Is it possible that we are in the midst of the busy selling season for existing homes and banks have recently sharply cut prices?
We know that inventory is coming back to banks at a very rapid clip right now. As we progress towards the slower Fall/Winter selling season and inventory keeps rising, is it possible that we might continue to see substantial additional price declines as banks get anxious to reduce a rising REO level?
CR, you are assuming that the investors jumping in are making sound investments. But from what I've seen in many markets cap rates still do not pencil out for these REO's. If so, these are speculators (counting on future appreciation) not investors, and knife catchers to boot.
My guess is that it will take several dead cat bounces to drive the speculators completely out of the residential real estate market. Too many people still believe that sometime in the near future home prices will rapidly shoot up again.
People in general are simply too well versed in the idea that real estate and stocks are always good investments. The caveat "past performance is no indication of future returns" will hold new meaning for many in the not-so-distant future.
Reminds me of that "bottom" I caught when Cisco dropped 20% during the dot com crash.
I think we'll only know when there's a recovery in any segment of the market when it overcorrects past the point of affordability and the meme "housing always goes up" dies a timely death.
If the higher end will default later, that will put another wave of pressure on the prices of lower end homes.....since the same money gets more house.
If you want to live in the next house you buy, wait for the option arms to start exploding.
If investors buy these low end properties in the heavy REO neighborhoods, the market for rentals will be flooded and rents will go down, putting the properties back under water.
In slightly better neighborhoods the previously frozen out, prospective owner-occupiers are now looking. But as the price reductions hit better and better neighborhoods, the propsective owner-occupiers will stop looking in the worse neighborhoods, thus starting another cycle of decline from the bottom.
I do not believe in any bottom at the current stage of the cycle regardless of the price (unless it is zero). If some parts of the marked reached bottom now, it would be the quickest recovery in history after such a massive run-up. What about those future foreclosed inventory of the homedebtors that are currently getting sunk underwater by the REOs that set the low price comps?
I'm beginning to think that the end result of this bubble is that we will have a significantly wider price spread between the best and worst that real estate has to offer. Looking at CA and the Bay Area in particular, it just strikes me that the best locations are going to become the domain of a more homogeneous rich populous, and the diversity of SF in particular will be further driven out, or left to those who can barely afford to even rent there.
We saw the junk in the outer areas of the east bay go up 200% and in all likeliness, it could lose all that run up, but the 150% rise in the city looks like it could stick.
My reasoning behind this is that it fits perfectly in line with the rich have gotten richer at a super fast pace in the past few years, and for them, their standard of living isnt suffering even if they choose to buy the pricey property at today's prices. And most of that stuff was owned by the super rich already, so they come out ahead on asset appreciation anyway, most likely, for the majority.
I just have this eerie feeling that it would take a much much worse recession than even the bad one we are going to get, before the real quality RE really goes down in price by anything noticeable (as in, say 2000 prices for SF vs 2008)
But everything Ive seen so far tells me that the rich and powerful will find a way to keep themselves that way, and that the status quo will be preserved.
Hell, even Krugman doesnt get it anymore. He's talking about how inflation is no big deal. What he fails to appreciate, and what Ritholz nailed him for today, is that unless the prices of things that make up the majority of HH budgets decline for an extended period of time, our standard of living has been scaled back dramatically, and is set for more sccaling back since a recession and the job losses that come with it will hit tons of pocketbooks, either directly or through weaker wage growth.
Oy, ok, Im really in rant mode today, sorry. But seriously, what do you think it will take to really bring those prices back to realistic territory, since they sure dont pencil out as rental investments? My only hope is that once the option/arm neg-arm timebomb hits, we'll start to see that many of the newer "owners" of those properties can't really afford them. But we've got another year to go on that I guess. Granted the CA economy should be completely in the gutter by that point, but who knows what we'll be forced to bail out as taxpayers in the next year.
I watch our old Bay Area neighborhood pretty closely, where houses still sell in the range of $1.25M to $2.25M. They haven't dropped in the past year or so, and they are definitely up about 10-15% from the time we sold in 2005.
But what I see indicates that disstress is increasing at least as fast as prices are. Houses being put on the market are, more often than not, houses that sold previously in the past 3 years or so. For example, one is listed for sale today for $2.2M which sold about 1 1/2 years ago for $2.1M. Of course, when I ask RE agents why they are selling so soon, they are cagey, but occasionally an agent will admit that the owner cannot afford the house.
Not a good sign, IMHO. The pool of optimists is dwindling. So is the pool of foolish lenders.
Well the lower end is, IMHO where the credit crunch is most likely to be ameleoriated by prospective investors looking for propeties that will cashflow. There are a couple of basic reasons for this:
1.)The smaller unit price makes this possible. This means that there is a class of people who can buy them at low or zero LTVs. These are people who have better credit than those who would live in the properties.
2.)The rental/sales mix is more conducive to renting the properties out at lower prices. The traditional advantages of owner/occupation are such that the rental market is dominated by those who would have have difficulty qualifying to buy a house.
Interesting, I wondered about the same scenario myself (that the disparity between rich and the rest of us might be evidenced in the high end housing not falling so much). In fact I wrote an email to CR long ago asking his thoughts on that.
But I don't think that's the way it will work out. The high end houses were bought by people who cannot afford them, in too many cases. They just haven't run into financing problems quite yet. Also, the high end depends on the trade-up buyers, just like all the other levels of the house market along the way. And the high end is getting its legs cut out from under it right now.
My guess is that it will take several dead cat bounces to drive the speculators completely out of the residential real estate market. Too many people still believe that sometime in the near future home prices will rapidly shoot up again.
There was a lot of "dumb money" to be made in real estate over the last few years-- people who ignored how pricey RE was, kept the faith, and kept buying into 2001, 2002.
It worked for them once and, like most of us, they mistake their luck for hard work/perseverance/determination/ whatever.
It will take some time for this dumb money to run out...
I think that subprime and the low end were the first to get whacked. But as we now see the similar delinquency cycle build up in Alt-A its quite likely the dispersion will start to shift towards the higher priced homes. And then as Prime goes the dispersion will shift once again.
Median, average and such metrics play a role but in housing where location, vintage, quality, etc all play a role it pays to be more specific.
poszi writes:
I do not believe in any bottom at the current stage of the cycle regardless of the price (unless it is zero).
This has happened in parts of Bloomington at the start of the year. Cases were flippers/fraudsters who ran immediately. REO auctions won by the city for minimum bid but total costs after razing the house and turning into parks closer to 30K.
As part of the city risk management the houses were professionally appraised and demo costs put up for tender. A city official accompanied the appraiser and bid at auction. They only won when they were the only bidder - these houses were so bad (mortgage fraud) that the banks didn't even compete to try and recover any money. The city didn't want abandoned property.
ShortCourage - Im with you on this, but becoming more cynical over the past few years, and more inclined to believe that the natural course of events will find a way to be avoided, with the expected reality manipulated so as to avoid casualties amongst those in power. But I do understand well that there is a broad chunk of questionable financing out there that has yet to roll over into payment reality. And from all Ive read on the no-doc, interest only, neg-am situation, that's a pretty big wave that will crest directly onto the CA shore more than anywhere else. I do agree that the upper end is undercut completely by fewer tradeups being possible, but that clearly alone is not enough to move that high end back to more realistic valuations. I mean, you'd be paying 2% cap rates on a lot of the stuff, when 4% is typically a very aggressive price estimate for residential in general. And the difference between those two rates is 100%, meaning a 100% overvaluation possible if you buy now, meaning, your value could fall 50% if that market does come back to earth. Who in the world would buy now in those areas? Is is just that we'll have a long long catch up game before incomes and financing and rents rise enough to justify those prices? That means I'll have to wait much longer than I want to wait before I can buy what I want in SF. And that blows.
I'll just try to be patient and see how it turns out, but it's really annoying now to still have to hear from the RE people in SF that the prices aren't going to go down. It's like reliving the arguments I had with them a few years ago that there was a general bubble. They didnt believe that, but for now, they cling to the SF is different hopes, and pray that they are right. I of course, pray for a different outcome. But their smugness makes me ill to the core.
Checked out local homes for sale via Redfin this AM and saw that the "percent distressed" offerings ranged from 10% in Moraga to 70% in Clayton. I didn't check inner-city Oakland today, but in recent past it looked like at least 75% were "distressed."
In a macro-economic sense nationwide stats such as are being reported here have some value; but the intensely local nature of residential real estate that affects how we live is much more "interesting." States, municipalities and neighborhoods will see greatly varying impacts.
For the last two years in Sacramento, the media price has risen in the spring, and fallen the rest of the year. There is a lot of seasonality in RE, both in inventory and pricing.
Groundhogday, there is a difference between speculators and investors. I've worked the numbers, and some of the deals (on low end REOs) have cap rates close to 8%. That is investor numbers (the ROI is much higher).
This is only in some areas - and it's because the banks are being flooded with REOs in those areas. Maybe the price will fall further - but I don't think we can call these people "speculators" - at least not like the last several years.
Of course rents might collapse too - but I'm trying to figure out the most likely scenario.
Average Joe, yes. One of the reasons I'm interested in these distribution charts is I expect the distribution to change over time. The low end will probably always be the worse, but I expect the curve will flatten out some over time - as the Option ARMs and HELOC defaults hit the middle and upper ranges.
CR... do the more severe price drops at the bottom of the market eventually work their way up the price ladder as people are no longer able to build equity and stop looking to move up?
i.e. is some of the effect delayed at the higher end, or is up-market housing immune to the worst of the price declines?
Geoff, I get that same story here, that prices aren't going to come down in Los Gatos (where I eventually want to buy back in) or high-end towns like Los Altos, Palo Alto, Mountain View, etc...
"There's too much money in those towns"
"Everybody wants into the areas with good schools"
"Google and Apple are creating too many rich home-shoppers for prices to come down"
Well, the market sure makes those people look smart to this point in time. But in response, I just ask these questions:
Why am I seeing folks sell after 2-3 years in these nice areas, often after major remodels? Why did the Bay Area rank at or near the top in the use of crazy loans of all types (especially Alt-A)? Who are the trade-up buyers going to be going forward? And perhaps most importantly, why didn't rents go up at the same rapid rates? I mean, you can get those same nice schools that way, right?
Anyways, we shall see. I enjoy renting in these nice areas for now.
One thing to keep in mind is that most people living in "rich" areas are not rich, they're just long-time owners with extremely low cost bases. [Yes, the plural of basis is bases -- I looked it up to make sure.] Nonetheless, they're not immune to a bad economy, high inflation, etc.
The high end will get hit, too; it'll just take longer.
Speaking as a Minneapolis resident who has followed the market here, I don't think you are going to see a 'bottom' because the low end stabilizes or sells out. The price issue has always been the core problem and it remains. Mid-market homes in the Twin Cities market are out of whack with incomes, plain and simple. That will adjust or there will be an anemic market for many years to come. There is simply no alternative - you cannot sell to people who cannot afford your product.
Cobbling together some odd data, Santa Clara county had 585K households in 2006 and approximately 1 in every 8 households was a millionaire (excluding primary residence) in 2005.
The other thing, the prime stuff in SF, Pacific Palisades, etc, isnt just in demand from US citizens. These are the truly international markets, so global wealth plays a role in the valuations in these places. And global wealth (thanks central banks!) has been exploding, so there is a wide pool of buyers for a truly limited supply of super prime real estate. (they truly arent making any more land in SF, although they are massing condos like complete dopes.) But Im talking about the real houses, the vics, not the high rise condos that look like air purifying systems from the now defunct Sharper Image.)
Yes, the high end will get drubbed too for many of the aforementioned reasons. It is just plain silly to believe that segments of the housing market are immune to significant price declines. Cycles are both supply/demand and psychologically driven. Basic oversupply pushes price down, but emotional and fear push it further than it should rationally go. We have a few years to go. In about mid 2010, there will be broad public disdain of real estate. Then, and only then, will we hit bottom. How long the bottom will extent is another discussion...
Groundhogday writes:
CR, you are assuming that the investors jumping in are making sound investments. But from what I've seen in many markets cap rates still do not pencil out for these REO's. If so, these are speculators (counting on future appreciation) not investors, and knife catchers to boot.
At those prices - identified in the white paper for Mpls - I'm not sure they need a lot of appreciation to make money.
Any other Minnies out there who can speak to the numbers (not just national generalities)? I ask because I live outstate & don't have good first hand knowledge of the Twin Cities market (except for a few neighborhoods where I have friends & family).
But if the low end is in the $150K-200K range then cap rates for investors in Mpls are again reasonable though but not super.
My daughter & her fiancee were looking at apartments in 'nordeast' (not 'mpls north'). Pretty average home in working class neighborhood - not too close to the river or St Anthony Neighborhood to be 'expensive'- I'm guessing from the paper those are now in the $150K-200K range too. My daughter was looking at paying $1500 rent and it was considered a GOOD DEAL (even w/ no utilities) - most others places comparable had much higher rents for the same number of bedrooms & baths. Subtracting some expenses & taxes - that puts it in the 10% cap rate range for a 'bargain' rental rate. At 10% those properties 'cash flow' even if leveraged - not enough to live off w/out another job but they don't negative cash flow.
If they had charges typical rents - they would do better than 10% easy. This landlord always rented below market so s/he could sort the applicants.
That's a big difference between Midwest & say NYC or Cali - rentals tend to run positive cash flow out here because prices are so much lower.
"Cobbling together some odd data, Santa Clara county had 585K households in 2006 and approximately 1 in every 8 households was a millionaire (excluding primary residence) in 2005."
And seven out of those eight live west of 17/880 .
As others have said, some towns like SF have neighborhoods so rarified that foreign demand might keep them afloat. But Silicon Valley won't benefit from that. The Valley's always been about money and work, and nothing more. I expect even Palo Alto to drop some, eventually. Woodside, maybe not so much.
These are the truly international markets, so global wealth plays a role in the valuations in these places.
More so than before?
Back in the early nineties rich Chinese were invading the Southland, either those fleeing the Hong Kong turnover or rich mainlanders exploring their newfound freedoms. Didn't push prices to these levels.
I always take the "rich foreigners" line with a grain of salt. There's hardly enough rich Americans to occupy any reasonably sized market, let alone imported bodies.
Why keep trying to rationalize something so obvious? That's what people do during a bubble.
Int'l national housing is starting to get crushed as well from excerpts I read. My guess is int'l people are already chasing the commodity train and fleeing real estate by the hedge fund loads.
TJ - Im one of the biggest bears on this board probably, and am not trying to rationalize the prices so much. Im just trying to understand whether I could be wrong that these prices have to come down, or at least remain fairly flat for about 20 years. It's really not that obvious that the truly prime real estate will fall that much. It could just become trophy RE for the people who are so rich that they couldnt care less what the price is. Dont forget, that paying the highest price in an auction is called the winners' curse, but this doesn't hold when the name of the game is "who can brag the most about what they paid for their SF mansion"
I take it with a BIG grain of salt. My brother in Orlando was telling me a year ago that Florida newspapers touted foreign investors as saviors for their housing market problems. How'd that work out so far?
Florida? Im not talking about Florida. That place is mostly trailer trash with posers on the coasts (no offense). And the high end stuff isnt prime, it's Florida prime, which is just Florida.
Orlando? Good grief, I wouldnt be caught dead there.
Depends upon what you consider "trophy RE". If you're talking $10M and up, well, maybe. That stuff is pretty disconnected because the patrons are so wealthy, but nevertheless values wax and wane along with other odd markets like high-end art. The hyper-rich aren't exactly as numerous as they are ubiquitous, though.
Anything else is still subject to the market, and there's an awful lot of non-trophy properties that were bid up to trophy-like prices.
Well, partly I just think that I'm a bit worn out by the whole RE market. Even though we are approaching three years from the peak, I'm still fighting the same battles, they've just shifted to a different front. First, no one believed I had any clue that we were in a world of hurt ahead, and just as soon as people start to accept that I wasn't a raving lunatic on housing, they are already jumping to the, oh, no, you are a different lunatic. It's a great time to buy now, look at how much prices are down. I guess some people are just hopelessly optimistic (or perhaps just plain idiots.) I've already been holding off buying a house since 2001, so this is a painful weight, but Im hoping in the end it will be worth it, stockpiling cash, and waiting until what I really want to live in isnt' priced so ridiculously. But Im not about to try to pay $2mil for a home that I think is worth $1mil. And there is no amount of peer pressure (or other half (nesting) pressure) that is going to make me do it. It's just such a painful waiting and I'm SO SICK of discussing real estate every where I go.
"That place is mostly trailer trash with posers on the coasts (no offense)."
I just looked at 3 acres for 20k. Mudboggers parked in front yards,cars on blocks. Yep,I fit that description. But get this. It backs against a 10k acre wildlife preserve. Can you say gun range ??? For a kid who grew up on a farm its fuckin heaven.
"And the high end stuff isnt prime, it's Florida prime, which is just Florida."
Agreed,a lot is wayyyyy overrated.
"Orlando? Good grief, I wouldnt be caught dead there."
Actually in the right areas you would be dead short of a M1A1.
"Can I change that all to "no comment"?"
(donning asbestos suit...)
Geoff | 06.02.08 - 7:53 pm | #
Orlando? Good grief, I wouldnt be caught dead there.
Orlando's median house price peaked at 265k in July '07; it's down to 210k as of April '08. Best part is back in 2001 the median price was ~90k. Kissimmee is where you don't want to find yourself. The town was created as a dormatory for Walt Disney World employees. But the housing speculation by completely clueless yokels probably matched the worst anywhere. I forecast a decline of 95% for the area.
"But the housing speculation by completely clueless yokels probably matched the worst anywhere. I forecast a decline of 95% for the area."
Anonymouse | 06.02.08 - 8:34 pm | #
Actually I think Celebration might hold the honor of the worst of the speculation. Also from what I see in the county FC records there were a TON of out of state people speculatin' down here. I have long said prices will fall back to 98/99/00 levels due to complete lack of wage increases. It's going to be an interesting snowbird season this year for sure !!
tj & the bear writes:
Yep, this is just a "temporary" bottom.
Yep. I'm beginning to feel like a broken record. Seasonally, we are about to exit the best selling months of the year. New buying demand traditionally exceeds new supply during the spring selling season. We then reach a more balanced market during the summer (new selling supply arrives at about the same rate as new buyers). But then there is the Fall and Winter. I can believe a 3 month bottom for some areas... but when the weather turns south, so will the prices.
Like many American cities, a lot of the newer supply of homes in the greater Twin Cities is owned by speculator-investors. Stories of real estate agents with 4-6 'investor properties' besides their family residence are common. Also, many middle-class and upper-middle-class people have home equity loans at 2005-2006 appraisals.
Geoff: "and just as soon as people start to accept that I wasn't a raving lunatic on housing, they are already jumping to the, oh, no, you are a different lunatic. It's a great time to buy now, look at how much prices are down."
LOL, I hear you. I am the tiresome RE doomer at our family gatherings. I have a BIL who is looking to buy in SF (because prices will never come down in SF proper) and a SIL who wants to buy an investment property to rent which is cash flow negative (but rents will go up and payments won't).
I asked my DH if I should send them some links or just keep my nose out, and he voted for letting them be (and it is his brother and sister). And they didn't ask me any questions about what my research had turned up, so I guess he is right.
But I don't really get it. If I were about spend a huge amount of money on housing, and someone told me it was a really bad time, I would listen and asked what they based their theory on. I wouldn't necessarily instantly buy their theory or anything, but I would want to look over their evidence and reasoning. I would be interested in finding out about exotic loans and foreclosures in the area I was about buy in.
Aw well. Another reminder that people are very different in how they approach the world.
"the low end REOs in Minneapolis are seeing a significant pickup in buyer interest, possibly from investors, as the lenders have started to price these homes aggressively. This suggests that prices are approaching a bottom in some of these low end areas."
This doesn't follow. I expect buyer interest to accelerate as prices fall, but these are knife catchers -- way too early in this market. Prices will approach a bottom after the bulk of foreclosures are dumped on the market. And as we know, foreclosures beget more foreclosures, so we have to wait patiently for the bottom.
Thanks to craigslist I have been able to sample the cap rates in the TC area. I see cap rates ranging from low single digits up to 10%, maybe 11%. Given that I am using asking rents, my numbers are probably a little on the high side of reality. The other thing to remember is that cap rates are supposed to use Net Rental income not gross rental income. So subtract maintenance, turnover, property taxes (association dues) and you get a much lower number.
I may be missing something, but when I run these cap rates through a full investment analysis with prices and rents increasing at inflation, you only get an unlevered IRR in the high single digits. The IRR curve doesn't really move up until you are able to get LTVs above 60%. I am not sure many good investors would be happy with the margin of safety in these assumptions to settle with a single digit return.
The property that I rent downtown needs to fall 40% from the last comp price to generate a positive return. A similar property fresh off of a bank balance sheet, is on the rental market. Asking rent is $4,000 for a 2,000+ sq ft, 3 bdrm, 3 bath downtown townhome. I pay $2,400 for a similar unit. HOA dues really hurt the investment value downtown.
The only things that are going to get us out of this mess are 1) time - in which case we are in for a very long recession, or 2) more people to sop up the demand.
Perhaps we should open up the H-1B visa program. One idea would be to let in an uncapped number of immigrants provided they work or study in fields related to alternative and domestic energy production.
Minnirenter,
Prices in - to use one instance - the Loring Green buildings have been falling steadily for about three years. But, as you say, the killer is the HOA and tax totals. You pay more just for those than your full payment in a non-downtown condo.
I'm very curious about the Carlyle (I see a slight downward creep there) and several of the new, unfilled buildings in the Guthrie area. Developers have to be in pain there.
H1-B exploits workers by keeping them tied to one employer. Increase Green Cards. Don't limit it to specific industries. We will need unskilled as well as skilled, like people to change the boomer's diapers in nursing homes. Your kids won't do it, trust me.
Ultimately where capital is mobile and labour is not, you have disequilibria.
"Geoff writes:
The other thing, the prime stuff in SF, Pacific Palisades, etc, isnt just in demand from US citizens."
This might be true, but, as someone who spent 35 years living the Palisades, I can't think of a single foreign person who bought a house near us. Not one. Lots of Hollywood money has come into the Palisades recently (changing the tenor of the place IMO), where big blocks of cash were needed for the escalating prices, but again, I can't recall a single foreign buyer. Of course, despite the beauty, it's not a particularly exotic place. Visit it on the 4th, it looks more like Mayberry than Beverly Hills.
tj & the bear writes:
Yep, this is just a "temporary" bottom.
Love the way you make guesses stated as facts. You don't KNOW and I don't KNOW. The correct grammatical form is "I think" or "I believe". At least I think that's it...
But I don't really get it. If I were about spend a huge amount of money on housing, and someone told me it was a really bad time, I would listen and asked what they based their theory on.
But you're crushing their dreams. It just doesn't matter how batshit crazy fantasy based those dreams are. I was at a family function a couple of months ago, and talking with my BIL and his BIL. BIL(cubed) had just bought a heavily discounted condo in Ocean City. He was kind of nervous and hoping that the heavy discount would make up for the fact that the place ALMOST cashflowed, keeping in mind the 3 month rental season. BIL otoh, was positivly gushing about how BIL(cubed) stood to make out like a bandit with all the instant equity.
Wally,
Observing the % of units sold in a building is helpful, but counting the number of lit windows in the evening is really telling. The rental market is fairly balanced downtown right now, but there is huge pent-up supply. Not only are individual investors stubborn, but the developers are sitting on a lot of unsold units. Rents need to fall across downtown if there are any hopes to fill those units with warm bodies. That does not bode well for a would-be investor.
From what I hear regional banks gave developers a pass last summer on their loans. Hoping that the 2008 spring season would be fine. As we all know, it wasn't. I doubt the banks will take that same attitude again this summer.
Carlyle asking rents are outrageous. Other high-end buildings have similar crazy rents targeted for a market segment that doesn't exist. Who is going to pay $4,000 in rent? Almost all of those people own. But how else do you cash flow a $600,000 unit with and HOA fee of $850 and 1.5% property taxes?
Prices will fall more when the owners capitulate. The interesting analysis is figuring out when that will occur.
Lionel - PP isnt probably a good example. I havent lived in the LA area for years and forget the names of the nice places. Maybe RPV was closer to what Im aiming for. Not sure how much foreign money goes into those places, but it's more likely to end up in the coastal cosmopolitan areas of cities.
MinniRenter - this is the kind of stuff Ive been telling my parents, who keep bugging me about how well one of their friends has done investing with "this guy" the past few years. I finally beat it out of them with a stick (I guess they took said stick and beat it out of her) but anyway, she has been piling $50k at a time into a private NJ apartment trust (REIT). Now, what you just mentioned above is the kind of scenario Ive been warning them about. For a while, I only knew the investment was real estate, but when I heard it was very illiquid, that kind of narrowed it down. There is basically very little chance to get her money out, and in the next year, a lot of the cash flow she depends on (this funds her retirement spending) could dry up. AND on top of it, she'll have no access to capital.
You can only warn people so many times. At least my parents know that Ive set them up ok, even if they are making more conservative returns. But I begged them not to join up with this woman. They are only starting to worry for her.
Geoff,
I heard a similar story from a retiree I bumped into on a golf course. He went in with a partner who was building strip malls. He would use the cashflows from one complex to obtain the loan on the next. A rise in vacancies or a tenant default and the whole structure comes down.
They will probably lose what they put in, but it is really the lender's problem.
If you really are seeing cap rates (net rental income, not gross) at 8%, then perhaps some patches have hit bottom. I would agree that at face value these are not pure speculators.
I just haven't seen anything close to 8% anywhere I look (even using gross rental income), hence my doubts.
First let's assume that rents and home prices will eventually realign. Then we might also assume that basic supply and demand relationships will lower housing costs overall due to the rather large vacant inventory out there (I saw your earlier thread disputing a rather high estimate, but even your estimate for vacant housing is high). The conclusion I reach is the rents are quite likely to fall in most markets (how far, tougher question). Consequently, a cap rate of 8% (net) is still likely to be knifecatching in most areas. Even under the best conditions I would look for 10% minimum on a residential property due to the management hassle involved.
China Dismisses `Hard Landing' Risk From Faltering U.S. Growth
By Li Yanping
Enlarge Image/Details
June 3 (Bloomberg) -- China's central bank dismissed predictions that exports will collapse because of the U.S. economic slump, signaling it may allow further gains in the yuan.
Some think drastically weakening external demand may lead the economy to a hard landing and that we should loosen policies,'' the bank's financial research institute said in a report e-mailed to Bloomberg News yesterday. Analysis of exports should be objective andnot exaggerated,'' it said, adding that a ``drastic'' slowdown in shipments won't come soon.
To-Do:
Learn idiom for "whocoodanode?" in Chinese.
Noticed that the "Total Inventory" X-axis price ranges yielded a nice Y bell-shaped curve for Y for the Twin Cities. Would like to see the Orange County stats with price ranges that yield a similar shape. The OC price ranges aren't granular and low-end enough to provide a similar comparison IMO.
CR,
Thanks for coming to the defense of speculators/investors. I am curious about some of these comments. If you invest in a property are you not allowed to expect/hope that appreciation might be a component of your total return or if you do does that automatically damn you as a speculator and strip you of the investor label? Gotta love these guys here that have all the answers.
A real estate bubble is not a house bubble but rather a land bubble. A house after-all is replaceable for costs that did not rise as much as land. So it makes sense that the low end increased faster than the high end.
For example take two identical lots right next to each other. One has a gorgeous 4 bedroom house and the other has a tear down.
Before the bubble the lots are both worth $100K and the houses $50K and $300K for totals of $150K and $400K. After the bubble the lots have tripled in price to $300K. The house values might have increased by only 20% to $60K and $360 for total prices of $360K and $660K. So the cheap house increased by 140% whereas the expensive house increased by only 120%.
There are other effects such as subprime lending but the basic cause is likely that land increased faster than the house's replacement value.
Now for some real world facts. Our company manages about 700 SFH's on behalf of investors in the Phoenix MSA. Since say around 2003 we have not seen rental rates vary more than a few pennies one way or the other. Keep in mind that most of our rentals are in the areas experiencing the highest foreclosure rates. Currently, you can buy a post 2000 construction home for around $125K (1700 SF) put down 20% and cash flow, after management expenses, PITI payments and loading for 10% vacancy and reasonable maintenance, around $300 per month.
You assume that foreclosure equals flooded rental market but forget that the banks don't rent the property while it's in foreclosure. And here's the big surprise. Most of the homes that are selling are going to owner occupants, not investors.
Just one more thought that you can all talk over. Pulte just came on the market in one of the depressed suburbs with a 1600 SF product priced at $105,000. The only thing I can make of that is that they're just trying to move the land so they can get the carrying costs behind them. I don't think they can be making a dime off the product.
Addressing the issue of price distribution being skewed downward by foreclosures and short sales, with "traditional sales market" not having seen such large price decreases, I note that here in the northwest suburbs of Chicago, sales unit volume is down 55% to 75% relative to 2005, and I get the distinct impression (I just don't have time to do a rigorous analysis) that the fraction of that sales volume accounted for by mid- and high-range homes is much smaller than in previous years.
I suspect that in the middle and upper price ranges, sellers are still in denial and holding out for prices they'll never get, so only a very small number of sales are being made in those ranges, and those to buyers who think the slightly reduced prices are a bargain.
Someone above commented that it seemed banks had given builders a pass last year, hoping the market would recover by this year. It certainly looks like that here, too. A lot of very expensive spec homes have been on the market for a year or more -- vacant. How much longer can they wait for the second coming?
Since sales volume for more expensive homes has been so low, it's hardly relevant that some sales are perhaps still being made at prices down only a few percent from last year. That just masks the fact that to clear the market prices will need to fall much lower, and that as more and more sellers become unable to hold out any longer, they will.
Regarding Tom Lindmark's comment above on rental rates not declining much:
Here in the northwest suburbs of Chicago asking rents seem to have fallen little from last year. But nearly all the high-end rentals that were on the MLS last year are still there. This raises the question whether, if you ask $3000/mo for a 2500 sqft luxury townhome, but no one rents it, one should consider the effective rental rate to be the fantasized $3000/mo or the actual income of $0/mo.
After I sold my home last year, I rented a nice 3-bed, 2-1/2 bath townhome for $1950/mo after deciding two gorgeous alternatives asking $3000/mo just didn't justify an additional $12,000 per year. Next month I'm moving into one of those places for $1900/mo. Having gotten mortgage payment statements from the landlady, I know she bought long enough ago, with a large enough down payment, that she's about breaking even at that rate -- I suspect most of her competition couldn't. (BTW, the home went un-rented for the entire year.)
The property that I rent downtown needs to fall 40% from the last comp price to generate a positive return. A similar property fresh off of a bank balance sheet, is on the rental market. Asking rent is $4,000 for a 2,000+ sq ft, 3 bdrm, 3 bath downtown townhome. I pay $2,400 for a similar unit. HOA dues really hurt the investment value downtown.
MinniRenter | 06.02.08 - 9:26 pm | #
M/R - Thanks for your input. I have always thought downtown Mpls was silly - you confirmed it for me. Downtown Chicago - I can understand. Same with NYC, San Fran & the like. Downtown Mpls? Not so much - better than downtown Des Moines but not much better. Just my personal opinion.
FWIW my kids were looking up in nordeast somewhere between Jax's & Mayslack's. Can't remember the actual addy.
The rents they showed me were in the $1,500 to $1,800 range with no HOAs (all were whole houses or dups) but they were going to have to pay utilities... she said the one she really liked was 3BR 1500-2000 sq ft. Pets okay. Small yard. Homey feel if your definition of a home is 'old house'.
I know the area - I'm guessing a lot of those older places can't go for more than $200K. Bubble times they went for more - sure - not now.
And there would be maintenance cost but not outrageous unless you rent the place out to barbarians who trash it.
And taxes.
But I can easily see caps in the 10% range on property like that IF you can get the right price when you buy. Looks to me like it has to be under $200K up there. Prices appear to be getting there & probably getting even better IN THAT part of town anyway.
Downtown though is like CRs article suggested - high priced property isn't falling in price anywhere near as fast as low priced... that was his point. That the low priced areas might not fall a lot more because the cap rates will prop them up. That isn't true in the high cost areas - like you suggested, they have a long way to go before they even cash flow.
FWIW - Asians in particular have had an impact on high end real estate. I'd say that the Four Seasons Apartments in SF are more than 50% Asian owned. About the same percentage at Coal Harbour in Vancouver. Had dinner here in HK last night with a friend whose family has lots of property in HK and elsewhere and she told me that they were starting to sniff around in SF. I told her to not even begin to do any serious looking for at least a year.....
FWIW - A home on the Peak here in Hong Kong sold last week for HK$57,000 psf. That's about US$7,300 psf. The home was just over 5,000 sq. ft. Makes SF look cheap even at current levels.....
CR - You've postulated for while now that the high end homes would time-lag the fall in prices for the low end. Although that makes a simple kind of sense it doesn't show in the various Case Shiller curves - the phase of high end spike (and drop from it) are the same. So I would suggest that the simple logic is incorrect. No instantaneous thoughts on the subject - other than the obvious (but not very helpful) one that although asking prices may take longer to drop in the high end markets the actual selling prices (which is what Case Shiller actually measures) do not. More thinking necessary.
One needs only to look back at the last housing bust to form a good guesstimate on what will happen this time around. Back then, home prices at the low end dropped by a much higher percentage than at the higher end. As already suggested above, a big reason for this is because buyers' interest shifts to nicer neighborhoods as prices continue to fall. The lower-end-priced homes, which are usually in less desirable areas, then get creamed. The 6.2% spread cited in this article isn't wide enough to call anything other than a short-term bottom.
Unlike the last bust, this time we have a major credit bubble simultaneously deflating. Interested buyers may not be able to get credit. What happens when supply greatly exceeds demand (hurt by tight credit) even for higher-end homes? Prices drop!
Your story is like looking in a mirror. I'm the real estate doomer of my family, been sitting on the sidelines here in the Boston area since 2003 despite wicked nesting pressures (three of 'em, three years and under - yikes!). My wife and I don't have a problem paying what we would consider good money for a reasonable house, but to pay good money for a piece of crap depreciating in value by the minute, no way. And though prices have dropped here and pressures seem to be mounting, there was a mild pop in sales recently and prices are still way too high. Getting so tired of waiting..... Not to mention the snarks of those who bought 15 years ago or are still guzzling NAR kookaid.
So tired of waiting!!!! Hang in there. Our day will come?
Pitch
I would imagine that many metropolitan areas have a similar price curve for low, middle and high. Would be interested to know a little more about the data. Were the low priced homes always low end homes, or are the low priced homes originally higher priced homes that have been steeply discounted by banks/lenders to sell. My guess is that it is primarily the former, although I would be interested to know if anybody has data supporting that.
If it is the former, then it is more antedocatal evidence that "there was a systematic process of marketing inferior mortgage products to financially unsophisticated families/individuals". That should trouble anybody.
Is it possible that we are in the midst of the busy selling season for existing homes and banks have recently sharply cut prices?
We know that inventory is coming back to banks at a very rapid clip right now. As we progress towards the slower Fall/Winter selling season and inventory keeps rising, is it possible that we might continue to see substantial additional price declines as banks get anxious to reduce a rising REO level?
CR, you are assuming that the investors jumping in are making sound investments. But from what I've seen in many markets cap rates still do not pencil out for these REO's. If so, these are speculators (counting on future appreciation) not investors, and knife catchers to boot.
My guess is that it will take several dead cat bounces to drive the speculators completely out of the residential real estate market. Too many people still believe that sometime in the near future home prices will rapidly shoot up again.
Yep, this is just a "temporary" bottom.
People in general are simply too well versed in the idea that real estate and stocks are always good investments. The caveat "past performance is no indication of future returns" will hold new meaning for many in the not-so-distant future.
CR,
As you loan reset chart indicates, the option arm wave is equal to the subprime wave, yet hasn't hit yet.
Is the distribution of the option arms more toward the higher end?
In other words are the defaults on the higher end homes coming?
Reminds me of that "bottom" I caught when Cisco dropped 20% during the dot com crash.
I think we'll only know when there's a recovery in any segment of the market when it overcorrects past the point of affordability and the meme "housing always goes up" dies a timely death.
If the higher end will default later, that will put another wave of pressure on the prices of lower end homes.....since the same money gets more house.
If you want to live in the next house you buy, wait for the option arms to start exploding.
I am also in the "several dead cat bounces" camp.
If investors buy these low end properties in the heavy REO neighborhoods, the market for rentals will be flooded and rents will go down, putting the properties back under water.
In slightly better neighborhoods the previously frozen out, prospective owner-occupiers are now looking. But as the price reductions hit better and better neighborhoods, the propsective owner-occupiers will stop looking in the worse neighborhoods, thus starting another cycle of decline from the bottom.
I do not believe in any bottom at the current stage of the cycle regardless of the price (unless it is zero). If some parts of the marked reached bottom now, it would be the quickest recovery in history after such a massive run-up. What about those future foreclosed inventory of the homedebtors that are currently getting sunk underwater by the REOs that set the low price comps?
I'm beginning to think that the end result of this bubble is that we will have a significantly wider price spread between the best and worst that real estate has to offer. Looking at CA and the Bay Area in particular, it just strikes me that the best locations are going to become the domain of a more homogeneous rich populous, and the diversity of SF in particular will be further driven out, or left to those who can barely afford to even rent there.
We saw the junk in the outer areas of the east bay go up 200% and in all likeliness, it could lose all that run up, but the 150% rise in the city looks like it could stick.
My reasoning behind this is that it fits perfectly in line with the rich have gotten richer at a super fast pace in the past few years, and for them, their standard of living isnt suffering even if they choose to buy the pricey property at today's prices. And most of that stuff was owned by the super rich already, so they come out ahead on asset appreciation anyway, most likely, for the majority.
I just have this eerie feeling that it would take a much much worse recession than even the bad one we are going to get, before the real quality RE really goes down in price by anything noticeable (as in, say 2000 prices for SF vs 2008)
But everything Ive seen so far tells me that the rich and powerful will find a way to keep themselves that way, and that the status quo will be preserved.
Hell, even Krugman doesnt get it anymore. He's talking about how inflation is no big deal. What he fails to appreciate, and what Ritholz nailed him for today, is that unless the prices of things that make up the majority of HH budgets decline for an extended period of time, our standard of living has been scaled back dramatically, and is set for more sccaling back since a recession and the job losses that come with it will hit tons of pocketbooks, either directly or through weaker wage growth.
Oy, ok, Im really in rant mode today, sorry. But seriously, what do you think it will take to really bring those prices back to realistic territory, since they sure dont pencil out as rental investments? My only hope is that once the option/arm neg-arm timebomb hits, we'll start to see that many of the newer "owners" of those properties can't really afford them. But we've got another year to go on that I guess. Granted the CA economy should be completely in the gutter by that point, but who knows what we'll be forced to bail out as taxpayers in the next year.
Grrrrrrrrrrrrrrrrrrrr......
I watch our old Bay Area neighborhood pretty closely, where houses still sell in the range of $1.25M to $2.25M. They haven't dropped in the past year or so, and they are definitely up about 10-15% from the time we sold in 2005.
But what I see indicates that disstress is increasing at least as fast as prices are. Houses being put on the market are, more often than not, houses that sold previously in the past 3 years or so. For example, one is listed for sale today for $2.2M which sold about 1 1/2 years ago for $2.1M. Of course, when I ask RE agents why they are selling so soon, they are cagey, but occasionally an agent will admit that the owner cannot afford the house.
Not a good sign, IMHO. The pool of optimists is dwindling. So is the pool of foolish lenders.
Well the lower end is, IMHO where the credit crunch is most likely to be ameleoriated by prospective investors looking for propeties that will cashflow. There are a couple of basic reasons for this:
1.)The smaller unit price makes this possible. This means that there is a class of people who can buy them at low or zero LTVs. These are people who have better credit than those who would live in the properties.
2.)The rental/sales mix is more conducive to renting the properties out at lower prices. The traditional advantages of owner/occupation are such that the rental market is dominated by those who would have have difficulty qualifying to buy a house.
Geoff,
Interesting, I wondered about the same scenario myself (that the disparity between rich and the rest of us might be evidenced in the high end housing not falling so much). In fact I wrote an email to CR long ago asking his thoughts on that.
But I don't think that's the way it will work out. The high end houses were bought by people who cannot afford them, in too many cases. They just haven't run into financing problems quite yet. Also, the high end depends on the trade-up buyers, just like all the other levels of the house market along the way. And the high end is getting its legs cut out from under it right now.
My guess is that it will take several dead cat bounces to drive the speculators completely out of the residential real estate market. Too many people still believe that sometime in the near future home prices will rapidly shoot up again.
There was a lot of "dumb money" to be made in real estate over the last few years-- people who ignored how pricey RE was, kept the faith, and kept buying into 2001, 2002.
It worked for them once and, like most of us, they mistake their luck for hard work/perseverance/determination/ whatever.
It will take some time for this dumb money to run out...
I think that subprime and the low end were the first to get whacked. But as we now see the similar delinquency cycle build up in Alt-A its quite likely the dispersion will start to shift towards the higher priced homes. And then as Prime goes the dispersion will shift once again.
Median, average and such metrics play a role but in housing where location, vintage, quality, etc all play a role it pays to be more specific.
poszi writes:
I do not believe in any bottom at the current stage of the cycle regardless of the price (unless it is zero).
This has happened in parts of Bloomington at the start of the year. Cases were flippers/fraudsters who ran immediately. REO auctions won by the city for minimum bid but total costs after razing the house and turning into parks closer to 30K.
As part of the city risk management the houses were professionally appraised and demo costs put up for tender. A city official accompanied the appraiser and bid at auction. They only won when they were the only bidder - these houses were so bad (mortgage fraud) that the banks didn't even compete to try and recover any money. The city didn't want abandoned property.
Buy one house, get a second one FREE!
Local Developer Offers 2 Homes For Price Of 1 - San Diego News Story - KGTV San Diego
Re: The low price range is less than $176,486 (current dollars).
Does this suggest that we should be pricing in Euros?
ShortCourage - Im with you on this, but becoming more cynical over the past few years, and more inclined to believe that the natural course of events will find a way to be avoided, with the expected reality manipulated so as to avoid casualties amongst those in power. But I do understand well that there is a broad chunk of questionable financing out there that has yet to roll over into payment reality. And from all Ive read on the no-doc, interest only, neg-am situation, that's a pretty big wave that will crest directly onto the CA shore more than anywhere else. I do agree that the upper end is undercut completely by fewer tradeups being possible, but that clearly alone is not enough to move that high end back to more realistic valuations. I mean, you'd be paying 2% cap rates on a lot of the stuff, when 4% is typically a very aggressive price estimate for residential in general. And the difference between those two rates is 100%, meaning a 100% overvaluation possible if you buy now, meaning, your value could fall 50% if that market does come back to earth. Who in the world would buy now in those areas? Is is just that we'll have a long long catch up game before incomes and financing and rents rise enough to justify those prices? That means I'll have to wait much longer than I want to wait before I can buy what I want in SF. And that blows.
I'll just try to be patient and see how it turns out, but it's really annoying now to still have to hear from the RE people in SF that the prices aren't going to go down. It's like reliving the arguments I had with them a few years ago that there was a general bubble. They didnt believe that, but for now, they cling to the SF is different hopes, and pray that they are right. I of course, pray for a different outcome. But their smugness makes me ill to the core.
Continuing the East Bay thread...
Checked out local homes for sale via Redfin this AM and saw that the "percent distressed" offerings ranged from 10% in Moraga to 70% in Clayton. I didn't check inner-city Oakland today, but in recent past it looked like at least 75% were "distressed."
In a macro-economic sense nationwide stats such as are being reported here have some value; but the intensely local nature of residential real estate that affects how we live is much more "interesting." States, municipalities and neighborhoods will see greatly varying impacts.
For the last two years in Sacramento, the media price has risen in the spring, and fallen the rest of the year. There is a lot of seasonality in RE, both in inventory and pricing.
Groundhogday, there is a difference between speculators and investors. I've worked the numbers, and some of the deals (on low end REOs) have cap rates close to 8%. That is investor numbers (the ROI is much higher).
This is only in some areas - and it's because the banks are being flooded with REOs in those areas. Maybe the price will fall further - but I don't think we can call these people "speculators" - at least not like the last several years.
Of course rents might collapse too - but I'm trying to figure out the most likely scenario.
Average Joe, yes. One of the reasons I'm interested in these distribution charts is I expect the distribution to change over time. The low end will probably always be the worse, but I expect the curve will flatten out some over time - as the Option ARMs and HELOC defaults hit the middle and upper ranges.
Best to all.
CR... do the more severe price drops at the bottom of the market eventually work their way up the price ladder as people are no longer able to build equity and stop looking to move up?
i.e. is some of the effect delayed at the higher end, or is up-market housing immune to the worst of the price declines?
Geoff, I get that same story here, that prices aren't going to come down in Los Gatos (where I eventually want to buy back in) or high-end towns like Los Altos, Palo Alto, Mountain View, etc...
"There's too much money in those towns"
"Everybody wants into the areas with good schools"
"Google and Apple are creating too many rich home-shoppers for prices to come down"
Well, the market sure makes those people look smart to this point in time. But in response, I just ask these questions:
Why am I seeing folks sell after 2-3 years in these nice areas, often after major remodels? Why did the Bay Area rank at or near the top in the use of crazy loans of all types (especially Alt-A)? Who are the trade-up buyers going to be going forward? And perhaps most importantly, why didn't rents go up at the same rapid rates? I mean, you can get those same nice schools that way, right?
Anyways, we shall see. I enjoy renting in these nice areas for now.
Geoff,
One thing to keep in mind is that most people living in "rich" areas are not rich, they're just long-time owners with extremely low cost bases. [Yes, the plural of basis is bases -- I looked it up to make sure.] Nonetheless, they're not immune to a bad economy, high inflation, etc.
The high end will get hit, too; it'll just take longer.
Speaking as a Minneapolis resident who has followed the market here, I don't think you are going to see a 'bottom' because the low end stabilizes or sells out. The price issue has always been the core problem and it remains. Mid-market homes in the Twin Cities market are out of whack with incomes, plain and simple. That will adjust or there will be an anemic market for many years to come. There is simply no alternative - you cannot sell to people who cannot afford your product.
Cobbling together some odd data, Santa Clara county had 585K households in 2006 and approximately 1 in every 8 households was a millionaire (excluding primary residence) in 2005.
The other thing, the prime stuff in SF, Pacific Palisades, etc, isnt just in demand from US citizens. These are the truly international markets, so global wealth plays a role in the valuations in these places. And global wealth (thanks central banks!) has been exploding, so there is a wide pool of buyers for a truly limited supply of super prime real estate. (they truly arent making any more land in SF, although they are massing condos like complete dopes.) But Im talking about the real houses, the vics, not the high rise condos that look like air purifying systems from the now defunct Sharper Image.)
Yes, the high end will get drubbed too for many of the aforementioned reasons. It is just plain silly to believe that segments of the housing market are immune to significant price declines. Cycles are both supply/demand and psychologically driven. Basic oversupply pushes price down, but emotional and fear push it further than it should rationally go. We have a few years to go. In about mid 2010, there will be broad public disdain of real estate. Then, and only then, will we hit bottom. How long the bottom will extent is another discussion...
Groundhogday writes:
CR, you are assuming that the investors jumping in are making sound investments. But from what I've seen in many markets cap rates still do not pencil out for these REO's. If so, these are speculators (counting on future appreciation) not investors, and knife catchers to boot.
At those prices - identified in the white paper for Mpls - I'm not sure they need a lot of appreciation to make money.
Any other Minnies out there who can speak to the numbers (not just national generalities)? I ask because I live outstate & don't have good first hand knowledge of the Twin Cities market (except for a few neighborhoods where I have friends & family).
But if the low end is in the $150K-200K range then cap rates for investors in Mpls are again reasonable though but not super.
My daughter & her fiancee were looking at apartments in 'nordeast' (not 'mpls north'). Pretty average home in working class neighborhood - not too close to the river or St Anthony Neighborhood to be 'expensive'- I'm guessing from the paper those are now in the $150K-200K range too. My daughter was looking at paying $1500 rent and it was considered a GOOD DEAL (even w/ no utilities) - most others places comparable had much higher rents for the same number of bedrooms & baths. Subtracting some expenses & taxes - that puts it in the 10% cap rate range for a 'bargain' rental rate. At 10% those properties 'cash flow' even if leveraged - not enough to live off w/out another job but they don't negative cash flow.
If they had charges typical rents - they would do better than 10% easy. This landlord always rented below market so s/he could sort the applicants.
That's a big difference between Midwest & say NYC or Cali - rentals tend to run positive cash flow out here because prices are so much lower.
"Cobbling together some odd data, Santa Clara county had 585K households in 2006 and approximately 1 in every 8 households was a millionaire (excluding primary residence) in 2005."
And seven out of those eight live west of 17/880
.
As others have said, some towns like SF have neighborhoods so rarified that foreign demand might keep them afloat. But Silicon Valley won't benefit from that. The Valley's always been about money and work, and nothing more. I expect even Palo Alto to drop some, eventually. Woodside, maybe not so much.
Sorry -- meant to say, seven out of eight of the millionaires. See what an afternoon QAing bad software will do to you?
These are the truly international markets, so global wealth plays a role in the valuations in these places.
More so than before?
Back in the early nineties rich Chinese were invading the Southland, either those fleeing the Hong Kong turnover or rich mainlanders exploring their newfound freedoms. Didn't push prices to these levels.
I always take the "rich foreigners" line with a grain of salt. There's hardly enough rich Americans to occupy any reasonably sized market, let alone imported bodies.
Why keep trying to rationalize something so obvious? That's what people do during a bubble.
Int'l national housing is starting to get crushed as well from excerpts I read. My guess is int'l people are already chasing the commodity train and fleeing real estate by the hedge fund loads.
TJ - Im one of the biggest bears on this board probably, and am not trying to rationalize the prices so much. Im just trying to understand whether I could be wrong that these prices have to come down, or at least remain fairly flat for about 20 years. It's really not that obvious that the truly prime real estate will fall that much. It could just become trophy RE for the people who are so rich that they couldnt care less what the price is. Dont forget, that paying the highest price in an auction is called the winners' curse, but this doesn't hold when the name of the game is "who can brag the most about what they paid for their SF mansion"
tj & the bear,
I take it with a BIG grain of salt. My brother in Orlando was telling me a year ago that Florida newspapers touted foreign investors as saviors for their housing market problems. How'd that work out so far?
Florida? Im not talking about Florida. That place is mostly trailer trash with posers on the coasts (no offense). And the high end stuff isnt prime, it's Florida prime, which is just Florida.
Orlando? Good grief, I wouldnt be caught dead there.
Can I change that all to "no comment"?
(donning asbestos suit...)
I wasn't talking about Florida originally either (was talking about South Bay Area, Silicon Valley).
Just sayin, everybody everywhere comes up with these same rationales...
Geoff,
Depends upon what you consider "trophy RE". If you're talking $10M and up, well, maybe. That stuff is pretty disconnected because the patrons are so wealthy, but nevertheless values wax and wane along with other odd markets like high-end art. The hyper-rich aren't exactly as numerous as they are ubiquitous, though.
Anything else is still subject to the market, and there's an awful lot of non-trophy properties that were bid up to trophy-like prices.
I'll hazard a guess that $500K is not considered a starter home in MN.
Well, partly I just think that I'm a bit worn out by the whole RE market. Even though we are approaching three years from the peak, I'm still fighting the same battles, they've just shifted to a different front. First, no one believed I had any clue that we were in a world of hurt ahead, and just as soon as people start to accept that I wasn't a raving lunatic on housing, they are already jumping to the, oh, no, you are a different lunatic. It's a great time to buy now, look at how much prices are down. I guess some people are just hopelessly optimistic (or perhaps just plain idiots.) I've already been holding off buying a house since 2001, so this is a painful weight, but Im hoping in the end it will be worth it, stockpiling cash, and waiting until what I really want to live in isnt' priced so ridiculously. But Im not about to try to pay $2mil for a home that I think is worth $1mil. And there is no amount of peer pressure (or other half (nesting) pressure) that is going to make me do it. It's just such a painful waiting and I'm SO SICK of discussing real estate every where I go.
Go Red Wings!!
mike2 writes:
I'll hazard a guess that $500K is not considered a starter home in MN.
mike2 | 06.02.08 - 8:02 pm | #
Starter LAKE home maybe...
[OT] So, are you all ready to start trading GLD options tomorrow?
Let the fun begi
"That place is mostly trailer trash with posers on the coasts (no offense)."
I just looked at 3 acres for 20k. Mudboggers parked in front yards,cars on blocks. Yep,I fit that description. But get this. It backs against a 10k acre wildlife preserve. Can you say gun range ??? For a kid who grew up on a farm its fuckin heaven.
"And the high end stuff isnt prime, it's Florida prime, which is just Florida."
Agreed,a lot is wayyyyy overrated.
"Orlando? Good grief, I wouldnt be caught dead there."
Actually in the right areas you would be dead short of a M1A1.
"Can I change that all to "no comment"?"
(donning asbestos suit...)
Geoff | 06.02.08 - 7:53 pm | #
Hey,at least I admit I am full blown hilljack.
Chris
Orlando? Good grief, I wouldnt be caught dead there.
Orlando's median house price peaked at 265k in July '07; it's down to 210k as of April '08. Best part is back in 2001 the median price was ~90k. Kissimmee is where you don't want to find yourself. The town was created as a dormatory for Walt Disney World employees. But the housing speculation by completely clueless yokels probably matched the worst anywhere. I forecast a decline of 95% for the area.
CR,
Maybe in your newsletter you can define some investor metrics and what to look for when looking for investment homes.
"But the housing speculation by completely clueless yokels probably matched the worst anywhere. I forecast a decline of 95% for the area."
Anonymouse | 06.02.08 - 8:34 pm | #
Actually I think Celebration might hold the honor of the worst of the speculation. Also from what I see in the county FC records there were a TON of out of state people speculatin' down here. I have long said prices will fall back to 98/99/00 levels due to complete lack of wage increases. It's going to be an interesting snowbird season this year for sure !!
Chris
It's just such a painful waiting and I'm SO SICK of discussing real estate every where I go.
That's how they wear you down Geoff.
tj & the bear writes:
Yep, this is just a "temporary" bottom.
Yep. I'm beginning to feel like a broken record. Seasonally, we are about to exit the best selling months of the year. New buying demand traditionally exceeds new supply during the spring selling season. We then reach a more balanced market during the summer (new selling supply arrives at about the same rate as new buyers). But then there is the Fall and Winter. I can believe a 3 month bottom for some areas... but when the weather turns south, so will the prices.
Got Popcorn?
Neil
Like many American cities, a lot of the newer supply of homes in the greater Twin Cities is owned by speculator-investors. Stories of real estate agents with 4-6 'investor properties' besides their family residence are common. Also, many middle-class and upper-middle-class people have home equity loans at 2005-2006 appraisals.
Geoff: "and just as soon as people start to accept that I wasn't a raving lunatic on housing, they are already jumping to the, oh, no, you are a different lunatic. It's a great time to buy now, look at how much prices are down."
LOL, I hear you. I am the tiresome RE doomer at our family gatherings. I have a BIL who is looking to buy in SF (because prices will never come down in SF proper) and a SIL who wants to buy an investment property to rent which is cash flow negative (but rents will go up and payments won't).
I asked my DH if I should send them some links or just keep my nose out, and he voted for letting them be (and it is his brother and sister). And they didn't ask me any questions about what my research had turned up, so I guess he is right.
But I don't really get it. If I were about spend a huge amount of money on housing, and someone told me it was a really bad time, I would listen and asked what they based their theory on. I wouldn't necessarily instantly buy their theory or anything, but I would want to look over their evidence and reasoning. I would be interested in finding out about exotic loans and foreclosures in the area I was about buy in.
Aw well. Another reminder that people are very different in how they approach the world.
"the low end REOs in Minneapolis are seeing a significant pickup in buyer interest, possibly from investors, as the lenders have started to price these homes aggressively. This suggests that prices are approaching a bottom in some of these low end areas."
This doesn't follow. I expect buyer interest to accelerate as prices fall, but these are knife catchers -- way too early in this market. Prices will approach a bottom after the bulk of foreclosures are dumped on the market. And as we know, foreclosures beget more foreclosures, so we have to wait patiently for the bottom.
and I'm SO SICK of discussing real estate every where I go.
Except HERE, of course!
Geoff,
This'll cheer you up:
It's not so easy being less rich
OT
Anyone know how the treasury auctions went over today.
Thanks
sbarrkum
-Dryfly- Re TC Cap Rates
Thanks to craigslist I have been able to sample the cap rates in the TC area. I see cap rates ranging from low single digits up to 10%, maybe 11%. Given that I am using asking rents, my numbers are probably a little on the high side of reality. The other thing to remember is that cap rates are supposed to use Net Rental income not gross rental income. So subtract maintenance, turnover, property taxes (association dues) and you get a much lower number.
I may be missing something, but when I run these cap rates through a full investment analysis with prices and rents increasing at inflation, you only get an unlevered IRR in the high single digits. The IRR curve doesn't really move up until you are able to get LTVs above 60%. I am not sure many good investors would be happy with the margin of safety in these assumptions to settle with a single digit return.
The property that I rent downtown needs to fall 40% from the last comp price to generate a positive return. A similar property fresh off of a bank balance sheet, is on the rental market. Asking rent is $4,000 for a 2,000+ sq ft, 3 bdrm, 3 bath downtown townhome. I pay $2,400 for a similar unit. HOA dues really hurt the investment value downtown.
The only things that are going to get us out of this mess are 1) time - in which case we are in for a very long recession, or 2) more people to sop up the demand.
Perhaps we should open up the H-1B visa program. One idea would be to let in an uncapped number of immigrants provided they work or study in fields related to alternative and domestic energy production.
People's thoughts?
Minnirenter,
Prices in - to use one instance - the Loring Green buildings have been falling steadily for about three years. But, as you say, the killer is the HOA and tax totals. You pay more just for those than your full payment in a non-downtown condo.
I'm very curious about the Carlyle (I see a slight downward creep there) and several of the new, unfilled buildings in the Guthrie area. Developers have to be in pain there.
People's thoughts?
bsneath | 06.02.08 - 9:31 pm |
H1-B exploits workers by keeping them tied to one employer. Increase Green Cards. Don't limit it to specific industries. We will need unskilled as well as skilled, like people to change the boomer's diapers in nursing homes. Your kids won't do it, trust me.
Ultimately where capital is mobile and labour is not, you have disequilibria.
"Geoff writes:
The other thing, the prime stuff in SF, Pacific Palisades, etc, isnt just in demand from US citizens."
This might be true, but, as someone who spent 35 years living the Palisades, I can't think of a single foreign person who bought a house near us. Not one. Lots of Hollywood money has come into the Palisades recently (changing the tenor of the place IMO), where big blocks of cash were needed for the escalating prices, but again, I can't recall a single foreign buyer. Of course, despite the beauty, it's not a particularly exotic place. Visit it on the 4th, it looks more like Mayberry than Beverly Hills.
tj & the bear writes:
Yep, this is just a "temporary" bottom.
Love the way you make guesses stated as facts. You don't KNOW and I don't KNOW. The correct grammatical form is "I think" or "I believe". At least I think that's it...
But I don't really get it. If I were about spend a huge amount of money on housing, and someone told me it was a really bad time, I would listen and asked what they based their theory on.
But you're crushing their dreams. It just doesn't matter how batshit crazy fantasy based those dreams are. I was at a family function a couple of months ago, and talking with my BIL and his BIL. BIL(cubed) had just bought a heavily discounted condo in Ocean City. He was kind of nervous and hoping that the heavy discount would make up for the fact that the place ALMOST cashflowed, keeping in mind the 3 month rental season. BIL otoh, was positivly gushing about how BIL(cubed) stood to make out like a bandit with all the instant equity.
Wally,
Observing the % of units sold in a building is helpful, but counting the number of lit windows in the evening is really telling. The rental market is fairly balanced downtown right now, but there is huge pent-up supply. Not only are individual investors stubborn, but the developers are sitting on a lot of unsold units. Rents need to fall across downtown if there are any hopes to fill those units with warm bodies. That does not bode well for a would-be investor.
From what I hear regional banks gave developers a pass last summer on their loans. Hoping that the 2008 spring season would be fine. As we all know, it wasn't. I doubt the banks will take that same attitude again this summer.
Carlyle asking rents are outrageous. Other high-end buildings have similar crazy rents targeted for a market segment that doesn't exist. Who is going to pay $4,000 in rent? Almost all of those people own. But how else do you cash flow a $600,000 unit with and HOA fee of $850 and 1.5% property taxes?
Prices will fall more when the owners capitulate. The interesting analysis is figuring out when that will occur.
Lionel - PP isnt probably a good example. I havent lived in the LA area for years and forget the names of the nice places. Maybe RPV was closer to what Im aiming for. Not sure how much foreign money goes into those places, but it's more likely to end up in the coastal cosmopolitan areas of cities.
MinniRenter - this is the kind of stuff Ive been telling my parents, who keep bugging me about how well one of their friends has done investing with "this guy" the past few years. I finally beat it out of them with a stick (I guess they took said stick and beat it out of her) but anyway, she has been piling $50k at a time into a private NJ apartment trust (REIT). Now, what you just mentioned above is the kind of scenario Ive been warning them about. For a while, I only knew the investment was real estate, but when I heard it was very illiquid, that kind of narrowed it down. There is basically very little chance to get her money out, and in the next year, a lot of the cash flow she depends on (this funds her retirement spending) could dry up. AND on top of it, she'll have no access to capital.
You can only warn people so many times. At least my parents know that Ive set them up ok, even if they are making more conservative returns. But I begged them not to join up with this woman. They are only starting to worry for her.
Geoff,
I heard a similar story from a retiree I bumped into on a golf course. He went in with a partner who was building strip malls. He would use the cashflows from one complex to obtain the loan on the next. A rise in vacancies or a tenant default and the whole structure comes down.
They will probably lose what they put in, but it is really the lender's problem.
AOTC,
You're continuing, willful ignorance of fundamentals is always refreshing. Please go back to watching paint dry.
If you really are seeing cap rates (net rental income, not gross) at 8%, then perhaps some patches have hit bottom. I would agree that at face value these are not pure speculators.
I just haven't seen anything close to 8% anywhere I look (even using gross rental income), hence my doubts.
First let's assume that rents and home prices will eventually realign. Then we might also assume that basic supply and demand relationships will lower housing costs overall due to the rather large vacant inventory out there (I saw your earlier thread disputing a rather high estimate, but even your estimate for vacant housing is high). The conclusion I reach is the rents are quite likely to fall in most markets (how far, tougher question). Consequently, a cap rate of 8% (net) is still likely to be knifecatching in most areas. Even under the best conditions I would look for 10% minimum on a residential property due to the management hassle involved.
Kinda OT, kinda not:
China Dismisses `Hard Landing' Risk From Faltering U.S. Growth - Bloomberg.com
China Dismisses `Hard Landing' Risk From Faltering U.S. Growth
By Li Yanping
Enlarge Image/Details
June 3 (Bloomberg) -- China's central bank dismissed predictions that exports will collapse because of the U.S. economic slump, signaling it may allow further gains in the yuan.
Some think drastically weakening external demand may lead the economy to a hard landing and that we should loosen policies,'' the bank's financial research institute said in a report e-mailed to Bloomberg News yesterday. Analysis of exports should be objective andnot exaggerated,'' it said, adding that a ``drastic'' slowdown in shipments won't come soon.
To-Do:
Learn idiom for "whocoodanode?" in Chinese.
Noticed that the "Total Inventory" X-axis price ranges yielded a nice Y bell-shaped curve for Y for the Twin Cities. Would like to see the Orange County stats with price ranges that yield a similar shape. The OC price ranges aren't granular and low-end enough to provide a similar comparison IMO.
byzantine_ruins writes: China Dismisses `Hard Landing' Risk From Faltering U.S. Growth
Shorter: "it's contained"...
We call the child Goerge W.
CR,
Thanks for coming to the defense of speculators/investors. I am curious about some of these comments. If you invest in a property are you not allowed to expect/hope that appreciation might be a component of your total return or if you do does that automatically damn you as a speculator and strip you of the investor label? Gotta love these guys here that have all the answers.
George
Tom,
Expecting returns in a flooded rental market is akin is expecting sex at a XXX movie.
A real estate bubble is not a house bubble but rather a land bubble. A house after-all is replaceable for costs that did not rise as much as land. So it makes sense that the low end increased faster than the high end.
For example take two identical lots right next to each other. One has a gorgeous 4 bedroom house and the other has a tear down.
Before the bubble the lots are both worth $100K and the houses $50K and $300K for totals of $150K and $400K. After the bubble the lots have tripled in price to $300K. The house values might have increased by only 20% to $60K and $360 for total prices of $360K and $660K. So the cheap house increased by 140% whereas the expensive house increased by only 120%.
There are other effects such as subprime lending but the basic cause is likely that land increased faster than the house's replacement value.
Elvis,
LOL, cute comment.
Now for some real world facts. Our company manages about 700 SFH's on behalf of investors in the Phoenix MSA. Since say around 2003 we have not seen rental rates vary more than a few pennies one way or the other. Keep in mind that most of our rentals are in the areas experiencing the highest foreclosure rates. Currently, you can buy a post 2000 construction home for around $125K (1700 SF) put down 20% and cash flow, after management expenses, PITI payments and loading for 10% vacancy and reasonable maintenance, around $300 per month.
You assume that foreclosure equals flooded rental market but forget that the banks don't rent the property while it's in foreclosure. And here's the big surprise. Most of the homes that are selling are going to owner occupants, not investors.
Just one more thought that you can all talk over. Pulte just came on the market in one of the depressed suburbs with a 1600 SF product priced at $105,000. The only thing I can make of that is that they're just trying to move the land so they can get the carrying costs behind them. I don't think they can be making a dime off the product.
Addressing the issue of price distribution being skewed downward by foreclosures and short sales, with "traditional sales market" not having seen such large price decreases, I note that here in the northwest suburbs of Chicago, sales unit volume is down 55% to 75% relative to 2005, and I get the distinct impression (I just don't have time to do a rigorous analysis) that the fraction of that sales volume accounted for by mid- and high-range homes is much smaller than in previous years.
I suspect that in the middle and upper price ranges, sellers are still in denial and holding out for prices they'll never get, so only a very small number of sales are being made in those ranges, and those to buyers who think the slightly reduced prices are a bargain.
Someone above commented that it seemed banks had given builders a pass last year, hoping the market would recover by this year. It certainly looks like that here, too. A lot of very expensive spec homes have been on the market for a year or more -- vacant. How much longer can they wait for the second coming?
Since sales volume for more expensive homes has been so low, it's hardly relevant that some sales are perhaps still being made at prices down only a few percent from last year. That just masks the fact that to clear the market prices will need to fall much lower, and that as more and more sellers become unable to hold out any longer, they will.
Regarding Tom Lindmark's comment above on rental rates not declining much:
Here in the northwest suburbs of Chicago asking rents seem to have fallen little from last year. But nearly all the high-end rentals that were on the MLS last year are still there. This raises the question whether, if you ask $3000/mo for a 2500 sqft luxury townhome, but no one rents it, one should consider the effective rental rate to be the fantasized $3000/mo or the actual income of $0/mo.
After I sold my home last year, I rented a nice 3-bed, 2-1/2 bath townhome for $1950/mo after deciding two gorgeous alternatives asking $3000/mo just didn't justify an additional $12,000 per year. Next month I'm moving into one of those places for $1900/mo. Having gotten mortgage payment statements from the landlady, I know she bought long enough ago, with a large enough down payment, that she's about breaking even at that rate -- I suspect most of her competition couldn't. (BTW, the home went un-rented for the entire year.)
The property that I rent downtown needs to fall 40% from the last comp price to generate a positive return. A similar property fresh off of a bank balance sheet, is on the rental market. Asking rent is $4,000 for a 2,000+ sq ft, 3 bdrm, 3 bath downtown townhome. I pay $2,400 for a similar unit. HOA dues really hurt the investment value downtown.
MinniRenter | 06.02.08 - 9:26 pm | #
M/R - Thanks for your input. I have always thought downtown Mpls was silly - you confirmed it for me. Downtown Chicago - I can understand. Same with NYC, San Fran & the like. Downtown Mpls? Not so much - better than downtown Des Moines but not much better. Just my personal opinion.
FWIW my kids were looking up in nordeast somewhere between Jax's & Mayslack's. Can't remember the actual addy.
The rents they showed me were in the $1,500 to $1,800 range with no HOAs (all were whole houses or dups) but they were going to have to pay utilities... she said the one she really liked was 3BR 1500-2000 sq ft. Pets okay. Small yard. Homey feel if your definition of a home is 'old house'.
I know the area - I'm guessing a lot of those older places can't go for more than $200K. Bubble times they went for more - sure - not now.
And there would be maintenance cost but not outrageous unless you rent the place out to barbarians who trash it.
And taxes.
But I can easily see caps in the 10% range on property like that IF you can get the right price when you buy. Looks to me like it has to be under $200K up there. Prices appear to be getting there & probably getting even better IN THAT part of town anyway.
Downtown though is like CRs article suggested - high priced property isn't falling in price anywhere near as fast as low priced... that was his point. That the low priced areas might not fall a lot more because the cap rates will prop them up. That isn't true in the high cost areas - like you suggested, they have a long way to go before they even cash flow.
FWIW - Asians in particular have had an impact on high end real estate. I'd say that the Four Seasons Apartments in SF are more than 50% Asian owned. About the same percentage at Coal Harbour in Vancouver. Had dinner here in HK last night with a friend whose family has lots of property in HK and elsewhere and she told me that they were starting to sniff around in SF. I told her to not even begin to do any serious looking for at least a year.....
FWIW - A home on the Peak here in Hong Kong sold last week for HK$57,000 psf. That's about US$7,300 psf. The home was just over 5,000 sq. ft. Makes SF look cheap even at current levels.....
CR - You've postulated for while now that the high end homes would time-lag the fall in prices for the low end. Although that makes a simple kind of sense it doesn't show in the various Case Shiller curves - the phase of high end spike (and drop from it) are the same. So I would suggest that the simple logic is incorrect. No instantaneous thoughts on the subject - other than the obvious (but not very helpful) one that although asking prices may take longer to drop in the high end markets the actual selling prices (which is what Case Shiller actually measures) do not. More thinking necessary.
Looking at that index graph, I think it is the the long breath before the plunge... bring on the crash!
One needs only to look back at the last housing bust to form a good guesstimate on what will happen this time around. Back then, home prices at the low end dropped by a much higher percentage than at the higher end. As already suggested above, a big reason for this is because buyers' interest shifts to nicer neighborhoods as prices continue to fall. The lower-end-priced homes, which are usually in less desirable areas, then get creamed. The 6.2% spread cited in this article isn't wide enough to call anything other than a short-term bottom.
Unlike the last bust, this time we have a major credit bubble simultaneously deflating. Interested buyers may not be able to get credit. What happens when supply greatly exceeds demand (hurt by tight credit) even for higher-end homes? Prices drop!
Geoff -
Your story is like looking in a mirror. I'm the real estate doomer of my family, been sitting on the sidelines here in the Boston area since 2003 despite wicked nesting pressures (three of 'em, three years and under - yikes!). My wife and I don't have a problem paying what we would consider good money for a reasonable house, but to pay good money for a piece of crap depreciating in value by the minute, no way. And though prices have dropped here and pressures seem to be mounting, there was a mild pop in sales recently and prices are still way too high. Getting so tired of waiting..... Not to mention the snarks of those who bought 15 years ago or are still guzzling NAR kookaid.
So tired of waiting!!!! Hang in there. Our day will come?
Pitch
I would imagine that many metropolitan areas have a similar price curve for low, middle and high. Would be interested to know a little more about the data. Were the low priced homes always low end homes, or are the low priced homes originally higher priced homes that have been steeply discounted by banks/lenders to sell. My guess is that it is primarily the former, although I would be interested to know if anybody has data supporting that.
If it is the former, then it is more antedocatal evidence that "there was a systematic process of marketing inferior mortgage products to financially unsophisticated families/individuals". That should trouble anybody.
Awesome blog. You wouldn't happen to have a nice plot of the "Real Case-Shiller Index" for the three price ranges for Boston, would you?
Most of the media plots of the CS data show year-on-year percentage change.