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August 27, 2006 at 8:22 PM in reply to: Biggest Drops in 2007 and 2008; housing will fall 50% nominal terms #33587
powayseller
ParticipantI don’t think we’ll have a bunch of investors scooping up properties in freefall, especially when rental rates are falling as tens of thousands of San Diegans are leaving town or added to the unemployment rolls. Rental prices will stay flat or go down in 2007 and 2008.
Besides, how many people have got 100K to put down on a house? The opportunity cost of that money has to be considered too. You can’t just think that the cost of the $500K house is only $400K, bec. you took a $400K mortgage. You’ve got to think that the entire $500K is costing you 6%, and is the tenant going to cover that?
Who would want to buy rental property when the media is full of median price dropping 10-20% year over year? When rental rates are falling? When the only people who would rent are those evicted from their homes in foreclosure, and stories of non-paying tenants get more common? How many high FICO, stable job types of tenants would remain in 2008?
Once the market is desireable to investors, wouldn’t it also be desireable to first time buyers, and bubble sitters? They would buy, so where is the rental pool?
And let’s remember buyer psychology. There will be fear of further price drops.
Another consideration is the number of investors out there. How many homes will be bought by people who want to live in them, vs. people who want to rent them out. Is it typical to have so many rental homes, as we had in this last cycle? If the usual stock of rental homes is 5% of homes, and we were at 35% of homes due to speculator frenzy, then we have a big oversupply of homes that needs to be absorbed and not as many investors as needed to make significant price movements.
Your idea does merit further discussion. Perhaps you could lay out the plan how someone would earn 7% on a $320K house. If that were a guranteed rate, after taxes and maintenance and costs of having the place empty between tenants, that could be a draw for some people.
I was told that a house should cost 8x annual rent, to be cash flow positive. The $320K house in your example should provide you with an annual rent of $40K, or $3,333/month. That seem like a high payment for a $320K house, since we tenants are used to paying about half of the mortgage value. For example, the house we rented last year in my favorite neighborhood, Green Valley in Poway, cost $2500/month. At 8x rent stream, the landlord should have paid $240K, but she bought it for $650K. (It was underpriced, not listed on MLS yet, so she got a good deal. It was worth a $800K at least in the summer of 04 when she bought it).
Anyway, if she gets $2500/mo rental income from the tenant, which includes gardener, pool, and insurance, she gets net only $2200. Add taxes and maintenance. So, how much should that house be worth for her to break even? How much should she pay for that house to make the 7% you mention?
I’d love the input of the landlords on this forum, and how they decided to buy in the last downturn.
August 27, 2006 at 7:51 PM in reply to: Biggest Drops in 2007 and 2008; housing will fall 50% nominal terms #33583Participant“I just belive the declines will be more front loaded this time around. I could be wrong but that is my sense of things right now from what I see on the streets.”. We’ve got to keep you off the streets, sdr, this could be dangerous to your forecasting abilities.
Your comment is somewhat odd. What indicator do you have that the price drop is front end loaded? We haven’t even started the 2008 and 2009 $1.8 trillion ARM resets yet. We haven’t started the MEW-related or construction layoffs, which will result in tens of thousands of San Diegans out of work. Our unemployment rate will go up to 10%, brought down only by a further exodus of these unemployed people to other cities.
To be truly front end loaded, the majority of homeowners who would face foreclosure due to a resetting ARM or unemployment, would have their home listed for sale today, pushing up their MLS listing from 2009 to 2006. Is that what you are seeing? I seriously doubt it. I’ve seen houses ready to be auctioned off, that aren’t even on the MLS yet.
Schahrzad Berkland
Participantmydogsarelazy, you’ve fostered much creativity in your home. That’s really great. Now, about that long URL, that doubled the width of the entire thread… (Pretty please, use Links)
Interesting perspective, PD on sports. My entire family is very toned and in shape, but are not on any teams right now. Competitive sports is not the only way to get fit. My son did 3 years of competitive soccer starting at age 7, but he is one of the 80% of kids who drops out of team sports by age 13.
I have to say, the number of times he laughed and felt happy playing soccer is probably counted on one hand. But running with his dog, playing flag football with his friends, swimming laps with his sister, all cause laughter and squeals of delight.
Personally, I think competitive sports are great only if the child is asking to do it. In any case, every child needs physical activity, whether a dance class or just riding his bike around town.
It’s very interesting that many parents sign up their kids for sports teams, thinking the child is learning team spirit. From what I see, “team” sports are less about being a group, than about competing against each other. The best players in the team get the most playing time, while the others sit out. Like in band, where you compete against your classmates for the best chair, you’re constantly trying to be better than your mates, to get more recognition, more playing time, more approval of coach and parents.
While team sports are satisfying for kids who like to compete in this way, they do not nurture a feeling of comraderie and teamwork in the sense that I consider important. Real teamwork is found in building something together, like the house my kids built on a recent mission trip, or my daughter’s participation in her church youth group, or my son’s movie making.
At what age should kids start competing, and getting ready for the adult world? At what age should a tree’s support post be removed? With a tree, you don’t remove the post to encourage the tree to be independent and strong against the wind, but wait until it has developed sufficient strength to go it alone. Kids get plenty of competition in their lives, so I find it valuable to give them opportunities to work in tandem, in harmony. If everything they do is a competition, where in their lives is the joy of just doing, learning, being?
So while I like competitive sports, I think they take up too much time in our culture, and are not sufficiently balanced by doing sports for sports’ sake. A middle schooler should have no more than 3 days per week in a competitive sport, including games on weekends, and spend the other 4 days doing a sport for pure enjoyment: bike ride with mom, running with dog, basketball with friends, swimming, etc. This way, the child is not constantly led by adults, and trying to get their approval.
ParticipantEvery one of those statement made by Steve is false. He is either woefully undereducated, in denial, or lying. For this reason, the U-T deserves a thumbs-down. It is one thing to write your opinion in an Op-ed piece, saying “I don’t think prices will go down because I believe the biotech sector will grow creating high wage jobs due to Company XYZ announcing expansion plans”. But to come out and give this kind of erroneous statements as facts, is a sorry example of journalism.
No wonder people around here are disgusted with realtors. People like Steve have soured the mood, that’s for sure.
Schahrzad Berkland
ParticipantThe tiers of the market depend on each other. The middle end softened one year after the low end, because the low end seller couldn’t find a buyer for his home. And so the ripple effect moves up…. In the last downturn, all prices and loctions went down.
What is a middle end buyer? My lab tech who put down $150K on his $650K home in Carmel Valley, whic is worth $1.3 mil today? He has a 5 year I/O loan. When it resets, poof!
What about the millions of Americans, owning their homes since the 1980’s, who cashed out their equity and have none left? Now they are in foreclosure, since the interest payment have gone up so much they can’t make the payments. I found 3 old-timers in very good Poway neighborhoods, purchased in the 1980’s, starting equity refinancings in early 2000’s, and are now in foreclosure.
Don’t forget that many many people took the equity out of their homes. Not only is the equity gone, but they have rising debt payments on those adjusting loans.
Add in the slowing business at builders, lenders, retailers, and you can in foreclosure even with a fixed rate mortgage.
People will hold on as long as possible, and that’s why Ryan Ratcliff calls foreclosures a lagging indicator. He correctly said, “People will eat macaroni and cheese before they’ll stop making their house payment”. But with so many people living on the edge already, with so many adjusting mortgages and overextended credit, time is against them. Ultimately, if you can’t make your payment, you are going to lose your house.
Read the Roubini blog. Yesterday, he disputed the 8 common myths given by housing and economy bulls. Good stuff.
ParticipantHey, you are on fire with all those links and graphs. Love your post! Now I need to get motivated to make good posts like you.
Can you imagine if we need to get back to the trough of 22% of income spent on debt? I see a huge crash. Too many optimists here… No way will we go down 30%; we are going down hard.
Did the indentured servants run away, like our dear homeowners are bound to do? With 1/3 of mortgages I/O, 25% of homeowners having zero or negative equity, this doesn’t look good. If these zero and negative equity homeowners walk from their homes, the MLS listings could increase to over 100,000. I think you all need to start thinking about seeing MLS of 100,000 by 2008, and sales of 5,000 per year.
We have never had junk bond guidelines extended to housing.
In every past housing bust, borrowers had equity in their homes, and mortgage payments they could service. For the first time in our history, bank collateral is NOT the value of the home, but the expected increase in the value, and loans were made based on a temporary low payment without any regard to how those payments would be made once they increase 50-75%, and make up 90% of the borrower’s income.
My estimate for Summer 2008 MLS in San Diego: over 100,000 homes. Sales will be 2,000.
Schahrzad Berkland
ParticipantI think SD Realtor wrote that if you represent yourself, you can request the 3% buyer’s agent coop is given to you, or deducted off the sales price. So you should be able to save 3% by representing yourself.
I’d also like to add that one thing that I absolutely hate, is that many realtors discourage, or even scold me, for talking with my other party. Don’t let them tell you that you have to go only through them. I find it necessary and useful to have some discussions directly with my seller and buyer, and any realtor who tries to boss me around, is going to get an earful (just ask my buyers’ agent about the big lecture where I told her off, because she said I shouldn’t be calling my buyers).
Now my only question is: is there any data at all, or any anecdotes, about buyers representing themselves? It sure has the potential to save a lot of money!
ParticipantRight carlisle. I was making more of a comment on the fact that many homes were purchased by people with no money down. As the no-money-down loans decrease, the middle tier buyer can’t sell his house, since the $600K buyer was going on 0% down, so the guy can’t move up to the $1 mil + house. I should have been more clear.
ParticipantDr. Roubini is expecting the Fed to cut rates the next meeting, or the following one. Because the signs of recession will be so strong.
The only hope for our economy is:
1. Change from consumption to research and development, creating, producing ideas and innovations and products
2. Cut back on government spending, eliminate the Medicare bill that was just enacted, reduce social security promises and tell Americans they all have to work part-time in old age to pay for the excesses that they created. Else: the next generation which did not create this mess has to pay. Which is more fair?
3. Encourage saving over spending, by not taxing interest earned
4. Overhaul the tax code
5. Elect politicians with the will and ability to enact life-saving policies, and unite Americans in a common cause to improve our country
#3 and #4 are optional I think, but the others are a necessity. Without it, we are going the way of the Romans; in textbooks they will write about how America was once the super power.
ParticipantGreat article! I always love recession stories, because it’s about time the media covered what we’ve been talking about here since last winter.
Also check out Roubini’s blog from 8/26, where he lays to rest the 8 perma bull reasons why housing won’t cause a recession. He makes strong cases for bank and GSE failures, and the biggest US recession ever. Nasty, deep, strong recession.
ParticipantThis has been covered in length, and 100% cash, with some money in gold is the preferred option now, due to the upcoming recession.
Read the archives, search for key words Fleck (or Fleckenstein), cash or gold or stock market or Zeal (commodities trading service well loved by many of us) or Treasury.
We’ve had many threads about how to hold cash: CDs, Treasury, euros, swiss francs, as many of us are concerned about the falling US dollar, and how much further it might fall when more housing loans go bad and banks and GSEs go under. Nobody here has any answers.
Read the bubble blogger in the link at right, TheBigPicture.
I went 95% cash in March, in anticipation of a stock market correction that I knew I wouldn’t be able to time. The current uerber-bull rally is going to fizzle out soon enough. Just wait for a few more bad housing reports, lender shake-downs, and poor retailer reports, and the stock market is going to start its long climb down. I am expecting the stock market to fall 30% at least over the next year. When we’re in the middle of the recession, maybe next spring, I’ll get back into stocks. I am only speaking for myself.
ParticipantFor similar sq ft., Carmel Valley average price in 2006 is $1,223,000 and in 2005 was $1,395,000, a 12% drop.
The other thing that is going on is the 2-tier pricing. In the same neighborhood, some sellers are listing at lower prices, i.e. 2003/2004 pricing levels, while others are overpriced, i.e. as if we are still at the peak. Buyers are for some reason buying homes at both price levels, so the average is in limbo right now, but that will not last long. In any case prices are going down.
ParticipantThanks for the info, Steve. I will get more info on the Carmel Valley stuff.
So you’re saying that all coastal property fell in the last downturn, because everything fell…nothing was immune.
Have you noticed any tightening among lenders?
What are the types of reasons that escrows don’t close? Is the rate of escrows falling out, the same, less, or greater?
ParticipantYeah, my brother was hired by the #2 law firm in the country, on Wall Street, because he had a law degree from the Univ. of Michigan and wrote for their Law Review and clerked for a Supreme Court judge. If he had graduated from the ASU law school, he never would have been interviewed. But he ended up hating it and left. So in the end, it didn’t matter that he went there. My friend in Phoenix went there too, and is a stay-at-home mom. So it didn’t matter for her either. Her husband went to a regular law school and works for himself, billing at $300/hour.
My husband has an engineering degree from Univ of Nebr at Lincoln, and he is in the top 5% of salary for his occupation, so that several promotion job offers he received had to be turned down, because he would earn less money. He is maxxed out, and nobody cares he has only a bachelors degree. He has the character, intelligence, creativity, and he can sell the company based on his honest good work.
A survey of the Fortune 500 CEOs found that more than half went to little known public schools.
For these reasons, I don’t see the emphasis on getting approval from an Ivy league admissions counselor.
Seek approval from yourself. Develop your creativity, work ethic, flexibility, morals, relationships, spiritual life, humility, and service to God and others.
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