Thursday, May 05, 2005

Dallas, Haven't We Been Here Before?

The intrepid Danielle DiMartino makes it worth the sign up time at the DallasNews site. Here's a few bits of the Q&A she did today. "Over half of the new mortgages originated in the second half of 2004 were ARMs with lock-ups of less than three years. You'll have a LOT of inventory flooding the market in a matter of years. I wouldn't want to be one of the people coming in behind these sellers as those with 5 and 7 year locks rush for the exits all at once."

"So-called 'investors' are buying up properties in McKinney and doing cash-outs simultaneously with the original closings, all based on fraudulent appraisals, yes, this kind of stuff even goes on in non-bubbly Dallas, the damage all of these criminals are inflicting on communities is abhorrent...the same fraud that's going on on a national level is taking place here..Local foreclosures are three-quarters of the way to their 1989 record. Inventories have been north of 6 months for a long time, we are definitely in a buyer's market and the credit standards are even worse today than what they were in the years leading up to the S&L crisis."

"When the wheel stops spinning, we're going to be sitting on a massive mountain of debt..debt loads could easily bring deflation on in a slowing environment and the Fed knows it, that's why they would tell you, strictly off the record, that they HAVE to keep raising rates so that they have the needed ammo when the time comes to fight deflation."

38 Comments:

At 12:12 PM, Blogger John Law said...

shouldn't the dallas area be good with all that oil money around?

 
At 12:19 PM, Anonymous Anonymous said...

Sounds an alwful lot like what's happening in San Diego. Most of last years loans were I/O ARM's. Of course everyone with the loan is smart because they can sell in 2 years and make a profit. Yah right!

 
At 12:36 PM, Anonymous Anonymous said...

My niece and dr husband got the rights to purchase a new townhome in SD for 600K. He just started his career, so not a whole lot of downpayment. And they are going in using ARM and IO. The house won't be ready till december. I hope they are not in negative equity situation by the time they move in.

 
At 12:39 PM, Anonymous Anonymous said...

Yeah, but you will be able to go the malls around Dallas and look at all the young babes who's boyfriends and husbands payed for their boob jobs with a refi on over valued real estate.

 
At 12:55 PM, Blogger Ben Jones said...

John,
Texas capped most of their oil wells in the 80's. Not as much oil money there anymore.

I remember going to the Galleria in big D around 1987. It was a ghost mall.

Anons in SD,
Plese update us as to what happens.

 
At 1:36 PM, Anonymous Anonymous said...

Ben,

Will update you situation in SD.

General question. If they are going in with zero/very low down and IO loan, and their home value is $50K less than what they had agreed to pay, what happen to them in terms of bank loan? Will the bank require them to pay the $50K difference and still have zero equity? what happen if they back out?

I've asked them to check with their bank right now but just want to hear from others.

 
At 1:41 PM, Blogger Ben Jones said...

(Will the bank require them to pay the $50K difference and still have zero equity? what happen if they back out?)

Readers have commented on that quite a bit and it's complicated. Check back and maybe some of our resident experts can help you with those questions.

 
At 2:05 PM, Blogger deb said...

This comment has been removed by a blog administrator.

 
At 2:05 PM, Blogger deb said...

Hopefully, they had the good sense to make their purchase contingent on the unit appraising for the purchase price. They will have to do an appraisal as part of the loan process. If the unit does not appraise the lender will make a loan based on the appraised value, not on the agreed upon purchase price.

 
At 2:11 PM, Anonymous Anonymous said...

Hi Deb,

The unit will not be completed until December. So, if they had agreed to pay $600K now, and to find out the appraised value in December is $50K less. Situation like this can happen.

 
At 2:14 PM, Blogger deb said...

I would bet that the contract is contingent on the unit appraising. If they had a realtor representing them, I am sure it is. (We do bring some value sometimes, ya know). Otherwise, if the contract was written by the builder, they better get out the magnifying glass and read the fine print.

 
At 2:28 PM, Anonymous Anonymous said...

hi Deb,

I know the fact is that the contract was written by the builder.

oh uh..too late. They already signed the paper 2 weeks ago.

 
At 2:45 PM, Anonymous Anonymous said...

Deb,

Is it just me or San Diego is starting to see a bit of a price roll back?

My friends are telling me their agent told them they can expect to get 5-10K less than a July 2004 comparable property.

The market has changed, according to their agent. "you have to price it right" (code speak for price it low) Are we really seeng the begining of the roll back here?

 
At 3:20 PM, Anonymous Rob said...

Good article

".........that they HAVE to keep raising rates so that they have the needed ammo when the time comes to fight deflation."

In a way that makes a lot of sense.

Kind of like eating fast so so you can stuff more down before the brain realizes that the stomach is full.

 
At 3:21 PM, Anonymous Roib said...

Oh God.

I studder when I type too.

 
At 3:46 PM, Blogger deb said...

I am up outside LA. Here's the run down on our recent market...

Apr-June 04: manic beyond belief
(this is when we sold, believing it had topped)
July-Dec: slowed markedly, prices even dipped down. inventory nearly quadrupled.
Jan-present: market heated up again. inventory dropped. not as manic as last year, but I think prices are slightly higher.

I posted yesterday, prices in the San Fernando Valley are up 3% (average) or 7% (median) since May '04 by the Board stats.

 
At 3:47 PM, Anonymous boulderbo said...

if the buyer had a mortgage contingency, then the buyer can be turned down for "insufficient collateral". most likely, the buyer of the townhouse has long since passed the date of the contingency, meaning that the earnest money went "hard" (non-refundable). your friend has the option of coming up with the difference in cash or walking away from the deposit. this is just the beginning of an enormous amount of hard luck stories.

 
At 4:05 PM, Anonymous Anonymous said...

"I posted yesterday, prices in the San Fernando Valley are up 3% (average) or 7% (median) since May '04 by the Board stats."

I'll parrot what deb said the other day: This kind of appreciation isn't exactly what the flippers have in mind. Hopefully they'll take their hyjinx elsewhere soon...

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

No profit from 7% annual increase and flippers are losing blood, which is a good sign.

 
At 4:24 PM, Anonymous Anonymous said...

Deb -

This sounds like a classic "double top". The smart money has left, and only the most marginal players getting in at this point, with vague echoes of last years "easy money" still ringing in their ears.

 
At 4:24 PM, Anonymous memphis said...

Re. your last quoted paragraph from the Dallas News - I can see the crash coming well enough, but hyperinflation or deflation seems to be the unending debate. This writer you quote is sure that the fed will "have to" keep raising interest rates to avoid a deflation catastrophe (otherwise known as a Great Depression), and lots of real estate/stock bears agree. On the other side, you have just as many bearish folk yelling that the Fed is going to have to return to an accomodating position due to mortal terror of popping the credit/real estate bubble and throwing us into a deep recession. What's an ordinary mortal to make of it all?

 
At 4:32 PM, Anonymous Anonymous said...

As a Realtor in the San Fernando Valley also, I agree with Deb's 3:46 post about the intensity from Jan to Jun 04, the slowing from Jul to Dec 04 and the renewed intensity from Jan 05 to present.

However i feel the values have increased a lot more than 3% and 7%. Based on the LA Times April 17 Real Estate section many if not most of communities in the San Fernando Valley showed year over year (Mar to Mar) gains in excess of 20%, which is closer to my observation.

 
At 4:47 PM, Blogger deb said...

Anon 4:32,

The market kind of topped out last year around May and really didn't go much higher.

From So Regional Assoc:
Avg price April 04 $532
Avg price Mar 05 $551

Yes, I know it's not quite a full year. Price increases were so huge from Jan-April though. The average went from 455-532 in just those 3 months.

Check the board stats. I just double checked it myself.

 
At 4:59 PM, Blogger deb said...

In fairness, the median has gone up more:

April 04: $430
Mar 05: $469

If someone can explain why the median has increased 9% while the average has increased only 3.5%, I'd love to hear it. In the past they have tracked more closely with each other. I'm thinking that the higher end softening could result in a median that is still moving up rapidly due to the pressure at the low end, while the soft upper end is tempering the average prices.

 
At 5:20 PM, Anonymous Anonymous said...

I agree with your theory about the median and average prices.

Do you think we will see a similar pattern - slowing from July to Dec? It seems difficult to predict considering how hot the market is right now.

Do you think this might be the last upward spike before we see the market turn?

I agree with most if not all of your posts. We may be the only Realtors out there that feel we are in a major bubble and overdue for a major correction.

Fellow SFV Realtor

 
At 5:21 PM, Anonymous Anonymous said...

That 5:20 post was meant for Deb.

 
At 5:33 PM, Blogger deb said...

With almost all buyers taking out ARMs and affordability at historic all time lows, I have to believe the end is near. I just don't see where the buyers can come from to keep this pyramid scheme running.

 
At 6:36 PM, Anonymous Anonymous said...

Memphis had the following ? earlier. Anybody know the answer

Re. your last quoted paragraph from the Dallas News - I can see the crash coming well enough, but hyperinflation or deflation seems to be the unending debate. This writer you quote is sure that the fed will "have to" keep raising interest rates to avoid a deflation catastrophe (otherwise known as a Great Depression), and lots of real estate/stock bears agree. On the other side, you have just as many bearish folk yelling that the Fed is going to have to return to an accomodating position due to mortal terror of popping the credit/real estate bubble and throwing us into a deep recession. What's an ordinary mortal to make of it all?

 
At 6:47 PM, Anonymous Anonymous said...

Heres an answer: the Fed isn't going to set the rate. China is going to set it for us.

GMAC just got reduced to junk status. What that means is that thousands of foreign investors just lost about 20% on their bonds if they want to sell them, which some foreign banks may have to due if their charter says "investment grade" only.

So... having just been burnt, Asian investors will no demand a higher yield on their investments or refuse to invest in the US at all. The yields they've been getting obviously don't cover the risk and thus it is time to hold cash or get a real risk premium.

The US is reliant on foreign investment to cover its trade and spending deficit. We can't live without foreign investment, at least not the way we are living now.

 
At 7:12 PM, Blogger Ben Jones said...

On the deflation, inflation question, my bet is for the big D. That's assuming we are at the end game of a fiat money/credit bubble.

The GM news was huge. The credit markets will bear watching closely near-term. Thanks for the great comments.

 
At 7:32 PM, Anonymous Memphis said...

Okay - so if we *have* to raise bond rates in order to retain foreign investment $$$, as the previous poster is arguing, then what happens when (not "if") employers fail to keep up? (That pesky global labor arbitage thing.) The U.S. labor force doesn't have any "pricing power".

Without wage inflation, your HELOC-maxed, cash-out maxed out home mortgager is going to have nowhere to go when his everyday expenses (food, utilities, fuel) start to spike at the same time that his adjustable starts getting ugly.

Maybe an even better question - who ends up occupying abandoned and foreclosed properties, if credit standards are tightening at the same time? People have to live somewhere, but they can't just default on the 300K mortgage and then rent down the street from Foreign Investor, Inc. for half what the old mortgage was...can they? Common sense says that would only worsten the crash, and Foreign Investor, Inc. wouldn't buy in the first place for just that reason - as more owners default, investment properties would continue to depreciate.

I think maybe I need to read up on the Great Depression of the '30s for ideas. I haven't yet come across any prognosticators who've taken the predicted crash to it's logical conclusion - the knitty gritty of what happens to all those defaulted homes *after* the bubble. We've got new bankruptcy laws in this country that will prevent defaulters from renting anything decent, much less buying again in the foreseeable future, as it's Chapter 13 for anyone who has $100/mo. left after a theoretical budget that in most urban areas will amount to penury. (Catch-22) Also can't imagine that the homes would look that attractive to big corporate, rich, or foreign owners in such an environment, either - no matter how cheap the fire sale, buy cheap, rent out cheap, and you feed the deflationary fire, don't you? But I'm probably missing something.

 
At 9:01 PM, Anonymous Anonymous said...

To the realtor gloating about 20% plus gains in LA times:

Actual number in actual LA times from last month is 17% year-over-year gains.

Almost all of gains coming from first six months of year-over-year period.

One third of ALL zip codes dropping over last six in LA.

Really screwed up cities are the ones that are gaining last six months (San Pedro>40%, Compton, several cities ending with "gardens" which is not good).

If trend continues, total LA area will have less than 10% gains year-over-year by June.

Don't hype the LA times numbers, just because you are a realtor, your time is better spent looking for a new line of work. I guess you can read up on selling foreclosures.

 
At 9:13 PM, Blogger deb said...

"Don't hype the LA times numbers, just because you are a realtor, your time is better spent looking for a new line of work. I guess you can read up on selling foreclosures"

I am not the realtor who was "gloating" (she/he wasn't), but I am a realtor, and I would think you would be thrilled to see a couple of realtors on this board discussing the possiblity of a serious downturn in the market. Maybe you should read the whole exchange between the other realtor and myself again.

Why the bad attitude? We are all in this together and we all bring our own experiences and viewpoint. In the end, the other agent and I were in total agreement.

 
At 9:21 PM, Anonymous Anonymous said...

OK, I see you are not gloating....I see the word "realtor" and I assume that nonsense will be spoken.......the realtor's association is a mafia, and no dissent is typically ever muttered out of their mouths as they tease ignorant people to buy the disguntingly overpriced realestate in the LA area.

Honestly, it is disgusting what you hear. When everything crashes and so many first time home owners are financially devastated, they should be held responsible (along with the FED and all the easy loan originators).

 
At 9:36 PM, Blogger deb said...

Anon 9:21,

You need to understand how hard it is for a realtor to see any other reality than the one we are fed everyday by our own professional organizations. You should be thrilled to see us here. Lighten up, you might even like some of us.

I learned from watching the 90's decline and how off base NAR, CAR and the SRAR (then the SFVBR) were. Luckily, I worked for Fred Sands. He spoke out honestly durning the downturn (anyone else remember Fred's famous letter?). He took a lot of grief from the industry for it, but he was right on.

 
At 10:55 PM, Anonymous San Diego said...

Hi, deb:
Thanks for all your posts. I am learning a lot from your exchange, and I am happy to see honest, independent realtors posting on this blog!
Just curious -- where can I find Fred Sand's "famous letter"? I'd love to take a look to see what he said back then and whether there are any similarities to today's situation.
Thanks.

 
At 6:14 AM, Blogger deb said...

I wish I had a copy.

At that time sellers were pricing their properties too high for the major change that had taken place in the market (this must have been 91-92). The market was glutted with overpriced listings. He sent a letter to all the Fred Sands listings telling them to drop their price or get their house off the market. The other RE brokerages had a fit. He was right. He knew the quickest way through it was to reduce the inventory and create some demand with lower prices.

I would love to know what Fred thinks of this market. Very smart man.

 
At 7:05 AM, Anonymous Anonymous said...

7:32 PM Memphis:

"...who ends up occupying abandoned and foreclosed properties, if credit standards are tightening at the same time?"

Your question reminds me of NYC from the 70s (when the city was near bankrupt) up until around 1993. I've rented in the East Village of Manhattan since the late 80s. When I arrived, there were squatters in many of the East Village's buildings (the owners had stopped paying taxes and abandoned their properties; the cops had bigger problems to tackle than illegal entry and tresspassing as the crime rate surged and the police force shrunk). Eventually the squatters either legally took over the buildings, or were booted out by Mayor Guiliani. There was also a shanty town all around and inside of Tompkins Square Park (the homeless camps were removed as the nabe gentrified).

In other words, if there are mass foreclosures, squatting can't be far away.

As an aside, I was at a party last night in a old East Village townhouse. Everyone was admiring the huge rooms, the high ceilings, the large backyard. Lots of "Oh, I wish I could've bought this place back in the day." I had to remind them that there was NO WAY they would've wanted to walk on this block even 15 years ago, let alone live there 30 years ago, when the woman had purchased the place. (They also didn't know that up until about a year ago, there were still streetwalkers on that very same block, despite the gentrification. Maybe because the neighborhood is now so safe and pretty?)

Neighborhoods and cities change all the time, and no one can predict how.

 

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