Housing: 2007 Thread.

[dullard]

Originally posted by: BlancoNino
If houses decline in price, why is that necessarily a bad thing? What about people looking to move somewhere but can't afford a house?

All price moves with ANYTHING (housing or not) benefit some people and harm other people. Your question is essentially this:

"Why did anyone care when the stock market plummeted in the great depression? What about people looking to buy stocks?".

True, people who want to get in are helped by falling prices. Also, people wanting to move up to a more expensive home/location are helped by falling prices. On the flip side, people looking to get out of the housing market and/or people who are going to downsize are all harmed (think the big baby boom generation who is now at the age that they qualify for retirement housing). In a way, the positive part offsets the negative part. A price cut helps those who buy and harms those who sell - generally it is all a wash.

If Walmart drops prices 10%, then Walmart's customers are helped. But Walmart's shareholders are all harmed. As may be some of Walmart's employees if Walmart can't afford to pay them as much or may even let some employees go. There are two sides to EVERY coin.

But housing is even more complicated than the normal picture. Much of our economy is based on housing. Housing problems drastically harm the construction/home improvement/furnature industries. In 2006, the GDP was $11.4T. Of that, $0.55T was household equipment/furniture, $1.15T was housing services, and $1.31T was new housing. Thus, housing was 26.4% of the total GDP of 2006. If the housing market declines just 10%, the GDP drops 2.6%. That drop is enough to take us from good growth to the verge of a recession.

Worst problems: Housing declines lead to MANY lost jobs. Housing declines lead to more foreclosures and higher lending costs.

Moderate problems: Housing declines mean that people can't get their PMI dropped, they can't get nearly as much home equity that they have been using to get through difficult times, they can't sell the house to get the money they wanted for retirement. Etc.

Yes, some people are benefitted. But guess what, everyone is harmed. Harmed directly by their own net worth dropping or indirectly harmed by the downturn in the economy meaning less money at the company where you work and therefore less opportunity for you to get the raise you wanted. That is why I have this thread. To let people know about the potential dangers and to plan for them in case the bad things do happen. The happy-go-lucky ideal that nothing bad will ever happen just leads to misery (think about Aesop's fable of The Ant and the Cricket - one prepared for the oncoming winter and the other didn't).

 

[Slew Foot]

Told you so, about a year ago. You laughed at me then (at least some of you did, Vic) but now all you RE apologists shudder at reality.

Suckers: http://flippersintrouble.blogspot.com/

 

[BarneyFife]

Housing was getting out of control. Homes that were $50k in 1992, were now going for $200k 10 years later. We have 1200 sq ft lofts going for over 300k in the midwest. It was only a matter of time when people could not afford to keep up.

 

[WhipperSnapper]

Originally posted by: BlancoNino
If houses decline in price, why is that necessarily a bad thing? What about people looking to move somewhere but can't afford a house?

I'm all for a large price drop; the price of housing has gone insane over the past couple of years, perhaps due in part to real estate speculators, many of whom will take a bath once the party's over.

 

[WhipperSnapper]

Originally posted by: dullard
Yes, some people are benefitted. But guess what, everyone is harmed. Harmed directly by their own net worth dropping or indirectly harmed by the downturn in the economy meaning less money at the company where you work and therefore less opportunity for you to get the raise you wanted. That is why I have this thread. To let people know about the potential dangers and to plan for them in case the bad things do happen. The happy-go-lucky ideal that nothing bad will ever happen just leads to misery (think about Aesop's fable of The Ant and the Cricket - one prepared for the oncoming winter and the other didn't).

Did anyone (other than free market dogmatists and cuckoo-cloud no-think economists, politicians, and pundits) really think that Americans whose jobs are being sent to India and China or filled by Indians on H-1B and L-1 visas would be able to afford severely overpriced houses or new houses, for that matter?

I'm not surprised at all.

I'm interested in the housing market, not merely because it is an important component of our economy and not merely because I need housing too, but also because it reflects the nation's overall economic health.

 

[WhipperSnapper]

Here's an issue that I contemplate now and then:

Is it better to rent or to own?

In years past I've heard that it's better to own, but with the insane price of housing today, I really question that.

Sure, as a renter you're pissing your money away, but it's not as though home ownership doesn't carry costs above those of paying the mortgage. I'm currently paying $700/month for a decent two bedroom apartment, and I wonder about the non-mortgage costs of owning a modest 1200 ft house.

How would my $700/month compare to the costs of property taxes, grounds upkeep, house upkeep, insurance, and city services that are often covered by rent (trash, water, sewer)?

I've also wondered about buying a 5-10 year old manufactured home. I'd much rather do it if it were on its own piece of land.

 

[Slew Foot]

Originally posted by: WhipperSnapper
Here's an issue that I contemplate now and then:

Is it better to rent or to own?

In years past I've heard that it's better to own, but with the insane price of housing today, I really question that.

Sure, as a renter you're pissing your money away, but it's not as though home ownership doesn't carry costs above those of paying the mortgage. I'm currently paying $700/month for a decent two bedroom apartment, and I wonder about the non-mortgage costs of owning a modest 1200 ft house.

How would my $700/month compare to the costs of property taxes, grounds upkeep, house upkeep, insurance, and city services that are often covered by rent (trash, water, sewer)?

I've also wondered about buying a 5-10 year old manufactured home. I'd much rather do it if it were on its own piece of land.

I moved to Sacramento in May 2005 for work. The house I was looking at buying was 1700 sqft was asking for 450K, I didnt think the economics of the area could justify the prices so I held off and rented the same house for $1350/month. If I had bought the same house I would be running almost 3-4K/month in mortgage/maintenance/taxes, so I'm saving about 2K a month by renting. Also the same floorplan is currently on the market in the area for 375K, haha.

Same story is going on all over CA, Im now confident in holding off buying until late 2009 unless there is some major economic shift.

 

[Phokus]

Intersting... i'm currently a renter in the north east but i'm thinking of moving to Austin and buying one of those $200K McMansions down there (on a 100K salary between me and my fiancee). What do you guys think about that? Is the housing market in Austin going to go down along with the rest of the country?

 

[Slew Foot]

http://www.news10.net/display_story.aspx?storyid=24380
More than 25,000 homes were in various stages of foreclosure last month, compared to 8,753 in January 2006. The statistics include notices of default, auctions, and homes repossessed by the lender.


Oooof, foreclosures up 300-400% in CA in Jan 2007 compared to Jan 2006.

 

[LegendKiller]

Originally posted by: Slew Foot
http://www.news10.net/display_story.aspx?storyid=24380
More than 25,000 homes were in various stages of foreclosure last month, compared to 8,753 in January 2006. The statistics include notices of default, auctions, and homes repossessed by the lender.


Oooof, foreclosures up 300-400% in CA in Jan 2007 compared to Jan 2006.

I still wonder what a pre-"post legislation" environment would have looked like. While I think that the 2006 numbers are a bit suppressed due to the massive front-loading of BK and charge-offs, I don't think you could say that the YOY increase is totally due to the normalization of foreclosure levels.

 

[LegendKiller]

Originally posted by: Slew Foot
http://www.news10.net/display_story.aspx?storyid=24380
More than 25,000 homes were in various stages of foreclosure last month, compared to 8,753 in January 2006. The statistics include notices of default, auctions, and homes repossessed by the lender.


Oooof, foreclosures up 300-400% in CA in Jan 2007 compared to Jan 2006.

I still wonder what a pre-"post legislation" environment would have looked like. While I think that the 2006 numbers are a bit suppressed due to the massive front-loading of BK and charge-offs, I don't think you could say that the YOY increase is totally due to the normalization of foreclosure levels.

 

[Vic]

Originally posted by: nullzero
Subprime lenders are going out of business in droves, from so many bad loans made over the past few years. Subprime lender out of business tracker http://ml-implode.com/.

Ah... my favorite website on this subject. I know a lot of people being personally affected (for example Meritage getting folded into LIME, both offices are on "mortgage row" in Lake Oswego, OR, and not far from me, plus I used to work for a different Baldwin [LIME] subsidiary).

However, the issue is not bad loans made in the past, but that Wall Street investors no longer wish to purchase similar quality loans today. Make sense? These lenders don't hold onto these loans, even if they service (collect the payments) on them. LegendKiller, who works on that side of the industry, could explain better if you asked him.
Essentially though, what these lenders do is act as a money conduit. They have to keep originating new loans and then selling that paper up to Wall Street in order to stay in business, with their revenues derived on fee and yield spread. They are currently getting hit from both sides: less volume on the retail side (less people buying/refinancing) and less buying on the wholesale secondary side.
It's a shake-up, but it'll straighten out over time. Housing is an essentially product like food and clothing, and a person can't rent unless someone already owns it to begin with. Yeah, some people are going to get burned, but this isn't the dot-com. Housing will never be worthless.

 

[Slew Foot]

Originally posted by: Vic

Housing will never be worthless.

No one ever said worthless, just back in line with incomes. Especially in CA where the avg. 60K household income is buying an avg 450K house. How long is that going to last?

 

[Vic]

Originally posted by: Slew Foot

Originally posted by: Vic
Housing will never be worthless.

No one ever said worthless, just back in line with incomes. Especially in CA where the avg. 60K household income is buying an avg 450K house. How long is that going to last?

I have no idea. It's already lasted years longer than I had expected. I remember people predicting doom-and-gloom for the housing industry back in 2000 (because rates were up, and lots of lenders struggled that year as well).
It's a cyclical industry. I always remember something my first boss told me back in '95 when I first got into the business: "When I'm not dining on caviar, I'm eating cabbage soup."

 

[LegendKiller]

Originally posted by: Vic

Originally posted by: nullzero
Subprime lenders are going out of business in droves, from so many bad loans made over the past few years. Subprime lender out of business tracker http://ml-implode.com/.

Ah... my favorite website on this subject. I know a lot of people being personally affected (for example Meritage getting folded into LIME, both offices are on "mortgage row" in Lake Oswego, OR, and not far from me, plus I used to work for a different Baldwin [LIME] subsidiary).

However, the issue is not bad loans made in the past, but that Wall Street investors no longer wish to purchase similar quality loans today. Make sense? These lenders don't hold onto these loans, even if they service (collect the payments) on them. LegendKiller, who works on that side of the industry, could explain better if you asked him.
Essentially though, what these lenders do is act as a money conduit. They have to keep originating new loans and then selling that paper up to Wall Street in order to stay in business, with their revenues derived on fee and yield spread. They are currently getting hit from both sides: less volume on the retail side (less people buying/refinancing) and less buying on the wholesale secondary side.
It's a shake-up, but it'll straighten out over time. Housing is an essentially product like food and clothing, and a person can't rent unless someone already owns it to begin with. Yeah, some people are going to get burned, but this isn't the dot-com. Housing will never be worthless.

Sorry dude, but this is where you lose it.

Mortgage lenders, such as the sub-prime ones mentioned, do act as a pipeline for larger purchasers. The loans are often sold, whole, to the purchasers, except for claw-back clauses whereby if the obligor defaults within the first year then that loan, or maybe even all loans (depends on the indvidual whole-loan sale) gets pushed back to the original seller.

This is a significant clause because it assumes that the original seller has the liquidity to actually BUY those loans back. Often, the perpetual motion machine that is a sub-prime lender hits reality, that perpetual motion machines are impossible. Thus, they run out of cash and cannot rebuy the mortgages. This not only hurts the actual purchasers of those mortgages, but also the investors who also bought them as asset-backed bonds.

In laymans terms. Company A gave you a loan. They then sold that, with certain limitations to Company B. Company B bundled it with millions of dollars of more loans and sold it to Investor group C.

Now, when those loans perform like crap, they get "put" or force-sold back to Company A. However, company A can't buy them and goes out of business. Whatever money is left over from the liquidation of Company A goes to Company B, who uses it to pay back Investor A.

However, those mortgages are trash and continue to perform poorly. Thus, Company A's follies, Company B's ignorance, absolutely kills Investor C.

This in turn makes Investor D, E, and F, much more wary of mortgages, especially sub-prime. Thus, they demand more money from every other company trying to sell the mortgages, increasing costs.

These costs are passed on to YOU, as borrower. The biggest problem with this is that when YOU, as a person who has a 5/1 ARM, wants to get a 30-year fixed to avoid that reset and jack-up of your payments, you cannot do so because it's still too expensive for you, because of Company A's moronic credit policy, Company B's craptacular due-diligence, and Investor D, E, and F's refusal to buy crap mortgages.

Thus, the whole pipeline, from lender to investor goes to hell.

Just ask HSBC, who had to increase their sub-prime write-downs by 25%, equating to a massive embarassment and fear of increasing defaults (and a large increase in lending costs in the last 2 weeks).

Housing is not going to be worth 0, it's going to be worth what it's actually supposed to be worth, according to inflation + small increases for small risk. This adjustment is just starting in some places and in others are in the middle. I think it's going to get a whole lot bloodier in the next 12 months, as many sub-prime lenders fold and billions of dollars of MBS/CMBS start to perform poorly, forcing busted deals and billions in lost dollars.

 

[Vic]

I understand buy-backs (or claw-backs as you called them). Trust me, it's an important issue for those of us on the retail side. However, note that nullzero said "over the past few years." I don't know of any major secondary purchaser who will go back years on a buy-back other than Fannie Mae.

 

[LegendKiller]

Originally posted by: Vic
I understand buy-backs (or claw-backs as you called them). Trust me, it's an important issue for those of us on the retail side. However, note that nullzero said "over the past few years." I don't know of any major secondary purchaser who will go back years on a buy-back other than Fannie Mae.

Not sure about "years", maybe a year or so. Not sure why I said clawback, I think it was a term from my previous job wrt comissions on defaulted loans.

The buybacks reverberate through the whole system and are also a feedback loop. This actually magnifies the effect.

 

[nullzero]

We will soon find out the full blow to the real estate market when summer goes into full swing. I am betting by the end of this summer, the real estate prices across the nation will drop the most on record for a summer in the post WW2 history. I fully expect the real estate fall out to hit the overall economy as well. I believe recessionary pressures will be in full force by the end of summer as well.

 

[Vic]

Originally posted by: nullzero
We will soon find out the full blow to the real estate market when summer goes into full swing. I am betting by the end of this summer, the real estate prices across the nation will drop the most on record for a summer in the post WW2 history. I fully expect the real estate fall out to hit the overall economy as well. I believe recessionary pressures will be in full force by the end of summer as well.

There's pessimism, and then there's just outright irrationality. I'm not bullish on the housing market myself, but you're essentially predicting that the housing market will see its drop since WWII in the middle of the summer housing boom.
And this while many RE professionals (like myself) are seeing a nice pick-up in business for the spring after the usual winter lull.

 

[nullzero]

Originally posted by: Vic

Originally posted by: nullzero
We will soon find out the full blow to the real estate market when summer goes into full swing. I am betting by the end of this summer, the real estate prices across the nation will drop the most on record for a summer in the post WW2 history. I fully expect the real estate fall out to hit the overall economy as well. I believe recessionary pressures will be in full force by the end of summer as well.

There's pessimism, and then there's just outright irrationality. I'm not bullish on the housing market myself, but you're essentially predicting that the housing market will see its drop since WWII in the middle of the summer housing boom.
And this while many RE professionals (like myself) are seeing a nice pick-up in business for the spring after the usual winter lull.

I said biggest drop on record for a Summer post WW2. Not biggest drop period. Home sales can still be good but prices can come down at the same time due to high glut of housing inventories and desperate sellers dropping prices to sell.

 

[Vic]

Originally posted by: nullzero

Originally posted by: Vic

Originally posted by: nullzero
We will soon find out the full blow to the real estate market when summer goes into full swing. I am betting by the end of this summer, the real estate prices across the nation will drop the most on record for a summer in the post WW2 history. I fully expect the real estate fall out to hit the overall economy as well. I believe recessionary pressures will be in full force by the end of summer as well.

There's pessimism, and then there's just outright irrationality. I'm not bullish on the housing market myself, but you're essentially predicting that the housing market will see its drop since WWII in the middle of the summer housing boom.
And this while many RE professionals (like myself) are seeing a nice pick-up in business for the spring after the usual winter lull.

I said biggest drop on record for a Summer post WW2. Not biggest drop period.

Hmm... I'll believe it when I see it. My concern is more that still-very-low interest rates trigger another spike in housing prices.

On that note, anyone with an ARM should refi into a fixed this year. I strongly recommend it.

 

[Slew Foot]

Prices in the CA central valley (Sac included) are down between 10-20% on a median/sqft basis and inventory just took a HUGE jump as everyone who was waiting for the "Spring Boom" tries to one up everyone else in the market. I should take some pics from my neighborhood, youll find it hysterical.

 

[Vic]

Originally posted by: Slew Foot
Prices in the CA central valley (Sac included) are down between 10-20% on a median/sqft basis and inventory just took a HUGE jump as everyone who was waiting for the "Spring Boom" tries to one up everyone else in the market. I should take some pics from my neighborhood, youll find it hysterical.

Yeah well, the Sac market is an issue unto itself. I think that's something that you continually don't want to recognize. It has just been mangled by rampant fraud and overspeculation. As I've told you many times before this, most of the country is not in so bad a situation.
What is going to happen in the housing market is really going to vary region by region this year. For example, you mentioned that Sac was down 10-20% last year. While a market in my area (Salem, OR) was up 24% last year. So you really can't translate what your market conditions are like and claim it's going to be like that for the whole country.
I can guarantee you, I wouldn't buy a house in CA this year.

 

[Starbuck1975]

I moved to SoCal in the summer of 2004, just as the market was hitting its peak. I decided to rent and wait out the market, hoping for a nice bubble burst to bring prices back to reality.

When I moved here, homes that sold for 300k in 2000 were going for 700k, thanks largely to the real estate speculators and flippers who flooded the market in the hope if making a quick buck.

Well now things are changing...every weekend, I see more and more "Open House" signs, ads in the paper for "motivated sellers" and a noticeable spike in foreclosures.

What did people expect? Take out an interest only, no money down loan on a home you cannot possibly afford otherwise, hold onto it for 3 months, and then sell it for a 100k profit. The number of empty "investment" homes around my apartment complex is ridiculous.

Sure, some people made quick cash in the past 3 years, but a lot more are going to get burned. What kind of idiot goes into real estate AFTER the peak and expects the home to appreciate EVEN MORE.

There will be blood on the street this summer...I hate to wish for people's misfortune, but this herd and greed mentality is what caused the problem to begin with. I have been patiently waiting, saving money and renting...and by early 2008, I am hoping prices come back down to reality.

 

[DrVos]

Originally posted by: Vic
...On that note, anyone with an ARM should refi into a fixed this year. I strongly recommend it.

Hi Vic,

This is exactly the position I'm in. My wife and I purchased a home when I was a senior in college. We got an ARM with a year of super low payments (we wouldn't have been able to afford a regular fixed mortgage while I worked part time) and gambled that I would get a good job as soon as I graduated. Fortunately, the gamble payed off and we are doing well money-wise.

What bothers me is that our interest rate has been ticking up .25% or so every month which has me wanting to lock in a fixed 30 year loan. The question that I have is: When? Should i wait until spring/summer/fall? Should I be looking for a certain rate?

Any light you could shed would be greatly appreciated