been tested for takeoff in the extreme 115 (or 120) degree heat of that day.

There is land as far as the eye can see. It’s hot and dry. It’s not a center for high-paying jobs. I can see why SD was raised to bubble status, but Phoenix and Las Vegas? It makes no sense.

[powayseller]

Last October, when we listed our house, I thought prices would drop 20-30%. After reading Talbott’s Sell Now, I upped my prediction to 40-50%. Then lately, just to be provocative, I went with the 50% number. If I had to make a bet, I’d go with the 40-50% number. (Do that range thing, like the realtors…)

[powayseller]

The previous 2 corrections in the graph took us to a bottom, before settling at median.

I expect this correction to be the same way, in terms of settling at the bottom.

We may overshoot bottom because we have 2 new factors this time around: borrowers loaded up on adjustable mortgages at a time of historic low interest rates and will be forced to sell when those loans adjust, and our economy is much more dependent on real estate. Let’s also consider the global liquidity bubble. It made this RE bubble much worse. OTOH, can it save its decline?

[powayseller]

If we get institutional investors buying SFH, this would change the decline significantly. Is this realistic? They look for billions to invest, do you think they would buy up a bank’s REO division and deal in individual properties?

If we didn’t have negative savings rate, highest level of personal debt, stagnant wages, and exotic loans, I would vote for a 15% drop. But all the factors I mention, esp. the exotic loans resetting and resulting foreclosures, are making me the ueber-bear.

Another concern: from where come the high wage jobs to save the economy? There is no new buzzword on the horizon. It used to be high tech, then biotech. Lately, the headlines are ominously silent…..

[powayseller]

Thanks, I need to pay more attention to the percentage stuff. You’re absolutely right!

[powayseller]

I don’t know what he assumes. Did you read his update? I’ve e-mailed him about his China articles before. You can e-mail him too, make proper modifications to his story, and post back. Just a thought.

[powayseller]

At this point, with so much of a turn-off and fear of housing, I do not want to own. The thought of owning a house is repulsive to me, today. My landlord and I are signing a 2-year lease at current rent. I am comfortable and happy with my deal. If I had $800K cash, I would not use it to buy a house. I would wait 5 years and get a $1.6 mil house at the coast for $800K. I would still seek that sweet deal, and am willing to wait for it. Maybe because I love where I live, and I don’t care whether I own or rent.

I think it’s sweet that your kids want to own your homes, and I never wanted to say anything against it for sdrealtor, because I didn’t want to upset him. But really, how likely is it that your kids and their wife will decide to stay in SD? Your sons may get job offers of their dreams in Florida, or the new wife may get a surgery position of her dreams in Connecticut, or your son may get a promotion which takes him to San Francisco, and then he will leave the childhood house….I wouldn’t count on them staying in the family house. This is rare even in Germany these days, which is my heritage and my uncle and greataunts stayed in their parents’ homes and died there. However, the next generation is mobile, and goes where the job takes them. The job-for-life dream has disappeared, and everyone is mobile now. So I wouldn’t make my decision on where my kids might live, or make them feel guilty for not wanting to stay…Just a thought. Please don’t be upset by this suggestion. It’s just a possibility to consider.

[powayseller]

In my culture, people live in their homes their entire lives, and pass them on to their children. This paradigm is poor financial planning today, unless you have money to burn. Only people who have their home paid off are in that boat now. Anyone with a mortgage, sorry, doesn’t qualify as capable of owning a house these days.

[powayseller]

I think sdrealtors’ point is well noted – we all think the prices were climbing through summer 2005 because the median was going up. Well, we see how misleading that one number can be. Although we are seeing 5% reductions in many neighborhoods, and I got a 5% reduction in my 2 offers in December 05, the median price is still going up. There should be other metrics which complete the picture of what is actually happening, such as typical home month-month change.

At the current rate of price decrease, it will take many months before the median price reflects it.

This is why I like Bob Casagrand’s reports so much. He digs inside the numbers, and let us know several months ago that the median is up only because the lower end buyer is squeezed out, and proportionally fewer under-$500K homes are sold.

I still wonder how we can have thousands of above $500K sales every month, in a city where the median income is around $60K. How are people affording the $1.5mil homes? ARMs? IO teaser rates?

[powayseller]

sdrealtor believes the peak was in 2004.

[powayseller]

I disagree that you must own a “home”.

I am renting a “home”.

It is a warm wonderful cozy home, clean and tastefully decorated with my Ethan Allen curtains matching my Ethan Allen dining room set, my baby grand piano, laughing kids inside who adore me, pets, with kids who ride their bikes on the street, parents who walk their kids to the nearby school, interesting neighbors, kids who carpool with me, activities nearby that my kids walk/ride their bikes to, a park where our dog can run, mature trees, next to a creek and mountain trails for me to run, and full of chirping birds (even right now).

I am happier in this home than in the previous home which I owned and built. I gave up my $2500 Miele steam oven (yeah, ever heard of one?), Viking 6 burner range top, and green Iranian granite (so cool!!) for a simple 4 burner gas stove and formica. Small price to pay…I am financially much better off, and my husband is happier too without all those house projects that always weighed on him.

In an era of ridiculous home price inflation, a house cannot be thought of in the traditional sense of the American dream. It is an asset which is quickly losing value and will turn the American Dream into the American Nightmare, as thousands or millions of homeowners enter foreclosure.

(And wait until you get Fannie Mae’s audited books. They’re spending $800 million just on figuring out how bad the problem is…Gov’t bailout of unheard proportions coming soon..)

A house can become a shackle and a way to bankruptcy and foreclosure. We must think of a house as an asset, and not be emotionally attached. Many investors get attached to their stocks, and will not sell and cut their losses. Homeowners are like this, too.

Docteur, you can afford to lose 50% of your home equity. You made millions in your last deal, so you don’t mind losing $1mil in home equity. You deserve this, and for a person in your situation, this is the best decision. Someday, I hope to have a place paid off, where I don’t have to make any monthly payment to anyone.

For the median income American, and for anyone making that darn mortgage payment, losing 50% of equity will be a toughter burden to bear. Anyone with a mortgage or less than 50% equity, cannot afford to be carrying that house right now, because it is a shackle more than a home.

[powayseller]

The value of a house changes as the dollar rises or falls? How? We are not exporting or importing the house.

Inflation is much higher than the gov’t 2% number. If you adjust for inflation (gov’t CPI), wages are flat. If you adjust for the true inflation, wages are falling, as is the value of my CD which is paying only 4.75%. True inflation, to anyone purchasing/living in this country, would involve taking a basket of good we actually purchase, in percentages we actually spend. Why do they make healthcare less than 1% of CPI, when it is $800/mo/family, and about 10% of the median family’s income? Why exclude gas and food, just because they are volatile. And just so everyone knows, retail was up last month mainly because of gas station sales. I hope all the dots are connected with this explanation.

[powayseller]

Mr. Smith got several critiques on his calculations, and provided an update in which his new calc show a drop of the price of the SF home to only $350K. However, he maintains that overcorrection to the mean will still mean a 50% correction.

Check his blog for the 3/18/06 entry. And he did appreciate sduuude’s comments.

[powayseller]

Good points. While it is interesting to forecast, we won’t know if we’re right until afterward.

I also don’t know what’s going to happen. I post somethings as a starting point for a discussion. Often I end my posts with “Does someone disagree” or “Any weakness in this argument?”

I am also trying to learn. Please don’t think I have all the answers. I don’t.

I’m in the contrarian and this-must-make-sense-or-I-won’t-do-it camp, along with economists Dean Baker, Robert Shiller, John Talbott, and investors Bill Fleckenstein, Yamamoto. Let’s remember too that not a single economist predicted the 2000-2001 recession in September 2000, when the stock market had already taken a pre-recession hit and all the signs were there. My contrarian and does-this-make-sense view has served me well. It kept me out of tech stocks in 99 and got me out of the housing market in late 05.

I welcome corrections in to my views, and appreciate when someone points out weaknesses and errors in my analysis. I love a good debate, and thank sdr and sduuude for disagreeing with me and being so nice about it at the same time 🙂

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