47 thoughts on “Weeping”

1. Agent#777 August 21, 2008 at 4:17 pm

   “When subprime rebounds in a few years”?!?

   Surely you jest! I thought 20% was here to stay for a while.
   1. IrvineRenter August 21, 2008 at 5:33 pm

      20% will be here to stay. Subprime was originally about loaning to people with strong earnings and good collateral who had low FICO scores. In other words, if they had 2 of the 3 C’s — capacity and collateral — subprime would overlook the low FICO score. Subprime went terribly wrong is when it started sacrificing all of the 3 C’s. I believe subprime will return because there will be a lot of people who were foreclosed on during the bubble who have, or will have, capacity and collateral.
      1. Lee in Irvine August 21, 2008 at 6:17 pm

         Alt-A was distorted too, and I hope it comes back to service the people it was designed for. People like me.

         There is a valid need for Alt-A loans. Mainly to people that are self employed, who do everything possible to reduce their tax liability.
         1. zornundo August 23, 2008 at 6:50 am

            “Mainly to people that are self employed, who do everything possible to reduce their tax liability”

            Code for cheats on his taxes.
      2. Kirk August 21, 2008 at 7:41 pm

         Yeah, my reaction would have been like Agent#777’s, but I am starting to accept the business community’s cycle of stupidity. FedEx is getting sued in a big way for having a bunch of “contract workers”. This is the same bullsh*t companies got in trouble for a decade ago. Here we go again.

         Maybe all the back taxes and penalties were cheaper than actually paying the payroll taxes in the first place. More likely it was simply good for a short term gain as there doesn’t seem to be a management team (or investor) in the world that cares about the long term health of a company.

         I guess I’ll just have to accept that subprime, no doc, and neg-am loans will appear again in a decade or two. On the plus side, it’ll be another opportunity to short the hell out of these bastards.
   2. Laura Louzader August 21, 2008 at 8:39 pm

      As there a FEW sellers in Chicago who recognize reality and are pricing their offerings at something approaching rent-saver prices, I’ve been idly looking around and talking to lenders around town.

      You can get financing for 5% down, but the guidelines are way tighter. The building must be 70% owner occupied, the loan amount no more than 3X the borrower’s income, FICO at least 670, and the appraised value must be in parity with rents and incomes.

      This is all the more argument for just letting the inevitable failures happen. Many lenders and many buyers are waiting to step to the plate, but only if the prices are right, which they are not quite. When prudent lenders see the ratios they want to see and are pretty sure that valuations are in line with fundamentals, they will lend, but not before.

      But they won’t be doing Subprime or Alt-A or Stated Income or NINJA or Option ARM or pay option or IO.

      We will be back to reasonable prudence as that was defined in the 50s, 60s, and 70s, when you COULD even go no-down but couldn’t borrow an insane multiple of your income, or lie on your app.

      Now, all that has to happen for the housing market to revert to normalcy is for sellers to get real with their prices. That’s mostly not happening yet. I still see too many wishing prices, and there’s still way too much inventory.

      People just need to remember that “normalcy” will not mean a return to the insanity of 1998-2007.
2. cara August 21, 2008 at 5:23 pm

   A wood toilet seat, my favorite. That’s got to be worth $100k right there.

   Or it would be if that WWTT shade of mustard-yellow-brown-green in the living room didn’t knock off $50k. I mean at this price what’s a $100k between friends.
3. George8 August 21, 2008 at 5:27 pm

   Odds are offer of $385k (court house step price) will be accepted on this one.

   However, 3% compounded from 1996 price ($180k) yields only $257k. Buyer be aware.
   1. IrvineRenter August 21, 2008 at 5:36 pm

      I have predicted a 40% decline from the top because I thought it would take 5-7 years and inflation would increase rents a bit during that time. If we look at today’s market with today’s rents, a good rule-of-thumb is to cut the peak price in half. Your calculation goes about it in a slightly different way, but it comes to nearly the same answer: $273,000.
      1. MalibuRenter August 21, 2008 at 7:59 pm

         I posted this chart late yesterday. There is a moderate correlation of rent increases with home price increases. When you look at the two most recent bubble periods, 1987-90 had rent increases averaging 4.8% per year, and 2001-2006 averaged 5.8% per year.

         During the prior bust, 1991-1997, rent increases were only 1.2% per year. When home prices were the lowest in 1995, rents were actually dropping.

         My guess is four things are happening. 1. When lots of people have underwater homes the don’t want to lose to foreclosure, they often rent them. That’s puts downward pressure on rents. 2. Foreclosed homes often become rentals. 3. Once home prices approach the rent saver levels, landlords have a harder time raising rents. 4. Both rents and prices are being driven to some extent by the overall economy.

         I think for 2009-2012, average rent increases will probably be under 2%. Maybe slightly higher after that. This bust is unfolding much faster than the early 1990s.

         
         1. Lee in Irvine August 21, 2008 at 8:59 pm

            Excellent Chart.

            I wish I could get a chart indicating what percentage of gross income Southern Californians were paying for housing (owners & renters) during the same span in the chart above.
            1. MalibuRenter August 21, 2008 at 10:51 pm

               “I wish I could get a chart indicating what percentage of gross income Southern Californians were paying for housing (owners & renters) during the same span in the chart above.”

               You want the cost of housing for owners (regardless of when they bought) and renters, as a % of gross or disposable income?

               If so, I think I can find that and make a chart.
            2. Hormiguero August 22, 2008 at 1:50 am

               I noticed in the July dqnews blurb on bay area housing that the average payment on a purchase dropped a cool grand from a little over 3200 to a little over 2200 year-to-year. Not the region or the figure you’re talking about, but still remarkable.
         2. markh August 22, 2008 at 1:26 am

            Wow – very interesting chart, especially since we are placing such importance on price/rent multiples. 8 years in a row of 10% – 30% annual price appreciation! Gee, I wonder why that didn’t continue!

            OC has lost 30% in the last 4 quarters. It does seem to be unraveling faster than the early 90s. Presumably that would mean a shorter time as well.
      2. Dejnov August 21, 2008 at 8:07 pm

         Hey IrvineRenter,

         Back in the old days you used to publish a chart with your predictive losses and the median price biannually. Any chance you’d update that chart with an actual trendline and your new and more expert opinion trendline?

         Dejnov
         1. lawyerliz August 22, 2008 at 6:43 am

            Yeah, yeah. I’ve asked for that too.

            Would sure appreciate it.
4. MarkH August 21, 2008 at 5:33 pm

   Some thoughts on rental parity…

   Money Magazine has an excellent article in the current issue “How Soon Before Your Market Springs Back?” that discusses price to rent multiples. It also gives P/R ratios (Gross Rent Multipliers divided by 12) for a number of metro areas.

   http://www.money.com/pricetorent

   IR, I would be interested in your take on this. You suggest a GRM of 160 (P/R of 13) to determine an appropriate time to buy. According to this article, Orange County’s P/R was 19.9 in 2000, peaked at 40 during the height of the bubble, and has averaged 25 over the last 15 years. It stands at 29.9 in Q1, 2008. San Francisco’s P/R was 26 in 2000, peaked at 40, and has averaged 28 over the last 15 years.

   The good news is that we should all move to Detroit, Pittsburgh, and St. Louis, where the P/Rs are all in the acceptable range. In fact, the national average is 13 (the country must believe IHB even if OC is a little slow!)

   The article suggests that a better indicator than absolute P/R would be to take the local 15 year average or go back to 2000, which was pre-bubble. If that’s true, OC’s real target P/R should be between 20-25 (not 13). I realize that, based on pure economics, we shouldn’t buy at that high a multiple, but it seems that people that live in desirable markets don’t care (and didn’t care pre-bubble). It also suggests that if we are waiting for average P/Rs in OC to drop to 15, we may have a very long wait. Looking at yesterday’s Woodbury condo, I wonder how much lower it will really go.

   Any thoughts?
   1. IrvineRenter August 21, 2008 at 5:42 pm

      I will read the full article later, but I do have some observations based on your comment.

      1. The average in a bubble market is nearly meaningless because you average in all the periods of overvaluation. A much more meaningful number would be to see what values it bottomed at.

      2. 2000 was not pre-bubble. Prices were 10%-20% inflated then, and many people thought prices were too high. When prices did not revert back to affordable standards after 2000, a massive bubble was inflated.

      3. We will have a long wait, although the large number of foreclosures is shortening the waiting time. We will see more properties at rental parity next year, and we will start to see desirable properties at rental parity in 2010.
      1. markh August 21, 2008 at 7:08 pm

         I wonder if we will see the bottom of the last cycle in prices and/or P/R ratios. OC is a different place than it was then. Many baby boomers with many years of liquid savings are moving here for the great quality of life. Foreign buyers are increasingly investing in desirable US property. Both of these forces are relatively recent developments.

         Large private investment pools are being formed to sweep out the foreclosures. A friend of mine just bought a very nice house in North Scottsdale. It was 900K at the top of the bubble. An investor group purchased it for 575K and flipped it to my friend within 60 days for 650K (P/R about 18).

         I think the bottom may come (and go) sooner than people think. The sequence would be…(1) private capital pools sweep out most of the foreclosures at the bottom (2) prices stabilize (3) banks begin lending again (as Malibu Renter alluded to yesterday, they are ready with guns loaded) (4) people see the bottom (increased activity and rising prices) and jump back in. My bet is this happens next year, with the bottom coming in perhaps in mid-2009, with a reasonable bounce off the floor.

         The cool thing is that the numbers will tell us and we can watch for ourselves. FYI, there is a nifty web site http://www.city-data.com where you can enter your zip code, and it will graph sales activity and median selling price.

         Thanks, IR. Your content is exceptional and well thought out. You and your contributors do a great job!
         1. Roberticus August 21, 2008 at 7:39 pm

            Today’s post makes me wonder what the ripple effect will be for those of us outside of the really bad bubbles. I suspect a lot of SoCal real estate money has been supporting the high end market in our area. (I have nothing more than anecdotal evidence to go on for that, but more often than not the buyers of new $1mil+ houses in our neighborhood are from SoCal.)

            If that’s true, and that money dries up and pushes over the first domino here, then buying in Flyover Country may not be as safe as MarkH suggests.
         2. IrvineRenter August 21, 2008 at 8:36 pm

            You are not the first to suggest the foreclosures will be bought up by investment groups. I may need to devote an entire post to this idea.

            My first reaction is that it is not feasible. Even at today’s prices, none of the properties would cashflow as investments, so it is a pure speculation play. If credit continues to tighten, which it will, people are not going to be able to finance the loans required to take these investors out profitably. Whether these properties are purchased by investors or individual flippers, they cannot sell them for any more than the buyers can pay.

            The investment group would need a property management group capable of handling tens of thousands of properties. Each individual property must be prepared for rental or for sale. This is costly and it eats into the bottom line. The current rate of foreclosure in California is about 1,300 per day. The sheer volume will be difficult for even institutional investors to absorb.

            To me, the whole idea of boat loads of cash entering the real estate market to prop up inflated prices smells of desperation and denial. People who really have that kind of cash are smart enough to do a cashflow analysis and see that the prices do not make any sense.

            Also, how could a durable bottom be put in place when there are so many distressed homeowners who are underwater and have adjustable rate mortgages which are going to raise their payments? This is a particular problem for Option ARM holders. Their loans haven’t blown up yet. From 2009-2012, these loans will explode, and the foreclosure statistics will go even higher.

            If anything, the bottom will be farther off and at a lower price level than anyone thinks.
            1. markh August 21, 2008 at 11:33 pm

               Much of the new money will come from private equity or informal groups of personal investors that have the cash. At 30% down, and LIBOR based financing, most properties do extremely well at 20 P/R ratios.

               Some of the big banks that have sold off and written off their prior loans are more than willing to get back in the game. They realize their own mistakes – they’re reminded about them in the paper every day! It doesn’t change the fact that, once prices stabilize, 90% loans to people with good jobs and good credit (especially after this mess) are good loans.

               The reason I think we might get a bounce off the bottom this time is new homes are almost completely shut down and, as of late 2009, there will be some pent up demand from people that have not been able to buy for a couple of years. But this will only be true if interest rates stay relatively low.

               I realize my view of a 2009 bottom is contrary to IHB. It will be interesting to watch!
         3. Lee in Irvine August 21, 2008 at 8:38 pm

            I know you addressed this to IR, but I couldn’t resist a stab at it.

            First thing I want to say is lending is the mothers milk to the real estate business.

            Unfortunately, I believe we are about to reach a point in this cycle, were fundamental factors such as rents an income are going to be evaluated differently.

            Freddie and Fannie are insolvent, and the stock market is validating this right now. There’s simply no asset value left. When you buy their stock at $4-5, it’s more like buying a futures contract.

            The GSEs represent about 80% of the lending industry in the country, and FHA is absorbing most of remaining balance. All these lending markets are tied together. Despite the fact that Orange County has relied less on these lending entities in the past, doesn’t mean they will not impact us in a major way in the future. In fact, if the GSEs were to completely disappear, overpriced communities (OC) could face more peril. BTW, I do not believe the gov’t will allow this to happen. In other words, we’re about to see lending regulated and legislated to death.

            All this leads me to say, lending as we know it is about to change. And due to all the shenanigans and tremendous losses on WS, these changes are likely going to restrict lending, NOT enhance it.

            You say, “banks begin lending again (as Malibu Renter alluded to yesterday, they are ready with guns loaded).”

            I don’t see it that way at all. What banks are you/Malibu Renter referring to?

            Not WaMu, not Wachovia, not Citi, not BofA, not Wells Fargo, not Downey, etc, etc, etc, ….

            During the last down cycle, sales activity bottomed in 1991, yet prices didn’t bottom out for another 5-6 years.
            1. Anonymous August 21, 2008 at 10:07 pm

               Some interesing links on this topic

               Video link:
               http://www.cnbc.com/id/15840232?video=812131553&play=1

               Housing Prices Could Skid Another 33%, Analyst Says
               http://www.cnbc.com/id/26007215
            2. MalibuRenter August 22, 2008 at 7:07 am

               I can give you a few reasonable candidates. Comerica doesn’t have a large residential mortgage portfolio, but has enough to know how to do things. BBT is well liked by it’s customers and is not walking with a severe limp. GE sold most of its mortgage operations (and is probably glad they did), but they could get back in.

               There are also a number of banks that might buy a US servicing operation like Litton.

               Oh, and don’t forget Blackrock. They own a lot of distressed mortgage assets they got at fire sale prices.
         4. Schadendude August 21, 2008 at 9:22 pm

            Oh if only it were true Mark. I think by mid ’09 you’ll fully appreciate what a deep hole we’ve dug for ourselves. Bottom in ’09 ? Bounce back to prosperity ? Based on what ? We’ve all been getting rich figuring out how to borrow ever greater sums of money to spend on fancy cars, home upgrades and lifesyle. Show of hands, how many people here have, in the last 12 months, bought equipment or machinery that they will use to produce something of resale value. Exactly. Where will we get the money to bounce ? Borrow more from the chinese ? That dog won’t hunt my friend. He’s too old and weary.

            Go see IOUSA. We’re entering a new era of American life, whether we like it or not.
   2. LC August 21, 2008 at 8:44 pm

      I agree that rental parity would get a renter out of his apartment, and into a house. The income tax savings would have to be considered then. But I disagree that any investor would buy a house to rent out to make a profit, because most investors buy multi-family units, not single family homes. There are many reasons why this is so, mainly that having vacant house at any time is too much of a drain, compared to a single unit in a fourplex.

      So, this might influence first-time buyers, a certain percentage of the market, but not investors and speculators. But first time buyers might also affect the move up buyers.
   3. Carl August 22, 2008 at 12:56 am

      I wonder about that article. It is pretty decent, but the one data point I’m familiar with is totally, utterly wrong. I live in Raleigh, NC and it claims the price-to-rent ratio is 27.2, almost as high as OC. No way in hell. I rent for a two-bedroom condo about $1000, and some in my complex are for sale for approx $200k. That would be a ratio of 16. And my experience isn’t unusual at all. There are some stupid expensive downtown condos, but for the most part housing prices are stable or falling slightly but they really don’t have much to fall. My co-worker bought a house six months ago and saved money on rent. So this makes the article suspect in my opinion.
   4. Craig August 22, 2008 at 8:57 am

      Rental parity won’t be the savior of this sinking market, either. Rents will drop as the recession deepens, but even if they don’t, why buy a house for a price equivalent to the rent, when buying sticks you with the possibility of losing $100K or more as the market continues to free fall?

      Rents tend to go up slowly over time, but you don’t face the risk of negative equity that mortgage holders do.
5. alan August 21, 2008 at 7:04 pm

   Three bedrooms, 2 1/2 baths cramed into a space less than 1400 sq ft.

   Yikes, thats even smaller than yesterday’s property.

   I had no idea that so many hobbits lived in Irvine.

   Do you think IR can find a 3 bedroom under 1300 sq ft?
   1. Ambiepants August 21, 2008 at 8:51 pm

      Actually… yes, you can find 3 bedrooms under 1300 sq ft. Cortile (Plan 3) at Woodbury is 3 beds, 2.5 baths in 1,275 sq ft.
   2. alan August 21, 2008 at 8:59 pm

      oops, spoke too soon…

      Found one, 3bdrm 2 bath sandwiched into 1200 sq ft.

      [link]http://www.redfin.com/CA/Irvine/35-GREENBOUGH-92614/home/17124106[/link]
   3. SomebodyElse August 21, 2008 at 9:02 pm

      3 BR under 1300 square feet:

      http://www.redfin.com/CA/Irvine/35-GREENBOUGH-92614/home/17124106

      http://www.redfin.com/CA/Irvine/4-Summerfield-92614/home/17038470

      “hobbits” ha ha ha ha ha!
   4. ockurt August 21, 2008 at 10:08 pm

      We have lots of hobbits in our Brio tract.

      Most of the bigger units have about 1250 sq. ft., 2 bd, 2 ba.

      I have some neighbors that have their 2 teenage daughters living with them and my other neighbor had his in-laws from China over for 6 months so that was 6 people in his place not counting his mom that came over multiple times during the week. I asked him how he kept his sanity…he drinks lots of tequila.
   5. brea August 21, 2008 at 10:08 pm

      My house is a 4br/2bth and was originally 1,325 sqft. It was built in 1985 before the trend to supersize. We have added on a family room, master closets and a large laundryroom and it is now 1,875 sqft.

      One advantage is that you always know what your kids are up to.
   6. camsavem August 21, 2008 at 10:58 pm

      It really bugs me to hear comments like yours. I grew up in a lower middle class area of Torrance. My parents did not make a lot of money. The 4 of us lived in a 2 bedroom 1 bath 900 SF home for 13 years.

      I would have loved to live in that house as a kid, but i guess we cant all be from families of entitlement.
   7. The Moar You Know August 22, 2008 at 1:08 am

      You might find this hard to believe, but before the 1980s, most houses in this country used to be quite small.

      My grandfather’s house in Alabama was 3/2, 1250 sq ft…on 2 acres of land. My neighbor across the street from me here in San Diego is a 3/2 in 1152 sq. ft.

      My place is 875 square feet, but it’s just me. Do consider, however, that I lived in it as a teenager, with my little brother and my mom back in the day. It can be done – people don’t require nearly as much space as they think they might.
   8. No Cal SC August 22, 2008 at 7:04 am

      I live in a 3 bedroom 1 bath house that is 1071 sq. ft. :coolsmile:
6. Ochomehunter August 21, 2008 at 7:14 pm

   Irvinerenter, you are right about the Weeping in Real Estate and Construction/Financial Industry. I work for a large General Contractor and I can see writing on the wall for thousands of employees in construction industry, the ones that deal in commercial construction, wonder how much stress that would put on home defaults going forward. I believe in survival for the fittest, and I strongly believe most if not all on this board belong to this group.
   1. LEO August 21, 2008 at 7:55 pm

      just get a heavy machine gun and start shooting. let them die. they deserve it.
7. Dano August 21, 2008 at 7:47 pm

   Light and Airy? Look at that second picture – looks more like dark and dingy. I love the bathroom picture – I’m surprised there isn’t a growler in the bowl…..nice staging.

   This place should go for no more than $300K and even that would be a shame…..

   Dano
   1. ockurt August 21, 2008 at 10:11 pm

      growler…lol…thanks for the morning laugh..

      those pics are pretty terrible, you think they would turn on a few lights…

      Right next to the 405..where do i sign???
8. LC August 21, 2008 at 8:52 pm

   $279 dues!! $300 sq/ft!!

   Yes, this reminds me of George Harrison, who reminds me of Oasis…”Where were you while we were getting high?”
9. ConsiderAgain August 21, 2008 at 9:12 pm

   I think this one should be classified as a “Fixer” on Redfin. Electrical socket hanging out of the wall, a tube or wire strung outside the sink cabinets, filthy carpet and oven, disgusting bathroom, wonder what else awaits here…. It is amazing this place is shown thus, wouldn’t a couple thousand put into cleanup/fixup be warranted if you really thought to get $400k for a dwelling? I guess not.

   A wood toilet seat is just silly, porosity and all. Not to mention splinters.
   1. anybear August 21, 2008 at 10:54 pm

      A wood toilet seat is better than those puffy, squishy ones though. You know, the ones that make a farty sound when you sit down?
10. freedomCM August 22, 2008 at 12:11 am

    I wouldn’t pay $2000 to rent this dumpy place that is 100 yards from the 405.

    Constant noise, constant polluted air, constant dirt filtering over everything.

    I certainly wouldn’t want kids living here.

    Maybe you could get 4 college kids to pay $500 each, but then you will have to deal with the damage and vacancies.

    I predict this will sit for a year before it sells.
11. luckyguy August 22, 2008 at 7:21 am

    Hi MarkH,

    This is falling process:
    angery->denial->bargaining->depressed->accepted
    Where we are? denial ! yes.
    Way to go

    This is numbers when you really compare, I believe you did:
    2000 = 1
    2006 = 3
    2008 = 2

    I would say Reltor Asso…or Ass….I forget how to spell..

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