Friday, May 13, 2005

"A Crash Is Merely A Paper Loss": CNN

CNN Money is working overtime to assuage fears of a housing bust. "Don't panic just yet, though. Any pop is unlikely to be nearly as severe as what can happen in the stock market. Local markets can drop 10 to 20 percent, but that's about as bad as it usually gets."

"And a crash is merely a paper loss as long as you don't need to move. Meanwhile, you get a roof over your head and, with a little luck, nice neighbors and good public schools too."

The table at the bottom of the page records just how much some areas are up the past five years.


At 1:53 PM, Blogger deb said...

"Don't look for many outright losers JUST YET"

Wow, that's quite an admission of what they think is coming in the future.

At 1:55 PM, Anonymous Jim in Venice said...

Chances are, those who somehow managed to buy something in LA the past few months don't have very nice neighbors or a good school distrcit - unless they paid over a million.

More likely, they live in a tiny, run down condo in the scarier areas of LA unified school district.

At 1:56 PM, Anonymous Anonymous said...

CNN mentioned 10-20% declines.

That's it, I now fully expect 50% declines in most bubble cities.

So those nice $500K homes will be priced at $250K. But hey, don't worry, cause it's just a "paper loss" of $250K.

So when prices are up, you can borrow against them cause they are real, but when they are down, it's not real. BS.

At 3:19 PM, Anonymous Anonymous said...

Is that report by the same firm that Robert Shiller is associated with?

Look at all the California cities, they all show triple digit gaines, highest in the nation.

Look at this quote from the article:

"In Los Angeles, for example, just 5 percent of homes sell at prices affordable to a median-income local family."

California is going to fall hard!

At 3:23 PM, Anonymous Anonymous said...

I sold a condo in Chicago Land back in 1999. I rented for a year, I got cold feet because I was in IT was anticipating a Tech Jobs recession. I was right. But even back in 2000 condos were by my estimate at least 20% over valued. Now it is something like 50-60%. At todays price even a 20% percent over-valuation could bankrupt lots of folks of they have to sell because they literally have no equity. If all you put down was 5-10% you may have to cough up an extra 40-50 thousand just to walk away from a morgage.

At 3:32 PM, Anonymous Anonymous said...

In other CNN news.

Two marines suffered minor non-life theatening wounds in Iraq when a car bomb exploded as their Hummer passed by. Both soldiers lost an arm and a leg a piece.......

At 3:35 PM, Anonymous Anonymous said...

Case was quoted in the Boston Herald when they focused on dropping median prices in Dorchester/ Roxbury (the poorest parts of Boston proper). He argued that this data was meaningless. So I think he is not in the housing bear camp. I wonder what stakes he has in the RE bubble?

Shiller of course has recognized the bubble. But the firm CSW does not necessarily echo his view.

At 3:35 PM, Anonymous Anonymous said...

"It's only a paper loss"

No dumb ass, it's real money (as in a downpayment). If you put 20% down and the matket drops 20%, you just lost $80,000 on a $400K home. No you're not moving, but you may as well have put $80,000 in cash into a wheel barrel and lit it up with diesel fuel (same effect). It just blows my mind when they say its just a paper loss. I guess when these late commers (i.e. morons) pay into their mortgages for the next 10 years just to break even, they can say "see, it was just on paper". Brilliant, just brilliant!!

Where's the Tylenol!!

At 4:09 PM, Blogger goleta said...

I'm moving away from California and will just rent a $400K house with $1,000 rent. So many people have bought more homes than they need and they have to compete with each other to get tenants. Life is good to be a renter!

When the bubble pops, the loss in property value is just the beginning. All RE related jobs created in the past 3 years will be lost and the state will see a property tax shortfall. Unemployment and crime rates will both up. How is California going to handle those problems?

At 4:20 PM, Anonymous Anonymous said...

Renting a $400K home for $1000/ does happen.

Personally, I rent half a "$750K" home for $1250.

Great to be a renter.

At 4:23 PM, Blogger Thomas said...

I'd have to chase down a few bits of vaguely-remembered research , but my understanding is that crime rates don't necessarily go up dramatically during recessions. You might think that's counterintuitive, but for the past few decades, the vast bulk of crime comes from an underclass that is chronically underemployed to begin with; the economic cycle really doesn't affect those classes' employment levels all that much. Socialization has more to do with criminal activity than employment status. "Falling Down" scenarios are rare. (Although I do think that when the poop hits the fan in LA, that movie will have a very familiar feel.)

Seems to me that a real estate correction would mostly hurt workers connected to the real estate industry, who (aside from maybe a few seasonal construction workers) generally aren't known for high rates of criminal activity, even when unemployed.

We're not talking about Jean Valjean the mortgage broker finding himself unemployed and desperately stealing a loaf of bread. I'm having a very hard time imagining the nice lady who passes out pens and asks me if I want to sell my house knocking over a liquor store.

At 4:41 PM, Blogger Ben Jones said...

4:20 Anon,
I can assure you it happens. I rent a beautiful house with a double lot that is probably appraised at $475k. I pay $950/mo and some utilities.

At 4:43 PM, Anonymous Anonymous said...

While I believe the RE bubble will burst in six months or so, that's why I sold my house and lock in $500K profit, but I am not sure whether the market will crash completely or just decline over time. Actually I believe, more and more, they market, after initial rapid decline, will depreciate at a pace around 5% per year, and it might takes 5-10 years to justify the underline fundamental.
Maybe we should not have very high expectations that the housing market will crash completely and try to set up an better financial plan in case the market just decline gradually

At 4:55 PM, Anonymous Anonymous said...

Something Americans and people in other bubble-economy countries seem to have forgotten is that stock, bonds and real-estate are not the only form of investment. The most important investment of all is education, followed by private business equity. I think all the standard passive investments are going to do poorly over the next 20 years, and the real opportunities will be for people who take advantage of cheap rents and cheap borrowing costs to start up productive businesses. If you are too old to start a business, then I think you should resign yourself to making under 2% a year after inflation for the next 20 years.

At 5:55 PM, Anonymous jumpin' jehosefat said...

That CNN article is doing a major disservice by ignoring the concept of leverage.

Gee, the coming drop won't be as bad as the stock market. Housing may only drop 10-20%. That's comforting.

Maximum equity leverage for most people is 50%. And the avg Joe isn't leveraged at all. So if his stocks drop 20%, he's down 20%.

But the avg Joe (particularly those who have bought recently) is leveraged up the wazoo with real estate. The biggest down payments are now about 10%. Many put down 3-5% or nothing at all.

With a 10% down payment, a 10% drop in home price wipes out your equity. A 20% drop means you will have to bring a big check to the closing if you want to sell (remember the sales commission too.)

Sure, you can "wait it out". But many won't be able to. Plus, many are now using financing methods that create greater and greater burdens as time goes by. "Waiting it out" won't be an option for those people. If/when the market turns, an awful lot of people will start feeling the pressure, even if they aren't yet in trouble. That theme song from Jaws will be playing in a lot of heads in the months and years ahead.

Let's hope these folks have "nice neighbors", as the story says. They may need to move in with them.

At 5:59 PM, Anonymous guynoir said...

(Renting a $400K home for $1000/ does happen. Personally, I rent half a "$750K" home for $1250.)

I rent a $2.2M home for $4,250. California is in trouble.

At 7:01 PM, Blogger deb said...

We rent a $1.2M home for $2800.

Just thought I'd chime in as a realtor. A good rule of thumb is that it costs about 7.5-7.75% to sell a house with all the closing costs (comm, title policy, escrow fees, etc, etc). It has been cheaper lately because realtors have been discounting commissions so much. When the market is down, a good realtor is actually more likely to get a full commission. It takes a long time and a lot of marketing to sell a home in a down market. Not to mention that a seller must offer a buyer's agent a full commission. In the early 90's it was not uncommon to see sellers paying a bonus of an additional 1% to a selling agent (on top of the 3% selling + 3% listing).

A 10% down is nearly wiped out by selling in a FLAT market.

At 7:18 PM, Anonymous Anonymous said...

3:35 Anon:

What is this "20% down" you speak of?

At 8:19 PM, Anonymous moses said...

(What is this "20% down" you speak of?)

My son, back in Anno Dominus 1999 and before, most homedwellers were commanded to place vast sums of gold in the hands of moneylenders in exchange for the keys to their domains.

There was much distrust afoot in the land and the moneylenders believed in the sacredness of what they called "the down payment."

But a fresh breeze blew in from the Far East and with it oceans of credits. The moneylenders were put at ease and shared this largesse with as many homedwellers as they could find via late-eve television messages.

The homedwellers rejoiced. Now the piles of gold could be used instead for the purchase of ritualistic amulets: granite cooking surfaces, SubZero food preservation devices, carriages known as Hummers, and brightly-lit information screens as wide as a camel's back.

It was a time of milk and honey. Oh, how we wish for those days again.

At 10:38 PM, Anonymous Anonymous said...

Just sold a two bedrooms condo three weeks ago, the initial purpose is for investment because it closes to UC Irvine.

I made $280K in just a little over 4 years, however, I feel very guilty the way that I make money, the buyers are a young couple at their early twenty, their combine income is at $60K. they need to use IO and zero down methods to afford this house. I think they don’t understand they have signed a contract that they need to work for their entirely life, At the moment when I saw them, I even told me wife I will like to turn down the offer. This is just so unfair to these young people.
I hate to see when the RE bubble burst,this young couple will end up with tears.

At 11:40 PM, Anonymous Anonymous said...

For Case over at Wellesley College to not see this as a bubble is ludicrous. He's one of the top experts in the country and I remember his work during the Boston area bubble run-up of 1983 to 1986

Basically in Boston and 50 miles outwards, a house bought in 1982 would have doubled in price late 1986. However if you a renter and left the country in 1986 for 10 years and came back to the Boston region around 1996 to buy a single family house - you would got just about the same deal as you have gotten in 1986, a prices stayed flat for almost 10 yrs, with some portion of that period having severe price corrections

From 1990 to 1992- single family housing prices actually dipped 5 to 15% with suburban condos dipping as much as 10 to 40%. In fact many suburban condos were de facto unsaleable for 3 to 5 yrs.

The problem today with any comparable downturn is that the lending standards are much lower, so even a 10% downward ajustment would be very challenging. 20 yrs back lending standards were much higher with nearly every buyer needing 15 to 30k in cash to buy almost any house after 1985. ARMs were all but nonexistent and home equity loans were far fewer

Few considered walking away because the amount invested was considerable - unlike for example the Houston crash of the mid-80's where many had zero down VA and FHA loans

The continued runup of the last 24 months has probably all but ruled out the potential for a crash avoiding "soft landing". Had things leveled off in 2003, I would say it was possible, however it is not likely, at least in this region.

The similarities with the tech bubble of 1997 to 2000 are amazing, with many buyers of houses today just mindlessly parroting their expectation of 10% plus appreciation/yr into 2006 and many yrs beyond

In other words, humans natural inclination to expect past patterns to repeat as future patterns (no matter how irrational) - which might be some kind of DNA thing

At 11:40 PM, Anonymous Anonymous said...

Worst case scenario is foreclosure for this young couple. Which is not too bad in a non-recourse state like California.

Credit goes down the drain though.

At 3:43 AM, Anonymous Anonymous said...

CNN would probably say... Their credit has gone down, but only on paper.

At 5:42 AM, Anonymous Anonymous said...

also... this article forgot to mention... "and, oh, yeah, you also have your health."

At 5:45 AM, Anonymous Anonymous said...

The mainstream media also said during the stock market bubble not too worry... because it's just a paper loss. Same BS, different bubble.

At 6:46 AM, Anonymous Anonymous said...

..and a bubble is merely a paper gain!

EXCEPT that in this case people have refinanced, taking that paper gain and making it a real one. The money, in some cases, has gone for consumer consumption leaving the owner no richer in dollar terms, but with a larger debt. SO, when/if the downturn comes, the owners who were previously in fine shape financially are now in a world of hurt.

We've had it so good for so long that people have lost their fear of being in debt. But then, our leaders have set the tone with comments like 'deficits don't matter'.

At 7:44 AM, Anonymous randy said...

I don't know the answer to this, but maybe someone here does.

Let's say someone buys a home for $500K. They put no money down and end up with a $500K interest-only mortgage. The mortgage holder, I assume, considers the home itself as collateral for the $500K loan.

Then the home increases in value to $600K. The owner extracts that $100K via a cash-out refi. So the bank has now lent out $600K and is using the full value of the home as collateral.

Then the market turns and the home becomes worth $500K again. Obviously, the owner is upside down on his mortgage. And the collateral no longer covers the totality of the loan outstanding.

In this case, do lenders ever demand that owners pony up the difference b/w what the collateral is worth and the loan amount? Or do they just keep carrying the loan as is even though the collateral no longer supports the loan?

With business loans, there are frequently clauses that stipulate that a valuation change in collateral requires the borrower to make the lender whole or risk default. Is there any circumstance where that could happen to residential borrowers?

At 7:59 AM, Blogger desi dude said...


this is no legal assistance. check with a lawyer

the owner is not held liable for 100K as long he is making payments.

once he decides to sell, he is liable for the difference in loan amount and the sale price(assuming it is aloss).

in states like CA, if there were no cash out refi, owner could hand over the keys to the bank and walk away. credit is damned , but thats it.

if there is cash out refi, bank can go after his other assets/cash (except IRA/401K) for the difference.

At 11:00 AM, Anonymous Anonymous said...

Desi dude or someone else.
Isn't that true that ,if owner got foreclosed or turn the key to the bank he may be obligated to pay taxes on the difference. In your example $600k minus$500k = $100k is treated by IRS as a some form of gift and is taxed.
I am not sure of that, but I have read about it in Californian Mr Robert Campbell's "Timing the Real Estate" book mentioned on this blog many times.
If that true this is another form of financial trap in RE bubble.
MIke C., Chicago. Renting RE Investor.

At 11:33 AM, Blogger deb said...

Absolutely, people who did a short sale (sold for less than the loan balance) can and do receive a 1099. They received the $100k in the above example and didn't have to pay it back, so it is taxable. The only problem is, they already spent it.

They can also be pursued for a deficiency judgement if it was not a "purchase money" (ie: refi, cash out, 2nd) loan. This is not done often, but with what's coming we may see more of it.

At 6:01 PM, Anonymous Anonymous said...

I am renting 750. on a 350,000 home. wow what a great time to rent and I dont even have to bother about bubbling home prices.


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