Lets see 25-30% price drop in LA, on top of banks who gave out option ARM loans that 75% of the time are increasing to 110% LTV, ... the LTV on those OAs at the deflate price are going to be something to behold.
"I know a lot of people ready to buy with a 35% drop."
Oh, sure. By the time home values drop 35% everyone will be scared of housing. Few will buy. In the meantime, some other bubble asset will appear and those who were "ready to buy" a house will chase the next, great investment bubble.
... Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
I believe Thornberg's price forecast is for Los Angeles. It appears his "everywhere" comment is referring to all the neighborhoods in LA.
No. This is uncharacteristically bad analysis by you, CR.
He says prices will fall everywhere. The uses a one-word sentence ("Everywhere") for emphasis. Everywhere in this context clearly must be taken literally, meaning all over the world.
However, in context, he is not predicting 25-30% declines from the peak everywhere. This is only probable, not predictable.
rich, I don't know - I don't think Thornberg was very clear. He is clearly writing about the LA area: "Southland house prices have risen past sustainable levels for most homeowners."
Jeez rich, get your undies out of a bunch. CR was just trying to reasonably interpret as he always does. The man is nothing if not moderate and data driven.
"I know a lot of people ready to buy with a 35% drop."
Are you implying that such a rush would push prices up again? These people will need to have a cash downpayment. They won't all get in at once, since the drop will be gradual and it includes inflation -- the wait for that full 35 pct drop could be 7 years.
And there is normal turnover in the market as people retire, etc.
But how could income rise 6% a year? While a recession is coming on? Is all of Silicon Valley and Manhattan planning on relocation to LA?
No, he wasn't. There's too much at stake at this point. A clarification would be nice. If he's talking 25% to 30% 'nationally,' the U.S. economy is going to look like burned toast at the end of 2008.
Whenever we talk about great big declines over long periods of time we give the occulator a free pass with inflation adjustments. I can see a combination of 35% price decline AND another 15-20% lost to inflation.
Thornberg can weasel and say 3 years from now that flat prices and 20% inflation equals he's right. Likewise 35% prices and 20% inflation and he's right. That's not a prediction, that CYA.
35% doesn't do anything but erase the speculative froth and does nothing to drain the swamp.
I purchased in 1995 and 5% compounded through 2007 places the price almost exactly half its current market price. CPI places it at 1.32x.
Running the numbers in the post, if real estate corrects back to income multiples, home prices will need to drop 40%. The forty percent drop matches a 'stress test' that UK banks had to run a year ago.
In the end the Fed will inflate to fight deflation. The difference between 40% and the actual drop will be how much inflation the Fed drives.
In the end, so what? For my children real estate needs to pull back to income multiples.
The public sector better wake up. After the banks, they are next.
Finally, geography again so I'm not completely at sea!
But, while ambiguous, I think I'm in the "Everywhere localized in LA" camp on a close reading. He specifically brings up "neighborhoods" when discussing foreclosures. The use of Los Angeles specific rather than national data also points that way in my estimation.
OK, back out to the briny deep for me - I get so SIV- and CDO-sick but I am trying to work past the queasiness and nausea to enlightenment.
I've always been impressed with Thronberg. The reason I've criticized him in the past is because he (like Leamer) was predicting flat house prices when they knew perfectly well that was crazy.
I understand the reasoning behind this, and that in normal times it's important not to scare people, but these aren't normal times and I think unjustifiable optimisim has contributed to a lot of the problems we have today.
Even if it's warranted, sometimes you have to be careful about sticking your head too far up your rear or you run the risk of suffocating.
"What if income inflates 30% in the next 5 years?"
Oh please, will the hyper crowd stop already! There is absolutely no evidence that wages will increase by anywhere near that amount - globalism insures that wages will not increase. My guess is that whoever remains employed over the next several years will have to work more for less money.
Most people I know in tech haven't seen a meaningful raise since 1999. Next case!
You guys just stop smoking it and look at the context of the text surrounding the data.
"There are "experts" out there who once preached that there was no bubble; they now preach that all real estate is local and that prices in your neighborhood won't be affected by foreclosures and price declines elsewhere.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak."
The cold hard truth is that those "experts" are wrong. Real estate is not local; hence, not just LA.
When you smoke so much during the day, you just don't understand the cold, hard truth.
One thing to keep in mind is that the Los Angeles MSA (Metropolitan Statistical Area) is near the top in total housing value out of 265 total MSAs. In fact, many bubble cities are in the top 20.
So 25% to 30% declines in the large, bubble-prone markets is significant. LA is not "everywhere", but taken together with Miami, Boston, Las Vegas, the Bay area, Phoenix, etc. it might as well be.
I think the negative effect on buyer psychology is proportional to the time it takes the price declines to drag out. When potential buyers stop seeing a "temporary sharp correction" and start seeing a "where's the bottom to this thing" it will get painful.
The same price inflation dynamic has taken place all over the country to some degree. I agree with the premise that residential real estate values should fall back to the levels typical for the most recent period of "normal" lending standards. Which was 2000-2003. Few people want to accept the full impact that lending practices over the past five years have had on property values. Unless there is another rabbit in the hat, a 25% decline in property values is probably conservative.
I know one reason new house prices fell and home sales are diving. I called Wells Fargo today. You can get a mortgage (non-jumbo) if you put 10% down at around 6% interest. If you do a jumbo they want 20 to 30% down.
This is the DC area where right now a 3/2 SF within reasonable commuting time will cost you 700k+. My guess is the pool of qualified buyers is pretty shallow this year.
Short story made even shorter. I was visiting in Hawaii when the music stopped a couple years ago on banks handing out bad loans. Savvy real estate guy there said "It's over" meaning real estate, since no more money was coming from investors from CA.
He said agents all over the country were linked like tag-teams finding 'investors' for real estate purchases EVERYWHERE, particularly outside CA where prices appeared 'cheaper' thus a 'better' investment.
rich, I'm looking at the context too and all that context is SoCal specific. His "local" is in in the same paragraph as "neighborhoods". Now, that doesn't mean prices won't fall more, or won't fall more on Pluto and in the Orion Nebula which are also everywhere last I checked. But, that's our interpretation of the landscape and as best I can tell the intent of what is admittedly a very short and specific article.
I live in Bel Air. I spoke to a prominent RE agent at an X-Mas party last week who routinely sells 2-20M homes. He told me that the uber high end is still moving, but that anything under 3 million is dead. He went on, saying he knows many 2 income white collar couples that make 3-500K a year and live in 4-5 million dollar houses. He said the kids are in private school and everybody drives Range Rovers. He also said they don't have enough money to buy furniture, and that most bought with OA loans in 2004-2006. They bet on appreciation. There is another large article in the LA Times today about these loans. They will begin to reset next year. This agent said its crazy, but you will see people who make nearly half million bucks a year go into foreclosure all over westside LA. He also told me that he is having a huge problem even finding loans for qualified buyers. He told me not to buy until winter 2009. Another very savvy realtor I know, Joyce Essex, just listed a 3 bedroom house in Bel Air for 1.8. It has a pool and a view and a yard. I know, because I follow the market that this house is down 1M for what it would have listed for 18 mos ago. The price shocked me and my wife. Joyce is very savvy--she wants to move the house. It hasn't sold yet.
Westside LA is the priciest and most desirable RE in the country. Many people think it's immune. It went through parabolic appreciation, that is now starting to reverse. Many people who make 400K bought 2.5-4M houses. LA is rich, but it's not that rich. It was a credit bubble. As those people go under with their house/reset they will 1) list the house for too much money and be slow to reduce it (this has been going on for a year) 2) liquidate savings to keep current on the mortgage 3) try to refinance (VERY DIFFICULT NOW). They will do anything not to have the stigma of default. On top of this, LA is in the midst of a labor dispute with the Hollywood writers. LA's peak was reached only this year, about a year after the rest of So Cal, and it has already dropped 9%.
Here is the kicker, though--I've seen research that says over 70% of the loans in LA County since 05 were OA. I think it was from Zelman.
So when Thornburg says 30%, I think he means LA, but I also think he's being safe. He's still one of the most bearish mainstream guys. He will be remembered as having gotten it right. I would bet if you chatted him up over a spiked eggnog he would tell you to expect close to 50%.
The thing that gets me is how this relates to the macro picture. Those Westside OA loans were the basis for massive Wall Street gearing in CDOs and MBS. The Wall street blood can't stop until the underlying collateral on all this ponzi-ness finds a bottom. When I look at the data, and combine it with my anecdotal knowledge of my fishbowl, I'm blown away. We are nowhere near the bottom. Free fall is still accelerating, and already CFC, BOA, C are reeli
To finish my thought, already the big firms are tottering. Several vultures have been immolated(nice job BOA, buying into CFC at 26!). Many more vultures will jump too early. Fictitious capital is being incinerated at an unbelievable rate.
All this, and the average guy in the street has yet to get the FEAR. 2008 may be the year for FEAR, maybe 2009. When the DOW goes they will understand. I think the match could come from China. Watch for a scary drop in Chinese stocks just before the Olympics...
Looking at the OFHEO data, it appears that might have happened in Texas in the early 80s when there was a rebound the first year of the downturn that turned into another power slide.
Unless we have a serious recession, I wouldn't be at all suprised by a false bottom in the national market. But my tendency right now is to think job losses will preclude that.
"Westside LA is the priciest and most desirable RE in the country"
PUH-LEASE! You need to get out a little. I wouldn't live in that rathole if that $3m house listed at $250k. You and all those realtors need to realize this 30% down is an average. The $600K+ market in CA will see 60% off sales.
Unfortunately, between 2002 and 2006, Thornberg would have been continuously scolded as being wrong. In real terms, he was...because stupidity takes time to take effect.
Now that he is right, let's just hope the correction will be greater than 25-30%...that just seems too low.
I bought a condo in Orange County 10 years ago for 250,000. Sold in June 2005 for 660,000. Even if it fell 50% I'd be sitting with an $80k gain. This is a break even if CPI inflation adjusted and probably a 2-3% average increase in 10 years. Folks who can't imagine a 50% decrease just haven't done the math!
Now add in market revulsion to real estate, difficulty of having a 10-20% downpayment, difficulty of qualifying for a loan and those who bought even 10 years ago will have a hard time finding a buyer, even at break even prices.
Now add in the potential lack of funds for even lending since most (smart) investors won't touch all the alphabet soup 'investment vehicles' and you will find folks (who can) that will be willing to take even 60% off from 2005-06 prices just to sell. You'll have owner financing as almost the only way to even sell a house too!
Nope, Thornberg was being V-E-R-Y conservative and altho it sounds like he was being local in his references, he'll probably turn out to be correct in a national and even non inflation adjusted sense.
--
"... Prices must and will fall. Everywhere. Probably 25% to 30% from their peak."
So, Sherman Oaks, Studio City, etc., that are already down 24-27% from the peak, are bottoming out?
Only lucky areas in LA will avoid 50% drop from the peak. This would mean that prices are back only to where they were in 2002. I thought that prices had gone up too much by 2002.
chill dude. I get out a lot. I'm from the Carolinas and travel all the time with work. I've lived in LA for ten years. I'm not saying westside LA is the best place to live--I'm saying it's the most expensive per acre (an expression of desire)...
personally, I don't think westside is worth the premium, btw, but what can you do? gotta work...
you'd be stupid not to buy 3M Bel Air crib for 250K though. The weather here blows every other climate away. It's 70 degrees most days and sunny. My kids live in shorts and t-shirts and flip flops. There's no bugs and it's not humid. Anything you put in the ground and water grows like crazy. The gardens in Bel Air are extremely beautiful. Traffic sucks. We need a good earthquake or a riot to thin things out a little...
"you'd be stupid not to buy 3M Bel Air crib for 250K though"
That $3m is totally meaningless. Wait and see what prices look like in a near cash market.
BTW - I hate crowds, smog traffic, trendy, absense-of-character or community, shallowness... everything about West LA. You couldn't pay me enough to live there. This sentiment alone if it catches on could cut RE prices down by 80% in LA.
Muzical: "Now add in market revulsion to real estate, difficulty of having a 10-20% downpayment"
Is there any data regarding how many first time buyers have more than $20k in cash? I'm guessing that the percentage with more than $40k is nearly zero.
Re: Both Fannie Mae and Freddie Mac have been classified as adequately capitalized through the third quarter of 2007, according to a statement released late Thursday by the Office of Federal Housing Enterprise Oversight.
You know what that means, OFHEO is going to pump up the mortgages to much higher ranges now!
My home value has already fallen 40% from the top. I bought in 1999 for $110,000. In 2005 homes in the neighborhood were selling for $200/sq.ft and at 2700 sq.ft. that put my house above $500,000.00 (which I knew was ridiculous).
I just did a re-fi on the minimal mortgage remaining (I paid off principal rather than borrow against the equity!) and the new appraisal came in at $300,000.00.
Doesnt that piss anyone off that Paulson is going to get his way with Jumbos? OFHEO was playing hard ball with Fannie corruption, but now we can add OFHEO to the collusion club!
Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac, the largest sources of finance for American mortgages, may help ``jump start'' the market for the largest home loans.
Paulson said in an interview today that he favors temporarily allowing the two companies to purchase so-called jumbo loans, which exceed $417,000. He said the proposal should be part of a package of legislative changes governing the two government chartered companies.
"That's your GSEs putting your tax dollahs at RISK."
I was going to include that in my comment. Does anyone have any evidence of a non-GSE supported (i.e. retaining for their own portfolio) bank originating loans with 10% down?
On CNBC today, Charlie Gasparino showed an internal BoFA memo saying they're gonna icksnay the soap in the office toilets.
This rumor is getting way overblown and Charlie should know better. They are taking the soap out of the toilets for 30-60 days to teach employees to stop wasting so much soap. What's wrong with that?
Look, there are many mid-size markets and quite a few larger markets where the median house is around 200 K and median salary of homeowners is 60 K or so. So after 20 K DP, the cost is 3x income. You guys in CA would choke if you saw how much house you can get for 400 K in my neighbourhood, which is the most prestigious in the area.
Those Westside OA loans were the basis for massive Wall Street gearing in CDOs and MBS.
x-man, that was an interesting tale, although I think Realtors® are prone to hyperbole, particularly at cocktail parties. "Routinely selling $2-$20 mil homes?" - Dude.
Keep in mind:
1. OAs are overwhemingly kept in portfolio (versus becoming RMBS)
2. Only about 3% of OAs have orignal loan amounts in excess of$1Mil.
3. Those high balance OAs have the same incidence of default as those with average balances do.
The thing with high end real estate is it is the last to turn down, but because the market is so small the downturn is more severe. Especially in the areas that became "new" rich.
"" We've seen a lot of prime properties sell lately, often close to their asking prices. The properties that are not selling well, are those that seemed to enter the million-dollar category during the 1988/1989 price run-up. These have since come down disproportionately in value," said Donald L. Cohn, DataQuick CEO.
The high-profile million-dollar market has been the hardest hit of all housing categories during the economic slump of recent years. Sales were cut in half and sales prices declined by 35 percent and more. Prices in other home categories have declined 15-20 percent, DataQuick reported."
It would be "bad" to have a lot of motivated sellers in such a small market, especially with so few willing or able to leverage as much as people did during the boom. The high end could get quite ugly. But it also could be an opportunity for those who have saved to buy in 3-4 years.
To me the scariest part of this bubble and credit tightening is trying to envision how it is going to get better. If you figure a good portion of first home buyers are fresh out of school with mountains of student loan debt, how are they going to come up with 10, 30, 50K for a down payment? They can't. This wasn't just a housing bubble.
It seems likely that the "new high end" was substantially fueled by people who sold for $500k a place they'd bought for $250k with $50k down and a $200k mortgage, and put the $270k equity down on the biggest home they could swing with an option ARM (per x-man's 2:59 post above), depending on two high incomes even to make those payments. When one or both of those high-income jobs disappears in the coming recession, they'll be wiped out even before the OA recasts, and if not, the recast will wipe them out.
obviously 20M is not routine. But 4.5 million on the westside is routine. I know it's a shock. I assume you don't live in LA?
I trust the realtor guy because I've known him via a college girlfriend for nearly 15 yrs. It was the opposite of hyperbolic in tenor, because it was a catch up over a holiday drink. He wasn't BSing me.
3% of OA over one million? Link, please. Not being skeptical, I'm always open to edification.
jm has it-
not to mention a lot of wealth tied up in Wall Street that could easily vanish.
The rising tide lifted all the boats and floated a lot of folks that would normally have sunk.
They lived to the max, and may not be able to take a decline to the norm, let alone to below normal economic conditions.
I predict that all of Phoenix will go back to 2001 prices, and that mortgage holders will offer special deal to underwater homeowners to get them to keep paying the mortgage and keep the loans somehow current.
I imagine that the lenders will accept 50% haircuts on the loan value to save some of the money and keep a payment flowing. After all, if they bought it for 40 cents on the dollar in the aftermarket, they make serious money getting 7% on 125% of their equity (last I checked this would be a 8.75% annual return with a 25% kicker upon sale).
That will be the new business model- now if the vultures wake up and start offering mods to the performing loans they bought cheap, they will make a killing and be able in a few years to repackage these loans as performing!
I thought i remeber you saying you were in Florida...
Here is a perfect example...I like a 5 acre lot east of i75 in Sarasota. In 1999-2000 these were approx 50% of my annual wages. The last i saw these same lots were selling for 6 TIMES my current wage. I'm considered a highly paid employee in Sarasota county so the froth is realllly insane in south Florida. I have the ability to by but why??
Heck,you should see Port Charlotte,we have been averaging 40-50% of monthy sales as REO.
The mls has exploded to over 400 listings under 100k. 3 years ago you might get a dumpy trailer for that...
Its gonna be a couple of more years of drops here in Florida i'm afraid.
"and that mortgage holders will offer special deal to underwater homeowners to get them to keep paying the mortgage and keep the loans somehow current."
AllenM,
A guy i work with mentioned to a local bank in Sarasota..."What are you doing with all the people upside down/behind"
The response surprised him...The bank manager told em we tell the homeowner to pay whatever they can afford...we do NOT want the house back.
The bank is FC houses,I think they are trying to string it out...
The reason I talked to Wells Fargo was we wanted to look a foreclosure. Nice neighborhood. We were looking at paying a little over 20% less than what they were 2 years ago.
I know, I know but we plan to live there for the rest of our lives. Well, it already sold as in cash. The agent who was amazed when I told her about Wells Fargo wanting 10% below 416k said someone bought it for an investment. She told me "the market is going to turn around in 3 -6 months."
"I imagine that the lenders will accept 50% haircuts on the loan value to save some of the money and keep a payment flowing"
Anyone with 10% positive equity and can't stay current will either get foreclosed or a refi at reduced rates. I don't see lenders reducing loan amounts substantially for those with means. It's too slippery of a slope.
Elvis noted: Oh, sure. By the time home values drop 35% everyone will be scared of housing. Few will buy. In the meantime, some other bubble asset will appear and those who were "ready to buy" a house will chase the next, great investment bubble.
Not to mention a huge pool of potential buyers is giving up. At a Christmas party a recent transplant to Denver, returning only to sell his California home (He and wife are now committed to Denver.), was bragging about the lifestyle in Denver... These stories are recruiting more transplants. As CA jobs decline... it will be another 1990's exodus.
As X-man alluded, this pain is already at the 3 million level price point. It will go higher. The tide is going out in 2008 and we'll begin to see who was swimming naked. 2009 will be the major downturn.
But as others allude, there is a lot of reasons to really like LA. But will it become like the Caribbean sans a strong middle class? Or will we have one of our normal downturns that returns housing to where it entices new people?
I certainly know far too many retirees who must sell their primary residence in order to retire in a lower cost area. So this downturn could have many years behind it...
The natural tendency of central banks all across the world is of inflation.
Yet, the natural tendency of blog readers to cheer and chant for a Housing explosion. Are they all waiting to buy? Or are they angry their neighbors have higher net worth?
"everywhere" in Thornberg's piece means certainly something beyond the L.A. market - first Thornberg cites disapprovingly "experts" who (...) now preach that all real estate is local. In reply, Thornberg says that it ain't so and that prices must fall "everywhere". The neighborhoods of L.A. can be still seen as one locality, because people working there could choose long commutes and live on the other end of L.A. I personally would assume that Thornberg means the whole US with "everywhere".
Yeah, I bet Sarasota is in for some big hurt for sure. How's Bradenton holding up... that was VERY a speculative place 8-10 years ago?
I'm in South St. Pete, just off the Bayway to Passe-a-grille and Ft. DeSoto, which has historically been depressed re: home values (you know... the "south end" of town... never mind that Maximo and Pinellas Point are very wealthy and predominantly white neighborhoods). The bubble happened in my neighborhood (Maximo) about 3 years after I bought... and boom, my house was suddenly valued at 4X what I paid for it... in 6 years...
Something was ALWAYS wrong with that picture.
That said, my next door neighbor sold 4 years ago at the top. She got 315,000 for a house 1000 square feet smaller than mine.
Spec house on the next block has been empty for 3 years... price keeps dropping, prospective buyers remain absent.
Meanwhile, wages in Pinellas county have not budged for 20 years...
I know it is beating a dead horse - but I think CR was right. I doubt people from LA ever think about places like Cleveland unless they have to change planes there.
x-man - I don't know how anyone who earns 3-500k a year can afford a 4-5 million dollar house. General rule of thumb is a house costs about 10% of purchase price a year (give or take - maybe somewhat less if you have a really low interest rate). So no way the math makes sense. And what were these people counting on the appreciation to do? Pay their property taxes?
In any event - I have no sympathy at all for these people (50 year old guys in Detroit metro area who are losing auto-related jobs and neighborhoods - yes - these people - no). Maybe we'll see them walking around Home Depots soon - carrying little signs - "Will Work for Botox" (grin).
BTW - I disagree about Westside LA being the priciest area in the country. Palm Beach (not the county - the town) - maybe Hobe Sound (where Tiger Woods lives) - some place like that - has to be at the top. After all - you can't dock your 150 foot yacht in Westside LA.
Remember CR's post on disappearing homeowner's equity? The existing markets were built on decades of equity trade-ups. NO MORE EQUITY, NO MORE TRADE-UPS! All housing will revert to prices reflecting what incomes alone can support on 80% down, FRM financed homes.
From the Times' article: "In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner's income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of "affordable."
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income..."
Those numbers from pre-bubble LA in 2002? Where I live, median housing prices are lower and median incomes are higher today than they were in LA five years ago.
Either CR called it right that Thornberg must have meant LA only (regarding price forecast), or Thornberg literally doesn't know what he's talking about. My sympathies go out to Californians, but California is clearly not representative of the country.
Pugg - I think just about all of us in Florida are in for declining prices. How much depends on how far up we went - and how fast. And what our real-estate buying populations are like (working or retired - income levels - etc.).
There is a certain knock-on effect. For example - if a retiree up north wants to sell his house and move to Florida - and can't sell up north - you can 86 2 sales. If a move-up buyer can't sell the house he has - he can't move up.
My father expressed concern today that his senior independent living facility (which is a rental owned by a national company) may go under because of numerous vacancies (people can't sell their houses and get enough money to put in the bank to pay the monthly rental costs). There was a long waiting list when he moved in 2 years ago.
As for younger people and down payments - the simple answer is save money. My husband and I bought our first place after we had been married 3 years. We were earning a total of about $20k a year - and we had to put down 20% of $66,000. So we saved. No big cable TV bills - no $4 Starbucks coffee (of course - Starbucks didn't exist then). No BMW - baby or otherwise.
For people in the right position (not only younger people) - I think this may wind up being a terrific buying opportunity. Note that we bought our first place during the depths of the 73-74 recession. We weren't scared. We had secure jobs - and were too young to realize how bad things really were.
Only thing is - when you go to Bank of America to inquire about a mortgage - don't eat the cookies (no soap - yuck!).
TJ - How long is ages? In my town - median income is about $80-85k and median home price is about $450,000. To get in line - our prices have to come down - but not by a huge amount - not like the LA numbers. Maybe our median income will go up too - but I'm not making any assumptions along those lines. Although it wouldn't be out of the question. My town used to be a middling retirement oriented place - but now it is a bedroom suburb of Jacksonville - lots of doctors - lawyers - people from the PGA Tour - whatever - live here. Crossing the county line (Duval to St. Johns for you Florida people) to get their kids into what they think is a better school system.
The real estate market in the general metro area that I think will suffer most is the low end condo and middling to upper end rental market. We have a lot of $30k/year jobs that were shipped here from up north in the last decade - like Merrill Lynch Credit Corp. jobs - and I think there will be lots of job losses in that sector of the job market.
Perhaps these numbers explain why Sebastian and I seem to have a similar view of the world which varies from those of a lot of people here. I don't know if Sebastian has ever said what part of the country he lives in - or what it's like. Perhaps he would like to share that information if he hasn't already.
Thanks, I have seen that article before. It's a good one. Unless you work for a servicer, I can't get you any more detail, you'll just have to trust me or do your own research.
And, yes - I do follow the LA market very closely, thank you. Did you check my "homepage"? That speaks volumes about the LA mentality as of late - its become a parody unto itself.
Since some people here seem to throw around the word "Depression" lightly - I thought I'd look up the definition. This one is kind of simplistic - but readable:
Can someone point me to a good source of residential housing price data going back at least 50 years? I suspect that house prices exhibit what is known as super exponential growth, at least during bubbles. With this kind of growth, if you plot the prices on semi-log paper you still get convex curve. You can fit these kinds of curves with p(t)= A+B (tc-t)^z. Here tc is the time at which the price explodes to infinity. The trick is to let z be complex (as in having a real and imaginary part). Once you estimate tc you get an idea of the time the growth undergoes a phase transition. In the current context, this is the region when prices max out. This fit has oscillations (from the imaginary part of z) on a log(time) scale. If you see these oscillations in the data, you know your model works. The geophysicist Sorentee used this technique to predict the turning points for the UK and the LA housing bubbles. Who knows if this is really correct? But if it is, then there are some very ominous signs for the future. Sorentee has fit this model to world population and world GDP data and gets tc= 2050 plus-minus 10 years. Its spooky that you get the same date with these two very different data sets. Im generally skeptical about doomsday scenarios, but sometimes you have to wonder.
As I see it, in the context of the article, the only plausible interpertations of "everywhere" would be 1. everywhere in Los Angles, or 2. everywhere in Southern California, or 3. everywhere where the average mortgage consumes 60% of the income of the average resident. To presume that the author was making the perposterous perdiction that all real estate nationaly would fall 25-30% from current levels would diminish the otherwise valid point of the article regarding debt ratios.
To me the scariest part of this bubble and credit tightening is trying to envision how it is going to get better. If you figure a good portion of first home buyers are fresh out of school with mountains of student loan debt, how are they going to come up with 10, 30, 50K for a down payment? They can't. This wasn't just a housing bubble.
I think we're going to see a whole bunch of recent college grads moving back in with Mom'n'Dad. Nothing beats free rent while paying off student loans.
A year ago Thornberg was predicting that house prices will be about the same in 2012. Obviously he means that nominal prices will be the same, so real prices will fall. At 4% inflation over 6 years, that's approximately a 24% real fall in prices.
I heart renting.
Lets see 25-30% price drop in LA, on top of banks who gave out option ARM loans that 75% of the time are increasing to 110% LTV, ... the LTV on those OAs at the deflate price are going to be something to behold.
Chris has been right on the money for some time, I think that is why he left the perma-bruins at UCLA!
I know a lot of people ready to buy with a 35% drop.
What if income inflates 30% in the next 5 years? Thats only a 6% per year adjustment for inflation. Although unlikely, much more likely than 35% drop.
I was born behind the whorehouse and raped by my mothers pimp.
Let the "I wish I would have sold" begin, en mass.
.
"I know a lot of people ready to buy with a 35% drop."
Oh, sure. By the time home values drop 35% everyone will be scared of housing. Few will buy. In the meantime, some other bubble asset will appear and those who were "ready to buy" a house will chase the next, great investment bubble.
What if income inflates 30% in the next 5 years?
The most likely scenario for avoiding the bust continues to be the Fed allowing the inflation tiger out of the cage.
Of course, putting the tiger back in the cage will then, in a few years, lead to even more trauma for the economy.
... Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.
No. This is uncharacteristically bad analysis by you, CR.
He says prices will fall everywhere. The uses a one-word sentence ("Everywhere") for emphasis. Everywhere in this context clearly must be taken literally, meaning all over the world.
However, in context, he is not predicting 25-30% declines from the peak everywhere. This is only probable, not predictable.
You have to read closer.
The Fed will have rates @ 20%+ overnight if they believe even for a second that wage inflation is occurring in any meaningful way.
rich, I don't know - I don't think Thornberg was very clear. He is clearly writing about the LA area: "Southland house prices have risen past sustainable levels for most homeowners."
Maybe Everywhere means Everywhere.
Best Wishes
Jeez rich, get your undies out of a bunch. CR was just trying to reasonably interpret as he always does. The man is nothing if not moderate and data driven.
"I know a lot of people ready to buy with a 35% drop."
Are you implying that such a rush would push prices up again? These people will need to have a cash downpayment. They won't all get in at once, since the drop will be gradual and it includes inflation -- the wait for that full 35 pct drop could be 7 years.
And there is normal turnover in the market as people retire, etc.
But how could income rise 6% a year? While a recession is coming on? Is all of Silicon Valley and Manhattan planning on relocation to LA?
I think Thornberg's everywhere would be a national decline of 25-30%.
I believe California will have closer to a 50% decline.
I believe "Reversion to the mean" will reduce the problems caused by excess demand and that will erase the increase above a normal trend line.
The problems caused by the excess supply will be in addition to the above.
CR- "I don't think Thornberg was very clear."
No, he wasn't. There's too much at stake at this point. A clarification would be nice. If he's talking 25% to 30% 'nationally,' the U.S. economy is going to look like burned toast at the end of 2008.
Whenever we talk about great big declines over long periods of time we give the occulator a free pass with inflation adjustments. I can see a combination of 35% price decline AND another 15-20% lost to inflation.
Thornberg can weasel and say 3 years from now that flat prices and 20% inflation equals he's right. Likewise 35% prices and 20% inflation and he's right. That's not a prediction, that CYA.
35% doesn't do anything but erase the speculative froth and does nothing to drain the swamp.
I purchased in 1995 and 5% compounded through 2007 places the price almost exactly half its current market price. CPI places it at 1.32x.
Running the numbers in the post, if real estate corrects back to income multiples, home prices will need to drop 40%. The forty percent drop matches a 'stress test' that UK banks had to run a year ago.
In the end the Fed will inflate to fight deflation. The difference between 40% and the actual drop will be how much inflation the Fed drives.
In the end, so what? For my children real estate needs to pull back to income multiples.
The public sector better wake up. After the banks, they are next.
Finally, geography again so I'm not completely at sea!
But, while ambiguous, I think I'm in the "Everywhere localized in LA" camp on a close reading. He specifically brings up "neighborhoods" when discussing foreclosures. The use of Los Angeles specific rather than national data also points that way in my estimation.
OK, back out to the briny deep for me - I get so SIV- and CDO-sick but I am trying to work past the queasiness and nausea to enlightenment.
Also, when professional writers use terms like "prices must and will fall," it's for over-the-top emphasis.
It's the equivalent of pounding your fist on the table and turning red in the face.
What a clear and ugly indictment of the Fed: that, in four years, the median L.A. home price rose by 100% while incomes rose 15%.
Bubbles cannot be seen real-time, Alan?
Please, let's bring back a special debtor's prison for AG and his cronies.
The carnage from this unwind is going to be terrible. Neutron bomb-like.
I've always been impressed with Thronberg. The reason I've criticized him in the past is because he (like Leamer) was predicting flat house prices when they knew perfectly well that was crazy.
I understand the reasoning behind this, and that in normal times it's important not to scare people, but these aren't normal times and I think unjustifiable optimisim has contributed to a lot of the problems we have today.
Even if it's warranted, sometimes you have to be careful about sticking your head too far up your rear or you run the risk of suffocating.
rich, he could just be emphatic locally.....
"What if income inflates 30% in the next 5 years?"
Oh please, will the hyper crowd stop already! There is absolutely no evidence that wages will increase by anywhere near that amount - globalism insures that wages will not increase. My guess is that whoever remains employed over the next several years will have to work more for less money.
Most people I know in tech haven't seen a meaningful raise since 1999. Next case!
You guys just stop smoking it and look at the context of the text surrounding the data.
"There are "experts" out there who once preached that there was no bubble; they now preach that all real estate is local and that prices in your neighborhood won't be affected by foreclosures and price declines elsewhere.
The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak."
The cold hard truth is that those "experts" are wrong. Real estate is not local; hence, not just LA.
When you smoke so much during the day, you just don't understand the cold, hard truth.
One thing to keep in mind is that the Los Angeles MSA (Metropolitan Statistical Area) is near the top in total housing value out of 265 total MSAs. In fact, many bubble cities are in the top 20.
So 25% to 30% declines in the large, bubble-prone markets is significant. LA is not "everywhere", but taken together with Miami, Boston, Las Vegas, the Bay area, Phoenix, etc. it might as well be.
I think the negative effect on buyer psychology is proportional to the time it takes the price declines to drag out. When potential buyers stop seeing a "temporary sharp correction" and start seeing a "where's the bottom to this thing" it will get painful.
OT: Check out the move back to the 50 day.
No surprise. The hedgies run the financial system now.
$Buck$
The same price inflation dynamic has taken place all over the country to some degree. I agree with the premise that residential real estate values should fall back to the levels typical for the most recent period of "normal" lending standards. Which was 2000-2003. Few people want to accept the full impact that lending practices over the past five years have had on property values. Unless there is another rabbit in the hat, a 25% decline in property values is probably conservative.
I know one reason new house prices fell and home sales are diving. I called Wells Fargo today. You can get a mortgage (non-jumbo) if you put 10% down at around 6% interest. If you do a jumbo they want 20 to 30% down.
This is the DC area where right now a 3/2 SF within reasonable commuting time will cost you 700k+. My guess is the pool of qualified buyers is pretty shallow this year.
nova
LA vs Everywhere?
CA IS Everywhere.
Short story made even shorter. I was visiting in Hawaii when the music stopped a couple years ago on banks handing out bad loans. Savvy real estate guy there said "It's over" meaning real estate, since no more money was coming from investors from CA.
He said agents all over the country were linked like tag-teams finding 'investors' for real estate purchases EVERYWHERE, particularly outside CA where prices appeared 'cheaper' thus a 'better' investment.
He was right. Just something to keep in mind.
rich, I'm looking at the context too and all that context is SoCal specific. His "local" is in in the same paragraph as "neighborhoods". Now, that doesn't mean prices won't fall more, or won't fall more on Pluto and in the Orion Nebula which are also everywhere last I checked. But, that's our interpretation of the landscape and as best I can tell the intent of what is admittedly a very short and specific article.
I live in Bel Air. I spoke to a prominent RE agent at an X-Mas party last week who routinely sells 2-20M homes. He told me that the uber high end is still moving, but that anything under 3 million is dead. He went on, saying he knows many 2 income white collar couples that make 3-500K a year and live in 4-5 million dollar houses. He said the kids are in private school and everybody drives Range Rovers. He also said they don't have enough money to buy furniture, and that most bought with OA loans in 2004-2006. They bet on appreciation. There is another large article in the LA Times today about these loans. They will begin to reset next year. This agent said its crazy, but you will see people who make nearly half million bucks a year go into foreclosure all over westside LA. He also told me that he is having a huge problem even finding loans for qualified buyers. He told me not to buy until winter 2009. Another very savvy realtor I know, Joyce Essex, just listed a 3 bedroom house in Bel Air for 1.8. It has a pool and a view and a yard. I know, because I follow the market that this house is down 1M for what it would have listed for 18 mos ago. The price shocked me and my wife. Joyce is very savvy--she wants to move the house. It hasn't sold yet.
Westside LA is the priciest and most desirable RE in the country. Many people think it's immune. It went through parabolic appreciation, that is now starting to reverse. Many people who make 400K bought 2.5-4M houses. LA is rich, but it's not that rich. It was a credit bubble. As those people go under with their house/reset they will 1) list the house for too much money and be slow to reduce it (this has been going on for a year) 2) liquidate savings to keep current on the mortgage 3) try to refinance (VERY DIFFICULT NOW). They will do anything not to have the stigma of default. On top of this, LA is in the midst of a labor dispute with the Hollywood writers. LA's peak was reached only this year, about a year after the rest of So Cal, and it has already dropped 9%.
Here is the kicker, though--I've seen research that says over 70% of the loans in LA County since 05 were OA. I think it was from Zelman.
So when Thornburg says 30%, I think he means LA, but I also think he's being safe. He's still one of the most bearish mainstream guys. He will be remembered as having gotten it right. I would bet if you chatted him up over a spiked eggnog he would tell you to expect close to 50%.
The thing that gets me is how this relates to the macro picture. Those Westside OA loans were the basis for massive Wall Street gearing in CDOs and MBS. The Wall street blood can't stop until the underlying collateral on all this ponzi-ness finds a bottom. When I look at the data, and combine it with my anecdotal knowledge of my fishbowl, I'm blown away. We are nowhere near the bottom. Free fall is still accelerating, and already CFC, BOA, C are reeli
I thought it was the Bay Area versus Everywhere Else but that's certainly the mindset I remember from my callow youth.
My mistake. I forgot that gravity only works in LA.
hmmm... maybe everywhere in California. there's an excellent post by Dr Housingbubble 2 days ago showing homes of genius statewide:
Special Edition: Real State of Genius: Today we Salute you California with Our Real Home of Genius Award! 10 Homes throughout the Golden Bubble State. » Dr. Housing Bubble Blog.
30% throught the state from peak to bottom is not outlandish
very nice post. thanx x ma
To finish my thought, already the big firms are tottering. Several vultures have been immolated(nice job BOA, buying into CFC at 26!). Many more vultures will jump too early. Fictitious capital is being incinerated at an unbelievable rate.
All this, and the average guy in the street has yet to get the FEAR. 2008 may be the year for FEAR, maybe 2009. When the DOW goes they will understand. I think the match could come from China. Watch for a scary drop in Chinese stocks just before the Olympics...
Many more vultures will jump too early.
Looking at the OFHEO data, it appears that might have happened in Texas in the early 80s when there was a rebound the first year of the downturn that turned into another power slide.
Unless we have a serious recession, I wouldn't be at all suprised by a false bottom in the national market. But my tendency right now is to think job losses will preclude that.
"Westside LA is the priciest and most desirable RE in the country"
PUH-LEASE! You need to get out a little. I wouldn't live in that rathole if that $3m house listed at $250k. You and all those realtors need to realize this 30% down is an average. The $600K+ market in CA will see 60% off sales.
Unfortunately, between 2002 and 2006, Thornberg would have been continuously scolded as being wrong. In real terms, he was...because stupidity takes time to take effect.
Now that he is right, let's just hope the correction will be greater than 25-30%...that just seems too low.
I bought a condo in Orange County 10 years ago for 250,000. Sold in June 2005 for 660,000. Even if it fell 50% I'd be sitting with an $80k gain. This is a break even if CPI inflation adjusted and probably a 2-3% average increase in 10 years. Folks who can't imagine a 50% decrease just haven't done the math!
Now add in market revulsion to real estate, difficulty of having a 10-20% downpayment, difficulty of qualifying for a loan and those who bought even 10 years ago will have a hard time finding a buyer, even at break even prices.
Now add in the potential lack of funds for even lending since most (smart) investors won't touch all the alphabet soup 'investment vehicles' and you will find folks (who can) that will be willing to take even 60% off from 2005-06 prices just to sell. You'll have owner financing as almost the only way to even sell a house too!
Nope, Thornberg was being V-E-R-Y conservative and altho it sounds like he was being local in his references, he'll probably turn out to be correct in a national and even non inflation adjusted sense.
The music has stopped. Where's your chair?
For doubters, have a chat with Ron Burkle if you think Westside real estate can't be had cheap in a downturn.
.
On CNBC today, Charlie Gasparino showed an internal BoFA memo saying they're gonna icksnay the soap in the office toilets.
My guess is they do that "Everywhere."
--
"... Prices must and will fall. Everywhere. Probably 25% to 30% from their peak."
So, Sherman Oaks, Studio City, etc., that are already down 24-27% from the peak, are bottoming out?
Only lucky areas in LA will avoid 50% drop from the peak. This would mean that prices are back only to where they were in 2002. I thought that prices had gone up too much by 2002.
Jas
Barely,
chill dude. I get out a lot. I'm from the Carolinas and travel all the time with work. I've lived in LA for ten years. I'm not saying westside LA is the best place to live--I'm saying it's the most expensive per acre (an expression of desire)...
personally, I don't think westside is worth the premium, btw, but what can you do? gotta work...
you'd be stupid not to buy 3M Bel Air crib for 250K though. The weather here blows every other climate away. It's 70 degrees most days and sunny. My kids live in shorts and t-shirts and flip flops. There's no bugs and it's not humid. Anything you put in the ground and water grows like crazy. The gardens in Bel Air are extremely beautiful. Traffic sucks. We need a good earthquake or a riot to thin things out a little...
"35% doesn't do anything but erase the speculative froth and does nothing to drain the swamp."
Hard to say where this lands. It may take a serious recession to take us back to 4/2002.
Question -
Isn't the origination with 10% down far too risky? After all, the buyer is likely to be under water in a year.
"you'd be stupid not to buy 3M Bel Air crib for 250K though"
That $3m is totally meaningless. Wait and see what prices look like in a near cash market.
BTW - I hate crowds, smog traffic, trendy, absense-of-character or community, shallowness... everything about West LA. You couldn't pay me enough to live there. This sentiment alone if it catches on could cut RE prices down by 80% in LA.
Muzical: "Now add in market revulsion to real estate, difficulty of having a 10-20% downpayment"
Is there any data regarding how many first time buyers have more than $20k in cash? I'm guessing that the percentage with more than $40k is nearly zero.
Allen, "Isn't the origination with 10% down far too risky?"
That's your GSEs putting your tax dollahs at RISK. They don't care that it's the worst time to gamble.
Re: Both Fannie Mae and Freddie Mac have been classified as adequately capitalized through the third quarter of 2007, according to a statement released late Thursday by the Office of Federal Housing Enterprise Oversight.
You know what that means, OFHEO is going to pump up the mortgages to much higher ranges now!
My home value has already fallen 40% from the top. I bought in 1999 for $110,000. In 2005 homes in the neighborhood were selling for $200/sq.ft and at 2700 sq.ft. that put my house above $500,000.00 (which I knew was ridiculous).
I just did a re-fi on the minimal mortgage remaining (I paid off principal rather than borrow against the equity!) and the new appraisal came in at $300,000.00.
Are you telling me I've another 30% down to go?
... that would be depressing.
Doesnt that piss anyone off that Paulson is going to get his way with Jumbos? OFHEO was playing hard ball with Fannie corruption, but now we can add OFHEO to the collusion club!
Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac, the largest sources of finance for American mortgages, may help ``jump start'' the market for the largest home loans.
Paulson said in an interview today that he favors temporarily allowing the two companies to purchase so-called jumbo loans, which exceed $417,000. He said the proposal should be part of a package of legislative changes governing the two government chartered companies.
"That's your GSEs putting your tax dollahs at RISK."
I was going to include that in my comment. Does anyone have any evidence of a non-GSE supported (i.e. retaining for their own portfolio) bank originating loans with 10% down?
This rumor is getting way overblown and Charlie should know better. They are taking the soap out of the toilets for 30-60 days to teach employees to stop wasting so much soap. What's wrong with that?
Look, there are many mid-size markets and quite a few larger markets where the median house is around 200 K and median salary of homeowners is 60 K or so. So after 20 K DP, the cost is 3x income. You guys in CA would choke if you saw how much house you can get for 400 K in my neighbourhood, which is the most prestigious in the area.
Those Westside OA loans were the basis for massive Wall Street gearing in CDOs and MBS.
x-man, that was an interesting tale, although I think Realtors® are prone to hyperbole, particularly at cocktail parties. "Routinely selling $2-$20 mil homes?" - Dude.
Keep in mind:
1. OAs are overwhemingly kept in portfolio (versus becoming RMBS)
2. Only about 3% of OAs have orignal loan amounts in excess of$1Mil.
3. Those high balance OAs have the same incidence of default as those with average balances do.
BTW, my home is in Florida - Tampa Bay area.
- pugg
The thing with high end real estate is it is the last to turn down, but because the market is so small the downturn is more severe. Especially in the areas that became "new" rich.
Read through the DQ archives for California:
DQNews - DataQuick Real Estate Headlines and Statistics
"" We've seen a lot of prime properties sell lately, often close to their asking prices. The properties that are not selling well, are those that seemed to enter the million-dollar category during the 1988/1989 price run-up. These have since come down disproportionately in value," said Donald L. Cohn, DataQuick CEO.
The high-profile million-dollar market has been the hardest hit of all housing categories during the economic slump of recent years. Sales were cut in half and sales prices declined by 35 percent and more. Prices in other home categories have declined 15-20 percent, DataQuick reported."
It would be "bad" to have a lot of motivated sellers in such a small market, especially with so few willing or able to leverage as much as people did during the boom. The high end could get quite ugly. But it also could be an opportunity for those who have saved to buy in 3-4 years.
To me the scariest part of this bubble and credit tightening is trying to envision how it is going to get better. If you figure a good portion of first home buyers are fresh out of school with mountains of student loan debt, how are they going to come up with 10, 30, 50K for a down payment? They can't. This wasn't just a housing bubble.
Cal- Amen....got cash?
It seems likely that the "new high end" was substantially fueled by people who sold for $500k a place they'd bought for $250k with $50k down and a $200k mortgage, and put the $270k equity down on the biggest home they could swing with an option ARM (per x-man's 2:59 post above), depending on two high incomes even to make those payments. When one or both of those high-income jobs disappears in the coming recession, they'll be wiped out even before the OA recasts, and if not, the recast will wipe them out.
shnaps,
obviously 20M is not routine. But 4.5 million on the westside is routine. I know it's a shock. I assume you don't live in LA?
I trust the realtor guy because I've known him via a college girlfriend for nearly 15 yrs. It was the opposite of hyperbolic in tenor, because it was a catch up over a holiday drink. He wasn't BSing me.
3% of OA over one million? Link, please. Not being skeptical, I'm always open to edification.
If OAs are kept in portfolio, CFC is DEAD.
CHECK THIS OUT:
Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
jm has it-
not to mention a lot of wealth tied up in Wall Street that could easily vanish.
The rising tide lifted all the boats and floated a lot of folks that would normally have sunk.
They lived to the max, and may not be able to take a decline to the norm, let alone to below normal economic conditions.
I predict that all of Phoenix will go back to 2001 prices, and that mortgage holders will offer special deal to underwater homeowners to get them to keep paying the mortgage and keep the loans somehow current.
I imagine that the lenders will accept 50% haircuts on the loan value to save some of the money and keep a payment flowing. After all, if they bought it for 40 cents on the dollar in the aftermarket, they make serious money getting 7% on 125% of their equity (last I checked this would be a 8.75% annual return with a 25% kicker upon sale).
That will be the new business model- now if the vultures wake up and start offering mods to the performing loans they bought cheap, they will make a killing and be able in a few years to repackage these loans as performing!
Someday this war's gonna end...
pugg squaar | 12.28.07 - 3:53 pm |
I thought i remeber you saying you were in Florida...
Here is a perfect example...I like a 5 acre lot east of i75 in Sarasota. In 1999-2000 these were approx 50% of my annual wages. The last i saw these same lots were selling for 6 TIMES my current wage. I'm considered a highly paid employee in Sarasota county so the froth is realllly insane in south Florida. I have the ability to by but why??
Heck,you should see Port Charlotte,we have been averaging 40-50% of monthy sales as REO.
The mls has exploded to over 400 listings under 100k. 3 years ago you might get a dumpy trailer for that...
Its gonna be a couple of more years of drops here in Florida i'm afraid.
Chris
Personally:I believe for every drop of rain that falls, a flower grows.
I believe that somewhere in the darkest night, a candle glows.
I believe for everyone who goes astray, someone will come to show the way.
I believe, I believe...
"and that mortgage holders will offer special deal to underwater homeowners to get them to keep paying the mortgage and keep the loans somehow current."
AllenM,
A guy i work with mentioned to a local bank in Sarasota..."What are you doing with all the people upside down/behind"
The response surprised him...The bank manager told em we tell the homeowner to pay whatever they can afford...we do NOT want the house back.
The bank is FC houses,I think they are trying to string it out...
Chris
The reason I talked to Wells Fargo was we wanted to look a foreclosure. Nice neighborhood. We were looking at paying a little over 20% less than what they were 2 years ago.
I know, I know but we plan to live there for the rest of our lives. Well, it already sold as in cash. The agent who was amazed when I told her about Wells Fargo wanting 10% below 416k said someone bought it for an investment. She told me "the market is going to turn around in 3 -6 months."
Nova
"I imagine that the lenders will accept 50% haircuts on the loan value to save some of the money and keep a payment flowing"
Anyone with 10% positive equity and can't stay current will either get foreclosed or a refi at reduced rates. I don't see lenders reducing loan amounts substantially for those with means. It's too slippery of a slope.
Elvis noted:
Oh, sure. By the time home values drop 35% everyone will be scared of housing. Few will buy. In the meantime, some other bubble asset will appear and those who were "ready to buy" a house will chase the next, great investment bubble.
Not to mention a huge pool of potential buyers is giving up. At a Christmas party a recent transplant to Denver, returning only to sell his California home (He and wife are now committed to Denver.), was bragging about the lifestyle in Denver... These stories are recruiting more transplants. As CA jobs decline... it will be another 1990's exodus.
As X-man alluded, this pain is already at the 3 million level price point. It will go higher. The tide is going out in 2008 and we'll begin to see who was swimming naked. 2009 will be the major downturn.
But as others allude, there is a lot of reasons to really like LA. But will it become like the Caribbean sans a strong middle class? Or will we have one of our normal downturns that returns housing to where it entices new people?
I certainly know far too many retirees who must sell their primary residence in order to retire in a lower cost area. So this downturn could have many years behind it...
Got popcorn?
Neil
The natural tendency of central banks all across the world is of inflation.
Yet, the natural tendency of blog readers to cheer and chant for a Housing explosion. Are they all waiting to buy? Or are they angry their neighbors have higher net worth?
"everywhere" in Thornberg's piece means certainly something beyond the L.A. market - first Thornberg cites disapprovingly "experts" who (...) now preach that all real estate is local. In reply, Thornberg says that it ain't so and that prices must fall "everywhere". The neighborhoods of L.A. can be still seen as one locality, because people working there could choose long commutes and live on the other end of L.A. I personally would assume that Thornberg means the whole US with "everywhere".
"They are taking the soap out of the toilets for 30-60 days to teach employees to stop wasting so much soap. What's wrong with that?"
Well, for one thing, it makes it difficult for people to wash hands.
Unwashed hands spread disease.
Disease causes employees to miss work.
Must have been the same minds that came up with layering untold layers of risk to eke out another 2 basis points. Smart, real smart.
Chris (cobradriver) -
Yeah, I bet Sarasota is in for some big hurt for sure. How's Bradenton holding up... that was VERY a speculative place 8-10 years ago?
I'm in South St. Pete, just off the Bayway to Passe-a-grille and Ft. DeSoto, which has historically been depressed re: home values (you know... the "south end" of town... never mind that Maximo and Pinellas Point are very wealthy and predominantly white neighborhoods). The bubble happened in my neighborhood (Maximo) about 3 years after I bought... and boom, my house was suddenly valued at 4X what I paid for it... in 6 years...
Something was ALWAYS wrong with that picture.
That said, my next door neighbor sold 4 years ago at the top. She got 315,000 for a house 1000 square feet smaller than mine.
Spec house on the next block has been empty for 3 years... price keeps dropping, prospective buyers remain absent.
Meanwhile, wages in Pinellas county have not budged for 20 years...
NoVa, put a 12 month reminder in your phone calendar to think about that "missed opportunity" and thank your lucky stars.
I know it is beating a dead horse - but I think CR was right. I doubt people from LA ever think about places like Cleveland unless they have to change planes there.
x-man - I don't know how anyone who earns 3-500k a year can afford a 4-5 million dollar house. General rule of thumb is a house costs about 10% of purchase price a year (give or take - maybe somewhat less if you have a really low interest rate). So no way the math makes sense. And what were these people counting on the appreciation to do? Pay their property taxes?
In any event - I have no sympathy at all for these people (50 year old guys in Detroit metro area who are losing auto-related jobs and neighborhoods - yes - these people - no). Maybe we'll see them walking around Home Depots soon - carrying little signs - "Will Work for Botox" (grin).
BTW - I disagree about Westside LA being the priciest area in the country. Palm Beach (not the county - the town) - maybe Hobe Sound (where Tiger Woods lives) - some place like that - has to be at the top. After all - you can't dock your 150 foot yacht in Westside LA.
You guys are forgetting something huge.
Remember CR's post on disappearing homeowner's equity? The existing markets were built on decades of equity trade-ups. NO MORE EQUITY, NO MORE TRADE-UPS! All housing will revert to prices reflecting what incomes alone can support on 80% down, FRM financed homes.
Prices will go down to levels not seen in ages.
From the Times' article: "In 2002, the median price of a single-family home in Los Angeles was $270,000 and the median homeowner's income was $65,000. With a $50,000 down payment, the annual cost of that house (taxes, insurance and payment on a 30-year fixed-rate conventional mortgage) would add up to about 33% of the median household's income -- just under the 35% mark that the Federal Housing Administration calls the upper limit of "affordable."
By 2006, the cost of that same house doubled, to $540,000 -- pushed by unbridled speculation fueled by unparalleled access to mortgage capital. But median income rose a paltry 15%. So today that same set of costs come to 60% of gross income..."
Those numbers from pre-bubble LA in 2002? Where I live, median housing prices are lower and median incomes are higher today than they were in LA five years ago.
Either CR called it right that Thornberg must have meant LA only (regarding price forecast), or Thornberg literally doesn't know what he's talking about. My sympathies go out to Californians, but California is clearly not representative of the country.
Sebastia
Pugg - I think just about all of us in Florida are in for declining prices. How much depends on how far up we went - and how fast. And what our real-estate buying populations are like (working or retired - income levels - etc.).
There is a certain knock-on effect. For example - if a retiree up north wants to sell his house and move to Florida - and can't sell up north - you can 86 2 sales. If a move-up buyer can't sell the house he has - he can't move up.
My father expressed concern today that his senior independent living facility (which is a rental owned by a national company) may go under because of numerous vacancies (people can't sell their houses and get enough money to put in the bank to pay the monthly rental costs). There was a long waiting list when he moved in 2 years ago.
As for younger people and down payments - the simple answer is save money. My husband and I bought our first place after we had been married 3 years. We were earning a total of about $20k a year - and we had to put down 20% of $66,000. So we saved. No big cable TV bills - no $4 Starbucks coffee (of course - Starbucks didn't exist then). No BMW - baby or otherwise.
For people in the right position (not only younger people) - I think this may wind up being a terrific buying opportunity. Note that we bought our first place during the depths of the 73-74 recession. We weren't scared. We had secure jobs - and were too young to realize how bad things really were.
Only thing is - when you go to Bank of America to inquire about a mortgage - don't eat the cookies (no soap - yuck!).
TJ - How long is ages? In my town - median income is about $80-85k and median home price is about $450,000. To get in line - our prices have to come down - but not by a huge amount - not like the LA numbers. Maybe our median income will go up too - but I'm not making any assumptions along those lines. Although it wouldn't be out of the question. My town used to be a middling retirement oriented place - but now it is a bedroom suburb of Jacksonville - lots of doctors - lawyers - people from the PGA Tour - whatever - live here. Crossing the county line (Duval to St. Johns for you Florida people) to get their kids into what they think is a better school system.
The real estate market in the general metro area that I think will suffer most is the low end condo and middling to upper end rental market. We have a lot of $30k/year jobs that were shipped here from up north in the last decade - like Merrill Lynch Credit Corp. jobs - and I think there will be lots of job losses in that sector of the job market.
Perhaps these numbers explain why Sebastian and I seem to have a similar view of the world which varies from those of a lot of people here. I don't know if Sebastian has ever said what part of the country he lives in - or what it's like. Perhaps he would like to share that information if he hasn't already.
x-man -
Thanks, I have seen that article before. It's a good one. Unless you work for a servicer, I can't get you any more detail, you'll just have to trust me or do your own research.
And, yes - I do follow the LA market very closely, thank you. Did you check my "homepage"? That speaks volumes about the LA mentality as of late - its become a parody unto itself.
Fortunately, where I live, when a $4.5 mil property sells, there is literally a story about it in the newspaper.
Since some people here seem to throw around the word "Depression" lightly - I thought I'd look up the definition. This one is kind of simplistic - but readable:
Recession? Depression? What's the difference between a recession and a depression?
It's kind of like saying you have the flu every time you catch you a cold.
Can someone point me to a good source of residential housing price data going back at least 50 years? I suspect that house prices exhibit what is known as super exponential growth, at least during bubbles. With this kind of growth, if you plot the prices on semi-log paper you still get convex curve. You can fit these kinds of curves with p(t)= A+B (tc-t)^z. Here tc is the time at which the price explodes to infinity. The trick is to let z be complex (as in having a real and imaginary part). Once you estimate tc you get an idea of the time the growth undergoes a phase transition. In the current context, this is the region when prices max out. This fit has oscillations (from the imaginary part of z) on a log(time) scale. If you see these oscillations in the data, you know your model works. The geophysicist Sorentee used this technique to predict the turning points for the UK and the LA housing bubbles. Who knows if this is really correct? But if it is, then there are some very ominous signs for the future. Sorentee has fit this model to world population and world GDP data and gets tc= 2050 plus-minus 10 years. Its spooky that you get the same date with these two very different data sets. Im generally skeptical about doomsday scenarios, but sometimes you have to wonder.
R-, way before you sauntered on in to this corner of the world, we defined depression as a drop of 10% or more in GDP.
Jas, tj, et al. all know what they mean when they say 'depression.
As I see it, in the context of the article, the only plausible interpertations of "everywhere" would be 1. everywhere in Los Angles, or 2. everywhere in Southern California, or 3. everywhere where the average mortgage consumes 60% of the income of the average resident. To presume that the author was making the perposterous perdiction that all real estate nationaly would fall 25-30% from current levels would diminish the otherwise valid point of the article regarding debt ratios.
To me the scariest part of this bubble and credit tightening is trying to envision how it is going to get better. If you figure a good portion of first home buyers are fresh out of school with mountains of student loan debt, how are they going to come up with 10, 30, 50K for a down payment? They can't. This wasn't just a housing bubble.
I think we're going to see a whole bunch of recent college grads moving back in with Mom'n'Dad. Nothing beats free rent while paying off student loans.
A year ago Thornberg was predicting that house prices will be about the same in 2012. Obviously he means that nominal prices will be the same, so real prices will fall. At 4% inflation over 6 years, that's approximately a 24% real fall in prices.
YouTube - Real Estate Bubbles and California's Economic Growth, Part 1
What's been said above: LA prices will drop 50%
"This would mean that prices are back only to where they were in 2002. I thought that prices had gone up too much by 2002."
Jas
Jas Jain | 12.28.07 - 3:23 pm | #
so did i but obviously we were both wrong