This week’s Voice of San Diego article was born when I dug into the DataQuick data to determine how many homebuyers were putting down how much. For all the ranting I do about EZ-credit, even I was kind of shocked: in 2005, 35% of San Diego homebuyers made no down payment.
Given San Diego’s flatness over the past year, and given the costs associated with selling a home, many of these people are effectively underwater. They, along with their cash-out refinancing and HELOC-ing brethren, really have no incentive to hang onto their homes if times get tough. If prices start down, or people lose jobs, or ARM payments adjust too painfully upward, the most obvious financial move for some of these folks will be to walk. This is one of the primary risks to the market, and the reason that I expect foreclosures to skyrocket at some point, though probably not before the 2007-2008 timeframe.
February 16, 2006 @ 8:49 PM
Interesting stuff, Rich. Do
Interesting stuff, Rich. Do you know if the numbers for Orange County are similar?
February 16, 2006 @ 8:54 PM
Counting the Costs:
Counting the Costs:
What are the costs to a borrower who “hands the keys to the bank” and says, “See ya later!” Must he file for bankruptcy, etc?
February 17, 2006 @ 1:49 AM
“Costs to a borrower” can
“Costs to a borrower” can get quite interesting. Usually a lender will file a “Notice of Default” (NOD) on a property after the payments fall into arrears. That goes into the borrower’s credit report as do any late payments. If a borrower can negotiate a “short sale”, wherein a new buyer comes in paying less than the principal on the loan, the lender has the option to go after the borrower for the “deficiency”.
Another thing that can happen is that the borrower could be taxed on the loss because the IRS rules classify it as income. Obviously, these are pretty drastic consequences, so it’s human nature to put it off as long as possible in the hopes of rescue from a recovering market. Many of these folks will burn every other credit position they have (credit cards, auto loans, etc) in order to try and hang onto the house. So by the time it all comes down to an outright failure, the borrower’s consequences often go far beyond just the mortgage on the house and bankruptcy becomes almost inevitable. The downsides under the new bankruptcy laws are going to make things even worse for some of these people.
However, the good news is that it is only the people who lack the resources to debt service their loans under market terms whose assets are at risk. It’s only a loss when you go to sell. In the event of a downturn in the market there will end up being a lot of peope who are “trapped” in their homes as a result of being upside down on the mortgage, but only the folks who lose a job or get sick or who were so strung out on their payments that an adjusted rate to market terms starves them out will actually have to face a loss. So, not everyone will get burned.
February 17, 2006 @ 9:03 AM
So, not everyone will get
So, not everyone will get burned.
This isn’t quite true. For everyone that has has negative equity, and for everyone whose house value has plummeted, they will feel like they’ve lost wealth (and they have!). More importantly, they will lose the ability to get into cheap rental units if they continue to try to service their mortgage. In other words, they will be making huge payments for years to live in a place that they could have rented for considerably less.
The point is, walking away from a mortgage has one huge benefit–the amount that you will be paying for housing falls tremendously.
February 17, 2006 @ 9:33 AM
Doesn’t surprise me one bit.
Doesn’t surprise me one bit. That is pretty much what I have seen the past 2 years in the San Diego area. It isn’t just 100% financing on 400k condos either. It is happening on 1.2 million dollar homes as well. Lots of those people doing the 100% loans are also using stated income. Based on the statistics, most people in San Diego do not make enough to afford the 500-550k median priced home (or whatever it is at this time).
Per ziprealty.com, the SD inventory is at 16,795 at this moment. Looks like 17,000 is in the very near future…possibly by the end of the month.
Another F—-D Borrower – Casualty of the Housing Bubble
February 17, 2006 @ 1:52 PM
The big questions are: how
The big questions are: how many of the 16,000+ listings involve sellers who are compelled to sell no matter what; and how many such forced sales does it take to drive the market? I mean, I can remember a time (mid-90s) when foreclosure sales were plentiful enough that they set the baseline. Any savvy investor knew that even if they couldn’t purchase the one property they were after for their price that it only took some patience, because another REO would invariably be coming along to take it’s place. I can remember looking at certain parts of the market where out of 8 sales, 7 would be foreclosure sales and the 8th would be priced the same way because that’s what it took to compete.
I don’t think it’s imminent, but I do think it can happen…again.
February 18, 2006 @ 3:01 AM
Socal, correction, my
Socal, correction, my friend, SD inventory is now at 16,847. not that anyone is counting… =)
February 18, 2006 @ 12:34 PM
That number is “like
That number is “like so 9 hours ago”…inventory is 16,907 here at 12:35 p.m. Hey what’s 60 new listings since 3 a.m. anyway, right?
The end is nigh…
Cock a doodle doo
February 17, 2006 @ 11:53 AM
Most people probably think
Most people probably think that debt taxed as income is discharged through BK – but as far as I know it’s not – Uncle Sam gets paid even if your other lenders get screwed.
So if you short sell for $100k loss and declare BK – the governement will still come after you for the taxes even after Chaper 7/13. So even after your “clean start” chapter 7 – you are still in the hole for $30k.
I suspect many people are abount to learn this the hard way.
February 17, 2006 @ 3:56 PM
These are interesting
These are interesting results. One does get the uncomfortable feeling that a potential “house of cards” has been built and one of the structural components is highly leveraged financing. I’m reminded of the phrase that a homebuyer has to be 1)ready, 2)willing; and 3)able to purchase. If the financing engine sputters because of tightened standards that could have a dramatic impact as new potential buyers are “unable” to buy because they might actually have to put some money into the deal. These numbers imply that if Wall Street backs away from highly leveraged deals (because of losses or credit agency ratings) it could have a large impact on the number of prospective buyers – ouch!
February 18, 2006 @ 9:19 AM
This data is for the *city*
This data is for the *city* of San Diego, not the county, right? thanks
February 18, 2006 @ 9:22 AM
I’ve been reading this blog
I’ve been reading this blog for a few weeks. I live in the mountains west of Denver and San Diego is on my list of possible retirement areas. The real estate market here is awful and has been since 2001. I can’t say the real estate pros have been all that honest about what’s been happening here, either. What’s not being talked about are the concessions that sellers have been required to make to sell their homes. A common one is paying the closing costs. So the sold price does not reflect the actual price the seller ends up with in his pocket. Plus, there are thousands of foreclosures here and sellers are having to compete with properties that have been foreclosed. That means dropping their asking prices. Simply put, the housing bubble you’ve enjoyed has passed Denver by.
I’m a native of So Cal and all my life I heard about the imminent housing decline, but it never seems to happen. Prices seem to go up and up and up and nothing seems to stop it. Even during the last bust in the early 1990s, the prices didn’t decline all that much — and zoomed up far higher after the bust was over. Sometimes, I don’t think that the experts take into consideration the impact of both legal and illegal immigration on what’s happening in So Cal. As long as immigrants continue to flood into that area, what’s to stop the boom? The illegals can group three families together and cram into a 1000 sq. ft. house. Immigrants with money from Asia can buy palaces in Del Mar and Rancho Santa Fe.
Plus, many people are willing to pay a premium for nice weather. Believe me, as a displaced Californian living in the Rocky Mountain area, I am more than willing to pay a bit more for a better climate year ’round. The problem is, it will be very difficult for people like me to afford a dump out there because of the sick real estate market here. And I have a 2,800 sq. ft. house with beautiful views on 2.3 acres! Our prices just haven’t kept pace. Sigh.
February 18, 2006 @ 11:00 AM
I shared your pain regarding
I shared your pain regarding the cost to move to CA. We moved from Phoenix, where the bubble started several years after we left. We had almost no appreciation, and were almost unable to buy here. My husband had to ask for a raise just to afford a tiny house. We got one of the houses in an outlying area, last to see the runup in prices. Of course, it was one of the first to see a decline, but thanks to its unique location and acreage, we sold it quickly. Wait for a few years – prices will come down. I’ve already spotted a few preforeclosures in my area.
February 18, 2006 @ 12:30 PM
Centex is offering 70K
Centex is offering 70K reduction in prices in San Diego County developments (SFH) this weekend. The evidence is ALL around me that what is about to happen will be SIGNIFICANTLY different this time.
Inventory is piling up…
Inventory is climbing in Phoenix…(all SoCal $$)
Prices on new homes are being cut…
No more first-time buyers…(they’re priced out)
The MAIN difference which is overlooked is that in the last downturn, most people were not “legging in” to additional investment homes with the equity from their primary residence. Every week I meet some fool who has JUST CLOSED on an investment home in AZ or TX or some other dumb place, using home equity or no equity to get in.
This is the BIGGEST HOUSE OF CARDS EVER BUILT!
“This just in…gale force winds heading east and west…highlights at 11”
Cock a doodle doo
February 18, 2006 @ 4:00 PM
teatsonabull- I have a
teatsonabull- I have a friend who couldn’t sell her house in SD to move to Phoenix, where her husband wanted to flip homes. So they took a HELOC, and purchased an investment house in Fountain Hills (suburb of Phoenix). Another friend told me today he plans on selling his 1930’s Escondido home for $1mil, and plowing the proceeds into Austin real estate. I told him TX was cheap for a reason, but he seems to know more than me. It’s full steam ahead: the race is on to Texas.
February 18, 2006 @ 4:21 PM
Stories like this help me understand why people go for dark matter economics… or alchemy… or fusion in a jar… Magic pixie dust is so appealing, especially when everybody else seems to be getting rich using it!
February 18, 2006 @ 10:35 AM
When will people start
When will people start camping out at their house with shotguns to defend against foreclosure?
Seriously.. almost everyone that I’ve met in the real estate industry is completely insane. I do not want to predict what happens when this fantasy comes to an end.. even if you happen to mention to them that prices are dicated by a free market based on economic principles they usually completely freak out..
I predict we’ll start hearing about people with shotguns camping out to ‘protect’ what’s theirs… even though they have 0 equity, 4 nice cars and a boat that they got to enjoy for all this time…
February 19, 2006 @ 8:36 AM
I used to have to feel
I used to have to feel defensive when I told people I was invested in the stock market and read The Motley Fool. People told me, including an ex-girlfriend, that real estate is it! I tried to tell her that over the short term that may be so. Its a long term thing, and terribly illiquid. She and others just gave me a look that said, damn it I got burned buying Cisco at 85$ it ain’t gonna happen again.
Now it looks to be happening again. So let me ask this, if we all strongly feel that this bubble is bursting as we speak, how do we profit? I realize that this is the intent of Rich’s site long term, but short term we seem to focus on a blow by blow decline. Shouldn’t we take a step back and say, ok we are past the peak, what symptoms are next? I know no to asset bubbles are exactly alike, but they do all seem to be eerily similar in terms of the phsychology. Is that the indicator to watch most closely? Are there more secondary effects which will be better canary’s. For instance, a slow down in sales at the local BMW dealership? I also liked the thread on restaurants. Since real estate has been the heavy lifter of job creation, Rich looks at that industry, but what about industries that support real estate? Stuff like Tanning Salons and Brazillian waxing joints. Its just a thought.
February 19, 2006 @ 3:12 PM
The difference between
The difference between buying a piece of property strictly as an investment and viewing one’s own home as an investment may seem minor but it isn’t. Most people view their home as part of their identity, so a loss of value in their home cuts into that identity. Home purchases frequently carry with them a lot of emotional baggage not normally found with other asset types. It is that involvement of ego in the transaction that makes a lot of our local speculation hazardous.
The good thing about investing in real estate is that you can tell what you’re getting, both in terms of the asset itself as well as the market in which it competes. Unlike when buying stocks, the markets for which move quickly, the values are not dependent solely on what the companies are or are not reporting about themselves – it is impossible to really know how well a company is doing unless you’re on the inside. Not so with real estate. It is a tangible asset in a basically transparent market. The other attribute that appeals to a lot of people is that these markets do tend to move slowly enough that an investor who’s paying attention can often make an educated prediction about the direction, if not the distance, of the trend. Even in a down market there are usually opportunities to be had if investment is the primary motivation.
A real investor doesn’t care much what bubble they follow, because up is up. There are some who believe that the bubble basically moves from one asset type to another; real estate became the investment of choice as a result of the retreat from the stock market after the Dot.Bomb blowout. Right now, commodities are where some investors have moved. Stocks will probably become the flavor of the month(again) after that. Then it’ll be back to real estate. Having investment money laying fallow does nothing for the person who is following these bubbles as a way of avoiding having to work for a living.
There’s nothing inherently wrong about investing for the money or taking advantage of a rising real estate market to do better for your family. It’s when people get involved in the investing game without assuming the investor’s viewpoint – an investment is worthwhile on the way up but when it isn’t it becomes time to move on. Being greedy isn’t wrong, but being greedy and foolish or emotional is a bad combination.
The way to make money in real estate is to pay attention to what’s going on. The old adage has never been more true – you make your money in real estate when you buy. Now is indeed a great time to buy if you really think the market will continue to increase during the time you intend to hold your position.
February 21, 2006 @ 1:25 PM
One way to profit from the
One way to profit from the imminent decline in sandiego housing stock is to trade futures and options on futures. In April 2006 the Chicago Mercantile Exchange will begin trading housing indexes on San Diego and a host of other headliner markets such as Miami, Las Vegas and others.
February 21, 2006 @ 4:32 PM
By the time they start
By the time they start trading, 2 months from now, the bubble will be general knowledge, and our chance to make money by being contrarian will be reduced, right?
February 20, 2006 @ 10:36 PM
If I am reading this chart
If I am reading this chart correctly, nearly 55% of the buyers in 2005 are in for less than 10%. Considering that this may not be the most sophisticated bunch of buyers (no intention of slander here, just claiming to be one not willing to participate in the zero-down Greenspan lottery game), it wouldn’t surprise me that these people couldn’t get out of a house for less than 7% or so (typical commission plus incidentals) plus moving costs and money towards a deposit on a rental, etc. … This leaves little margin to keep these buyers heads above water.
Recent anecdotal evidence I’ve seen in our community in California (not San Diego) is that recent joiners to the ‘home-owners club’ do not realize all the incidental costs that come along with owning, operating and maintaining a home and have failed to maintain their membership in the club. This has been much to theirs and their mortgage holders sadness.
With the fairly high volume residential sales that we’ve seen of late and the fact that market prices are set at the margin, then it follows that there is a substantial portion of the market that will likely be pushing supply numbers up – if not sooner, then later either from lack of appreciation or inability to keep ahead of cash flow. And with those rising supply numbers would come a reduction in the demand for the goods that the ‘hot’ real estate sector of the economy has been producing … a potential formula for a self-reinforcing trend?
February 21, 2006 @ 3:05 PM
One question that came to
One question that came to mind after reading your posting is this- if 35% of the buyers had zero down, then what is your estimate of the ratio of owner occupied versus non-owner occupied with zero down? The reason I ask is that I believe statistically, owner occupied has a far better track record in terms of non-default that non-owner occupied. Thanks.