Peter Schiff is predicting the OC housing market will get much worse.
Irvine Home Address … 30 JACKSON Irvine, CA 92620
Resale Home Price …… $675,000
We think we climb so high
Up all the backs we've condemned
We face our consequence
This is the beginning of the end
You wait your turn, you'll be last in line
This is the beginning
Get out the way, cause I'm getting mine
This is the beginning
Nine Inch Nails — The Beginning of the End
Back at the peak of the housing bubble, it was obvious (at least to me) that prices were too high and were going to crash. Some bears lost their conviction when the false rally of 2009 began, but prices were still too high, affordability was too low, inventory was artificially constricted, and the entire rally was dependent upon government props. With those headwinds plus an enormous shadow inventory to liquidate, there was little or no chance the 2009-2010 rally would be sustained.
Now, with the elimination of many government props, prices at rental parity, and affordability at decade-long highs, the direction of prices is much less certain. I still believe prices will decline for at least a year or two due to the liquidation of shadow inventory and the continuing weak economy. But I could be wrong.
What was most interesting to me when reading the comments on the recent post on Irvine affordability was the difference in opinions among the various astute observers. Most were still bearish, but some were bullish — not stupidly bullish like many commenters over the last 5 years — but thoughtfully bullish based on the improvement in conditions we are seeing now.
I selected today's featured article because Peter Schiff has been right about many of the conditions which contributed to the collapse of the housing bubble and the economy. Further, he knows quite a bit about the Orange County housing market, and is he is thoughtfully and unapologetically bearish.
Housing market will get much worse
October 22nd, 2011, 12:02 am
Before Peter Schiff had a national reputation for calling the economic crash of last decade, he was a highly opinionated money manager from Orange County. (Recall his interview with us when he predicted home prices would fall 50%?) He’s returning to Orange County on Nov. 7 for an investment chat and Q&A at 6 p.m. at the Irvine Barclay Theatre. (Details here!) We asked Peter for his real estate outlook in advance fo his local appearance …
Us: Is real estate pain over yet in O.C. and/or SoCal?
Peter: No, it’s going to get worse. The current market is still being propped up by government-subsidized mortgages, artificially low interest rates, and a backlog in the foreclosure process. Prices will not bottom out until these props are removed and true market forces are allowed to clear the market.
IHB: Yes, I agree. In particular the backlog of foreclosures must be cleared out before we can be certain the market has bottomed.
In addition, the California economy is going to get a lot worse. More business will leave the state and more workers will lose their jobs. More people will chose to rent, and many that do will have to have roommates. The vast majority of new home construction is currently taking place in the multi-unit building category, which confirms this trend.
In addition, many unemployed homeowners may take in borders. College grads loaded up with debt and unable to find jobs will likely move back home with their parents. The elderly, stripped of interest income as a result of rock bottom interest rates and thereby unable to cope with rising costs of living will move in with their grown children. All of these factors will continue to put downward pressure on real estate prices for years to come.
IHB: If his macroeconomic call is correct, the housing market will continue to decline. New household formation is essential to a strong housing market. All the conditions Schiff describes above will hinder household formation and keep prices down until conditions improve.
Us: How bad could it get … again?
Peter: Ultimately it will get very bad. The market is already on life support, even with mortgage rates at the lowest levels in nearly 70 years. But imagine if rates rose to the levels they were at just five years ago, to say six or seven per cent? What will that do to property values? I think ultimately mortgage rates will rise farther, maybe even above 10%.
IHB: I have maintained that higher interest rates will work to pummel prices — when rates finally move higher. Unless higher interest rates are compensated for by wage inflation, the higher interest rates will reduce loan balances, and in areas like ours which are inflated to the limit of income affordability, smaller loan balances will force prices lower.
At the same time, I think the California unemployment rate will continue to rise and taxes in California, will continue to go up. I also think there is a distinct possibility that the ability to deduct mortgage interest from personal income taxes will, at some point in the not too distant future, be curtailed or eliminated, especially for wealthy individuals. What do you think would happen to real estate prices under that scenario? Pretty soon you will not have to imagine this, you will be living it.
IHB: As we discussed yesterday, if the home mortgage interest deduction is curtailed or eliminated, prices locally will likely come down to adjust for the increased cost of ownership.
Us: Do you think the presidential political discourse will be a factor in the 2012 housing market? Why?
Peter: No, housing prices will decline no matter what happens in the election. There is still a large overhang of excess inventory. However, I expect housing and foreclosures will certainly be issues in the campaign. I would imagine that candidates will be looking to outdo one another on ways to bail out overstretched homeowners. Of course, anything the government does to interfere with the foreclosure process, to keep people in homes they can’t afford, and in which they have no equity, only worsens the overall crisis.
IHB: I totally agree with his assessment. The politicians will pander, and if they actually do anything, it will do more harm than good.
Us: Do any political proposals being floated right now stand out as extremely helpful or harmful to real estate?
Peter: Many are harmful. Even those that would help clear the market would mean that housing prices would go a lot lower. The solution to the housing problem can only occur with lower prices. High home prices relative to income are part of the problem, and keeping them artificially propped up only makes that problem worse.
IHB: This describes Orange County, but not Las Vegas. Prices are just now reaching the limit of affordability in Orange County whereas the cost of ownership is a fraction of rent in Las Vegas. In fact, Las Vegas is the example of what happens when prices are allowed to fall freely to reach their market clearing price. Prices there are very low, but the Las Vegas economy will not be near so burdened by mortgage debt in the future. This will have positive repercussions on the local economy.
The best solution would be a vibrant economy that creates productive jobs. We can only achieve that if we reduce government spending, repeal regulations, and lower taxes.
Us: If you had a magic wand and could do one thing overnight to help the housing market … what would it be?
Peter: Specifically for the housing market I would abolish Freddie Mac, Fannie Mae, and the FHA. Then I would reform the tax code to lower marginal rates and abolish the mortgage interest deduction.
IHB: All great ideas. This would eliminate all government subsidies in the housing market. It likely won't happen, but it would be the best thing for the housing market.
Actually, I would abolish the income tax completely, which would make the mortgage deduction moot anyway. If we do that we will have a free market in housing. That will lower prices, and produce a viable market. We will clear up the excess inventory, bring down housing costs, and remove the risk to taxpayers for future mortgage defaults.
IHB: It would also dramatically lower prices and cause the bankruptcy of most of America's banks. I love it.
The free market will make sure that only people who can afford houses buy them, and that there are adequate down payments product lenders in the event of default. At that point, prices will find a real and sustainable bottom. When that happens, the dynamics will change and homes will become a wiser purchase and home lending will become a profitable use of capital, even without government guarantees.
IHB: The housing market would survive the transition to a truly free market. Many loan owners wouldn't like the impact of prices during the transition, but the economy would be much better off without the various subsidies we currently have in place which only serve to inflate prices and shift the risk of loss to taxpayers.
Las Vegas Cashflow property workshop
Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 PM Wednesday, October 26, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com. at the same location.
Screwing the FHA before the loan limit went down
The owners of today's featured property show why the FHA loan limits need to go down and why FHA insurance premiums are on the rise.
- This property was purchased on 5/8/1998 for $312,000. The owners used a $245,000 first mortgage and a $67,000 down payment.
- On 12/6/1999 they obtained a stand-alone second for $35,000.
- On 4/10/2001 they opened a $60,000 HELOC.
- On 8/3/2001 they refinanced with a $340,000 first mortgage.
- On 3/20/2002 they got a $40,000 stand-alone second.
- On 5/23/2002 they refinanced with a $400,000 first mortgage.
- On 6/13/2002 they obtained a $20,000 HELOC.
- On 5/5/2003 they got a $65,000 stand-alone second.
- On 12/10/2003 they refinanced with a $478,100 first mortgage.
- On 12/12/2003 they opened a $50,000 stand-alone second.
- On 7/26/2004 they obtained a $78,000 stand-alone second.
- On 3/17/2005 they got a $116,674 stand-alone second.
- On 12/15/2006 they raided the bank for a $234,000 stand-alone second.
- On 1/18/2008 they went back again for a $262,000 stand-alone second.
Their mortgage broker must love them. BTW, based on the behavior of these borrowers, do you think it would have been difficult for a lender to recognize these borrowers were Ponzis? Thirteen refinances in nine years! The total disregard of obvious red flags shows just how bad banking standards were during the bubble.
But it gets worse.
Despite the obvious signs of a Ponzi, the FHA approved a $677,407 loan to these people on 8/2/2011 — just a few months before the conforming limit dropped. So how did these borrowers behave after they got their debt-consolidation loan from the FHA?
They opted to sell the house short. They are screwing the FHA and ultimately the US taxpayer — you. I am forced to wonder if they even bothered to make a payment. The loan is only two months old. Given their obvious experience with mortgages, they probably made the first two payments to avoid being charged with mortgage fraud, so now after making the September and October payments, they are selling short.
The started with a $245,000 first mortgage, and now they have a $677,407 first mortgage. That's 432,407 in mortgage equity withdrawal. I wonder how they will adjust to life without a home ATM machine?
——————————————————————————————————————————————-
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com
Irvine House Address … 30 JACKSON Irvine, CA 92620
Resale House Price …… $675,000
Beds: 4
Baths: 2
Sq. Ft.: 2453
$275/SF
Property Type: Residential, Single Family
Style: Two Level, Cape Cod
View: Faces East
Year Built: 1978
Community: Northwood
County: Orange
MLS#: S677010
Source: SoCalMLS
On Redfin: 4 days
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This will be a DEAL for someone! Inviting curb appeal and a GREAT 4 bedroom floorplan with bonus room. Granite in kitchen, all baths and bar area. Kitchen features sunny breakfast nook, gas cooking and loads of cabinets. Low maintenance ceramic tile floors throughout downstairs living areas. Family room with cozy fireplace. 3 car garage and full driveway. Extra large backyard with room for pool. Slumpstone fence and over 10 fruit trees. One block to elementary school. Don't miss out on this bargain!
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Proprietary IHB commentary and analysis 
Resale Home Price …… $675,000
House Purchase Price … $312,000
House Purchase Date …. 5/8/1998
Net Gain (Loss) ………. $322,500
Percent Change ………. 103.4%
Annual Appreciation … 5.7%
Cost of Home Ownership
————————————————-
$675,000 ………. Asking Price
$135,000 ………. 20% Down Conventional
4.18% …………… Mortgage Interest Rate
$540,000 ………. 30-Year Mortgage
$130,065 ………. Income Requirement
$2,634 ………. Monthly Mortgage Payment
$585 ………. Property Tax (@1.04%)
$0 ………. Special Taxes and Levies (Mello Roos)
$141 ………. Homeowners Insurance (@ 0.25%)
$0 ………. Private Mortgage Insurance
$0 ………. Homeowners Association Fees
============================================.jpg)
$3,360 ………. Monthly Cash Outlays
-$432 ………. Tax Savings (% of Interest and Property Tax)
-$753 ………. Equity Hidden in Payment (Amortization)
$201 ………. Lost Income to Down Payment (net of taxes)
$189 ………. Maintenance and Replacement Reserves
============================================
$2,565 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,750 ………. Furnishing and Move In @1%
$6,750 ………. Closing Costs @1%
$5,400 ………… Interest Points @1% of Loan
$135,000 ………. Down Payment
============================================
$153,900 ………. Total Cash Costs
$39,300 ………… Emergency Cash Reserves
============================================
$193,200 ………. Total Savings Needed
——————————————————————————————————————————————————-
Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com.
Looks like Schiff agrees with my prediction that OC house prices will average $200,000 in the next few years.
I’m looking forward to seeing realtor signs with electronic price displays that slowly spin lower, perhaps $1,000/day.
That would be the opposite of the US Debt Clock, always going higher. 🙂
I could only see it happening if interest rates were to shoot the moon and that seems very unlikely at this point. Each time it looks as though mortgage rates could not fall a 10th of a percentage lower – they come up with a new way to drive interest rates downward. Banks are now advertising “high yield” money market savings accounts with .85% interest rates that were paying out 5% when the economy imploded.
And not to mention that people in the upper income brackets are rebounding a lot faster than those in the lower income ranges and many will likely be willing to “overpay” for a nice neighborhood.
The problem with Schiff is that he is always predicting the end of the world any day now and telling people to buy gold and lots of it, preferably from Euro Pacific Capital if they have 250K to gamble with. The stock market has a bad day and he is on the radio telling everyone to ready their Ham radios and head to their shelters with all their gold. The stock market rebounds the following day and he is back on the radio proclaiming that the can has been kicked down the road for another day so everyone should remain close to their shelters and be ready to transact gold coins for their caramel lattes at starbucks in the coming weeks. In my eyes, he has lost some credibility riding the “buy gold prepare for hyperinflation” talk.
What Schiff has been predicting for a long time is not just increased interest rates and worse unemployment, but something on the order of a global panic/crash/deep financial crisis with severe and abrupt changes is interest rates, food prices, oil prices, etc. to the extent that nobody will recognize the country for what it was anymore – it will be that bad.
I think the media and politicians are reporting/selling a slow, long-lasting recession followed by a slow, measured recovery.
Schiff, the proverbial “Debbie Downer”, says no freaking way. It’ll be like an unexpected economic heart attack/stroke, and it could happen any day now.
SanJoseRenter,
Is that DaveAZ moved to San Jose? Does this mean that you graduated? Doing a post-doc or working in industry? Anyways the beat goes on with the extend and pretend.
Did they really have those massive dust storms in Phoenix, AZ as portrayed on the web?
Fed trying an old FDR trick — inflate your way out of debt. Just need wage inflation to work. That won’t happen until the rest of the world need something from the US that can’t be purchased elsewhere.
The US needs to stop being the world’s free policeman and start SELLING the arms for the rest of the world to police themselves.
loads of cabinets
Dewd – I’m like a tewtilly professional realtor, man. You should see this killer house with sh_t-loads of cabinets in it. Far out.
room for pool
http://www.crackthecode.us/images/RoomForPool.jpg
At least when hyperinflation rolls through O.C, the owners of this house will be ready to grow their own vegetables in those herb gardens and fill sandbags from the dirtpile to fortify their perimeter and fire their guns at the passing marauders. If they decide to not put a pool in that room then it will make a good place to store more guns and extra food. Looks like lots of space to bury large caches of gold coins too.
That shed could be great for the servers their going to need to store all their bitcoins, too.
Maybe they could buy ammunition made of gold. Kill two birds with one stone and all that.
Paul Volcker was interviewed on Charlie Rose last nite. Some quotes:
– Glass/Steagal is 2 lines. The Volcker Rule is 35 pages. These are not complicated to understand. Pick one or the other and enforce it.
– 1 trillion euros … wow, that’s the first time I ever had to say that.
– in 2008, the shadow or non-banks such as mutual funds actually had their money in European banks. Can you imagine what would have happened if the Greek crisis was exposed in 2008 and there was a run on our mutual funds? That’s why I think mutual fund deposits should be in regulated banks.
– Japan’s real estate and stock market values fell 70% during their crisis. You can’t just press a button and fix that type of economic problem.
– executives say that capital requirements and restrictions on proprietary trading will hurt growth. I say that type of financial engineering is secondary to real economic growth.
– adding a tax on stock market trades will only be possible if other countries do that as well, which won’t happen
– we’re deleveraging the mortgage market through foreclosure, which is a very painful process
– why was there $60 trillion in swaps protecting against $6 trillion in risk? what does that even mean?
– we have deleveraged maybe 25% of swaps. It’s a start, but still high compared to 15 years ago.
– the middle class has not improved economically in 10 or 20 years. OWS should have happened sooner.
I really like Paul Volcker
To his comments about what Wall Street says to him:
…[Wall Street] executives say that capital requirements and restrictions on proprietary trading will hurt growth…
1) We don’t have growth now, so how can such restrictions hurt?
2) We had great growth in the 50’s and 60’s before high speed computers and networks made proprietary trading possible.
Everywhere I look now, I see High Frequency Trading goods and services:
– HFT servers
– HFT data centers
– HFT fiber connections
All optimized to reduce lag, similar to the online game server sector that mushroomed 2000-2010.
All this talk of dismantling Freddie, Fannie, etc and abolishing the income tax is nothing but talk because the financial industry writes the laws that govern these institutions thru their lobbyists. I’d love to see a 5-page tax code and no government involvement in real estate but we’d have to completely remove special interests from the equation first. Good luck with that! In the meantime I’ll be holed up in my OC bunker with my guns, canned food, bottled water and stacks of gold coins waiting to protect my family from bands of hyperinflation marauders terrorizing the neighborhood in their luxury SUVs. 🙂
I look forward to seeing Schiff in November.
If you haven’t seen his testimony to Congress from September 2011 on youtube, then you really should. The best (and simultaneously worst) part are the incredulous looks and clearly worried follow up questions that expose just how poorly informed and educated today’s American congressmen and women are on these critical issues of national debt, government intervention and taxes. They obviously have no clue what they are doing wrong and are getting tons of horrible advice.
Schiff was right about the housing crash and the 2009 financial crisis. Now he’s more bearish and foreboding than ever, mainly because all of the policies enacted by Congress and the Executive branch since 2000 have been a series of tragic, colossal and likely irreversible mistakes.
Schiff slams Obama’s administration for not addressing the issues early on. Instead, more borrowing and govt intervention has made matters worse. The interesting thing though is that Schiff’s criticism really goes back to the Clinton Adminstration. Also, Schiff doles out punches for Bush & Co. in equal measure.
I like him because he’s a fiscal conservative and old school Repubplican minus the holy roller, intelligent design charade.
It gets funnier by the Day…
From the WSJ:
“The main subsidiary of mortgage insurer PMI Group Inc. has been seized by insurance regulators in Arizona, and will begin paying just 50% of claims beginning Monday, according to its website.
The remainder of each claim will be deferred, the company said.
PMI becomes the second mortgage insurer since the housing-bubble burst to be subject to restrictions on payments, as fallout from the bursting of the housing bubble takes another turn for the worse. The insurer joins smaller rival Triad Guaranty Inc., where policyholders since 2009 have gotten 60% of their claims paid in cash with the balance deferred.
According to an order from an Arizona Superior Court judge posted on the company’s website, the Arizona Department of Insurance now has “full and exclusive power of management and control of PMI.”
Not much pisses me off these days, but this particular consequence of kissing banker and homedebtor ass year after year is infuriating.
If you want low interest rates for a couple of years, then be a good lil’ monetarist and do the deed: slash ’em for a while. Treasury holders aren’t entitled to great returns all the time.
But this seemingly endless period of low rates is punishing people who did not play the Big Casino with all their money. Everyone must live with risk, but no one should have been shafted the way savers have been since the late 1990s.
I remember the days when you could sign up for a 5% CD almost anywhere. That must be fantasyland for today’s younger generation. If you aren’t rewarded for saving, why do it?
“If you aren’t rewarded for saving, why do it?”
To me, that is the most pernicious problem resulting from the bubble crash. With interest rates at zero for an extended period of time, the only reason any saves is because they know it’s a good life habit. There is no other reward.
“IHB: It would also dramatically lower prices and cause the bankruptcy of most of America’s banks. I love it.”
Be careful what you wish for. U.S. economy is not competitive. If most banks die unexpectedly, shutdown will be inevitable. It is point of no return. Do not expect any recovery, because China and others will capture international markets.
Banks are like terrorists these days. They have a bomb – big one. They demand money from taxpayers and expect to give nothing in return.
IR – Reading the above posts, do you think gold is in a bubble?
I do think gold is a bubble, but it won’t burst until people stop feeling the need to flee to safety.
I’ll make this bold guess: gold will crash when inflation actually arrives. Markets are always forward looking. Most are buying gold now, in a time of deflation because they are seeking safety, and they are anticipating future inflation. When the inflation actually arrives, people will sell gold in anticipation of inflation ending. With inflation will come alternative investments yielding better returns. People will flee gold in favor of these other investments.
Ultimately, I can’t get excited about gold because gold gives me no other gold. It is purely a safety and speculation play. If gold had cashflow, perhaps I would find it more compelling, but it doesn’t, so I don’t.
That being said, gold has another several years of rally left in it, IMO.
Schiff is a radical right person with abolish the income tax. In otherwords, he is a nut case. Things will not be near as bad as he proclaims.
I was hoping someone would share this simple truth. Thank you.
I am neither a member of the “Radical Right” nor am I a “nutcase.” I am, however, the founder and owner of a $10M business located in the SE US. As such, I feel somewhat qualified to comment on our current income tax system — it is a massive drain on productivity and the creation of real wealth. Simplify the system, either by flat tax, 9-9-9, or Fair Tax (i.e., national sales tax) and this country’s economy will take off.
This, IrvineRenter, is the “simple truth.”
Schiff may be a nutcase and his views might be too extreme. HOWEVER, history has proven his predictions were far better than just about any other pundit out there. Either the other pundits are too stupid or they don’t want to “tell the truth” and are afraid of rocking the boat.
> Schiff is a radical right person with abolish the income tax. In otherwords, he is a nut case.
Almost 1 million of America’s most educated, talented citizens waste their careers as “tax professionals.”
If a flat tax can liberate even 1 of those people to do productive work, it’s worth it.
Herman Cain’s 9-9-9 proposal resonates with people for 2 reasons:
1) everybody knows our tax system is shameful.
2) Americans are starved for policy. They’ll listen to anybody who is willing to think about the future of this country, instead of empty sound-bite rhetoric. Even a pizza salesman.
Some simple truths that are touched on but ignored by the MSM and at times, economists: First, in persistent high unemployment, local real estate values deflate or plummet (rents and home values both); schools empty, young people especially move, government also cuts back employment. Second, what is different this time is that in California and Nevada with obscene rates of underemployment/unemployment, one would expect 5% or more of the younger family population to LEAVE for greener pastures. They haven’t, apparently. When they do leave the state, as now it is clear the jobs aren’t there, won’t be there, then see “First” above. To reduce California unemployment to 6%, 6% of the workers have to leave, with their families; in Nevada, it is more like 8% have to leave. Either they don’t leave, or more and more are laid off as some also leave. Now factor that into your housing future value predictions, say three million Californians leave, think that may have an impact?
I won’t buy a house again until interest rates have normalized at the 50 year long term average. This may not happen in my life time and I am now 40. This said, people must understand that people – for the most part – only care about their monthly cost of ownership. With interest rates artificially low monthly costs of ownership don’t look too bad…but, not if but when rates rise dramatically we will see monthly costs of ownership skyrocket and consequently a tremendous loss of housing prices.
Only if you plan to live in the house for the term of the loan or until death does this make sense. You can buy a 1M dollar house with 20% down at 4% today but, what happens when you sell the house 20 years from now at a simple 8% rate??? The result is that all of the equity you have accumulated in 20 years is whipped out…because monthly carrying costs are double and in 20 years of a 30 year term you still have only built 50% equity!! This is amortization and leverage!!!
I live in a house that costs my landlord 8K a month and my rent is 4500. Stupid. Good luck to people calling a bottom in prices. These will grind lower as rates rise. And if rates don’t rise??? Pobre Si! That means the economy is soo weak that we will be in and out of recession for the next 20 years – every 4 years.
My .02
BD
My .02
Re: Schiff
And I quote
“abolish Freddie Mac, Fannie Mae, and the FHA”
“abolish the mortgage interest deduction”
“abolish the income tax”
Gee, what a surprise, typical OC John Birch (or is it John Wayne?) type of conservative nonsense in an OC blog.
The above are of course all GREAT policies that served the country and the economy well until they fell into the hands of W. Bush who undecided to unregulate EVERYTHING.
Duh.
What a croc.
Your buddy Barry isn’t exactly trying to reign in the regulation now is he? Face it folks, you have two idiotic parties here (Ds and Rs). They both serve their elite Wall St. and banker masters equally. This country will keep circling the drain until this cycle is broken!
Anybody that automatically blames everything on one party but says nothing about the other automatically has zero credibility in my mind. You’re just a mindless partisan hack. BOTH political parties have a lot of responsibility for the current mess.