REALITY CHECK!
I know, it has been a month or so since my last post. With the amount of ‘housing bubble’ news that is hitting all aspects of the media, I started to figure that the blogs weren’t needed as much as they were when ‘nobody’ was talking about a housing bubble. Well, I ended up having a good conversation with one of my long time readers. They said that a new post was needed from me now, more than ever, since things were starting to happen. After our hour long conversation, I agreed. It was also suggested that not every post has to be a long one…that even shorter posts would be fine. I agreed that it was getting tough to write long posts, so I think making shorter posts more frequently will be on the order. How does that sound? Now lets get going…
What I am about to say probably won’t come as a surprise to many of the long time readers, but after talking to my friend, he believes that many people could benefit from much of what we talked about in our conversation.
As much as many people are seeing inventories increase, prices decrease, and the sales pace drop dramatically…I am here to tell you that YOU AIN’T SEEN NOTHING YET!!!
I know the pundits and experts like our favorite econoMISSED Leslie Appleton-Young, are saying that yes, things are slowing, but that is all that is going to happen. Things will turn around in 12-18 months. The market is just finding a balance between buyers and sellers.
BLA BLA BLA… Read this ‘gem’ from a nice Desert Sun ‘fluff piece’ titled “Real Estate Upswing Predicted for Valley - Expert says market will bounce back“: Leslie Appleton-Young, chief economist for the California Association of Realtors, told more than 500 real estate agents, mortgage brokers and other business people at a real estate forecast symposium Thursday in Palm Desert that home sales and median prices statewide are likely to decline slightly from the once ‘red-hot market,’ then level off over the next 18 months.
“‘The housing market is going through an adjustment after a four-year boom that was not sustainable, but the (economic) fundamentals are still very positive for this region,’ Appleton-Young said. ‘But there’s no area of California that is immune to the adjustments,’ she said.”
I am here to tell you BULLSH!T regarding ‘positive fundamentals’ or that things are just going to ‘level-off’. What part of doubling inventories, and a 40-50% slower sales pace makes the fundamentals so ‘positive’? Not to mention that incomes in the desert communities do not afford most of these 400k+ ’starter homes’. I also find it pretty funny that 500 RE agents show up to a meeting in an area that has barely sold 700+ homes so far this year. I’m not so good at math, but it doesn’t seem like that is enough houses to ‘employ’ 500 agents.
All you have to do is read the articles on Ben Jones fabulous blog to see what is going on. I scan his blog daily…the difference is that I am not surprised one bit at anything I read there. Heck, I tried to tell people what was coming….and I STILL AM!!
I tried telling people for the past few years that this was going to happen, but nobody wanted to hear it. I was told that I was just bitter because I ‘didn’t own a home’ or missed the boat. This blog gave me a place to share my thoughts to whomever wanted to read them. I guess some people wanted to hear what was really going on in the industry as well over a million unique visitors have hit my blog. As for some of the people who told me I was crazy a year or so ago, some of those same people have actually contacted me for advice because all that ‘equity’ they had, is evaporating, and the mortgage payments are starting to take their toll. Again, lets use Orange County as an example…what REALLY happened the past 5 years to take the median home price from about $220k to about $620k??? Think about it…
I was just in NYC for a quick business trip. I happened to get lucky and was asked to share a limo with 4-5 other people instead of waiting in the taxi line that was easily 60 people long. As traffic from JFK was terrible, we had plenty of time to talk. The topic of real estate came up when they found out I was from SoCal (the other people were from Utah). Needless to say, these people were surprised by much of what I said, but they all agreed that mathematically things didn’t make sense. After we dropped the group off at their hotel, it was just the limo driver and myself. I guess he was listening pretty intently to our conversation, because he asked me what I knew about filing BK. He said that his mortgage alone was over $2700 a month, and that didn’t include the taxes. He said he had talked to some friends about the BK process, and that he wasn’t considering it now, but in a few months. He was amazed at how fast things turned, and that he couldn’t even sell his house for what he paid for it. I didn’t get into too much detail with the guy, I just hope he and his wife figure things out.
Lets take a look at some of the things we have seen in the news lately. We have seen homebuilders reporting large amounts of cancellations, a decrease in profits, and some smaller homebuilders are even losing money now. We are seeing inventories increasing, and the sales pace in many major areas is 35-55% slower than it was just a year ago. We are seeing stories start to pop up about appraisal fraud, people being upside down on their homes, and people trying to find ways out of their housing contracts. We are seeing that the builders are cutting prices in many areas, and this is ’screwing’ the individual homeowners that can’t match the builders with incentives and/or price decreases. We are seeing rather large layoffs in the mortgage industry as loan production is down from previous years. ALL of this is happening…AND WE ARE NOT EVEN IN 2007 YET!!!!!!!
You think things are getting interesting now? Just check back in 12 months and see how things are. I will tell you that the spokespeople for the NAR and CAR are doing nothing but blowing hot air. Their logic of a ’soft-landing’ is filled with more holes than all the golf courses in Florida. I’m sorry, but the fundamentals do NOT support property values where they currently are in the ‘bubble areas’. There is NO way to rationalize or explain it. Over the next 12-24 months, many of the flippers, ‘investors’, and interest-only-ARM-home’owners’ will be flushed from the market. There will be even MORE properties coming on the market, with less people that will be in the market for them.
That also brings me to another point. Just as many ‘novice’ investors and flippers hit the market, there were also a lot of ‘novice’ developers that entered the fray. Many of these developers (along with established homebuilders/developers) started housing projects when things were good, but won’t be completing things until 2007/2008 time frame. You have already heard stories of some developments being canned because it was early enough in the project. But many more were too far along and have to complete their projects. These builders/developers are facing cancellations and will be forced to sell their units in a market that already has a larger than normal inventory. It will be interesting to see how well these ‘new homes’ are absorbed into the already bloated housing inventory.
So, my advice to you BE INFORMED before you make any financial decisions. Do NOT blindly follow the advice of the industry ‘experts’ or any other person that has a financial interest in the industry. Look at the stock market bubble. All of the analysts, MBAs, and financial ‘gurus’ said “it was different this time”. They had ’strong buy’ on stocks that were trading at 100+ times future earnings. As we can look back and see, they were all WRONG. The same things are being said today about property values. If the numbers don’t make sense…then it is NOT a good deal, no matter what the realtor says! Notice how people call property ‘investment property’ and not ‘income property’ anymore?? Maybe that is because most of the ‘investments’ of the past few years are NOT throwing off ‘positive income’. Check back to this post in 1, 2, 3 years from now and see where things are. I feel confident that 2007 is going to be the ‘year’ that REALLY shakes things up a bit. It is going to be interesting to see what happens when 18-25% of the 9 trillion dollars of outstanding mortgages adjusts in 1 year.
Well, I hope this helps people some. I am working on a few posts right now. There was a ‘Flip that House’ marathon on TV this past weekend, and I managed to catch quite a few shows. I will give the shorter posts a shot, as that will help me be able to post more frequently and get ideas on ‘paper’ when I have them, and not have to incorporate them into a larger post. I look forward to the comments and feedback.
Stay tuned…the next 12 months will be VERY interesting!
SoCalMtgGuy
November 12th, 2006 23:20
It’s good to have you back.
I miss the good ‘ol days of your blog when you worked in the industry and had actual firsthand stories of what was going on. However, you were smart to escape.
It’s not true that “nobody” was listening to you back then. I was.
So that’s at least one person that agreed with you and understood the big picture.
And I entirely agree with you: we ain’t seen NOTHIN’ yet!
November 13th, 2006 00:18
That should be 9 TRILLION dollars of outstanding mortgages, I think.
November 13th, 2006 07:45
Greenlander…
I am still tied pretty close to the industry as some of my really good friends are still duking things out. It was smart to get out when I did as I am seeing/hearing more and more stories of people going ‘how am I going to make as much money as I was, NOW???’.
Either way, I have a pretty good perspective on the industry, and I feel pretty confident on what I think will be coming our way.
anon. yup…got that should be 9 trillion.
thanks!
SoCalMtgGuy
November 13th, 2006 08:48
Thanks for your post!! I really enjoying reading your comments! Please keep it up! My husband is chomping at the bit to buy and your comments have really helped. He knows it is not a smart time to purchase a home here in LA, but he just hates renting. I can’t wait for 2007 - 2008!! My secretary at work (who constantly said there was no bubble last year and prices will NEVER fall) now glares at me and does not talk about real estate at all. She says prices only went down a couple of months and then went straight up during the 1991 S. Cal. real estate crash. I told her she was nuts. Who’s right now??? We will see!!
Thanks again!!:)
November 13th, 2006 09:11
I vote for more frequent posts, even if brief ones. The best, to me, are the actual-conversation examples. Thanks.
November 13th, 2006 09:32
Thanks for the post. While Ben’s blog is pretty authoritative because it’s all quotes from other sources, it’s hard to see the big picture of what’s going on. You have a way of putting all that into context nicely.
Reading through these posts is sort of like getting the economic education I didn’t get in high school or college.
Thanks!
November 13th, 2006 10:07
What will be the most interesting is when the option ARM’s reset at the fully indexed principal and interest payment. I have read where the CEO of Countrywide has called option ARM borrowers and asked if they’ve thought about the negative amortization and they always reply, “what do I care about the balance as long as my home is appreciating?” I think it’s fair to say, especially in the bubble areas, that homes aren’t appreciating anymore, but the option ARM debt sure is. I see borrowers who have a hard time on smaller balance loans where the rate goes up 1 to 2%. How will these folks handle a doubling of their payment?
When we see the nonsense (low documentation loans, IO and option ARM’s, RE fraud) that has propped up the bubble and the beginning fallout, I don’t see how any “professional” observer can say that we will be returning to normal anytime soon.
November 13th, 2006 11:02
So much for a short post!
Great to see you back, it would be great to hear more from you (even in short posts) over the next while. Here in Vancouver we recently hit an affordability ratio of about 70% of pretax income to cover mortgage costs. Considering the rest of that ‘pretax’ income would go to taxes thats pretty impressive. I guess these people all get free gas and groceries.
We’re also in that strange phase where houses and condos have been sitting on the market for months and the seller keeps raising the price even though they can’t sell at their current price. Its a heavily faith-based market that keeps going up because its gone up in the past. Looking at whats going on in the US, I have a feeling we’re in for some interesting times up here.
I’m trying to track some of the stuff thats happening in our market at http://vancouvercondo.info
Great to see you back, please keep posting!
November 13th, 2006 11:34
I used to like ben’s blog, but has way too many posts on florida.
I vote for housing panic. It’s real and raw.
November 13th, 2006 12:16
What is this crap?? LA - a “bubble-proof” market??? Please give me some of what these people are smoking!! I need it!
http://money.cnn.com/popups/2006/biz2/newrules_bubbleproof/index.html
November 13th, 2006 12:39
Sometime during the next year, either Congress will attempt to pass legistlation to provide relief to homeowners or they will start to regulate the mortgage industry… or maybe both. I’ve got friends who refuse to listen to any talk about “bubbles in housing”… and these are the same people with multiple “investment properties”. I see them holding on the same way people held their internet stocks in 2000. In two or three years I see them suicidal… keep up the posts.
November 13th, 2006 12:45
Keep up the fantastic posts. If you can gives us some real time FBer stories well appreciated to keep the chin up waiting the last 3 years to buy in an absolute insane housing market.
November 13th, 2006 13:03
Grind them into submission…
Be patient and keep saving money. Once the ‘wealth’ effect of housing turns and people are stuck making these huge mortgages with no ‘upside’ look for lots of deals and a large correction. It will take more than 1-2 years to work through a 5-8 year RE boom.
The 30-yr fixed mortgage will return…it might just take a few years to do so. These ‘low payment now’ mortgages only ‘work’ in the long term if things go up rapidly. For people buying for short term gains…they will realize that renting is a better choice unless you are going to be somewhere for a few years. No longer will people ‘buy’ a place when they are only going to live there for 12-24 months.
SoCalMtgGuy
November 13th, 2006 13:34
Hey, good commentary on the “newbie developer” nuance of all this. Man, those clowns are everywhere. More kindling for the fire.
I think some commentary on the role of illegals and foreign “investors” who not only have no skin in the game, but no real ties to this country is also timely. That aspect has been overlooked. So far.
November 13th, 2006 14:27
txchick57
Yes, I completely agree with you. The problem with that topic is that people automatically cop the ‘you are a racist/bigot’ for saying such things and it gets ugly.
I have so many stories that I could tell about that. When I was in the business, I got rid of most of my ‘hispanic’ offices because pretty much EVERY loan was a 100% stated income deal. I wasn’t that competitive on those loans, and I ‘knew’ how many of the deals were being done.
I knew there were CPA’s that would do Certified CPA letters for a fee. You would think that every landscaper and housekeeper in SoCal was making 10k a month. It made me sick to my stomach, so I got rid of those offices. Not to mention the ‘relationships’ between the people on the loan. Basically it was a matter of finding 2 borrowers that were citizens with FICO scores, and putting them together on a loan. You would see owner occupied homes with a ‘not normal’ relationships like daughter and father-in-law. Why would a daughter be buying a house with her husbands father to live in ‘together’? People knew what was going on, but nobody would say anything. It is called ’straw borrower’.
I also didn’t like seeing some poor hispanic lady with her children who couldn’t speak english get ’sold’ on how she could afford a 500k house by some good looking hispanic guy in a suit. Then I would hear them ‘laugh’ about how they got a huge rebate or sold a high rate on the loan.
It was almost as if hispanics would trust somebody just because they were hispanic or ‘one of them’. Same thing seems to happen with other minority groups as well. They base trust on the fact that they are ‘the same race’ and in some cases, end up getting taken advantage of. Not always the case, but I have seen it more times than not.
It will be interesting to see how the whole thing pans out. Hopefully this comment by me won’t be taken the wrong way or out of context. It is mainly to show that without stated income and lowered standards, many of these borrowers would NOT have been able to buy houses.
SoCalMtgGuy
November 13th, 2006 14:30
Thanks for the post.
Ben’s blog is authoritative nationally, but the So Cal focus is kinda missing even with John Doe’s blog.
I always enjoy the I told you so posts. Just pop back in re-reference an old post as the predictions come true.
November 13th, 2006 15:00
SoCalMtgGuy
I know what you mean about like types trusting each other. I have relatives that are Christians who pass work whenever possible to other Christians. Knowing what I do about my relatives…..PT Barnum said it best. It is sooo easy to take advantage of another when the “trust factor” is there.
November 13th, 2006 15:08
I started researching the housing market about a year ago. Actually, we had sold some property, made a little profit, and thought ( good thing we just did that) of buying a bigger home. This is when I realized what bad shape this housing market is in. I appreciate your blog. It was hard to find candid, informed people out there. of course, now we find a lot. It has almost become an obsession of mine to read anything on housing. Once I realized what was happening, and how inflated the market was, I tried to find out more and more. People are still pretty oblivious. But fear is sinking in. You have thousands of people that believed that their homes would make them into millionaires. Now they are realizing that this might not be so. ANyways, it sure is an interesting subject. Thank you for your posts
November 13th, 2006 15:24
SoCalMtgGuy:
Glad to have another post from you. I vote with Chip for your suggestion of shorter but more frequent posts. And any ‘insider’ stories you can provide via your contacts are always interesting.
You are right on about the difficulty of convincing others. I have no insider experience, but I have been doing a lot of research on housing (via various sources including your blog). Despite the fact that the bubble argument made good empirical sense, I don’t think friends or family truly believed me until they started seeing ‘prices will likely decline’ type stories in the news. And tv stories, for whatever reason, seem to carry more weight than print media, even among the highly educated. It has been a learning experience, for sure. But thanks to you, Ben, Piggerton, and others, it is one I am having from the comfort of low monthly rent (vs. PITI) and no debt.
November 13th, 2006 15:25
Didn’t mean to post as ‘Anonymous’, when ‘SLO_renter’ seem anonymous enough . . . .
November 13th, 2006 15:45
Thanks for the post! I’ve been checking the site daily and am glad you are back. Short posts, long posts; it’s whether you have time…..just glad to read your work.
Regards
November 13th, 2006 15:48
Nice to see a new post.
Here in San Diego, denial is still running deep.
e.g. We have good friends who are shocked they can’t sell their 600K-purchased (2001) home for 1.2M today (2006).
I shared some “housing bubble” data and trends with them, just to be basically brushed off.
The same thing has happened when I’ve tried to advise people that recently became “real estate investors.” This includes a work colleague that went to Carleton Sheets seminars and now owns 10 properties.
I have decided to “shut my trap” and just quietly continue short-selling public homebuilders. I have already paid off my debts and purchased a late-model SUV from the profits thus far this year.
In summary, housing bubble believers: we are still a minority.
November 13th, 2006 15:54
Hey SoCal, great to have you back. I bought in ‘02 in Pacific Palisades and sold in ‘04, then moved back East where I had kept my original residence. It was a great ride up!!! I have been closely monitoring the LA Westside and things there have finally started to calm down. Lots for sale, some on the market for quite some time. This is going to get very interesting in no time at all. keep writing!
November 13th, 2006 15:58
SD Homeowner said: In summary, housing bubble believers: we are still a minority.
Sad but true
November 13th, 2006 15:59
SD Homeowner
I agree with you about keeping your mouth shut with certain people. NOBODY likes to hear they made a mistake or a bad investment, or that things are less than rosy.
It is amazing how people think they are entitled to 600k in gains in 5 years just be cause they were ’smart’ enough to buy a house.
120k a year in gains is more than 95% of the people in this country earn in income. And people think that is real?
SoCalMtgGuy
November 13th, 2006 16:08
Glad to have you back and posting. I always check your blog to see if you’ve posted recently, and if short is all you can manage, then short is great.
I would like to see more stories about “community lending” if you will…whether it’s hispanic to hispanic or Christian to Christian, or what have you. Predators misusing trust to make a buck…gee, what a surprise. My interest is, how is all this going to unwind, and who will be the bagholders. Like many who saved money and stayed out of the mania, I am apprehensive that the players who gamed the mortgage system and are now losing will start crying “victim”. As in, I don’t speak English and didn’t know what I was signing….or I speak English, and I still didn’t understand what I was signing.
I don’t get a sense that the adminstration has any clue or concern about the housing crash or it’s spillover effect on the economy. Maybe they have enough other problems, or maybe it’s a deliberate effort not to start a panic–but, I heard not a word during the recent elections. With 2007 around the corner, and all those trillions of looming resets, wouldn’t you think it would have been of some concern? With Paulson running Treasury, wouldn’t you think he’d be concerned about the quality of MBS and the potential for disaster? I feel the country is as unprepared for the housing crash as New Orleans before Katrina made landfall. The storm has been tracked, the warnings posted, and the emergency systems are ready to malfunction.
November 13th, 2006 16:10
Right on, mouth is shut from now on!
BTW, our 440k house (2003) peaked in value at 700k (2005)
Considered cashing out, but didn’t want to rent or relocate
Mortgage only 300k => sold a 200k house (2000) for 350k (2003)
IMHO, all the home value gains since 2003 are an illusion
Even today, our house shows up on zillow.com as 680k (2006)
Absolutely not real!
November 13th, 2006 16:43
SoCalMtgGuy,
Good read. I know you’re busy but if you can posibly do more frequent posts, that would be most appreciated.
I’ve been a bubble believer when bubbles weren’t cool - which is almost four years now. It was so hard to find articles back then, but there were enough to convince me.
Watching the panic start to happen and the stubborn denial is amuzing.
Thanks again for what you do.
Melody
November 13th, 2006 17:40
Nearly 700 homes sold in Coachella Valley and 500+ agents show up to an event. I find that amazing.
I monitor that market closely, and have already seen a 10-15% decline in prices over the last 12 or so months. I suspect it will continue. We bought a one bedroom in 2003 for $74k. We used it, but had we rented it year round it would have rented for $600. Seemed like a reasonble price back then since our payment was about $675 on a 15 year loan w/20% down. We sold it earlier this year, got $147k. Rents are $700 a month now. Seems out of whack now.
November 13th, 2006 18:14
SoCalMtgGuy :
Always enjoy the posts.
I believe the really interesting part happens when the credit tightens. There is always a nasty backlash when the risk premium for loans drops below the true risk. When that is realized… snap!
2007 is going to be ugly. I predict the ball really gets going at the end of 2Q 2007.
Neil
November 13th, 2006 18:31
I think all of you have forgotten that the last few years its been very difficult for Smart people to get a real job in America.
You post a resume and i get 30-40 unlimited income be your own boss make $100K selling real estate scams WEEK!
I seem to get rejected for the 20 something airheads, and when the economy tanks they will be STUCK with these employees and the clueless companies will fold faster then they otherwise would have, had they hired smart ADULTS in the first place.
I can’t tell you the last time i had an interview with a real ADULT (over 30) in HR.
November 13th, 2006 20:37
wow richard. how true. i hadn’t realized how bad it had gotten lately.
i’m self employed but i still keep in touch with my friends in the corporate/employed world. it seems like the average age drops every year.
the next downturn in going to be a bloodbath
November 13th, 2006 22:59
For those you who like to read while waiting for the events of 2007 to unfold, try “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay. Originally published in 1841, then 1852, and then again in 1980 by one of my favorite financial writers, Andrew Tobias. It includes descriptions of the Dutch Tulip Bubble, the Mississipi Scheme, and the South-Sea Bubble.
In reference to a prior remark about the 2000 stock market - the day I read that “this time things were different”, I sold all of my mutual funds and was “wrong” for about a year. To this day, people are still asking me “how did I know?”
A market is a market is a market.
November 14th, 2006 01:23
hello from germany,
good to have you back.
as long as the statet incomes are not like this one there is still hope…..
another form of statet income/assets… cartoon
http://immobilienblasen.blogspot.com/2006/11/another-form-of-statet-incomeassets.html
November 14th, 2006 04:37
SCMG: I was actually thinking more about people from Europe and Asia, especially the riffraff types from places like Eastern Europe, former SU, Africa, Middle East, etc. Those are the real crooks (Casey for insrance!). There are a couple of scammers from Nigeria in the Dallas area who have already stolen a bunch of money and left foreclosures.
Why these people were able to obtain loans really frosts me. They take their ill gotten gains and disappear back to whatever hellhole they came from.
November 14th, 2006 07:51
What is this all about? http://www.latimes.com/business/la-fi-homes14nov14,1,6164926.story?coll=la-headlines-business An increase in prices?? What’s up???? It really makes me sick!
November 14th, 2006 08:17
For the nerdy, there is a name for the phenomenon where groups of ‘minorities’ take advantage of implied trust:
Affinity Fraud
November 14th, 2006 08:27
So Cal,
I echo the others in expressing how glad I am to see you back.
I don’t know what is worse, the rampant fraud or the excessive prices. Granted, they are a cause and effect kind of situation.
In my area there are two stories to tell. One is of panic and desperation. That is on the HB’s, developers, and SOME FB’s. For the most part, sellers are still in denial and holding on to 2005 prices. The number of units for salwe has swelled to a four YEAR supply, while the number of units sold cut by more than half. Adding to the turmoil is the outrageous increase in insurance and taxes.
The “official” word from the FAR is that prices have stabilized, or come down maybe 10 %. The real world is a much different story. I have seen prices off 20% + from the asking price to sell.
Anyway,
Regards
November 14th, 2006 10:08
Quote of SoCal: “also didn’t like seeing some poor hispanic lady with her children who couldn’t speak english get ’sold’ on how she could afford a 500k house by some good looking hispanic guy in a suit. Then I would hear them ‘laugh’ about how they got a huge rebate or sold a high rate on the loan.
It was almost as if hispanics would trust somebody just because they were hispanic or ‘one of them’. Same thing seems to happen with other minority groups as well. They base trust on the fact that they are ‘the same race’ and in some cases, end up getting taken advantage of. Not always the case, but I have seen it more times than not.”
As you know, I do retail lending for a bank. The above is often very true. I see this regularly. I am doing a refinance now for a couple who bought a home 2 years ago from a real estate agent and mortg broker (of the same race) who put them into a very bad “B-” loan when they have 750 scores, 20% down and good, verifiable income. From the super high margin, prepayment penalty and points paid, the broker made a fortune on them. Really obscene. They could have gotten an “A” loan easily.
I also see the people who try to refinance who got their loan by overstating their income, who are in way over their heads, because they trusted their “people.”
November 14th, 2006 10:28
New York City is an example of a “bubble proof” city. Eventually your property will go up in value no matter what. Prices may drop in the next year, but they will sky rocket again once the developers stop building. Everyone wants to live in NYC and there are plenty of jobs for them.
November 14th, 2006 10:34
SoCalMtgGuy
I too surf by your website and it’s good to see you post again. In my group I was the Lone Ranger about RE till I stumbled across your site that spoke some sense in this madness of house buying. In my area (High Desert CA) people were lining up to buy slapped together WAY over priced houses, my wife and I would look at each other and say “How do people afford it ?” I try to tell my friends about over inflated housing prices and what goes up MUST come down they just give the glazed eye look and think here he goes again doom and gloom. So I’m doing what some other people are doing and keep my mouth shut and be standing by the lifeboat when this ship starts springing leaks and goes down.
November 14th, 2006 11:48
New York City is an example of a “bubble proof” city. Eventually your property will go up in value no matter what. Prices may drop in the next year, but they will sky rocket again once the developers stop building. Everyone wants to live in NYC and there are plenty of jobs for them.
No city or asset class is “bubble proof”, not even the mighty NYC RE market, “special” or not. It’s true that the property you overpaid for last year will “eventually” go up in value, but how long is it likely to take? One year? Ha! Dream on FB… Meanwhile the carrying costs (mortgage, tax, insurance, maintenance) of your “alligator” are eating you alive. Oh, and you’re fast approaching the reset date on that $0-down neg-am wonder you used to “buy” the propery.
Tick, tock, tick-tock… Found a greater fool yet?
November 14th, 2006 11:55
My guess is that immigrants will be hit hard by the bubble bursting. As people have already pointed out, immigrants are often preyed upon by greedy salesman and fraudsters. In addition, based on my experience, real estate tends to be a very popular investment for many immigrants for two reasons. First, it is easier to understand than stocks, bonds, and CDs. Second, many immigrants come from countries where corruption and inflation make hard assets like real estate the “safest” investment.
November 14th, 2006 12:13
According to a friend these people will just go out and get another “funny” loan to push out their re-adjustment. She doesn’t think we will hit bottom for another 8 - 10 years here in LA. My point is what if they can’t re-fi due to stricter lending requirements or their house not being worth enough to refinance? I bet this will happen a lot!
November 14th, 2006 13:27
Anon,
Who is your friend? Have they thought this through? You have to have EQUITY to refinance. Many people will not be able to refi because their property will be worth than their loan balance. Many people bought homes with little to no money down…so there isn’t any equity to begin with.
The lenders will tighten up because the secondary market is getting hammered. This will make it tougher for these people to get ‘fresh’ loans.
Again…we are NOT even in 2007 yet. Just wait until all the ‘happy homeowners’ get their first ARM adjustment in the mail. It ain’t gonna be pretty!
SoCalMtgGuy
November 14th, 2006 15:34
SoCal,
Have you heard of appraisers acknowledging decreasing home prices on the appraisals? If this happens, this automatically tightens underwriting standards for everyone because lenders won’t provide max financing on homes in declining areas. I also wonder if appraisers start to do this, if this will encourage mortgage lenders/brokers, to appraiser shop some more. Appraisers also have to acknowledge demand supply and marketing time. It will be interesting to which boxes are checked when some areas have 2+ years of home inventories.
November 14th, 2006 19:07
Appraisers are reluctant to check the Declining values box, usually choosing the Stable values box. Here is an example of one I saw recently. Townhouse sold for $555,000. Recent sales of 549,000 and 559,000 for same model supporting value. However, three current listings of 542,000, another 542,000 and 549,000. Value given was 540,000, with the appraiser saying that the listings would sell for less than asking price. BTW, this report was completed 2.5 months ago and current lisings are in the 520-530,000 range.
November 14th, 2006 19:20
I agree with Sensible Lender. My contacts are not yet seeing the declining box being checked yet. A few are ‘getting away’ with increasing, but a lot more ’stable’ being checked.
They are seeing more appraisals not meeting the ‘value’ ‘needed’ by the borrower…but such is life. Lots of no-money-down 100% financers TRYING to find a way to refi and get some cash out. AIN’T HAPPENING!
Once things start rolling and the ’seller concesssions’ get big enough…buy my 400k condo, and get a free Ferrari…they won’t be able to hide the fact that the condo actually ’sold’ for 250k (+ 150 Ferrari).
People are trying anything and everything to sell their place…and the brokers/realtors want to keep the comps high. Eventually, they will HAVE to lower prices…and SHOW it. It will take a while….but I got nothing but time.
SoCalMtgGuy
November 14th, 2006 22:06
SoCalMtgGuy, I sold my house because I chanced upon your website way back in the beginning of 2005. I was already feeling panic then, and your incredible posts gave confirmation to what I felt, which prompted me to sell for top money in middle of 2005. Thanks to you very much! Now I am sitting on big pile of cash in CD’s and liquid foreign stocks. Once the stock markets crash for US equities, that’s when I plow CD-cash into US stocks.
Your website rocks from the very beginning. Short posts are wonderful to keep our feel-good party going for those of us who have high sensitivity to irrational and fake behaviors. Your sensitivity chip is definitely outstanding and very helpful for people like me who look up to you to warn and caution us to stay away from money-sharks. You do great public service. And all for free. Much blessings to you and your very kind guardian angel.
November 14th, 2006 22:07
Your blog makes a great deal of sense… so I linked to it.
In Atlanta, the sellers have observed the bubble in other parts of the country - and have been jealous of it. It’s silly, really… and greedy.
The market has been softening for a while, yet few sellers want to hear the truth… and I seldom get to talk to them.
And I agree… 2007 is going to be worse.
I enjoy your blog - keep it up.
November 15th, 2006 07:28
I’m not saying the market has hit bottom, but inventory in San Diego County has dropped by 10% since July, to under 21,000 SFRs and condos.
November 15th, 2006 08:05
Lloyd,
That is true about inventory dropping from July, but a lot of that is due to expired properties, and people that ‘realized’ they were not going to get their ‘price’. Like the stock market, many people are going to ‘try’ and wait for things to go back up.
If you listen to the RE ‘experts’ things will be better after the first of the year. I disagree…but only time will tell who is right.
SoCalMtgGuy
November 15th, 2006 08:26
As an ethical, professional appraiser in OC, I can tell you all that YES, I have been checking the declining values box when the market warrants such an action. I am doing many more foreclosures now than ever before. I just did one in Trabuco Cyn (Wagon Wheel). There are 4 REO’s alone within the same development, and a couple actives that were purchased in 2005 for more. Kind-of eary driving around. Nice cars in the drive-ways, with “bank-owned” for sale signs in the lawns. How could this happen in South Orange County???
Looking at public data indicates no shortage of “underwater” borrowers in this area (Wagon Wheel Cyn). To make matters worse, the last contract (pending) was signed 3 months ago. This, in a market that usually sees 2-3 contracts (sales) per month.
Yes, the sky appears to be falling in this sub-market. The scary part is that I see the same thing across most of OC.
I have not seen a market with “valid” price increases in over 10 months. I’ve been doing foreclosures from the Santa Ana markets, to the higher end Coto Markets, and all areas in between (Mission Viejo, Laguna Niguel, Dana Point). Not seeing so much REO work in the high end $3M+ markets, as those buyers have appeared to be more well healed. A lot of REO work in the $1-2M range, where I suspect it was move-up buyers biting off way more that they could chew, especially in the way of higher property taxes. Be careful you guys, there is still a lot of fraud and it seems to be picking up. I get several call a week now from local brokers asking me to pump values, as they go down their list of appraisers in a given area. Sad part is, they always find someone willing to commit fraud. No shortage of appraisers in OC that is for sure. And since most are really new, they dont know what they dont know. So they actually think they are giving their clients “good customer service”, when they phish for comps to hit a predetermined value. Just be careful out there.
The OC real estate market is currently in decline and the mommentum appears to be shifting into high gear.
At least from my vantage point.
November 15th, 2006 08:44
I continue to talk to people about the bubble, they laugh at me..I keep telling them that there will be at least a 10-20% drop in housing prices over the next 18 months however they disagree. What does it take to get them to listen, why is it okay for housing to go up 100%++ in 5 years but a simple 10-20% pullback and everyone starts crying. Greed created this housing bubble and when $1 trillion worth of ARMS reset in 2007 and a recession nears I hope those who I have talked to about this believe me then.
November 15th, 2006 10:24
Hey OC Appraiser:
Do you have the name of the street(s) of those properties in Wagon Wheel and Coto (and addresses if it is not too much trouble).???
I am looking to buy in that area eventually and would like to track these properties.
Thanks much,
Bubble Butt
November 15th, 2006 10:54
Oc Appraiser,
Some one needs to start a blog informing the public about the BS that happens on our side of the industry. The fact is the state agency for appraisers here in California is a complete joke. If you ever read the “disciplinary” actions they are a total laugh. Its the same appraisers again and again with $1000 fine and an extra 7hr class requirement being all thats required to make thier outright fraud disappear. Going through the Rolodex till they can find someone to hit their number is what the joker brokers do and they find plenty of appraisers to do it. As this crash comes we will see how publicised the crooked appraiser becomes or if the state and powers that be continually sweep it under the rug to “keep the public trust”. This is a fact - there are convicted felons that hold appraisal licenses in California. I was shocked when I found out. I was always under the impression (be it from parents, teachers, etc., scare tatics) that once you were convicted and served time you were screwed forever - apparently not in the People’s Republic of California. By the way one of the convicts that has a license - his crimes were not mortgage fraud or flipping related. He is a convicted burgler - do ya think that going into various houses for a living with an appraisal license could possibly be a problem? Thanks to Arnold and his appointee at OREA (CA’s appraiser agency) this dude has a valid license. These are your tax dollars hard at work!
November 15th, 2006 12:12
Thats correct, enforcement is lacking, and its just too damn easy to make money as a crook in the real estate business. The thing I dont understand is why someone would be willing to commit a federal offense for a measly $350.00 I guess it goes to show you that the many appraisers in California and namely OC arent very bright, and are just looking for the easiest way to make money, with the least amount of effort. How hard is it really to find a slimmy broker in OC? They are practically on every corner. All the appraiser has to do is knock on the door with a smile and a wink to be assured a steady stream of business. I’ll be interested to see how long these relationships last with the fraud investigations starting to gain traction. In Colorado and N. Carolina, appraisers are going to Federal Prison, just for being stupid. One trainee even tried to plead ignorance. Sorry, up the river you go. Now we just need the wave to hit California and they should be running scared. Hopefully they will go back to working at Del Taco, or whatever else these sorry bunch of characters did before they got their appraisers license.
On the REO side: In WW, they are located on Charokee, Raindance, and Longhorn. For confidentiality purposes, I did not include the street name of the appraisal I did as a
pre-foreclosure. Some of these are already bank owned, and others are just active for less than original sales price.
I would not offer list price in this environment. A prudent buyer will attempt to take advantage of a sellers desperation. Afterall, like I said, not one buyer has been willing to sign on the dotted line in the area in 3 months. If that is not a RED flag, I dont know what is. Do your research!! Oh yea, Coto REO’s: Look in the “Tanglewood” tract, streets: Charleston Ln, Raleigh Ct, and Westchester Ct. There are some folks underwater in there, as well as many other area of Coto. I could list these all day long,
they are all over OC. Maybe later I’ll come back and give you guys some from some coastal communites. Hot tip: if you have access to public data or the local mls, you can see when someone bought something, for how much, and best of all, how many times have they refied and for how much and when. This is the key. Find someone who is totally underwater, and there is a good chance it will be an REO at some point. Find multiples in certain neighborhood, and you will be well served to hold out for the firesale that will soon follow, as the banks will all dump these at the same time. In my opinion, right now is too soon to get anything at a “percieved” discount, for more will follow. Good luck, and watch you backs. Dont trust anyone you dont go out and hire yourself. And even then, be careful.
November 15th, 2006 13:30
OC Appraiser,
Glad to have your comments and posts here! Shoot me an e-mail when you get a moment. socalmtgguy@gmail.com
Thanks!
SoCalMtgGuy
November 15th, 2006 15:42
Hey SoCalMtgGuy — your “Reality Check” echoed my sentiments *exactly*. I’m here in Utah, where the RE market trends lag LA, SF, Phoenix, LV markets about 1 year to 1-1/2 years. All the investors from those markets packed up and came here. I wish people would read information like yours and get a clue.
Here in Utah it’s all about “the Emporer’s New Clothes.” I know of many, many houses in newer neighborhoods asking in the $500’s, which would have sold in the mid-200’s a couple of years ago. It’s gone completely outer limits. Who in Utah can afford these houses when the median income is in the $60k range?
My wife and I are waiting for the foreclosures, failed investment properties, etc before jumping back into homeownership. We might have to wait a little longer than our California and Florida friends, but it will be well worth the wait.
November 15th, 2006 16:02
Oc Appraiser,
Its only the really desperate, totally new or really stupid appraisers that do any shady business for a one time $350 ish fee. Check out how many of these REO’s and foreclosures were on the market on their original sales for example at $545k. Mostly in 2005 these beauties sat on the market at the above price for 21 to 45 days then were all of a sudden pulled off the market. They were relisted the next week @ 599k and sold in 3 to 7 days. Smells and sounds like cash back to me. Call the listing agents and see how nervous they get when you ask questions. For certain the scumbag appraisers were in on it and I’ve seen plenty of them pull up in the MB 600 SL. Now, not that a good appraiser can’t hustle, build a business and drive his own MB 600 SL legitimately, but some 23 yr old Del Taco reject whose crooked uncle is the mortgage broker? Please! Check out Ladera Ranch. Plenty of funny business going on.
November 15th, 2006 16:21
Oh, Ladera is a hotbed for this kind of activity.
In my estimation, and I’ve done tons of work in Ladera, I would have to say that the Ladera Ranch market has fallen more than any other market in OC, in terms of value. I’ve come across some “pocket markets” in Ladera that were down
15-20% from the peak in 2005. There is a joke around my “legitimate” appraiser friends that Ladera is falling fastest, because half the owners in the entire community are either agents or mortgage brokers. The flipping that is taking place in the newer Coventry Hills is rediculous. Something like 2 years worth of inventory, if not more.
With most of the mls listings stating “owner is licensed RE agent”. Its very important for appraisers to double check all the data in the mls against what the agents say. And the prudent appraiser will leave out any sales (comps) that are not truly reflective of current market conditions.
If something seems fishy, and all the comps say 500k, except for 2 that stick out like a sore thumb, leave out the 2, and just mention them in the report, after calling all the agents and asking questions. Remember the def of market value considers the “typical buyer/seller”, under “typical” condiitons. 10% cash back at closing is not typical, and is considered fraud if not disclosed by all parties. A sale with a 10% kickback should NEVER be used as a comparable in an appraisal report. Espeically in a data rich market like Orange County. But to the number hitting, rubber stampers out there, its the inflated sales that allow them to tell clients that they can “hit” their number. Because xyx comp says so. And the cycle repeats itself over, and over. That, my friends, is how a market runs up 20-30% per year lacking other fundamental market support. And to think that people thought that it was because of the great OC weather.
November 15th, 2006 18:14
I am a Mortgage Broker on the East Coast… Just refinanced an older woman in her late 60’s early 70’s… She was thrown into an Option Arm within the last year… She had no clue that her balance was going backwards… Her Loan was about 200k so i am sure some broker/lender who Pushes these option Arms told her how great this was for her while knowing he can make a MINT off of pushing her into it… These Option arms pay so much YSP to us Brokers so people are offering them up left and right to people who just dont understand it.. Thank god this little old lady was in the State Of NJ b/c there is No prepayment Penalty allowed so I was able to get her into a standard 30 yr fixed below 7.00%
Not to Pat myself on the Back.. But my small firm refuses to offer this Product even to someone who claims to understand it.. The Ysp is GREAT with 3 yr prepays But no thanks…. I have no interest in being involved in class action lawsuitsa in 2007-2008
Love your site Keep it up
November 15th, 2006 18:32
Jack Bauer…
Yup…the option-ARM makes a lot of money for the brokers. You might like this post from a year ago…where I spelled out exactly how they ’sell’ the 3yr pre-pay penalty.
option ARM Post
Thanks for reading my blog!
SoCalMtgGuy
November 15th, 2006 19:35
Love the writing.
We know you called it.
Keep it up.
November 16th, 2006 16:28
@SoCalMtgGuy. RE: Trusting your own ‘people’
I’m from the Bay Area. And have been looking at buying and now am waiting to see how all this unfolds.
During my initial search I came across this situation which left a bad taste in my mouth. I was looking at a townhome during and openhouse and had a very aggressive and slimy agent. Not only did he want to service the seller and buyer (me). He even told me if I got everything ie. agent/loan through him that he would give a ‘courtesy’ fee to my current agent who was representing me at the time.
What really annonyed me was because he was telling me how low his seller was willing to take and that since the seller just recently paid a 18k special assement that the place was a good buy. I should offer x amount and he can presuade his seller to accept.
Apparently, because I and he were asian, it would be something that I would be interested in getting the best deal out of his seller. I got the hell out of dodge ASAP. His seller was asian btw.
Best part about this he kept calling/sending me emails about other properties later and then saying how he can even get the seller to go lower than the numbers he talked about during the open-houde. (I thought that was my agent’s job). He finally STFU when I reminded him that the special assesment that has been paid for by the seller and listed as a ‘bonus’ means that the hoa has not been doing their job properly. The HOA was like $380 a month.
His badgering has since then stopped….
I’ve got other stories where the moment I walk into an openhouse the RE agent upon seeing me will start talking about how good a school district is.
“Fricking bay-area asians playing the race card….”
This is ironic and funny as all hell, As these were the exact words used by me and my RE agent. Why ironic/funny? I’m Malaysian and she is Phillipino.
I think I’m going to fold and sit out the next few hands like everyone here.
November 16th, 2006 20:55
hi
first time posting on this website. I started investing in realestate in early 2004. My parents home which they bought for 220k in 1991 was valued at 660k. We had a loan balance of 75k. I refinanced the loan into a fixed rate 20 year 5.62%. I then took out a home equity line of credit for 200k at 4.50% or so. i used the 200k to purchase a property in early 2004 for 485k. I am currently trying to sell the property with a realestate agent. It was put on the market for 685k. After two months i was informed that many buyers were interested but the price was too high. So we dropped it to 625k and i got a couple offers for 600k. So yes the market in NY is not what it used to be but i still belive that the market is strong. Their are billions of dollars being spent in huge projects all over. Some will be started in 2007 & 2008. Yes their not selling so high or so fast but they are still selling.
Back to the home equity line, the interest rate peaked at 8.5%. But we got offered to refinance with citibank ( being very aggresive in the market todaY ) FOR 6.99% FIXED 20 YEARS no closing costs.In 2004 the house was appraised for 660k in 2005 740k in 2006 by a bank hired appraiser at 840k. What is going on, will a bank offer to give you a no closing cost loan to refinance your existing loan and extra cash if it was following newer stricter guidlines??
I dont know about the cal market but the NY market is still very strong. Another example, i bought a piece of manufacturing zoned land in late 2005 for $ 300k. I wanted to eventually build a warehouse for my buisness. Now im getting offers of 1.5 million because they MIGHT be constructing a new NETS stadium in the area. So what are we to think. Yes there is a bubble in some areas and in some cases. But if an individual bought with money down and a fixed long term rate loan. Their much safer then the other WACKO loans.
Realestate is a nice investment but its not for everyone. People have to decide if its for them or not.
November 16th, 2006 22:40
nycinvestor…
I don’t know how long you have read my blog…but I have said many times that if you can afford to put money down, get a fixed rate loan, plan to stay a while, and realize that property values might go down in the meantime, then go ahead and buy.
I don’t doubt what you are saying about aspects of the NYC markets. I don’t doubt that a 300k property would be offered 1.5 mil if there was a chance a pro team was going to be arriving in the neighborhood…that would happen anywhere in this country for the most part.
The main point of this blog to to let people know what is going on out there, and make the best decision for themselves and their families.
Thanks for stopping by!
SoCalMtgGuy
January 3rd, 2007 22:04
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January 16th, 2007 17:19
UWS
ABC
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2007-01-17T01:16:00Z
2007-01-17T01:17:00Z
1
31
177
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9.2720
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Avg Rent
Avg. Sale
Avg Monthlies
Studios:
$1,800+
$450K
$625
1BRs:
$3,200+
$750K
$950
2BRs:
$5,000+
$1.4
$1,400