Friday, May 13, 2005

San Diego Prices "Only" Up Double Digits

San Diego may be the most vulnerable housing market in the US. Yet this is what they consider "cooling off". "The county's overall median price in April was $484,000, up 10.3 percent from a year ago and the lowest year-over-year increase for any month since the 10.1 percent increase recorded in January 2000. The median was $7,000 higher than in March and $45,000 higher than in April 2004."

"Single-family resale homes rose to a record of $540,000, but they were up only 11.3 percent from a year earlier. Resale condos also hit a record, $395,000, up $15,000 from March and 16.5 percent"

"Sales totaled 5,345 last month, up from March as is typical in the spring but down 12.3 percent from the frenzied activity of April 2004."

"DataQuick analyst John Karevoll said he gets more calls about San Diego from East Coast financiers than for any other market he monitors. 'We're being watched,' Karevoll said. 'We're under the magnifying glass.'"

"Anne Throckmorton said that most real estate professionals remain optimistic. 'We went around our group, asking about each state's market areas, and there wasn't one area where the market was down,' she said. 'It was a very ebullient attitude.'"

87 Comments:

At 8:39 AM, Anonymous Anonymous said...

Wait until summer, year-over-year numbers will be less than 10%

Then maybe people will get scared.

 
At 9:02 AM, Anonymous Anonymous said...

July YOY will be flat. What then.

 
At 9:23 AM, Anonymous Anonymous said...

Check out this article people -

http://www.safehaven.com/article-3064.htm

"This jibes well with the current plans of the central planners to engineer one final leg of the cyclical bull market between 2007-2009 before the Kress 120-year cycle crashes into the 2010-2014 time period."

So we may all be renting until 2014 before a real estate crash happens.

Are you ready to wait that long?

See, it has to be this way, since baby boomers have no 401k cash to retire, so the gov is making sure that their homes are worth enough so as to finance their retirement.

In a sense, new home buyers are financing the retirement of baby boomers by buying their inflated houses.

Still - which of you will keep renting till 2014? Will your wives allow you to rent that long??

Seems like the central planners will win again.

 
At 10:07 AM, Anonymous Anonymous said...

Off-topic:

http://www.atimes.com/atimes/Japan/GE07Dh01.html

Danger ahead for booming Japanese real estate

TOKYO - An increasing number of analysts are warning that a mini-bubble in Japan's real estate industry is being formed, and that the overheated market may collapse when the real estate investment trusts (REIT) sustaining the current real estate boom come to their maturity in 2007 and 2008.

 
At 10:08 AM, Anonymous Anonymous said...

This has got to signal a market top:

http://www.etherzone.com/2005/scall051305.shtml

IRAQ THE COLONY: AMERICA'S NEW REAL ESTATE MARKET

"Samara could very well be the hot new real estate market in five years when the bubble in our own market has burst."

 
At 10:09 AM, Blogger goleta said...

when the YOY numbers drop to less than 10%, there is more money to be made in exchanging your dollars to yuan. China has been testing the water lately. They allowed yuan to float for a few hours on the last trading day before their week-long May 1st holidays, so it's now expected that yuan will be appreciated for over 20% in the next two years. There will be no reason for international investors to put money in any US assets.

 
At 10:14 AM, Blogger desi dude said...

anon,

you beat me to this article.

DO you think this could wait so loong?

what would happen to price in the interim? do they increase at a slower rate. The article says it might be a stgnation or mild softening(soft landing??).

What would happen to all those who wanted to flip , those with IO/ARM?
will they wait till appreciate? remember at least the new price has to cover the selling expenses, their interest only payments etc.

These technical/chart guys dont consider the psyhology of the market. There lies the variable not captured in the charts.

 
At 10:20 AM, Anonymous Jim in Venice said...

"Still - which of you will keep renting till 2014?"

I'd love to. I hope it takes that long to bottom out because every year that goes by is more cash money I'll have in the bank to swoop in and pay cash for a house. Here in LA the deals are so good for renting, there is absolutely no reason to even think about buying.

My fiancee and I just for kicks looked at a rental house (3 bed, 2 bath, very fancy area, big yard) for $3000 - a house that would easily be priced over a million to sell. Why on earth would I buy a house when I can get that? The property taxes alone on a million dollar house would almost equal the rent.

 
At 10:23 AM, Blogger goleta said...

So we may all be renting until 2014 before a real estate crash happens.

Are you ready to wait that long?



So the FED is going to keep the rate low and make sure all the people who bought their homes with ARMs will not lose their jobs till 2014? The FED will buy all those expensive houses in 2013 when people knwo the crash is coming the following year?

You just gave me a good laugh!

 
At 10:23 AM, Anonymous Anonymous said...

"So we may all be renting until 2014 before a real estate crash happens."

and

"These technical/chart guys dont consider the psyhology of the market. There lies the variable not captured in the charts."

Yes. That's amazing faith in charts and history! That kind of faith can usually only be found in casinos and churches. It's like saying 'This slot machine has not paid out a jackpot in 1,000,000 pulls so I'm due a win.' No, you are not! Statistically speaking, you can win 2 jackpots on consecutive pulls or bankrupt yourself trying to win just once.

You'd be plain nuts to plan your life or investments that way. Think back 120 years ago. The world economy was dominated by coal, wood, steam, Europe and their empires. Those econ cycles were based on a vastly different world.

Furthermore, at some point (probably well before 2014) the rent vs. own calculation will probably tilt in favor of ownership--even if there's an ongoing decline in RE prices.

Chart guys and gold guys are stopped clock investors (they tell the right time twice a day).

 
At 10:25 AM, Anonymous Anonymous said...

Property taxes on a 1-M dollar house in LA are about 1000/month.

Monthly payment on mortgate is about 4500, assuming 20% down (200,000 dollars, which is a pretty decent chunk of change).

Probably lose a lot of deductions because the buyer will most likely be hit with AMT.

Renting is definately cheaper.

 
At 10:27 AM, Anonymous Anonymous said...

I think home prices will be flat till about 2010-14. Then a huge crash as many boomers will try to sell at the same time. Only the smart ones are selling now.

But, even as prices drop, the US gov will make sure that they don't go down to much. Boomers need cash to retire, and the gov will lie, cheat and steal to make sure they do.

The 20-30 somethings of today are the cannon fodder for boomers retirement.

I'll keep renting till 2015.

Sort of sad, since most of my savings go to my 401k, so I don't know if I'll be able to use that to buy a home in 2015?

 
At 10:30 AM, Anonymous Jim in Venice said...

"Monthly payment on mortgate is about 4500, assuming 20% down (200,000 dollars, which is a pretty decent chunk of change)."

Good luck finding someone in LA with that much money in the bank!

 
At 10:31 AM, Anonymous Bazooka said...

"So we may all be renting until 2014 before a real estate crash happens."

In effect, you are saying that RE will keep going up until 2014. I have several problems with this theory.

With mortgage companies already dipping HEAVILY into subprime and condo's becoming the new rage, and 70% home ownership with boatloads of ARM's, there's not a lot of people left to keep this thing going up(and it MUST go up or go down there is no flat of "soft landing" possible.) A flat market = a down market don't let any RE person say otherwise! The house-as-atm crowd starts going bankrupt in ever larger numbers in a flat market which will lead to a down market very quickly.

One to two years tops, and then it's all over. I don't think a 0% Fed rate (if such a thing were even possible) will keep the bubble inflating once the subprimes are done and there's nobody left but the speculators devouring each other. IMHO

 
At 10:34 AM, Anonymous Anonymous said...

I have quite a bit more than that in the bank. But I rent. And I sold my house two years ago.

 
At 10:38 AM, Anonymous Jim in Venice said...

"I have quite a bit more than that in the bank. But I rent. And I sold my house two years ago."

Ah yes, I forgot about the few smart people who sold and now rent. You are in the best position of all.

Unfortunately, I was born too late to have been a previous owner. I hope this situation repeats itself in 30 years as I near retirement.

 
At 10:40 AM, Blogger deb said...

I don't think the Fed can keep the RE market from doing anything it is going to do. The interest rate is the only card they hold, and that one has been played. You could make some arguement for the gov't propping up stocks because it is one cohesive market, but RE, no way to do it.

 
At 10:51 AM, Anonymous Anonymous said...

ORLANDO - Hot Housing Market Edges Out First-Time Buyers

Sellers Turn Profit Of $100,000 On Homes Months After Purchasing Them

http://www.wesh.com/money/4482842/detail.html?rss=orl&psp=news

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

"You could make some arguement for the gov't propping up stocks because it is one cohesive market, but RE, no way to do it."

I disagree. The gov can (and do)manipulate any market they wish. We no longer have free markets.

Interest rates are just one tool for manipulation. They also have the tax code at their disposal.

Imagine giving all homeowners a tax credit, on top of interest rate deduction!

Sky is the limit...the US gov could even freeze home prices via a law, calling it the "American Dream Act"

 
At 11:03 AM, Anonymous Jim in Venice said...

"Morgan already made big gains selling another house around the corner. It sold in just a few hours. The buyer didn't even look inside"

What the hell???

 
At 11:03 AM, Blogger goleta said...

Sky is the limit...the US gov could even freeze home prices via a law, calling it the "American Dream Act"


That dream sounds so much like Stalin's dream!

 
At 11:09 AM, Blogger Tim said...

All the Fed and the government can do is lower rates and bail out lenders and/or homeowners when loans start going bad.

It's hard to imagine that the Fed can create another refinance/cash out boom if they start lowering interest rates again, but maybe.

Loans will start going bad when the speculation stops and everyone realizes it's Nasdaq 2000 all over again. Then loans will start going bad, and it's a matter of what the Fed and the government do - you'd think that they have to create new money to replace the money that vanishes when debt goes bad - bail out the lender and/or the homeowner.

If they don't do this, then the world pretty much ends (mortgage backed securities held by pensions, the Chinese, etc.). So, when it turns, maybe a quick 10-20% off the peak, speculation stops, then an unrelenting gradual decline over a period of many years until prices revert to the mean?

 
At 11:17 AM, Anonymous Anonymous said...

"You'd think they have to create new money..."

What do you think the social security private account idea is for?

http://www.harpers.org/The4.7TrillionPyramid.html

 
At 11:23 AM, Anonymous Anonymous said...

"So, when it turns, maybe a quick 10-20% off the peak, speculation stops, then an unrelenting gradual decline over a period of many years until prices revert to the mean?"

Problem is the peak will be in 2010, and could take 15 years to deflate. That would mean waiting 20 years from today before buying a home.

If you're in your 30yrs now, that would mean buying when your FIRST home when your 50 yr old!

Seems like a no win.

I wonder who is will loss patience, and buy a home before then.

 
At 11:27 AM, Anonymous Anonymous said...

I've given up on the idea of buying a home. I can't afford more than $1200 per month for housing, and there is nothing in my area that I could buy for that, other than a 1bd condo (yuck).

I'll rent til I die.

 
At 11:31 AM, Blogger Tim said...

2010 - we'll see

I'm betting houses will be much more affordable within three years, maybe four

 
At 11:34 AM, Anonymous Anonymous said...

I read a few years ago that when the Japanese real estate investors drove up Hawaii prices (right before prices crashed last time), that is what was happening. They would drive by a house and make an offer without even going in.

 
At 11:35 AM, Anonymous Jim in Venice said...

"I'll rent til I die."

It's all about attitude. Earlier this year, I was hell bent on buying a house. Fortunately, through prudent decision making and voracious reading of this blog, I've come to realize there is nothing wrong with renting. More specifically, I've learned that you can build equity faster by renting than by buying, at least in the current market, through wise and safe investments (I'm using CDs).

Now, I'm starting to plan for our financial future by assuming we'll rent until our future kids are in college (25 years), then take the massive amount of money we've saved up to pay cash for a little retirement cottage somewhere cheap and pay for the kids' college.

Lower payments. Freedom to move as you please. No property taxes.

Renting ain't so bad.

 
At 11:35 AM, Anonymous Anonymous said...

"Problem is the peak will be in 2010, and could take 15 years to deflate. That would mean waiting 20 years from today before buying a home."

There is no way that the peak will be 2010. At that point, affordability will be 0-3%, home ownership will be 80-90%, there will be 40,50,100+ year loans, they will be lending to livestock and pets because subprime suckers will be gone, and other silliness.

One to two years tops B4 major correction begins.

 
At 11:35 AM, Anonymous Anonymous said...

Ben,

Here are some data sets I made myself for San Deigo. What is going to happen in July when the reported YOY shows an appreciation rate near zero?

Pop!!!

Cashking

SAN DIEGO
DATE Median HP YOY Appreciation 6/04 – present Appreciation
2004
Jan. 2004 396K 17.9% N/A
Feb. 2004 406K 13.7% N/A
March 2004 425K 17.1% N/A

April 2004 439K 22.6% N/A
May 2004 454K 21.1% N/A
June 2004 464K 19.0% N/A

July 2004 472K 23.6% 1.72%
Aug. 2004 483K 24.2% 4.09%
Sept. 2004 480K 23.1% 3.44%

Oct. 2004 489K 26.4% 5.38%
Nov. 2004 487K 23.9% 4.95%
Dec. 2004 491 21.2 5.81%

2005
Jan. 2005 478K 20.7% 3.01%
Feb. 2005 472K 16.3% 1.72%
March 2004 477K 12.5% 2.80%

April 2005 477K 10.30% 2.80%
May 2005 ???K ???
June 2005 ???K ???

 
At 11:36 AM, Anonymous Jim in Venice said...

"They would drive by a house and make an offer without even going in."

The thought of making one of the biggest purchases of your life without even seeing what you're buying truly baffles me. People like that deserve to lose everything.

 
At 11:36 AM, Blogger desi dude said...

anon

"I wonder who is will loss patience, and buy a home before then."

before that qn to be asked

I wonder who is will loose patience(waiting for 10% gain), and sell a home sooner.

 
At 11:39 AM, Blogger Tim said...

Folks, this is a mania - people are not acting rationally.

 
At 11:54 AM, Anonymous John Vosilla said...

California folks ever think of either moving or if your really want to own real estate continue renting in CA but invest in property in places like Houston and Dallas. Check realtor.com the values will astound you.

http://realestate.aol.realtor.com/FindHome/HomeListing.asp?snum=22&frm=bymap&mnbed=3&mnbath=2&mnprice=2000&mxprice=125000&js=off&pgnum=3&fid=so&mnsqft=2000&mls=xmls&vtsort=&typ=1&gate=aolrealestate&source=a2ankt1t1074&poe=realtor&exft=i2sty&ct=Houston&st=TX&areaid=4&all=&areaid=66352&areaid=60253&areaid=11345&areaid=68697&areaid=23501&areaid=27494&areaid=36326&areaid=70437&areaid=45038&areaid=80527&areaid=41941&areaid=87449&areaid=70924&areaid=7517&areaid=2836&areaid=68422&areaid=57775&areaid=36454&areaid=58061&areaid=19251&areaid=93023&areaid=50604&areaid=86944&areaid=87074&areaid=13213&areaid=14999&areaid=40290&areaid=94379&areaid=70219&areaid=47884&areaid=37970&areaid=14160&areaid=19856&areaid=65394&areaid=73979&areaid=5248&areaid=69581&areaid=40491&areaid=17985&areaid=21543&areaid=43410&areaid=89779&areaid=74878&areaid=59819&areaid=10679&areaid=1358&areaid=51796&areaid=72445&areaid=28440&areaid=29753&areaid=10378&areaid=61144&areaid=39560&areaid=26728&areaid=3902&areaid=1988&areaid=88657&areaid=66040&areaid=4091&areaid=14733&areaid=80028&areaid=8659&areaid=18684&areaid=85807&areaid=45145&areaid=5133&areaid=79662&areaid=37855&areaid=34377&areaid=4599&areaid=1710&areaid=5905&areaid=65562&areaid=18331&areaid=5681&areaid=11724&areaid=10019&areaid=88374&areaid=83192&areaid=13095&areaid=66611&sid=04AEECEC6473C&snumxlid=1045470673&lnksrc=00003

 
At 11:56 AM, Anonymous Anonymous said...

So you guys/gals that are now saying that that it won't flatten until 2010 or 2014 are basically switching sides and are agreeing David Lereah ridiculous prediction that this boom will continue into the next decade.

With all the news and evidence that we are seeing on a daily basis I am 100% convinced that it will end within a year from now.

Even David Lehreah has modified his position.

If you really believe in the 2010-2014 prediction, then this blog is 5-10 years premature.

 
At 12:08 PM, Anonymous Anonymous said...

I personally am saving $20K per year in my 401k. After 10 years, I'd have $200K, assuming no appreciation. If we assume some gains, then I'd likely have around $300-400K. Let's assume $400K.

Could then use that 401k cash to buy a first home??

Could I borrow from my 401k? Will I need to pay myself interest? Any downside to this strategy?

 
At 12:10 PM, Anonymous jl said...

I think Cashking's data shows that there is a great likelihood the price will at least flatten sometimes in late summer. So not 2010 or 2014.

I think it will be a critical time to see how many investors with a negative cash flow we have in San Diego. If there is few of them, then it will be a plateau. If there are many of them, it could trigger a pop.

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

I will publish my data on Los Angeles and San Fracisco when those numbers come out later.

CashKing

 
At 12:20 PM, Anonymous Anonymous said...

Some of you seem to be assuming that if prices are flat for 10 years, renters will eventually give in and start buying overpriced houses because they like the "psychological feeling" of owning a house.

Allow me to disagree. If prices are flat, you are going to have the choice of paying, say, $1000 to rent or $3000 to buy (includes interest, taxes, repairs and insurance, but not principal because you are, in theory, "saving it").

So you are essentially paying $2000 for the privilege of having the "psychological feeling" that you own a house. At the same time you are building equity at a much slower rate than the money you would put in the bank if you were renting. Besides, you have to worry that prices may go down for the whole 10 years, that an earthquake may come (here in CA), that you may lose your job, etc.

I don't know about you, but if I have to pay $2000 a month for the "fuzzy feeling" of owning a home, I can be renting all my life.

 
At 12:28 PM, Anonymous Anonymous said...

Agreed. The reason everyone has wanted to own a home is that they feel they are making money on the deal. If it costs more, people will rent.

My biggest fear is that someone in congress or the federal government will attempt to bail out all of the homeowners by floating a really huge bond that the taxpayers will have to pay off over the next century.

 
At 12:30 PM, Anonymous Anonymous said...

Cashking - shouldn't the number for February be negative? And how can the next two months show a gain if the avg price is the same?

 
At 12:34 PM, Anonymous Anonymous said...

"My biggest fear is that someone in congress or the federal government will attempt to bail out all of the homeowners by floating a really huge bond that the taxpayers will have to pay off over the next century."

That would mean that all the renters waiting for the crash will be paying for the mistakes of the homeowners who bought at the peak.

Exactly the sort of thing that the Amerikan gov would so.

 
At 12:42 PM, Anonymous Anonymous said...

12:30 Anonymous
The feb. 2005 appreciation number is Feb. 2005 compared to June 2004.

Each months appreciation in the third column is compared to June 2004.

Feb. 2005 is less than Jan. 2005, but that is not what I am examining in this post.

The media always posts the 12 month Year over year rate of appreciation and I think the ten month rate of appreciation is much more telling.


Cashking

 
At 12:46 PM, Anonymous Anonymous said...

Thanks Cashking, that makes more sense now.

 
At 12:47 PM, Anonymous Anonymous said...

From reading the posts on this blog I assume very few people have been through a real crash in RE prices. I have been, and it's NOT fun.

I live in Denver, which has a very cyclical RE market. Lots of big ups and downs.

In the early 80s while the rest of the country was in the grips of an awful recession Denver was doing very well with lots of new energy boom related jobs. When the energy boom went bust the jobs disappeared and HUD ended up owning many thousands of houses.

There was a weekly supplement of about 30 pages in the Sunday papers with line listings of HUD owned properties. Condos that had sold a year or two earlier for $60k were offered for $10k to $15k. Whole buildings in some condo developments were owned by HUD. I remember seeing a building of 6 individual condos in it for a total asking price (it probably sold for less) of $90k...for all 6 units!

You couldn't give a house away. I had purchased a house in 1985 for $95k..I thought I really made an incredible deal. By early 1989 I couldn't get $70k for it. There just were VERY few buyers, and about 30,000 houses on the market in the Denver metro area.

I bought a 4 unit rental in 1984 for $104,000. 2 years later the building next to it, almost the exact same thing, went into foreclosure. The bank sold it for $45,000.

The psychology that goes along with a bust like that is totally depressing. No one thinks it will recover. About 1990 things started to recover and about 8 years later a new price boom was under way.

I think the current situation in areas like southern CA is more dangerous than Denver was in 1985...its WAY more overpriced, people have less savings in general than they used to to get them through a price decline, and they are buying with no money down and adjustable rate mortgages that weren't around back then.

Also, there wasn't $3 Trillion in mortgage backed bonds sitting in banks, pension funds and mutual funds back then either. These bonds are going to be worth a lot less when the mortgage payments that flow through to pay the bond interest stop or decline.

A bust this time will affect many areas of the economy, retail in particular, and many investments that on first look don't seem RE related.

I sold my home last year and have been renting for the first time in 30 years. I like renting. No repair bills, my utilities are included, someone else takes care of problems, no taxes. At some point I'll buy again, but for now, I'll wait as my cash grows and home prices fall.

If you are in a bubble area, and are renting, just be patient. This won't last.

 
At 12:57 PM, Anonymous Anonymous said...

Anon 12:47

Excellent post... I also get the feeling that many on this blog have not been through a down cycle...

Your insight shows that prices do not just flatten, but can and in fact do go down, and not just 5-10% but drastically...

 
At 1:00 PM, Anonymous Anonymous said...

I'm in the same boat as another anon who posted earlier.

I have not savings other than my maxed out 401k. My company matches 50%, with no limit, so I'm going with the max contribution.

Cause of that, taxes, insurances, bills, and rent, there is no cash left over to save.

I do think one can borrow against your 401k. So keep saving in that fashion. If you can amass a few hundred of thousands, you can borrow from yourself to buy your home, they pay yourself back with interest. Buy when you pay back the loan, make sure you are still maxing out your 401k.

This way, you may not need to borrow from the darn evil banks.

 
At 1:05 PM, Anonymous Anonymous said...

I thought you can borrow at most 50K or 50% from 401K. Not enough for downpayment nowadays.

 
At 1:07 PM, Blogger goleta said...

I've been renting in Santa Barbara for 9 years since I sold my previous home in Somerset, New Jersey.
Home prices here are 3 to 4 times what they were back then. Even then, I didn't think it was such a good idea to own a home, as you not only need to pay mortgate, property tax, and insurance, but also have to be the one getting people to fix everything that is broken. Now I live in an apartment, if anything goes wrong, it's landlord's problem and I just need to tell the managers and they will do the rest.


Owning your home certainly has some advantages like any improvements you do to your home is still yours to keep and you don't need to move unless you want to. But now that the annual rents are only 1/30 to 1/40 of the home prices, it makes no sense to own.

 
At 1:13 PM, Anonymous Anonymous said...

Why is everyone so worried trying to time the RE market?

Just buy a house when rent = housing costs!

It happens every few decades. This time will be no different.

Every year, just calculate housing costs assuimg no money down. When rents > or = mortgage costs + property taxes + insurance + repairs - interest deduction, then BUY!

So simple.

 
At 1:14 PM, Anonymous Jim in Venice said...

"From reading the posts on this blog I assume very few people have been through a real crash in RE prices."

As one of the younger readers of this blog (24), I sympathize with my peers who stretched themselves thin to get into some POS condo in the last 12 months. They are starting their adult lives in a big hole. Many of them have very limited knowledge of finances, particularly the fact that real estate does in fact go down.

Fortunately, I double majored in history and economics :)

 
At 1:26 PM, Anonymous Don said...

Regarding borrowing from the 401(k), there are several things to be aware of.

First, there's the borrowing limit mentioned earlier (generally 50K).

Second, the interest you pay yourself is after tax money and it will be taxed again when it is withdrawn, so you are paying income tax twice on that money.

Third, if you lose your job you must repay the full amount of the loan very quickly (30 days I believe), or it will be classified as a withdrawl and you will be both taxed and the 10% early withdrawl tax will be imposed. Of course, since you couldn't pay the loan back in the first place, you will have to withdraw additional moneys from the 401(k) to pay the taxes, and those withdrawls will be taxed + 10% as well, so you can end up like this:

50k loan can't be repayed. 30% tax rate + 10% punative rate = 20K taxes to pay on the load. To pay those 20k in taxes you need to withdraw an additional 33K from the 401(k) because of the taxes on the withdrawl, so the 50K loan ends up costing you 83K.

 
At 1:35 PM, Anonymous Anonymous said...

Do any of the people here who have been through a bigtime down cycle have any comments on how banks behave when it comes time to renew an underwater mortgage?

Im thinking of a "owing $150K on a place that is worth $90K at the end of a 5 year term on a 25 year mortgage" type situation. I keep asking mortgage specialists, "Why would the bank allow me to continue in that situation when I have no equity? Wouldnt they want more money down to do another term?"

They are ademant that they would sign me up for another term in that situation, but I am skeptical... One person hinted that thats part of the reason for mortgage insurance, (ie, the bank gets the payments either from you or the Insurer, so they dont really care if you can make the payments once you have the insurance).


Comments?

 
At 1:44 PM, Anonymous nostradamus said...

("This jibes well with the current plans of the central planners to engineer one final leg of the cyclical bull market between 2007-2009 before the Kress 120-year cycle crashes into the 2010-2014 time period." So we may all be renting until 2014 before a real estate crash happens.)

I think the above scenario has a strong likelihood of playing out. The past 20 years of supposed economic strength has been 2 parts debt/credit and 1 part innovation/productivity.

The credit cycle appears to be on its last legs and then the debt deflation comes. Greenspan may be leaving but whoever replaces him will surely keep pumping, perhaps ever harder.

Right now, they are raising short rates so that they have ammo to go through another round of lowering and start the reflationary process all over again in 2006-2007.

The stock market is bearing the brunt right now. But we will likely see a shift at some point (perhaps early 2006 when Greenspan retires) back to equities and away from bonds and real estate.

Relatively low rates will keep RE from crashing (altho bubbly markets will surely get hit) and the economy will muddle through for a couple more years.

But at some point, there will be no recourse and we will have a multi-year period of severe recession and debt deflation. IMO, of course. Likely time frame 2009-2012. I pity whomever gets elected president in 2008.

It is in this period that I foresee real estate get smacked hard. That doesn't mean that RE will go gangbusters from now until 2009. It may just stagnate or rust a bit. But the big hit comes later.

 
At 1:45 PM, Blogger deb said...

When the market goes, and psychology swings to the other extreme, it will be just as hard not to get sucked into the "crash" psychology of the herd as it is now not to get sucked into the "mania".

At the bottom in LA (95-96) my husband and I knew it was time to buy. We did buy a residence and wanted to buy some rental property. We just didn't have the guts to buy the rental units even though we knew it should be the right time (and they would have been cash flow positive!)

You who have never been through it, you won't believe the pessimism that will be everywhere. It will be worse this time too because the whole country will be suffering at the same time and the debt loads are so much bigger.

 
At 3:09 PM, Blogger dwr said...

This comment has been removed by a blog administrator.

 
At 3:11 PM, Blogger dwr said...

deb-
"We just didn't have the guts to buy the rental units even though we knew it should be the right time (and they would have been cash flow positive!)"

Cash flow positive with what size of down payment? This is an argument I have all the time with a friend of mine who is currently buying "investment" properties. He claims in Southern California properties have "never" been cash flow positive without mammoth down payments (30% or more).

 
At 3:13 PM, Anonymous Anonymous said...

I bought a house in San Jose, CA, the heart of Silicon Valley, 8 years ago for 360K. Today it's worth about $850 based on comparables. However, the schools are going to hell in a handbasket and I would like to move to a neighborhood with better schools or send my kids to private school. If I move, I'll be faced with buying another property at bubble prices and I will also pay much larger property taxes. If I stay, and send the kids to private school, it will be easily $1700/month for both kids or more. SO, I'm thinking - maybe I should MOVE to the area with better schools, become a renter, and RENT OUT my home, since I can get a positive cash flow out of it. I have a fixed rate 15yr loan on the remaining mortgage. (Imagine that, a conservative mortgage!) What do y'all think?

 
At 3:14 PM, Blogger desi dude said...

Shoudnt cash flow calculation include the opp cost of the downpayment?

 
At 3:17 PM, Anonymous Jim in Venice said...

Two of my coworkers are currently talking about how they are about to buy houses using no money down, negative amortization loans.

I want to beg them to PLEASE STOP THE INSANITY and to save themselves, but why bother?

 
At 3:19 PM, Blogger tempest_in_a_teacup said...

desi dude, I'm not sure what you mean - I wouldn't be buying, I'd be renting a house while renting out my owned property.

 
At 3:23 PM, Blogger deb said...

I don't remember the exact details, but one place we almost bought was a duplex (2 2+1 units). Each rented for $1050/mo. Great area, great schools. It was priced at $219k, probably could have bought it for about $200.

Back then you had to put larger down payments on non-owner occupied property. Anything less than 20% would have been a tougher loan to get by the lender. We would have put 20%. I think some did 10%.

 
At 3:27 PM, Anonymous Anonymous said...

To the guy in Denver. I'm moving to the Denver area this summer. Do you recommending buying now or renting? Denver doesn't look like it's in a bubble to me. Thanks.

Renter in Menlo Park, CA

 
At 3:30 PM, Blogger desi dude said...

Jim_in_Venice

I'm in a similar situation.

Three of my former co-workers met with the realtor last week!

Another neighbor went to see an open house.

I've discussed all the numbers with these people couple of times. They are bitten by 'no owner left behind' syndrome I guess.

One of three called me and told me that his wife wants to buy now!. he wanted me to talk to his wife! about not buying now

 
At 3:37 PM, Blogger Van Housing Blogger said...

"My biggest fear is that someone in congress or the federal government will attempt to bail out all of the homeowners by floating a really huge bond that the taxpayers will have to pay off over the next century."

I never understand it when people say this. There are around 100 million homeowners in the US. Just how is the government going to prop them up? Send a 10K check to all of them? That would be one trillion dollars. And 10K would not do very much for homeowners in the face of a housing crash.

Just where would they get one trillion dollars? Taxation? Float bonds? The story just makes no sense.

 
At 3:44 PM, Anonymous Anonymous said...

Forget the cash-flow positive calculations. Just use the rule of 100x gross monthly rent to know when to buy, though you probably want to use a higher multiple for expensive detached houses. If California 2 bedroom condos are renting for $1500/month, then I'd recommend against buying until the price drops to about $150K.

I've rented most of my life though I owned at one time and even got involved in rental property once. I really don't understand the mania for owning rather than renting, assuming the cost is equal. I really like the idea that if the roof on my current apartment falls apart, it's the landlord's problem and not mine. This whole "pride of ownership" concept completely escapes me.

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

Anon 1:35

What do you mean by "when it comes time to RENEW an underwater mortgage"? and they will "sign you up for another term"? I don't understand the "renew" and "sign up for another term" terminology.

If you find yourself in an upside down situation, the bank will not simply rewrite your loan or reduce your principal balance, unless you are trying to sell and owe more than what the property is then worth. They call that a "Short Sale". There are certain conditions, you will have to show a financial hardship and they will want to see financial statements. If you have income, savings, or assets they will expect you to participate in the loss, you will have to bring money to the closing. Also they will issue you a 1099 for any amount that they write off from your loan and you will have to pay taxes on it.

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

The only possible federal bailout would be to allow moderate 7-8% inflation of a decade. This would cause huge problems in general, but would prevent nominal price drops in housing.

People with fixed mortgages and jobs would make out great. People with ARMs would have a problem.

 
At 3:48 PM, Anonymous popmeplease said...

"That doesn't mean that RE will go gangbusters from now until 2009. It may just stagnate or rust a bit. But the big hit comes later."

I know a lot of people believe RE can flatten of "rust" or "soft-land" or something but this is TOTALLY IMPOSSIBLE! Either it continues to boom or it crashes hard, there is no middle ground!!! The reason for this is that there is no savings, no equity, no income growth, tons of ARM's, I/O's etc. Therefore when RE flattens for even a short amount of time, endless refi becomes impossible for the droves of people living off the house atm. Bankruptcies and forclosures by the millions is the inevitable result and there's just no way around this. How can anyone say that a rust or soft-land is even a possibility?!?

Also, AG dropping rates to 0% will have no effect when prices are so high that even a neg-am can't draw any more suckers out of the woodwork.

 
At 4:08 PM, Anonymous Anonymous said...

Don't even think that drop starts in 15 years. The top is near and the proof is in the pudding. Famous on the blog David Lereah from NAR made lately 2 simultanous moves. He included condos in single homes data and he moderated his position about how long this boom will be prolonged. For those who dont understand I will translate.
He recognized that it is the end and he is buying time by manipulating data for the purpose of having enough CYA press releases. Then after the crash he can point that he was warning the public for weeks or months.
And Kuznietz cycle can reach the bottom in 15 years, but that doesnt mean that RE market will be uptrending until that time. From my readings about cycles I concluded that it will bottom then and start new cycle, which means new secular uptrend for markets. So, most likely we will have long term downtrend up this time not uptrend.
MIke C in Chicago. Your humble, renting Realtor.

 
At 4:15 PM, Anonymous Anonymous said...

Mike C in Chicago

I'm sorry but what do you mean by this;

"From my readings about cycles I concluded that it will bottom then and start new cycle, which means new secular uptrend for markets. So, most likely we will have long term downtrend up this time not uptrend."

 
At 4:33 PM, Anonymous Anonymous said...

"Just where would they get one trillion dollars? Taxation? Float bonds? The story just makes no sense."

What makes no sense to me is when people act like the government has limits on its spending. In a fiat money system, the government can spend as much as it wants. If this causes long-term bond yields to rise, the Federal Reserve can step in and buy long-term bonds to keep the yields down. Alternative, the Fed can simply telegraph to the hedge-fund community that it plans to keep the overnight rate down for an extended period of time, and then rely on the private carry-trade to bring down long-term rates.

Still, I don't think the government is going to bail out homeowners, either by handing out money or by inflation. But if the government wants to bail them out, that's the easiest thing in the world to do.

And don't point to Japan as an example of government impotence. The Japanese haven't tried very hard to create inflation. All that have to do is give every man, woman and child the equivalent of $100,000/year welfare check, financed via the Japanese central bank (aka electronic printing press), and I guarantee there would be a quick end to the Japanese deflation.

 
At 4:37 PM, Anonymous Anonymous said...

"And don't point to Japan as an example of government impotence. The Japanese haven't tried very hard to create inflation. All that have to do is give every man, woman and child the equivalent of $100,000/year welfare check, financed via the Japanese central bank (aka electronic printing press), and I guarantee there would be a quick end to the Japanese deflation."

This is basically the "helicopter money" scenario. I agree that it is theoretically POSSIBLE for the government to do this kind of thing, but that would just result in hyper-inflation followed by a mega deflationary depression. They're better off just letting the deflationary recession happen like Japan did.

 
At 4:37 PM, Blogger Thomas said...

Van Housing Blogger,

A little quibble with your logic: True, there are 100 million homeowners in the United States, but not all of them by a long shot would need bailing out in a correction. In the bubbly markets, even a 50% correction would hardly get us back to the 2002 values -- so people who'd purchased before that time would just have watched their paper assets rise and fall with no real effect. (Unless, of course, they'd tapped their home equity above the 2002 values, in which case they'd be screwed along with the post-2002 purchasers.)

In other words, the government wouldn't have to bail out all 100 million homeowners -- only some of them. (Which would be bad enough -- any assistance to them would distort the market and delay the correction reaching bottom.)

There's at least one way the government could bail out overextended homeowners without spending any money -- a foreclosure moratorium, like several states enacted during the Great Depression. Again, though, all that would accomplish would be to prevent the overinflation from being purged from the market and give us a Japan-style stagnation rather than a return to sustainable valuations and appreciation.

 
At 4:46 PM, Anonymous Anonymous said...

The example of $100,000/year for every man, woman and child was just to illustrate the true nature of a fiat-money government's power. A more likely scenario is a bailout of PBGC, FDIC, Fannie Mae, Freddie Mac, plus 0% overnight interest rates to bail out the banks and credit card companies, plus a guarantee of continued low overnight rates to keep long-term rates down (courtesy of the carry-trade), plus huge amounts of government spending to ease the pain of recession. The net effect would be a massive government deficit and rising inflation (though not hyperinflation), say 10%/year. This is the NOT what I am expecting, but it is definitely possible and any investor should be prepared for such a scenario.

 
At 5:30 PM, Anonymous Don said...

I think commentary about fiat monetary inflation is misguided unless you take into account the fact that the US is the world's current reserve currency. If the USFG were to enact some of the measures described above resulting in high inflation then foreign banks would no longer desire to keep their exchange reserves in USD, and the US would no longer have the privilege of borrowing entirely in its own currency. If that were to happen then our enormous Debt / GDP ratio catches up to us very quickly and the US financial system goes down in a blaze of "glory". That is the limiting factor on the ability of a fiat money system to just create monetary units and throw them around.

 
At 5:48 PM, Anonymous Anonymous said...

I quite agree that there are some issues involved with permitting high inflation at this point, but the fact remains, politicians are known for being short-sighted. If an election is coming up and the economy is ailing, the politicians might just decide to go on a spending/bailout rampage and to hell with the long-term consequences. Once the pols had committed us to a doubling/tripling/quadrupling/whatever of government debt, the Fed might easily decide to permit double-digit inflation in order to burn this debt off, regardless on the effect on the US dollar reserve currency status, since the alternative to such inflation would be very severe debt deflation. Again, I don't think is what will happen, but it is definitely a possibility to be kept in mind.

 
At 6:08 PM, Anonymous I heart SD said...

San Diego is "America's Most Livable City", so there is a big premium on living here. We are right on the ocean, so it stays cool in summer evenings. It's laid-back, but professional. Everyone wants to live here. The downtown scene is booming. The Padres and Chargers are up-and-coming teams. It has the best-looking women in the USA. It's the biotech capital of the world. Located on the coast, it's perfectly located for Pacific Rim, Mexican and Central American business and trade. There are a lot of illegals here so you can find people cheap to clean your house, walk your dog, blow your leaves around, clip your hedges, clean your pool, buff your nails, wipe your nose. People will pay any price, ford any river, climb any mountain to live in America's city of the future. Living in San Diego is the pinnacle of the American Dream, maybe even the World Dream or the Universe Dream. That's why prices are rising and why they will keep rising. This year, next year, the year after that. Next decade. Next century. Next millennium.

I think that just about sums it up...

 
At 7:04 PM, Anonymous Anonymous said...

That was a joke, right?

 
At 7:34 PM, Anonymous Anonymous said...

San Diego is a great place to live. I've lived all over the country and this is the best place I have ever lived. It has some of the best surfing in the country but I don't know how many surfers are homeowners. Either way basic economic principles still apply here just like anywhere else.

I really worry about our home's value enough to seriously consider selling and renting or moving somewhere else.

If we move out of California, we can alwaysw take some nice surf trips with the money we can save.

Thanks to all for your input/opinions. I have learned quite alot from this blog. Just to see things from the other side, does anyone know of any reasonably unbiased blogs representing the other side of bubble or non-bubble? Thanks.

 
At 8:01 PM, Anonymous Pete in SD said...

I heart SD:

Yeah, sure!!! And I have a bridge to sell you too!!

Pete in SD

 
At 12:31 AM, Anonymous arealgrownup said...

iheartSD Please spare me. We just moved after living (and yes, owning) in SD for nine years. The weather is beautiful, but stop glorifying the rest. From the sounds of your post, I suspect you are a male somewhere around 20 years old, with mom and dad paying everything from your expensive car payment to your parties on the beach. Those people you pay to "wipe your nose" are human beings by the way. They are people who are trying to make a better life for themselves. You make them sound like slaves.

San Diego has many problems, just like lots of cities. Research them all before making a move there--don't move just because there is sun. Or you'll end up performing "iheardSD"'s unwanted chores.

That said,

 
At 12:55 AM, Anonymous galahad said...

(San Diego has many problems--don't move just because there is sun.)

I wouldn't be so hasty. Folks in SD have made so much money buying and selling property that a group of them are getting together to do a leveraged buy out (LBO) of the sun.

If the deal goes through, the only place on Earth where the sun will shine daily will be San Diego. All others will have to pay a licensing fee or do without.

Sounds illegal to me, but i'm no finance expert. Maybe we should start a petition or something...

 
At 2:17 AM, Anonymous Anonymous said...

Another confusion about high prices and higher prices.

SD is a very nice city, so it can command a high price. But for prices to go higher, there must be new external facts or information such as matching salary growth. If SD has not become MORE desirable when compared to X years ago, either it was underpriced X years ago or it is overpriced now.

 
At 2:24 AM, Anonymous Anonymous said...

With investments, a very dangerous proposition is to assume everybody wants what you want.

 
At 7:16 AM, Anonymous Anonymous said...

Mike C to 4:15 Anonymous
Simply put. Every cycle has its top and bottom. If cycle bottom in 2015 it means there was a downtrend leading toward it. In 120 years cycle, top cannot occur in 2014 and bottom in 2015. So theory that we have long time of RE "gains" in head of us until the bottom in 2015 is simply not what theories about cycles are saying. Top must occur much sooner. Original post quoted Jeff Drake who writes on www.savehaven.com. I am not big fan of his theories. If You are interested in cycles, I would recomend study KOndratiev Wave or K-wave.
According to K-wave we are now in fourth season (winter) and we are generally speaking going down with the economy. Last winter started in 1929 and ended around 1949. It was debt liquidation faze. My believe is we are in debt liquidation faze. Debts on RE is just a part of it. I have learn aboy K-wave a year ago and spent some time reading about it and so far nothing in the economy negate validity of the theory. We are under deflationary pressure. It started in 2000 with the stock market and RE can be next. K-winter always ended with the depression. I hope we will not experience it, but I prepare myself accordingly. I hope I answered your question. Try www.longwaveanalyst.com
Mike C, Chicago

 
At 10:53 AM, Blogger Thomas said...

San Diego is a beautiful city. It was just as beautiful a city six years ago, when prices were half what they are now. Something other than a nice city environment is at play here.

 

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