Don’t you understand, what I’m trying to say?
Can’t you see the fear that I’m feeling today?
If the button is pushed, there’s no running away,
There’ll be noone to save with the world in a grave,
take a look around you, boy, it’s bound to scare you, boy,
but you tell me over and over and over again my friend,
ah, you don’t believe we’re on the eve of destruction.
Eve of Destruction — Barry Mcguire
Do you get the sense that our real estate market is on the eve of destruction? Prices on the leading edge of the decline are already 20% off peak, credit is tightening and will continue to do so, the inventory is mounting, and the number of foreclosures keeps rising (We are behind San Diego, but on the same path.) There are no signs of any of these trends reversing.
What is really scary about the foreclosure trend is the fact that it does not include any of the homeowners represented in the chart above (remember the ARM reset problem?) The foreclosures and REOs we are seeing today were caused by people who started defaulting in 2006. Now that prices are clearly off the peak, most of the people needing to refinance will not be able to get it. In short, many of the homeowners represented on this chart are going to default and become REOs.
Since it takes at least 6 months to become an REO after the homeowner stops making payments, and since most people will exhaust all other forms of credit before they succumb to foreclosure, we can assume there will be a 1 year lag from the peak of the ARM reset chart to the peak of the REO problem. That puts us into March of 2009 before there is any hope of the number of REOs declining. Since it will also take some time to sell this inventory (we currently have a 20 month supply,) that puts the earliest possible bottom of the market in the Summer of 2010. Realistically, the selloff will continue into the 2011 buying season with the spring of 2011 being the earliest possible bottom.
If we are 20% off now, how low will we go?
We profiled another property near today’s recently: Run Away. They gave up on selling and pulled their property off the market. Today’s neighbor is in similar circumstances, but they have decided to get out — with a hefty loss…
Asking Price: $350,000
Income Requirement: $87,500
Downpayment Needed: $70,000
Purchase Price: $390,000
Purchase Date: 6/2/2004
Address: 131 Huntington #255, Irvine, CA 92620
1st Loan $316,000
2nd Mtg. $79,000
Downpayment $-5,000
Beds: 2
Baths: 2
Sq. Ft.: 1,000
$/Sq. Ft.: $350
Lot Size: –
Type: Condominium
Style: Cape Cod
Year Built: 1987
Stories: One Level
Area: Northwood
County: Orange
MLS#: S509250
Status: Active
On Redfin: 1 day
New Listing (24 hours)
From Redfin, “Short Sale! THis home has a newer kitchen appliances and flooring and is in good shape. Needs some paint but has a lot of potential. Come and get it won’t last long. Nice view of the trees and parking near the unit. Probably the best 2 bedroom 2 bath condo in Irvine.”
Probably the best 2 bedroom 2 bath condo in Irvine? This realtor is probably full of $hit.
Nice view of parking?
Nice picture of kitchen clutter. I particularly like how the bottle of Comet cleaner is prominently featured.
Check out the curio cabinet in the living room…
.
.
Look at that rollback: $40,000 or 10% off a 2004 price. Wow! (pardon the exclamation point.)
Another one of those surprising 100% financing deals going south. This buyer may have even obtained cash at the closing. Either way, they are walking and leaving the bank to hold the bag. If this property sells for asking price minus a 6% commission, the bank stands to lose $66,000.
This property has an interesting sales history:
Date Price Appreciation
06/02/2004 $390,000
08/03/2000 $180,000
04/01/1996 $122,500
12/13/1995 $120,000
09/25/1990 $159,000
Apparently, we have seen 20%+ drops before…
Just drawing out your data points in my mind, looks like, with normal
appreciation, this should go for between $220,000 down to $200,000.
Really, no matter how well it was staged, it wouldn’t make a difference.
Note: several years ago, developers in Miami and on Fla’s west coast saw this happening and started requiring 30% down for speculators. This should have told everyone something. And people bought anyway. Now some attys are offering–on a contingency yet–to sue to try to get the money back. There is no case law on this, unless you can argue fraud, which I don’t think was happening. A fellow came by my office for something else a couple of years ago, and mentioned he was putting 30% down on a house on the west coast. I said, that’a an awful lot of money, and are you sure you want to do this? He said, yes, yes, in 2-3 years, when the house is built I will surely make a lot of
money with all the appreciation. Haven’t heard from him in a while. . .
—–
That is the real question isn’t it IR?
I regularly look at a few communities with a mind to moving back to Cali someday in the future. What astounds isn’t the basic runup in prices. That’s bad enough. But for one inland San Diego city that’s vastly overpriced the development was almost exclusively in two areas for years. Apartment condo conversions and mcmansions. Yes, there’s an excess of stadard SFRs but it’s the other two where the market, in this community in particular, is outrageously bloated. And it hasn’t seemed to quite hit them yet that there is no market for mcmansions or grossly overpriced apartments in that market.
I have this feelings and it’s just a feeling, that in some specific places when the bottom drops out entirely, it’s going to extremely ugly. What’s the choice? Demoing an entire neighborhood of what was once $1Million plus mcmansions or selling them $300k? Do you blowup the block of 40 year old apartments that were converted to $500k plus condos or do you sell them for whatever you can get? Rent them? To whom? There is already a ton of rentals in that city.
It’s going to be quite interesting indeed.
“$40,000 off a 2004 price”
That sounds about right to me.
The house I bought in 2004 (not my first house, thankfully), is worth exactly what I paid for it – about $700k for 3000 sf in Dana Point.
This is a place that was a great deal at the time – more than $50k under comps.
According to later appraisals and comp sales, it was at one time worth $150k more than I paid.
Now it is back to $700k and dropping like a stone according to the neighborhood comps (a great neighborhood by the way).
I figure it will bottom at about $600k, with desperate sellers willing to unload at $550k.
Looking for the bottom in 2010.
After that we will probably take another ride up in value.
IR as usual a clear argument on why this could get much worse. I guess the only wild card could be some sort of govt. bail out that delays the foreclosure. But that would only be a delay and ultimately I hope the NAR is smart enough to realize their best day is a quick, sharp decline in pricing that then returns to a normal market in volumes of sales.
Over the weekend when I was talking re with a person who bought an investment property I heard a response that I’ll bet is happening over and over — namely that he will look for a renter as his agent suggested that the dip in prices was a temporary hiccup due to the credit market mess! No thoughts that perhaps the run up in pricing was a hiccup, not the recent decline in pricing being a hiccup.
The next day when I was thinking about this I realized another tid bit that has changed — I no longer hear ads about those 1% , 2% teaser rates. Does anyone else see these commercials? Or have we finally seen the end to the massive teaser rate loans?
teaser rates are still there. They’re just 4% & 5%, now.
IR,
Can you post where you got the ARM reset graph? The one I have used previously had much smaller #s, but it was almost 18 months old from Credit Suisse.
My guess is that there were a ton more refis, & those refis were for only a year or 2 at the most.
I found this graph on OC Register’s site. I believe it is the update for the older Credit Suisse chart, and it does reflect the loan originations after Credit Suisse compiled their data.
Another listing that hits close to home. I live right next to 131 Huntington (1 building over). They will have a lot of competition as on the other side of the complex there are at least 4 condos for sale. One of those 4 has been doing open houses on weekdays. I thought they only do open houses on weekends?
I haven’t seen any commercials for far-below-market rates, but Wachovia is currently advertising on CNBC a “pick your payment” mortgage (option ARM I assume). Who know if this is a bate-&-switch deal or if they’re really still making these loans.
We may be on the eve of destruction but not in my opinion simply because of the subprime loans. Subprime loans were a class of loan that became more popular at the final stages of the bubble. It infuriates me when a pundit repeats the mantra “Subprime Mortgage Crisis” as the root cause of the wave of foreclosures. I believe the root cause to have started much earlier, years before subprime loans became popular. I believe the liberal application of “Stated Income” to all borrowing classes, including W2 employees fueled the runaway housing prices starting in 1998-2000 till 2005.
Stated Income had its purpose in the beginning for the self employed borrower with complicated tax returns, maximizing his deductions on the schedule C and lowering his net income. Stated income borrowers initially had to have 3 to 6 months of stated income as reserves and a 680 FICO score or higher. It was a make sense underwriting for a business owner. But stated income loans began to morph to include everyone including W2 employee’s, who could readily prove his income, as a way to qualify for a home loan.
Including the W2 employee to the “Stated Income” category allowed a huge segment of the market to qualify for a loan they had before been denied. This was the beginning of where the borrower’s ACTUAL income did not support the qualifying ratios for the loan on the property. As this new class of borrower began to flood the housing market prices and multiple offers began to rise.
So therefore everyone was a QUALIFIED borrower. NO ONE WAS DENIED! The price on the property didn’t matter anymore. The qualifying ratios for underwriting didn’t matter anymore. You backed into the necessary income for the loan application. Stated Income loans allowed every borrower to qualify.
This new flood of home loans fueled by the newly classified stated income borrowers propelled the issuers of these notes to further lower underwriting guidelines in order to capture more business for Wallstreet to package and sell on the secondary market. This is where subprime came into the market, at the end of the bubble, not the beginning.
Stated Income qualifying guidelines deteriorated
? Fico scores needed were dropped from 680 to 600.
? Reserves requirements were lowered from 3 months stated income to 3 months PITI (principal, interest, taxes & insurance). Then two months. Then you could STATE YOUR RESERVES.
? LTV’s (loan to values) were raised to 100% CLTV
? Interest Only and Option Arms or neg-am loans were promoted aggressively in order to allow more buyers to qualify for the bubble prices
Subprime loans are a large contributor to the foreclosures we see today but they are a small part of the stated income borrowers that used Alt-A and Prime products in order to buy a home well above of what they could truly afford. Many borrowers with 700 plus FICO’S used stated income to buy their McMansions. Stated income infected all loan products NOT just subprime.
In the last two years of the bubble home prices had diverged so far away from reality of what people actually earned as income that EVERYONE had to use stated income to buy or refinance a home. It was usually the only way a borrower could qualify for the loan.
I came to the conclusions above from originating loans for over 20 years. I’m sure many will place the blame on the brokers but the brokers didn’t come up with the stated income, interest only or neg-amortization loan products and the associated underwriting guidelines. It was brought into our offices as loan products designed by Wallstreet Bankers.
These same Wallstreet Bankers have now found religion especially after the collapse of the secondary markets that used to buy their Mortgage Backed Securities and the emergence of new State a Federal laws restricting loan guidelines. The Banks have rolled back their underwriting guidelines to 1995 standards, with 20% equity required in most cases and FICO Scores back to 680. Stated Income has essentially been outlawed in Minnesota, Ohio, Colorado and Nevada.
And House or Representative Keith Ellison of Minnesota has introduced a bill restricting loan guidelines nationwide. HR 3081
Stricter underwriting guidelines and thousands of resetting loans to higher loan payments will take home prices back to where they should have been in the first place, where ACTUAL Income supports the loan on the property.
Therefore Median income in Irvine is approximately $85,000 divided by 12 is $7,083.33 a month. Multiply this monthly income by a 28% front end qualifying ratio and you get $1,983.33 for PITI (principal, interest, taxes and insurance). Calculate a present value of a loan supported by this $1,983.33 payment for 30 year fixed fully amortizing loan @ 6.00% and you can borrow $330,747. Therefore with a 20% down payment you can buy a home valued at $413,434. WOW…Hardly where the median home value is now in So Cal at $590,000.
So I see prices headed down another 30-50% lower. Back to where home prices are supported by income.
The above is only my opinion. I enjoy this blog and I thought I would share my experience and thoughts.
Loanbuilder
Thank you for your comments and analysis. I agree with everything you wrote.
Can you imagine what would happen if the Minnesota model becomes national law? It would severely curb housing bubbles, and it would destroy the California residential market in the process.
Virtually no new first time homebuyers have 20%. It will take them a while to save that much up, and it will take them a while to figure out that they need to save that much up, if they want to be a homebuyer, so they can start saving.
So nobody’s going to put a toe on the first rung of the ladder for
quite a while.
I always thought that the FICO scores were bogus. Not in the sense
that they are actually inaccurate, but in that they were something
placed inbetween the lender and the borrower to avoid both having to deal with reality. Because reality is difficult and time consuming.
If the FICO scores didn’t exist, I doubt that the underwriting would
have reached such pitifully low standards.
By the way, excellent post.
Loanbuilder’s assessment makes perfect sense to me. Synthesized: if people are only allowed to purchase homes that they can “afford” with a traditional 30 year fixed and 20% down then simple math would dictate that prices must eventually decline dramatically (IE prices will reflect personal income and assets. Of course this assumes that lenders and buyers become and remain rational. Interesting how this insane irrational runup is often characterized by those with a vested interests as perfectly rational and thus any sharp declines are described as unlikely.
Another aspect of this irrational runup that I find interesting was that buyers would be willing to make the financial sacrifices neccessary to purchase and then live in piece of crap “rentals’ like the one profiled today. It is my assessment that a huge portion of the “condos” out there should only be treated as investment property to be rented out. I can’t believe how many of them were purchased as a primary residence. What prompted these people to buy these things to live in?
Citi just admitted that its profits were reduced 2 billion something.
That’s 2% of the 100 Billion that’s involved in its share of the shaky pools. And the
mkt dropped a bit. Gee, in 50 years they’ll be back to square one.
They showed a profit of 2 bil plus, so if you take all the phony profit away, it would only take 25 years.
IR,
It’s just a matter of time before the Minnesota Model is the law of the land. State Attorney Generals are already lining up lawsuits against the Wallstreet firms that sold the Mortgage Backed Securities to their state pension funds. Just Google the Ohio State’s Atty General. And the bill in congress will surely pass. HR 3081
Well if stated income loans disappeared completely and underwriting was on a full doc basis only then the California housing meltdown would probably be worse than a 50% haircut.
To date we still have stated income loans in California but the Jumbo stated underwriting guidelines are so restrictive as to make them moot.
So it’s like a slow death in the market at this time. The Minnesota Model will just be the attendent turning off the respirator.
Loanbuilder
Good point about FICO. It’s meant as an indicator of creditworthiness in general, not credit worthiness for any particular product. High FICO doesn’t mean you can sell a person anything at any price and have everything turn out well.
What I find really interesting is the credit market is 70%+ subprime on the reset charts.
From the looks of the resets, the brokers and banks let everybody get sub-prime loans, whether you were or were not a subprime risk. You became subprime, simply due to the kind of loan product you chose to use.
After the reset, I suspect they will be subprime, whether they choose or not.
No worries folks, the problem is subprime only.
This is the key:
“In the last two years of the bubble home prices had diverged so far away from reality of what people actually earned as income that EVERYONE had to use stated income to buy or refinance a home. It was usually the only way a borrower could qualify for the loan.”
The essential problem is not creative loans, subprime loans or the credit crunch. The essential problem is prices. All those things helped drive prices too high. Now that reality has hit the fan the market will suffer until prices are back in line with fundamentals.
Which means in turn that the market will recover once prices hit their proper level. Not before, and not after. The recovery will not be driven by corrections to lending practices, foreclosures or a governmental bailout, except to the extent that they drive the correction in pricing. On the flip side, anything that artificially supports current pricing will only prolong the pain.
Just like you cannot legislate morality – you cannot outlaw stated income except in a few “Nazi” states where people don’t have any voice. That will not be the choice action in CA. I don’t advocate fraud but I don’t think the State should dictate who loans what to whom. I laugh at every article that deals with “freezing” the ARM rate or that the lender “refuse” to renegotiate the deal after 3 years. Of course they refuse! YOU signed the deal. Even many of the “fraud claims” where the buyers say the broker, lender etc. falsified the app form is more than likely just a cover up of the buyers own misdeed.
Prior to this mess, I used to consider myself a free-market capitalist and a political Libertarian. I would never have supported a law like the Minnesota Model.
This experience has changed my mind.
I fully support legislation that would limit the market’s ability to create a bubble with borrowed money, which is exactly what the legislation in Minnesota does. If implemented and enforced in California, we would all enjoy stable house prices and long-term economic prosperity. Of course, people would have to abandon their dreams of riches in California real estate…
“If implemented and enforced in California, we would all enjoy stable house prices and long-term economic prosperity.”
IR – With respect, don’t kid yourself.
I saw an analyst today from Deutsche Bank & Trust on CNBC power lunch, and he said they think housing will bottom sometime in 2008.
WTF!?
But then I remembered the Deutsche Bank was the number 1 purchaser of our negatively amortizing products. When I am researching possible note modification opportunities, I get to see who the investor is on the loan. 95 out of 100 are owned by Deutsche Bank.
Sounds like they maaaayy have a vested interest in housing don’t ya think?
As far as Minnesota is concerned, I’d like to see those sales numbers. Nothing other than full-doc loans can be originated, and only IO or fully amortizing loans. I told my mom to hold off for another year or two on purchasing in Minneapolis. It’s gonna get ugly there real quick.
We are in the midst of the largest monthly rate reset and business has slowed to a crawl. Most of my business is an occasional purchase, a conforming loan amount (which is few and far between in CA), or equity lines of credit. Countrywide, the largest lender in the universe has massive losses, and originations are way down. So where are all these ARMS going??? They aren’t being refinanced, and that is a huge problem.
The lowering of loan underwriting standards was not the root cause of the bubble. The bubble started when money got cheap, prices started to move up and speculators moved in.
One the speculators got into the market, “new home” prices accelerated their upward rise. The speculators in essence poured gas into a small fire and blew it up.
Prices of existing homes started to go up, but not nearly as much because they involve work to “flip”, whereas a new home could be flipped with no work involved.
At that point, would be homeowners got into the fray afraid they’d be left behind.
As prices escalated, the cost of home outstripped the ability of people to pay hence “fancy” loans were offered. The lowering of loan standards was a reaction to escalating home prices and they did help to maintain those crazy prices.
The speculators didn’t care about three year loan term resets because they figured they’d be out in a year or so….
McMansion owners…. hell, what can I say?
In the meantime, home builders, real estate agents and brokers, loan brokers, bankers, etc… all made money based on a percentage of the value of the loan… so bigger loans made them more money.
Anyhow, I think the loosening of loan standards kept the bubble going by perhaps another 20% and allowed builders to take the McMansion market to numbers that were non sustainable.
But it was the greed of the speculators and “real estate professionals” that kept this bubble going.
Agree
finally someone agreeing with my estimate of 200 sf in nicer hoods.
in the last few weeks nicer homes are dropping below the 300 sf mark. when I mention 200 sf (based on 1999 plus normal appreciation) people are know thinking silently instead of saying NO WAY. 🙂
beaiful, I try to explain what you said, I usually get the argument that everyone and their cousin in Irvine make 300k per year. maybe alot of people made money (lenders, brokers) but these days are long gone. now we wait and see who is left standing naked(current income) when the tide goes out. (quoting Buffet) 😀
IR’s excellent analysis again points out what happens when the market is skewed by unrealistic factors. Simply put, the market will drop because BUYING a house is not reasonably affordable to the average wage earner using reasonable and prudent lending standards. Houses will begin to sell when they become reasonably affordable, either because everybody is going to get a huge 100% raise or housing prices will plummet by 50%. Guess which one is most likely?
It was such a pleasant dream while it lasted…
“So where are all these ARMS going??? They aren’t being refinanced, and that is a huge problem.”
Are they feeding the foreclosure beast? They can’t make the payments…
It is my contention that government and “more” government intervention in the mortgage marketplace encourages folks to think that the government is doing their thinking for them and is taking their risks away. It seems when folks throw away their brain to the gov. that they end up getting themselves into risky transactions and overextend themselves. It is further my contention, that the extremes of the financial cycles would be less extreme without any government involvement. Oh well, it is all just theory. Unless Ron Paul gets elected.
Re: Deutsche Bank
Hello Mr. Barber, do you think I need a haircut?
or
Hello Mr. Realtor, do you think now is a good time for me to buy, (sell), a home?
Wages are going to be coming down due to the current and future job losses in the RE arena, and there will be income losses for those who stick around. If you couple this with inflation, it doesn’t look too good.
BTW, inflation will not support house price increases. Since homes are financed their prices are affected more by the financing available. As inflation continues at its pace and/or rises, lenders will command higher rates. This will LOWER house values.
IrvineRenter,
I agree that it looks like 2011 is the earliest date for the “bottom”.
In the past, you’ve mentioned that you plan to buy in 2010 (I think). When 2010 comes, let’s say your analysis is correct, do you plan to buy anyway ? Or will you wait another year ?
I’m asking because I’m in the same situation. My wife & I really want to buy in 2010. But we don’t want to lose money either.
Citigroup Net Falls 57 Percent on Fixed-Income Losses (Update8)
http://www.bloomberg.com/apps/news?pid=20601087&sid=azM5eB9Qw_KE&refer=home
Past-due home loans doubled in the U.S. The slide in the mortgage business is frustrating Prince’s effort to increase revenue faster than expenses.
Surging defaults “raise fear that credit quality may continue to be challenging,” said Tom Kersting, an analyst at Edward Jones & Co. in Des Peres, Missouri. The delinquencies are “worse than they talked about even a couple of weeks ago.”
Late Payments
The percentage of U.S. real-estate loans where borrowers were more than 90 days behind on payments climbed to 1.8 percent, from 1.4 percent in the second quarter and 1 percent a year earlier, Citigroup said.
This is to me the most solid argument for bearish short and mid term real estate market , and I’ve not seen a counterargument with evidence for this.
The first time that I read about this was in an interview of a big shot investor/speculator in Barrons magazine, he was afraid of the trillions of dollars of ARM resets and was taking short positions already, this was around summer 2006, at that time there was not a single mention of subprime issues or a credit crunch, but this data is well known in Wall Street, so how come these issues caught the lenders, banks and investment banks by “surprise” since August?
Bailouts
Behind The Banking Rescue
http://www.forbes.com/home/wallstreet/2007/10/15/banking-credit-treasury-biz-wall-cx_lm_1015banks.html
Those Libertarian instincts die hard.
Based on the bubble we just witnessed, people let their greed override their brains concerning the provision of basic shelter. IMO, this is an area where the government should prevent people from taking on these kinds of risks with their homes, particularly since the government will be asked to bail these people out. The lending industry failed, so the government will need to regulate them more closely.
It is similar to the stock market crash of 1929 and the regulation that appeared in the aftermath. I would argue that the SEC has helped foster a degree of stability in our equities markets through market regulation, particularly its limits on margins. It was margin lending that created the prosperity of the 20s and the great depression of the 30s, just as mortgage lending created the prosperity of the 00s.
I suspect you will see some government agency similar to the SEC emerge out of this crisis, particularly since the Democrats are in charge, and they believe in big government.
I find it interesting that 6 months ago these graphs showed ARM resets peaking in October of 2007. Not that this is not an ominous looking graph, it has the feel of a Nostradamos-esque forecast with the day of reckoning always 6 months down the road. Sort of a carrot on a stick if you will.
Once prices drop to where my payment, taxes, HOA, and insurance are equal to my rent, I will look to buy. At that point, even if prices drop further, it doesn’t matter to me because I am saving money on rent, and I control my housing situation. The only danger would be if I needed to move in 3 to 5 years because there probably won’t be much appreciation from 2010-2015.
Actually, I believe people should buy ahead of the market bottom. You will have the widest selection of homes from the most motivated of sellers. When prices are near or just past the bottom, inventories are low (which is why it becomes the bottom,) and you may not find the house you want.
The old Credit Suisse graph did not have all subprime originations from late 2006 and early 2007. If you take the old double-peak graph and fill the gap with another huge mountain, you end up with the current one. In short, the problem has gotten bigger.
I live in a Westpark condo and my rational was simple. I was paying $1800 for a 2br 2ba apartment owned by the Irvine Company. In early ’03 30yr fixed rates tanked and I could finance a condo across the street from where I rented (10% down) for $1500 PITI. Adding $175 for HOA and $300 for taxes, my total cost is $1900 + maintainance. After the tax benefit, I come out slightly ahead, not counting the $400 that goes to principle every month.
To answer the question: “What prompted these people to buy these things to live in?”
Why not, my wife and I young, have no kids and like to travel. We don’t need 3000+ square feet of space and a yard to deal with. I think the boom really pushed people to get much more than they needed. I know a few couples who bought those mansion and half the rooms aren’t even furnished. What’s the point?
I have to say that is my fear, as well. I do not want to buy (paying more to own than rent, bc the truth is that you always will for the first couple of years anyway) & lose money by paying more for it than if I had waited.
I really don’t think I will buy before 2010, & only then if it actually looks like NODs/NOTs are back to pre-bubble rates.
What about all the alt-a and pay-option arms? The graph shows a huge batch of subprime, but I think the “alt-a” is going to cause more pain around here.
I believe they compiled the data by “originator” which means all of the subprime lenders loans were categorized as subprime even if they were given to Alt-A or prime borrowers.
Let me add some input on credit grading. I am not sure how the the loans in that chart are graded, and what is used to define sub prime and prime.
I can tell you that 80/20 purchases were bought by investors with sub prime profit margins. The loans were considered “sub prime” only because of what the investor paid for the loan, not because of the credit profile.
I guess it doesn’t really matter if it’s prime, alt-a, agency, or sub prime. If the rates are adjusting the borrowers are in for some pain.
“I do not want to buy (paying more to own than rent, bc the truth is that you always will for the first couple of years anyway)”
Only in California do people believe they must pay a premium to own and fully expect to do so.
When you think about it, why doesn’t renting carry a premium? You can own a car much cheaper than you can rent or lease it. There should be a premium paid for transitory use and the freedom from obligations. Housing in California is the only asset I can think of that people pay a premium to own. Even stocks have a premium for rental (options.)
Anyway, I would not worry too much about overpaying. When it is cheaper to own than to rent, the bottom is not going to be too far away. However, if you believe you must pay a premium to own and that prices will not drop to where it is cheaper to own than to rent, you probably will overpay and regret it later.
Virtually nobody who is making a lot of money on something
will ever admit that his business is bogus or doing harm.
See the tobacco industry, tho it seems that the execs wanted to have it both ways.
The subprime categorization has enabled some of the bulls to maintain their denial because there are very few truly subprime borrowers in Irvine. If you can afford Irvine, you were probably prime or Alt-A. When a bull looks at that chart, they see something that will not impact our local market; however, as you pointed out, this isn’t the case.
Also, it is difficult to impossible to call the bottom.
Irvine renter, I believe this old expression pretty much sums it up.
Capitalism without failure is like religion without sin.
It doesn’t work.
You have to allow people the freedom to get into speculative bubbles, or the whole thing doesn’t work – the layers of regulation and top down market planning destroy it.
If you read Greenspan’s book, it has some history on things people have tried (in US and abroad), and basically, Ann Rand is mostly right – you have to let the markets take care of themselves. Otherwise, economic growth is slowed. (As to whether it’s worth the price – that’s a philosophic opinion as he documents with attitudes towards it in France, Latin America and such).
If you want to minimize “losses,” then continue to rent a unit a little smaller than you really need, in a slightly lesser neighborhood than your household income would normally dictate, and invest the difference. Even if prices reach a point in 2010 where the equivalent home rents for the same cost as purchasing, and even if appreciation returns to its historical rate (less than inflation), it is not a good investment. So don’t worry about when’s the best time to buy a house, simply don’t buy one.
That’s one thing I don’t quite get about a lot of the “housing-collapse-chearing” commenters on this blog. I don’t understand the anger. If you’re renting, you should be happy. You’ve made a wise decision, and you will not “lose” the money that owners continue to “lose.”
If the FED stops manipulating the markets with its monetary policy, I would wholeheartedly agree with you.
When prices are right, there are two advantages to ownership that I desire: 1. the ability to control my housing. 2. A hedge against inflation.
If owning did not have these two advantages, I would probably rent forever. I enjoy the freedom to move when and where I want to, and I enjoy not having to pay for repairs on the house I live in. Since I work in the REIC, I do have concerns over my future employment, and since I rent, I have no stress about it. If I lose my job, I am not straddled with a housing payment I cannot afford in an area where I may not be able to find work.
To obtain those benefits of renting, I forego the ability to make changes to a property to suit my desires, and I have to deal with the possibility that the owner may want me to leave. At some point, I will give up the freedom of renting to have my own house again. I liked being a homeowner, and I will do it again.
Personally, I’m not shooting for the bottom. I’ll wait till prices are clearly headed up again. I may pay 5% more than I would have at the absolute bottom, but it takes all the guesswork out of trying to predict when that has actually happened.
The categories do appear to be rather arbitrary. A few months back when subprime first started collapsing many lenders just recast the same loans as Alt-A.
Chairman Ben S. Bernanke
At the Economic Club of New York, New York, New York
October 15, 2007
The Recent Financial Turmoil and its Economic and Policy Consequences
http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm
IR and team, is there a reason you don’t delete Pingback SPAM?
lawyerliz,
Did you calculated from 1990 or 1996? Just curious.
From 1990 to 1996, it dropped about 20%. 1996 to 2000, it went up ~50%. From 2000 to 2004, it more than doubled. So if 1996 was the starting point and 1996 to 2000 price was trended out, then it should be some thing close to $300,000 which is still too much but it’s in Irvine, I guess. Just wondering…
What a dump!! Lookit that wretched ugly kitchen with an old range shoved into a niche,and those ratty print curtains on the window.
If the owner is reading this, you are begging to be insulted when you let your place be photo’d looking like this.
I can’t believe these people wouldn’t at least get all the clutter and tacky decorative articles out of the kitchen and get the place professionally cleaned, paint the walls a soft, nuetral color. The place will never look good in this condition,but at least it could be made to look clean and fresh.
Neighbors in my mother’s St. Louis suburb had their classic brick and frame colonial repainted and professionally staged, which made the place look coordinated and cozy at least, and probably helped get it sold after a YEAR on the market and a $60K price drop. The agent told them, hey, the market is caving, you’d better decorate and drop the price if you want to sell AT ALL.
I guess these folks are still living in 2005 and it will take 580 days on the market for them to get it into their noggins that their place is not worth what they thought it was.
The McMansions will be sold cheap the the sellers will take a huge, possibly fatal, hit.
The apts will be sold cheaply to “investors” who will rent them out to the first person who shows up with a Section 8 voucher.
The Forbes article cited by Sue sez that the paper assigned to the super pool will be quality, meaning, I suppose that it will not include
the trashiest of the trashy.
So is Citi going to keep the worst?
As presently outlined, the SIVs will retain the paper of least quality. The rationale is this frees up cash to pay marfin calls and short term paper which is not able to be rolled over. My guess is that it also keeps the worst paper from being “valued”. Howz about the part where Citi makes commissions and fees on all paper sold to the M-LEC? I guess they haven’t realized that it was the fees and commissions that got them into this mess.
My hub says that Rand assumes that the good guys are competent and the bad guys incompetent. Alas, that isn’t always so.
Unfortunately, libertarian economies are few and far between, so the experiment really hasn’t happened. Most of them are like Hong Kong, accidents of history.
Any successful libertarian state, since it doesn’t tax people enough to pay the huge miliary budgets of regular states, will promptly become a prize of the authoritarians.
I rather think that the urge to boss people around and be at the top of the heap, and to control the most resouces, even if the heap is small, and the resouces few, has to do with Darwinian natural selection. Like some birds collecting shiny objects, to attract the female of the species, we collect SUVs
and yachts. Appearance is everything in this scenario.
But natural selection being mindless, godless (and goddessless),
and which does not include any planning, much less purposeful planning, or Intelligent Design, only selects for what is useful right here, right now, and not 10 minutes from now. Since people can plan for the future, they are literally of 2 minds, one wanting to glory in the here and now, and one wanting to plan.
Plus we are pack or herd animals, and so we follow those instincts too, because they were successful in the past, and hence built in. It isn’t that we aren’t logical, altho the herd instinct seems illogical, under many circumstances, herds work,
but it’s that we are following a primitive or different logic, which no longer works so well in present circumstances.
People who can oppose the herd and buy when others are selling or vice versa, or do nothing are rewarded.
Sometimes.
You ignore biology at your peril.
And a house is of course, a nest, so we want one of our own. We are willing to pay a lot for one and defend it and are psychologically damaged when we lose it.
This too may seem illogical at times. But, there it is.
You are making too much of my comment. I was just eyeballing
IR’s figures. Being 3,000 miles away, I have no feel for prices in your area.
I keep looking for a blog closer to home, but there is no blog like the Irvine blog, which is just superb compared to anything I’ve found in South Florida.
Oh, yesss, I loved the part about the commissions.
No shame at all, none whatsoever.
Marfin calls? Maybe margin calls, eh?
They are. I get the rate sheets. IndyMac is dusting off their 5 year fixed option arm too. My rep came by today and says it’s not selling. [I am not representing this as anything more than an anecdotal comment]. She is getting some traction with their stated-stated 95% [min. 680 fico] conforming.
The saying going around now [I know, it’s a little late] is “Fico’s don’t pay the mortgage”
Gee, and here I thought that a marfin call was some special thing that I didn’t want to admit not knowing about!!!