Hello Everyone,
I would like to say a special “thank you” to Zovall and IrvineSingleMom for inviting me to join them as a poster on the Irvine Housing Blog. I have not been a reader or contributor to housing blogs very long; in fact, my wife regrets ever showing me these blogs as I spend too much time with them. I would like to take this opportunity to tell you a bit more about myself and summarize my outlook for the Irvine real estate market.
First, I need to remain anonymous. I will share some facts about myself and some generalities, but for reasons of paranoid self-preservation (I wear a tinfoil hat); I must keep my identity a secret.
I have lived in Irvine since 2003, and I lived in San Diego from 2001 to 2003. I sold my house in Florida before moving to San Diego and I chose not to buy in 2001 because I thought the prices were too high. Little did I know a massive speculative bubble was about to take off. I am fairly financially conservative: I am unwilling to finance a home with exotic terms (meaning other than a 30 year fixed rate mortgage). I carry no debt, I pay no interest, and I am in a position to purchase if the price and the terms were to my liking. I get annoyed at being called a “bitter renter.” These facts about me influence my perspective and come through in my posts.
I have a Masters Degree in Land Development (there is actually a degree in this), and I work in the real estate industrial complex (REIC). I am an entitlement project manager for a local real estate developer. My job is to take raw land and obtain permission to build houses on it. Because of my line of work and the people I am in contact with on a daily basis, I have a unique perspective into the wholesale side of the real estate market. My company buys raw land, often from individuals, but sometimes from other investors or companies. I do my thing, and then my company sells entitled lots to builders: they are our only customers. Irrespective of what the builders may say in public statements, I see what they actually do in their private dealings. I cannot and will not share details of the projects I am involved with or specifics of deals I see, but I can and will convey general happenings and trends I see in this market as it reveals a lot about the future of home prices.
I do not have an incentive to lie in order to hype the market. My livelihood is tied to the real estate industry, but my income is not derived directly from residential real estate transactions. Realtors, mortgage brokers, and many others depend on these transactions to survive; therefore, they have a strong incentive to convince buyers to step forward even if it is not in that buyer’s best interest. I have no such incentive. I can provide an objective analysis of the market from an industry insider’s perspective without being tainted by transaction dependency.
Also, I have a fascination with financial markets. I became particularly interested after losing money in stocks in 2000, and I devoted much time and attention to the workings of financial markets in general and the markets for stocks and real estate in particular. As a hobby of sorts, I trade stocks using a self-created automated trading strategy with Tradestation.com (I am not opposed to speculation in liquid assets like stocks). My posts will focus on real estate, but I may draw upon experiences or concepts from other financial markets in my analysis or examples.
There are many reasons to post to a blog like this. It is nice to have a forum where I can share my experience and insights with others, and there is an element of camaraderie and entertainment too. However, the passion behind my posting comes from my desire to stop people from being ruined financially by buying in today’s market. I am a housing bear, and I make no apologies for it. If I can save even one potential new buyer from bankruptcy, I will feel good about what I have done here (Sorry, I don’t have much sympathy for current F@cked Borrowers – FB’s. I have compassion for ignorance, but disdain for avarice). That being said, why am I such a bear?
The Future of the Housing Market
I would like to share a series of posts from other blogs that summarize my reasoning better than I could:
Evidence of a California Housing Bubble
Risks of a Serious Home Price Decline
There’s a Housing Bubble — A Fact-Filled Opinion
In summary I would note a few basic facts/opinions:
1. Price levels are determined by the balance between supply and demand.
2. Demand was increased by sub-prime buyers and loose lending standards. This was the primary mechanism which inflated this bubble.
3. The previous demand stimulus is being removed from the market.
4. The supply of homes for sale is increasing, and it will continue to increase. This supply will drive prices lower.
5. Prices will decline until fundamental valuations bring new buyers to the market (like me).
I would like to expand on #4 above because it is the most important point moving forward. Look at housing inventory as being like cholesterol: a high level is usually bad, but the ratio of good inventory to bad inventory is even more important. Good inventory is discretionary sales inventory. These are sellers who would like to sell if they can get their price, but they really don’t have to sell. An inventory of for sale homes made up of good inventory, even if there is a lot of it, will not drive prices down. A large amount of good inventory may slow the rate of appreciation, but it won’t take prices down. In contrast, bad inventory is composed of those homes on the market that must be sold at whatever price the market will bear.
Bad inventory has three main sources: life-changing moves, homebuilders and foreclosures. Life-changing moves are people who must sell a home due to job relocation, layoff, divorce or other factors. Homebuilders must build and sell homes, or they will go out of business. These two sources of bad inventory are ever-present, but usually a small enough percentage of the overall market that they don’t take prices down.
The final, and most important, source of bad inventory is foreclosures. This is where the action is. When foreclosures increase above levels where the market can absorb them, prices decline. When foreclosures increase dramatically, prices decline dramatically. This is what is going to happen over the next 2-3 years as all the sub-prime borrowers and over-extended homeowners buckle under the weight of their mortgage payments. Foreclosure statistics are the numbers to watch.
P.S. I promise future posts won’t be so long.
Irvine Renter –
1. Thanks for the information and your contributions.
2. In line with your general observations about a slow down (across the economic board – not just housing) I wonder if some of the perma-bulls (or better yet, new home builders) will begin reconsider given both Greenspan’s commentary and the recent 500 point market plunge… which may result in further new home price reductions, and perhaps countless more flippers caught in the guillotine… I suppose that I don’t have much sympathy for them either.
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Nice summary! Looking forward to more blog posts..
I look forward to more of your writing.
I agree wholeheartedly that people should *not* buy now. The artificial demand and price bubble created by elimination of underwriting standards and dislocation of risk premiums, is in the process of reversing. Once underwriting guidelines are again established within the next year, either via state regulations or investor appetite, housing prices will drop 30% in a matter of months. The late 2003/2004 surge in prices caused by 1.75% Fed funds rate is going to reverse.
That said, how can we knock some sense into bubble blogger readers, who are posting about making offers on homes? It just boggles my mind that long-time piggington readers are out there making offers on houses! This just indicates they did not own before because they were priced out, not because they had any superior understanding of bubbles of business cycles or real estate markets.
We need to do a serious education campaign, because our efforts have fallen short. What do you all think?
Looking forward to all the information I’m getting from this and other sites; been recently looking around the OC area housing market even though I know I cannot afford anything right now. Keep up the good work!
Wow, between IrvineRenter and zovall I’m almost embarassed to post my strictly amateur, “out and about” observations. You guys are the best! I’ll see what I can do to step up my contributions. We’re in this for the long haul – originally I had thought 2008 would be a reasonable time to buy but now I’m pretty convinced that 2009 makes more sense for me. We shall see how the market behaves. I look forward to being educated, entertained, and continually fascinated by my fellow bloggers and forum members as we move forward. Welcome again, IrvineRenter! (and thank your kind wife for us all, please!)
Great stuff! I look forward to more. Congrats on joining the team!
Welcome aboard and nice intro.
I “used” to be a real estate investor here in So Cal and I look forward to your insights.
Great post. I too sit on the sidelines, and not bitter 🙂 As for people buying into a falling market, I agree and see it up here as well. I think it takes a while to correct behavior, it has a lot of momentum. People are used to making money on their homes, no matter what, and are used to the feeling that they MUST own a home. Either way, they will learn the hard way. This market is so unstable and crazy I don’t know why any one would choose to buy now. I believe the territory we’re in now is unprescedented and will get worse. And the 500 point drop in the stock market is only the beginning, and will have a negative impact on RE. And before any bulls chime in, no, stock investors will NOT flee to RE for safety. That’s just absurd.
Umm, I didn’t know you were just a part timer… ha ha! I’m always late to the party…
-bix
I’m really glad I stumbled upon your blog. My wife and I were out looking over the last week or so just to get an idea what the different houses/developments were and how much we could get for the money. It’s great to see you lay things out like this so we have a better idea of what’s going on at the ground level.
Thanks for putting this blog together!
Great post, and just heightens the hilarity of the NAR radio advertisements stateing that NOW is the time to buy! I seriously laugh out loud when I hear them on KFI.
To Powayseller – it’s unfortunate, but no matter how much education and PR there will always be a number of folks who will buy “on the way down”. Unless of course they find a fantastic opportunity (e.g., 2001 price – haha).
To Irvinesinglemom – I was also thinking 2008/2009 – Don’t you believe it depends on the rate of increase in inventory? If the RE market panics (i.e., banks) – mid to late 2008 could be a great time for those who want to find a deal.
Does anyone think that REITs will be a popular instrument if they end up buying bulk REO-owned properties at discount? Also, who are the institutional buyers of REO props?
Expect your posings
Powayseller,
This expression always comes to mind: “You can lead a horse to water…” All we can do is give out unbiased facts. If people chose to buy, they can’t claim ignorance later.
Amateur,
Even with the panic which will likely happen, this will still take a while to play itself out. IMO, if you buy before 2010, you will spend some time underwater. 2012 is probably closer to the bottom.
BTW, I would like to answer your question about the REIT privately. I just happen to know where you might be able to invest in one that intends to buy properties over the next several years at rock-bottom prices.
IrvineRenter –
Seem like the bottom price can be a moving target. Say by 2012 rents increase by 20%, do you still expect 2002 price or is it closer to 2004 price?
I know many people like to pride themsleves as being objective and truthful but I think the only unbiased fact is none of us can really predict the future price.
Red,
“I know many people like to pride themsleves as being objective and truthful but I think the only unbiased fact is none of us can really predict the future price.”
I certainly agree with that statement. IMO, the 2002 prices are closer to current fundamental valuations, but as you point out, rents will probably rise somewhat, so reaching 2002 prices may not happen. Also, rents have flattened in previous housing downturns, but some of that was likely due to the corresponding economic downturns that accompanied them. That being said, if the number of foreclosures is large enough, we may overshoot fundamental valuations to the downside. Personally, I think this likely.
I currently rent in Woodbury and wouldn’t buy there. Why pay 5k mortgage when I can rent for half of that?
I think prices will continue falling as more people are forced to sell due to relocations, arm adjustments and foreclosures. Prices rose way too fast in the speculative market. There are not that many
people who can truely afford a million dollar home, but there are plenty of million dollar listings and not that many takers. Prices must go lower.
I see at least a 10-20% price decline in real estate over the next few years in areas that appreciated quickly like South Florida, California, Vegas, & Phoenix. Most of those areas are way overpriced at the moment. Salaries haven’t risen much at all. I do think the full extent of the decline depends on the stock market though.
The recent stock market woes though will force many investors back into the real estate game. As real estate prices dip a bit more, investors will jump at the chance and purchase more real estate at bargain prices and I believe the market will slowly decline, but level off by the end of 2008 in most markets.
Sub prime is not doing well we hear. To me, this is almost laughable. People that have bad credit are not paying their bills – no shit, that’s why they’re called sub-prime in the first place. This issue is over hyped. Sub prime foreclosures are up a few percentage points. We are at a record high, but the previous high was in 2002 right in the middle of the boom, so I’m not that worried about sub prime.
Once the real estate prices adjust downwards, general population growth and immigration over the next few years will even any sub prime issues out.
Nazz
Hello,
I am contacting you in regards to buying Bank REO’S. I am in direct contact with these Banks (CEO’s) who are wanting to sell these off ASAP!
I would like to know what you requirements are and location so that we may cater to your wants. If you have any interest in buying bulk reo’s please, fill free to contact me with any question or comments.
Thank You,
Ed. McGowin
Financial Note Advisor/Investor
Charter One Funding and Investors
205-567-2434 Bus.
205-833-8799 Fax