Real Estate Crash thread

[mcsquared]

It's all about cash flow.

In the long term, it can't cost more to buy a place on a fixed-rate mortgage than you can get back in rent. Further price increases are speculative.

This doesn't mean people didn't make a lot of money speculating -- just that it can't hold in the long term, because profit depends on flipping to a greater fool.

1970s, here we come again. Remember "white flight" to the suburbs? Entire neighborhoods are going to be abandoned as looters and squatters destroy unoccupied houses. But now it's almost the opposite: old suburbs are the slums now (e.g. Compton), and this will continue...but with $5 gas and foreclosures, the hardest-hit exurbs will become new slums. The rich and remaining middle class will consolidate in certain neighborhoods, primarily "urban renewal" zones for the middle class (to save commute costs), exclusive gated communities for the rich who can still afford to drive everywhere, and a few other places that are both on the water/in mountains and close to work (e.g. Hollywood hills).

I agree with your second paragraph. This has been happening for awhile now.

Not sure about your first statement. People will usually pay a premium to own rather than rent. Long term even if the value doesn't increase you are basicallly getting inflation protected rent payments. First time home buyers will bring us out of the current market. It is already starting to happen. Among my friends, the last of the home ownership holdouts, just had their rent increase 20% when they renewed their lease. They are starting to see what kinds of homes they can buy for a couple hundred bucks more per month and are seriously looking. Apartment vacancy rates are at the lowest they have been in a decade. There is a waiting list at many places right now.

[skier666]

^^^^^^

Rents still increasing the Sunnyvale & Santa Clara areas....close to 0% vacancy rates at the properties we manage. 1 bedroom units from $1375, and 2 bedroom units from around $1575. It would be interesting to see how the commute areas like Tracy, Stockton, Fairfield, or Sacramento are doing in the rental market with the housing numbers looking so grim over there.

[ColinB]

Fun side effect up here in resort land, drastically reduced rent prices. With gas prices going through the roof and people losing their homes etc, there are apparently not as many tourists renting condos for the weekends or the entire season for that matter, couple that with people getting desperate to hold onto their second homes/ investments/ condos...rent prices are actually back to affordable up here in the mountains for us resort employees.


still could never afford a home that has land up here though

[Core Shot]

Real FORECLOSURES of Orange County

http://www.ocregister.com/ocregister...le_2067427.php
heh.


SoCal Home Prices Plunge 27% in May
http://www.thestreet.com/s/socal-hom...FREE&cm_ite=NA

Housing prices across Southern California plunged a record 27% in May, signaling that more trouble lies ahead for builders and lenders exposed to the region.

Sales volume in the market fell 15% from a year ago, marking the slowest May in more than 20 years, according to DataQuick Information Systems.

The median price fell to $370,000 from $505,000 in the counties of Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura.

Sales of foreclosed homes repossessed by lenders continue to dominate many of the inland markets, such as Riverside County, where foreclosure sales totaled 57% of all home sales volume, DataQuick said.

As housing prices fall, the domino effect is that loan-to-value ratios are ballooning for many borrowers, which in turn creates more foreclosures as buyers find themselves unwilling to continue paying the mortgage on their houses.

This trend has already forced Wachovia (WB - Cramer's Take - Stockpickr) to increase loss estimates on its large portfolio of option ARM mortgages it has written in the state. Some analysts, and investors shorting the stock, say the company is still under-reserved for losses tied to loans going bad in the state

[Stu Gotz]

Things are going so swimmingly in the land of milk and honey.


June 18 (Bloomberg) -- Former Citigroup Inc. Chief Executive Officer Charles O. ``Chuck'' Prince III lost his job because of the housing slump. Now he's having a hard time selling his home.

Prince's five-bedroom Tudor-style house in Greenwich, Connecticut, has been on the market for six months. He has cut the price by $300,000 to $5.85 million, according to the property listing.

The housing recession has hit the bedroom communities that Wall Street favors most. The median home price fell 8.1 percent in Greenwich in the first quarter from a year earlier. Declines were as much as 25 percent in 14 of 19 wealthy Manhattan suburbs in Connecticut, New Jersey and Westchester County, New York, since the start of the year, according to a Bloomberg survey of brokers and multiple listing services. The drop shows that 83,000 job cuts and $393 billion of mortgage-related losses and asset writedowns at financial firms are damaging even the most expensive U.S. real estate markets.

``There is really just no firewall around these sorts of communities that insulates them from what is going on in the housing market,'' said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts. ``No one wants to make a purchase and have to tell a spouse, a partner or a friend that `Oops, I bought and that house is worth less today than it was.'''

full story.
http://www.bloomberg.com/apps/news?p...=auXmRexARYhc&

[Parvo]

Pulled the trigger this morning and put my old house on the market (I moved about 6 mos ago). I was going to wait out the storm, but I don't like paying a mortgage on a home I don't live in. I'll be lucky if I get what I paid, but I'm not anticipating making any dough on the deal.

If anyone is interested in a new, custom home in a resort town in N. Idaho, pm me.

[Core Shot]

Home prices in 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Prices in the 20 cities are now down 17.8% from the peak two years ago. The biggest declines were seen in Las Vegas, Miami and Phoenix, with prices falling by 25% or more in the past year. Prices in 10 cities have fallen by more than 10%.



Here's the city-by-city breakdown in the Case-Shiller index:

Las Vegas, down 26.8% in the past year;
Miami, down 26.7%;
Phoenix, down 25%;
Los Angeles, down 23.1%;
San Diego, down 22.4%;
San Francisco, down 22.1%;
Tampa, down 20.4%;
Detroit, down 18%;
Minneapolis, down 15.5%;
Washington, down 14.8%;
Chicago, down 9.3%;
New York, down 8.4%;
Atlanta, down 7.5%;
Cleveland, down 6.8%;
Boston, down 6.4%;
Seattle, down 4.9%;
Denver, down 4.7%;
Portland, down 4.7%;
Dallas, down 3.4%;
Charlotte, down 0.1%

[Core Shot]

got this headline in my email in box, from the Home Builders Association

Worst Housing Slump in 50 Years Has Not Run Its Course

The current housing downturn is shaping up to be the worst in 50 years, and it has not yet run its full course, according to the annual “State of the Nation’s Housing" report issued on June 23 by the Joint Center for Housing Studies of Harvard University.

“Despite product cuts rivaling those in the 1978-1982 downturn, the number of vacant for-sale homes on the market did not shrink in the first quarter of 2008,” the report says.

“The weak economy, tight credit and concerns over whether house prices had bottomed out continued to suppress demand and delay the absorption of excess units,” according to the study, which marks the 20th year that Harvard has been reporting on housing in the U.S. “Until this oversupply is reduced, housing markets will not mend,” the study warns.

While Harvard’s housing analysts remain bullish about the longer term prospects for housing demand, currently the industry faces what is described as “a rocky road ahead.”

Over the next decade, demand fundamentals should support average annual completions of more than 1.9 million units, including manufactured homes, the study says. But “the housing market must first work off the one million or more excess units that were vacant and for sale or temporarily taken off the market at the beginning of 2008,” a process that could trim demand to an annual average of 1.8 million units in the decade ahead.

A severe economic recession could make today’s situation worse, by further reducing household formation rates and forcing more households to double up, dampening immigration, keeping older units in the supply longer and reducing sales of second homes.

In the case of a mild downturn, which appears to be what the nation is now experiencing and is the consensus forecast for a majority of economists, “the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.”

However, “with credit markets in such disarray, the for-sale housing inventory at record levels and only small declines in interest rates, emerging from today’s housing slump could take some time,” the report cautions.

The good news is that the industry has made some progress in working down its inventory of new single-family homes, which has declined from a peak of more than 570,000 units in mid-2006 to less than 500,000 early this year. The bad news is that a precipitous drop in home sales has pushed the inventory to an 11-month supply, the highest it has been since the late 1970s.

Existing single-family home sales haven’t fared much better, with the supply “rocketing” to 10.7 months by this April.

“With a supply of more than six months considered a buyer’s market, homes for sale can languish for some time, inviting lowball offers that motivated sellers eventually accept,” the report says.

“Since home owners often resist selling at below-peak prices, adjustments in many markets have been larger on the new home than on the existing home side. Nonetheless, most current owners are unwilling to accept lower prices even if doing so enables them to buy new homes at more deeply discounted prices.”

House prices will remain under pressure until the number of vacant for-sale units on the market or being held off the market falls significantly. From 2005 to 2007, vacant single-family homes for sale were up more than 45%, according to Census Bureau figures, and vacant units being held off the market were up almost 10%.

The report says that working off today’s oversupply of homes will require some combination of the following:

A further decline in housing starts
A decline in home prices substantial enough to bring out new bargain-seeking buyers
Interest rates dropping enough to improve affordability
Improvements in job growth
A return of consumer confidence
Mortgage credit again becoming more widely available

“Turnarounds are often difficult to spot because false bottoms in sales and starts are common,” the Harvard study says. “Builders take their lead from consumers, ramping up production when sales increase and cutting back when they fall. Thus, only a sustained rebound in demand will bring the market back.”

Demand has not been stimulated by declining mortgage interest rates as much as in past downturns, the study notes. “In fact, after adjusting for points, real 30-year fixed mortgage interest rates were down marginally some 24 months after housing starts peaked. At the same point in previous cycles, real mortgage rates had fallen anywhere from 0.5 to 6.8 percentage points.”

Other factors putting more prospective buyers on the sidelines than in the past include a dramatic drop in home prices and the highest foreclosure rates since recordkeeping began in 1974.

“All of these factors may make this downturn more protracted than usual, and credit market woes may slow the eventual rebound,” the report warns. Spending on home improvements “will also come under increasing pressure because it is sensitive to both credit availability and house price appreciation.”

full report here: http://www.jchs.harvard.edu/

[Pow4Brains]

Well at least it's not all doom and gloom:

"In the case of a mild downturn, which appears to be what the nation is now experiencing and is the consensus forecast for a majority of economists, “the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover.”

[Benny Profane]

I don't see how a "strong rebound" is at all possible when loose money like we've seen for the past 6-8 years may not be available for maybe a decade or two (if ever). The banks have turned their backs on mortgages and are now trying to pile up sandbags against the credit card problems growing rapidly. I wouldn't think of buying a home for at least 18 months.

[mcsquared]

I don't see how a "strong rebound" is at all possible when loose money like we've seen for the past 6-8 years may not be available for maybe a decade or two (if ever). The banks have turned their backs on mortgages and are now trying to pile up sandbags against the credit card problems growing rapidly. I wouldn't think of buying a home for at least 18 months.

Well, the housing market, just like every other market, is a rubber band not a string, it gets over-stretched in both directions. And just like the stock market, there are always sectors or different strategies that are doing well. Right now the rental market is extremely good (or bad depending on which side you are on) in many markets. Money isn't exactly tight right now. If you have decent credit and a job it is pretty easy to borrow money.

My advice for the soon to be homeowner? If you find a home you like, in a location you like. Buy it. Paint it your favorite color, build a deck, remodel a bathroom, have your friends over for a BBQ, raise your family, and just live your life. It's gonna be ok.

[Spats]

Rents still increasing the Sunnyvale & Santa Clara areas....close to 0% vacancy rates at the properties we manage. 1 bedroom units from $1375, and 2 bedroom units from around $1575.[/IMG]

That would be the Google Effect: 10,000 well-paid single engineers tend to push up prices. There are plenty of places that will continue to do fine due to strong local employment trends. However, the idea that housing always goes up 10-30%/year, so you should always buy even if you need to use infinite leverage or negative equity, is dead.

mcsquared: yep, as owning becomes appealing vs. renting, it starts to make sense. You have to remember all the hidden costs of owning, though: property tax (which will go up as home values decrease and states go broke), maintenance and repair (usually ~1.5-2.5% of purchase price/year), and often HOA fees. Let's not forget the cost of commuting when you switch jobs and can't just pack up and rent somewhere closer.

Plus the frictional cost of buying and selling property is very large, in time as well as money. Now that zero-down is dead and banks are only doing 80% LTV, or even 60%, people won't usually have the money to buy a new place until their old place sells, unlike the last 10 years.

There are a lot of people catching falling knives right now.

[mcsquared]

mcsquared: yep, as owning becomes appealing vs. renting, it starts to make sense. You have to remember all the hidden costs of owning, though: property tax (which will go up as home values decrease and states go broke), maintenance and repair (usually ~1.5-2.5% of purchase price/year), and often HOA fees. Let's not forget the cost of commuting when you switch jobs and can't just pack up and rent somewhere closer.

Plus the frictional cost of buying and selling property is very large, in time as well as money. Now that zero-down is dead and banks are only doing 80% LTV, or even 60%, people won't usually have the money to buy a new place until their old place sells, unlike the last 10 years.

There are a lot of people catching falling knives right now.

So property taxes on large apartment complexes will remain flat while they raise the taxes on single family homes? And maintenance/improvements never need to get done at rentals?

I have sold 3 properties since December. 2 out of three got 100% loans. And the third put 10% down. So those loans are out there. And rates are stupid cheap right now.

[liv2ski]

I have sold 3 properties since December. 2 out of three got 100% loans. And the third put 10% down. So those loans are out there. And rates are stupid cheap right now.

Last time I looked at our internal list, Denver was a Declining Market Area and not eligible for over 95% ltv financing on a O/O SFR only. Other property types or occupancy type would require more down.
Rates from a historical stand point are good, but no where close to the 30 year fixed I got 5-6 years ago at 4.50%. That was stupid (thanks Greenspan) cheap.
I did look today at an internal list of zip codes and Declining Areas improved by about 100. It was a fast glance, put I am pretty sure there were 550+ last month down to 450 this month. Still brutal, but a good improvement. Part of that is due to how we come to the Declining Value decision. So I guess it needs to be looked at next month to compare apples to apples. I will let you know then.

[Stone-Free]

^^Are you using the Vertice Market Index for determining declining markets?

That thing is bullshit.

[Benny Profane]

I have sold 3 properties since December. 2 out of three got 100% loans. And the third put 10% down. So those loans are out there. And rates are stupid cheap right now.

I gotta call bullshit on those no money downs these days, unless the buyer was a saint in credit land, and even then...


Let's not forget the biggest cost right now. If, like most buyers, you're asked for 20% down, you could lose it all real fast with the downside momentum. There's a lot out there right now in that boat. Let's see, a nice little 350,000 cape next to the Cleavers, that would take about 90000 in down payment and costs. Why not just put it into a nice 1 or 2 year CD and watch the carnage unfold? It's not as though things are going to bounce back like in your rubber band theory. Remember Japan a few decades ago.....(and they're still making the world's best cars - would you buy a Ford?)

[liv2ski]

That would be the Google Effect: 10,000 well-paid single engineers tend to push up prices. There are plenty of places that will continue to do fine due to strong local employment trends. However, the idea that housing always goes up 10-30%/year, so you should always buy even if you need to use infinite leverage or negative equity, is dead.

In San Diego I have read the rental market is very tight as many ex homeowners are now in the rental market. Additionally, properties that may have been rentals have been sold/given back to the bank by over extended landlords. Point being, I don't think this is just a Google effect. The CA market is wacky right now.
Edit: In So Cal, you can go back in time and prices have easily doubled every 10 years. So that $200k property bought in 1984 is worth a boatload now.

[meatdrink9]

I've recently spoke with a maggot who just got a 100% loan. I've even seen investor loans with only 10% down (I always put down 20% anyway). The rate on a CD is less than that of inflation (in effect you lose money). I'm still buying real estate. For what I'm doing it continues to be a perfect storm of sorts. The only problem is that the financing is tougher. Even if I'm easily approved the banks still have issues lending on places that are beat-up. They want substantial funds escrowed for repairs at times.

I just refinanced one property I paid cash for. I paid 54K for two houses on one lot. I rent the two combined for $1000 a month. After my remodel costs I was into the two homes for grand total of 67K. They just appraised for 111K. I pulled out 69K (every penny I have into the property plus closing costs). So now not a single penny of mine is tied up in the property and I have a positive cash flow of $500 a month and have 42K equity. The remodel took one month.

I'll be refinancing another cash deal in about 6 weeks. The remodel took a month. I paid 57K for the home. After the remodel I'm into the home for 65K. I'll pull all of my cash out again and have a positive cash flow of $350 a month plus 50-55K of equity.

The perfect storm scenario is this: Tons of bank owned properties coming on the market. Less people able to afford/qualify for loan = more renters and better renters and less competition when buying. Rates on the whole are still pretty damn good. I just got 6.375 for an investor, cash out refi. The only trip up is lenders wanting to lend on beat properties. If you have the resources available to play with cash you can do a lot of damage and get your cash back 6 months later.

[Benny Profane]

The rate on a CD is less than that of inflation (in effect you lose money).

My Daddy used to say, in bad times, it's much better to make 3% than lose 25%.

You're on the right track with the rentals, obviously. I just don't want to be a landlord.

[Benny Profane]

http://www.nytimes.com/2008/06/25/bu...=5070&emc=eta1

"Many factors have propelled the unraveling of American real estate, from the mortgage crisis to a staggering excess of home construction, making it hard to pinpoint the impact of any single force. But economists and real estate agents are growing convinced that the rising cost of energy is now a primary factor pushing home prices down in the suburbs, particularly in the outer rings.

More than three-fourths of prospective home buyers are now more inclined to live in an urban area because of fuel prices, according to a recent survey of 903 real estate agents with Coldwell Banker, the national brokerage firm."

[mcsquared]

I gotta call bullshit on those no money downs these days, unless the buyer was a saint in credit land, and even then...


Let's not forget the biggest cost right now. If, like most buyers, you're asked for 20% down, you could lose it all real fast with the downside momentum. There's a lot out there right now in that boat. Let's see, a nice little 350,000 cape next to the Cleavers, that would take about 90000 in down payment and costs. Why not just put it into a nice 1 or 2 year CD and watch the carnage unfold? It's not as though things are going to bounce back like in your rubber band theory. Remember Japan a few decades ago.....(and they're still making the world's best cars - would you buy a Ford?)

Well, I actually got out the HUD settlement statements last night to double check. And you are right, I am full of shit. Only one got 100% financing. The other two put down around $28-29k on a $435k and a $345k home. So about 6%-8% down. The one I was wrong about sold in December ($435k property) and they had two loans which I thought were an 80/20 but after looking at the HUD I realized that they actually put about 29k down. So yea bullshit.

Like Meatdrink said, distressed properties are tough to finance right now. Although some friends of mine just bought a place last week. A bungalow that had an illegal upstairs apartment. Purchase price is 290ish. They actually were able to borrow a total of 312k in order to renovate the place back to a single family. Not quite sure how they swung that, but they did.

Also, this article from the Denver Post today. Seems to contradict the article CoreShot posted. Not sure who is right.
http://www.denverpost.com/business/ci_9686382
Although the main thing I take away from it is that if you are in it for the long term, even homes in Miami and Las Vegas are paying off quite handsomely. Better than a CD, at least.

[Benny Profane]

Although the main thing I take away from it is that if you are in it for the long term, even homes in Miami and Las Vegas are paying off quite handsomely. Better than a CD, at least.

Totally illogical, Captain. How can you say homes are paying off handsomely when they've lost 25% in a year?? Sure, South Florida will be a good investment for the long term, but you'd still be losing probably 10-20% of your capital if you jumped in now. We're not at a bottom!

[mcsquared]

Totally illogical, Captain. How can you say homes are paying off handsomely when they've lost 25% in a year?? Sure, South Florida will be a good investment for the long term, but you'd still be losing probably 10-20% of your capital if you jumped in now. We're not at a bottom!

Key words in my previous post was "Long Term". If you bought in Florida in 2000 you still doubled your money. I bet you freak out on a daily basis don't you Benny? Every time the dow drops .5% in a day you spaz out because on an annualized basis you are losing capital at a rate of 16%!!!

Like I said. If you find a home you like. Get the best deal you can, buy it, improve it, enjoy it, raise your family, live your life, its going to be ok.

[Benny Profane]

Well, since you mentioned it, the Dow is a much better long term investment than a house.

[grapedrink]

Totally illogical, Captain. How can you say homes are paying off handsomely when they've lost 25% in a year??

and something a lot of people seem to overlook, if prices drop 25% they need to increase by 40% to get back to where they were, if they drop 50% you need a 100% return just to get back to square.