California Confidential: Past and Present: Where the Foreclosures Sleep: Stage 3 Tsunami Building up Again. SB 1137 Delay and Toxic Mortgages. Bank of America, Wells Fargo, and Chase get a Welcome Gift to the Golden State.
Tax day is upon us and the state is going to get a rude awakening with a screeching alarm going off. It was a painful 2008 and this will be reflected in the tax returns that will be filed. As we have discussed, California relies heavily on personal income taxes and also sales tax. On Tuesday retail sales came in lower than expected as consumers tighten their wallets. This is only a surprise to Wall Street and D.C. where the recycling of money is occurring in a very tiny sequestered circle of power players. Most other Americans are finding things getting tighter through layoffs, credit card lines being cut, and for those who are employed stagnant or wage cuts. These are things that do not inspire the dancing on ceiling dreams of whacking out your credit card like a western shootout and shopping till you drop.
History of the Bubble:Â A Californian Perspective
California has a unique perspective on this meltdown. We had the heroine high of the gilded days and also suffered through the withdrawal pains. Contrary to what many think, some states didn’t have this perspective so it is hard for those living there to understand what it was like to live in the bubble and how it impacted daily life. During the bubble opulence was showered on many residents and extravagant spending was as common as a Hollywood divorce. Much of the newfound wealth came from real estate. Personally, I noticed significant societal shifts starting in 2000 attributed to the real estate bubble. I think many at this time, had doubts about the longevity of the technology bubble. Who could forget Dow 36,000 published in 1999:
There were many investors questioning the rational of the tech boosted rally. Like any bubble this one popped and we were in a recession come 2001. 2001 was a quite year in the first half. If many can recall the case of Chandra Levy, the D.C. intern was big news. That is of course until 9/11 hit. At this time, the Federal Reserve decided to drop interest rates to historic lows and spurred the bubble of a lifetime:
What this did was feed a bubble hungry population. It provided society the fuel and people responded by lighting the match. With the technology bubble there was massive speculation as we all know yet it did not open up the game to everyone. So it was “contained” to a certain point. I don’t know any lower income people that were speculating on WorldCom options. However, the housing bubble suddenly made every home buyer and seller a speculator. When I entered the industry at this time, I was utterly shocked about the loans being pumped out. Looking back I could never have imagined that it would have gotten this out of hand. I had read Nothing Down books and there were good nuggets of truth hidden in them (like negotiating a low price). Most seasoned investors that I had talked with said the cases laid out in the book were 1 out of 100. Being an investor myself now, I can attest to this. In fact, nothing down was a way to get broke people to attend seminars and line the pockets of those conducting the event. Mind you the people I spoke with at the time had decades of real estate investing under their belt. Yet this joke that we laughed about suddenly became the way of life in California.
And this laid out a perfect industry for those in the subprime business. If you look at the chart above, subprime loans already started making a big jump in 1999 with the repeal of the Glass Steagall Act. I’m not sure many on the ground here in the state understood the long-term implications of this massively poor decision but the groundwork was set for an epic bubble. In 2000 the best picture went to Gladiator. An epic of smacking down and taking what is yours. I love this movie. It is like watching the UFC with refined actors. Then in 2009 the winner ironically is Slumdog Millionaire. This is the story of two kids, one which lands a chance to win big bucks on India’s version of Who Wants to be a Millionaire. From economic gladiators to financial slums. Sounds like the history of the California housing market.
The California housing market responded with a feverish move to the upside when the Fed lowered rates. Mortgage brokers took note from Wall Street who didn’t waste any time in their thirst for mortgages to slice and dice in mortgage backed securities. Not only were subprime mortgages popular making the no money down common, but adjustable rate mortgages in all 31 flavors flooded the market. It was a good time to be in real estate. This meteoric rise was pumped by many things including pay option ARMs which are in my humble opinion the worst loan products ever created and should be legally banned from ever resurfacing on planet Earth.
Let us take a look at the massive price increase for Southern California to give you a sense of how lives were being changed:
As you can see, the median price of a home in Southern California in 2000 was $200,000. In July of 2007 it was up to $505,000. For seven years, the median priced California home went up $43,000+ a year or the equivalent to the median household income for many in the United States. Just buy a home, lay out on the recliner and make sure you have a solid calculator to count the equity as it flowed in. Aside from the obvious fact that it was a ridiculous bubble and you might as well pretend Monopoly money was real, you need to remember how people thought at this time. Many people actually “felt” twice as rich because of this pseudo equity. And they spent this way because of the consumer behavior aspects of the wealth effect. They did not spend modestly but over indulged by adding on to their homes gaudy expansions and even those glorious mythical granite countertops. This fueled the expansion of do-it-yourself stores like Home Depot and Lowes:
If you ever needed to do modest work on your home, you dreaded going to Home Depot on the weekend because you would run into a family in an oversized truck loaded up with grills, appliances, and every other thing HGTV was pimping that week. You would think they were on their way to constructing the Sistine Chapel and feeding the Lakers roster.   It was insanity. Initially I wondered, “how are these people getting that kind of money?” They weren’t. It was all a shell game where they were sucking money out of their home to put crap back into it. Not a good move when you think about it.
Yet as the decade progressed, more started believing this was a permanent change like the laws of gravity just didn’t apply anymore because of this new age real estate philosophy. Study after study had some weird convoluted explanation why housing prices were justified. Every cocktail party suddenly revolved around home appreciation and financial stocks and these weren’t Wall Street types either. Those that hinted at a bubble were shunned. My philosophy on this was those that want to learn will learn one way or another, no need to talk about it at a social gathering. Plus, most people from my experience didn’t want to hear about it unless it involved perma-growth and appreciation of 20 percent every year. I remember a colleague telling me, “currently it appraised at $600,000 but with a few more 20 percent years, I’ll be in a million dollar home!” Needless to say that home isn’t worth a million or even $600,000 anymore.
The way the bubble burst in California was slow and methodical. First, we saw a massive decline in sales yet prices holding steady:
In late 2006 sales started falling. In the first half of 2007 sales collapsed. Yet prices kept going up. People were still punch drunk on the glory days of the bubble. You need to remember housing prices had gone up on a tear since the late 1990s so many people had a good decade of appreciation-conditioning and simply had no idea what was in store. The real estate and finance industry unable to focus on sales anymore shifted to prices as the torch to carry. I can remember even in late 2007 when the cracks started hitting Wall Street, many in California started saying, “sales will be slow but prices will hold up. The most I see prices dropping is 5 percent.” This was the majority view although 2 years late it may not seem like it. The majority once thought the world was flat. There were many of course that were saying this was a gigantic bubble and this legion was growing but it was still a small group.
Finally in 2008 the market came unglued. The bubble burst. People started freaking out but for a fundamental reason. They had lived in the biggest real estate bubble known to humankind. Even during the 1920s Florida Real Estate Bubble, things did not get out of hand on a nationwide scale. This time the bubble went global with asset bubbles in Spain, Ireland, England, Japan, Australia, and many other places. It would seem that everyone believed real estate would never go down.
And that belief was the fuel to the bubble. All financial instruments never had a “doomsday” scenario built into the risk models. Heck, some models didn’t even have a modest declining scenario. Even now, as we make projections regarding the public-private investment program we still underestimate the severity of this current recession which is now the longest since the Great Depression.
The Future of the California Housing Market
I have been rather clear of where I see the bottom. In terms of price, I think we will start seeing a price bottom by spring of 2011 and the 10 reasons I gave nearly a year ago hold true now more than ever. In order to understand where we are going, you need to understand the past. That is what we covered in the first part. Now it is important to examine the trends that will keep prices depressed in 2009 and 2010:
The above data is from Foreclosure Radar that tracks foreclosures here in California. We need to think about what is going on in the above chart. Foreclosures and notice of defaults started rising in 2006. The only drop in this timeframe occurred in the summer of 2008. What happened? A couple of things. First, we had various programs pushing foreclosure moratoriums but more importantly the Governator signed into law SB 1137 in July which required lenders to contact borrowers regarding options. This is tantamount to telling someone that just jumped off the Empire State building in mid-air, “hey, that was a bad move. Don’t you think you need a parachute?” I talked about how pointless this was going to be and would provide a false sense of security. I illustrated the point with a water skiing squirrel which always helps to make a point. SB 1137 was an utter failure. All this did was create a tiny drop, a hope bubble in California housing. The hope was that in the next few months housing in California would miraculously go up again and all would be well. Well let us now look at the graph above again.
Notice of defaults are at an all time record high. Let me repeat that. Notice of defaults are at an all time record meaning we should expect to see the vast majority of these become foreclosures in the next few months. That is, we are already assured of massive foreclosures hitting the market. These are baked into the foreclosure cake. And as time went by and the bubble burst, most of the NODs now become foreclosures:
Again for Q3 and Q4 you notice the impact of SB 1137. Ironically, this did very little to stop actual foreclosures, it just knocked down the NOD sent out for two quarters. Need a parachute? As we looked at the most recent data, NODs are now over 50,000+!  This is horrific news given California has an unemployment rate of 10.5% and will increase once the state data if released on Friday.
Amazingly the market is in a delusion. The big banks have swallowed up California and all the problems inherent in the state. In essence, the nation is bailing out California:
JP Morgan Chase ate WaMu
Bank of America consumed Countrywide Financial
Wells Fargo devoured Wachovia
Each digested institution has 50%+ exposure to California and Florida in their held loan portfolios. With their toxic loans, this number may be higher. Once again I am hearing that same cocktail talk, “this is the absolute bottom! Rates are at all time lows.” Keep in mind that if you buy a $600,000 home with a 4.75% mortgage and rates shoot up to 8% which is not high via historical standards, your pool of buyers just massively shrunk. There is only one place to go with rates and it isn’t lower. Most successful real estate investors realize that price is everything. They rather have a 15 percent mortgage and a solid price, than a high priced home with a 3 percent mortgage. Why? You have more options at the higher rate/lower price. If rates ever drop, you can refinance. You can always sell. Or, you can pay down quicker since you are assured a 15 percent rate of return which many people now realize would be heaven. At a low rate/high price you have no wiggle room. If rates go up, that is it. Your pool of buyers declines. And paying down the note doesn’t do much since your rate is 4.75% which isn’t a great return.
Bottom line, many folks thinking this is the bottom are getting lured into the shark tank once again. They fail to look at the data. Yet they will quickly find out how dangerous it is to play in the California casino.
What do you think? Are you a bottom caller? Is 2011 to soon/late?
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35 Responses to “California Confidential: Past and Present: Where the Foreclosures Sleep: Stage 3 Tsunami Building up Again. SB 1137 Delay and Toxic Mortgages. Bank of America, Wells Fargo, and Chase get a Welcome Gift to the Golden State.”
“The majority once thought the world was flat. There were many of course that were saying this was a gigantic bubble and this legion was growing but it was still a small group.”
The reason many thought the world was ‘flat’ was that the ‘learned’ elite told the people so and supressed any rational debate by the same old tricks we see today. People are generally told what to think not how to think. Which makes this blog so refreshing!
Keep up the great work Dr. HB.
Any idea what ever happened to that one kid that bought a couple houses on liar loans and no-money-down. I think he had a blog and was in NewsWeek and some of the morning talk shows. I want to say his name was Nick, but I may be wrong.
I love how everyone is trying to snap up “deals” in Southern California now. They think because a crappy house was once valued at $550k in the Valley and now its selling for $329k that it’s the deal of the century. Reminds me of the people buying Yahoo at $70 in 2000, only to have it go down to $8 a year later.
I think calling a bottom in 2011 is relatively accurate. As all of us who live in CA know, there is a large discrepancy in home values as you head East from the Pacific. The lower-end of the market has already taken such a beating that while I don’t think there will be any recovery for some time, I can’t imagine prices going much lower. My experience is specific to Southern California.
Inland Empire and High Desert areas already reflect pricing that is phenomenally low – probably due to an over-correction. There is no shortage of stuff one can buy for less than cost of construction. Even though the rental market is in flux, an all-cash buyer shouldn’t have a hard time realizing an IRR of 10% or better. As long as that is the case, I don’t see prices going much lower in that particular segment of the market.
In my opinion – those falling prices will continue to move like a wave from East to West and the corrections which will continue to affect the median price through 2010 will be in the homes that are currently valued at $500K+. A lot of the stuff under $200K has already been hammered – I think we’ll be at a bottom in that segment by the end of this year (but with no rebound until at least Spring 2011).
my 2 cents … thanks for the great summary in your post!
I won’t argue whether it is Q4 ’10 or your Q1 ’11 bottom as there will be so much noise it may never be resolved. What I want to talk about the impact of “the monthly nut.” A $200k mortgage @4.8% is $1050. $1050/mo @ 7.5% gets you only a $150k mortgage. And part of the “monthly nut” is taxes and insurance. It doesn’t take a rocket scientist to know where those are headed in SoCal.
So, while we’ll see an end to the house price loses in 7-8 quarters unless taxes and other costs remain at current levels it may be just a temporary halt.
Julius – Don’t count on price stabilization inland. Unemployment, higher taxes, and overall wage deflation will set a new much lower median household income statistic which will reprice everything in CA.
The best thing that can happen to Californian tax payers it that their state and cities all go BK so they can renegotiate union contracts or privatize services.
A tax payer revolt from all citizens is brewing much like Prop. 13. Stick a fork in BS union entitlements. Pay as you go is finally back to stay!
Cheers!
i bought my last home in texas 10 years after the 1980’s crash. by 1995 my home had stopped going down in price…15 years of price decline. i think we will see price declines thru 2020. sounds impossible but that is what i experienced in the last RE downturn. now that was texas and i know california is special so i may be wrong…
Dr. HB,
Can you comment on the impact the removal of the mark-to-market accounting rules has had/will have on the SoCal RE market?
There have been several reports claiming there are already more than 600,000 foreclosures worth of ‘shadow inventory’ that have yet to even be listed (when comparing courthouse records to listings), with a significant portion of this unlisted inventory in CA.
Another observer opined:
“Right now, the biggest mortgage lending banks are …keeping their repo’d REO housing because they get to mark that stuff at 96% of book value.”
“So long as that state of affairs stands, the banks have no reason to sell all that REO. They’re better off financially renting those units or letting them rot and hoping they burn down for insurance money.”
Keeping these foreclosures from the current inventory helps to artificially prop up medians, and, add to that, manipulating the removal of the mark-to-market accounting rules likely represents greater value to their balance sheets than liquidating these assets would to boot.
What will be the banks greater motivation; Liquidating these assets for a fraction of what they’re currently on the hook for, while further depressing the value of said assets? Or hoarding this ‘shadow inventory,’ taking advantage of the lax mark-to-market accounting rules?
I’ve got to tell you this, and I’ve been meaning to say this for a very long time:
This particular blog is the most brilliant commentary anywhere on Housing.
Period.
I’ve been watching the crash in Key West. And today, the same cheerleaders from the RE cartel who told us to buy at the market top because “…there’s never been a better time to buy Real Estate,” are using the exact same line in their local NAR ads. Except this time, they are no longer pushing how RE always rises in price. Now they are pushing the idea that mortgage rates will probably go no lower and that now is the time to lock in rates at rock bottom percentages. Never mind that housing is still unaffordable to blue collar workers who work in this tourist town. Never mind that rents are falling fast and furiously and that to make money (if you are a speculator) buying RE is still a losing proposition when you figure in taxes, insurance, fees, maintenance, rents you could charge in a falling market and more.
The thinking of our local RE cartel is this: don’t try to time the bottom with mortgage rates so low. But as you’ve just pointed out in such brilliantly concise language,NODs are pointing to what the next year holds. Like in California, Notice Of Defaults are skyrocketing in Key West, meaning more foreclosures are sure to come on the market further surpressing prices.
I applaud your work. You are the clearest thinker on Real Estate along with Patrick of patrick.net and several other bloggers I follow. But your work, my man, is unsurpassed.
Thank you for keeping things so interesting and so easy to understand.
Yours truly,
Rock Trueblood
I read the Dr. every day…he tells it like it is. I was one of the “prophets” who bailed out of a 1300 sq.ft. house in LA in 2005, for more than $1M. I consult to hedge funds on where the market is going, and it is unbelievable how these guys just don’t get it. You need to either be in the trenches, or you need to interpret the data better(as the Dr. does). My only point is that, due to the banks and Wall Street’s delaying tactics with regard to financial reporting, we may see a LONGER period of decline, at a slower rate. Then the big finale is that due to over-taxation and the wiping out of the middle class, prices will be flat, and not increase, for a long time, unless the dollar really plummets in value.
Interesting, being tax day and all I am anxious to see how the results of this famous day pan out in the media. We all know the media is going to have a hay day with it. And probably push the DOW down even further.. Hey what do I know? I heard something really interesting the other day in relation to the new wave is building of foreclosures. They are trying to pass a law that would do away with credit scoring in relation to the interest rate given to by banks. Meaning in theory everyone is on the same page.. The guy with a 580 credit score can get the same interest rate as the guy with a 780 credit score. You know to be fair to all those who don’t have the smarts to not spend what they don’t have.. I could swear this sound a lot like the equal housing doctrine. Isn’t that why we have the sub-prime mess that we have now? We are going to see some interesting laws passed, and lets just hope they don’t give us a mess in the coming years..
To respond to DHB’s question…while not having to listen to the upside stupidities of bubbleheads is a relief these days, I’m constantly staggered by the widespread simplistic downside thinking. Like that soon we’ll “hit the bottom,” then things will go back to 2006. Or that all we have to do is tax these or those people, or cut these or those programs, and all will be well. Then there’s all the people still shopping like it’s spring 2007. It still feels a bit like voodoo thinking to me.
~
I’m still of the opinion that we have another year to eighteen months before it really truly sinks in with most people what’s happening, as those toxic mortgage resets and tax shortfalls unfold, and as the cost of high unemployment start to be seen. I’d say that if we are lucky enough to be at 2002 levels in 2022, we’ll be better off than I think we’ll be. I’m way on the gloomster side. We are seeing the crash of a Habitrail Economy at least 30 years old. Which–lucky us–is coinciding with overdue bills on the socioeconomic and environmental fronts. My hope is that it will be enough of a wake-up call to wake people up…but as I said, there’s a lot of sleepwalkers still out there. And people who are trying to extend the game by robbing the prudent (via taxes, public funding, etc.) so they don’t have to touch their own savings!
~
DHB put it well, about people sucking money out of their houses to put media-peddled crap in them. Yet I was thinking, Doc–the consumerist/materialist worship started even before Reagan, when I think about it. I was reading “Tales of the City” (Armistead Maupin’s fantasy about San Francisco in the ’70s) for the first time since the late ’80s, and it reads more like a shopping wish list than a novel. Constant dropping of upscale/designer/gourmet/chic brand names. This was the SEVENTIES. Already by then a reader was supposed to know what a Hermes belt, Russian Hill townhouse, Weejun loafers, Marcel & Henri sausages, or reading Town and Country signified.
~
This was the love-peace-beads “Sixties” generation as soon as they became adults. One might argue that, at that time, people weren’t as deeply in debt for luxuries…but the lust for things was already in place, and they had extensive generational privilege easily rocketing them into the taste for luxury. This was a major component of the thinking that swept Reagan into office everywhere but Minnesota by ’84. This classist materialism has older roots than the repeal of Glass-Steagall.
~
Well, kudos, DHB, for the ongoing intelligence, gravity, and levity. I read your blog like the old German U-boat captain sips brandy each day in “The Bedford Incident.” Equipoise on a heaving sea.
~
rose
Like several posters have stated, It is almost impossible to predict the bottom at this point because there is no telling how long the banks will decide to hold on to their fantasy-priced “shadow inventrory”. The eventual release will be a business decision made by them and them only. Obama won’t push them. Hopefully, the big banks will soon start going belly-up from all the CRE toxicity, and, as a consequence have no choice but to vomit out all their inventory in an abrupt fashion, so that even the sleepiest sleepwalker can understand what had really been going on behind the scenes for a couple years. We just have to wait and see how it plays out, but 2011 seems like the earliest possible bottom. The Shadow Inventory needs to be talked about more by everybody. Great post DHB.
I realize the inland empire prices seem low, but you have to consider how many foreclosures are still happening here. I think many people who have foreclosed moved back in with their families in other county’s. School enrollment is down and I simply don’t’ think there are enough people here anymore to fill all the vacant housing. I believe prices will continue to fall here unless banks decide to stop foreclosing.
I want to thank you again DrHB & co. for keeping my spirits afloat. It’s tough to rent and save. My wife wants to buy now and I want to wait. Lucky for us, we don’t have much choice since we are still saving up for the down payment. We might be there by mid 2010. Definitely by 2011. It’s difficult though, with our kids needing a house and the temptation of the $8k homebuying tax rebate. Hopefully the wait will end up paying off.
Well tonight on Larry King, Donald Trump was urging everybody to start buying real estate, insisting that the deals are stunning, and now is the time to get in, But at the end of the interview he went on to say that one should only buy real estate if he can get it ‘seller-financed’.
Lol.
He advises skipping the bank, and going straight to the seller for financing.
Yeah, like that’ll happen. How many seller are capable of handling that kind of thing?
Dr. HB-
Another awesome piece. Thank you!
I do think 2011-2012 is when the bulk of the bear price plunge will be complete. However, I believe we drag along the bottom for a few (several?) years after that…
A trend that people miss is that the popluation of california has been growing at 1% since 2000 and it was growing at 2% since the 1970’s. One of our vendors was at a conference in Reno last week entirely centered around companies that left CA for NV to escape taxes and regulation. If people keep leaving California won’t have a massive turn-around. It will take on the vacant appearance of Detroit where a house is $30,000 and no one wants them cause their aren’t any jobs.
The San Luis Coastal School disticts (central calif.) teachers union has a good grasp on reality. 40% of the teachers in that district make $84,000. for 180 days work. The union is demanding a 22% raise over 3 years.
Makes sense to me!
“where the recycling of money is occurring in a very tiny sequestered circle of power players”
Good point Dr. HB! I have noticed that not many people are commenting on this and the tax situation.
I am in construction and have been out of work for over a year, The wife still works but does not make much so we had to take money out of the IRA to pay for overpriced dental work (I’m gonna start going to Mexico).
Anyway, I did my taxes yesterday expecting a refund. I was shocked to find that I had to pay over $2000!!!! Here I am a renter with hardly anything and the Gov. takes $2k from me while they dole out billions to thier banker buddies who in turn award themselves multi-million dollar bonuses. Am I the only one who feels like they just cut a check they could not afford, to a rich banker?
On RE, the bottom callers are hysterical. Maybe CA can figure out how to gather up and market severed fingers, to make ends meet?
Whether the “bottom” is in 2011, 2012 or even 2020 doesn’t really matter. As Comrade HB as opined on here in the past, after the “bottom” the price for housing will simply progress sideways (flatline) for probably the remainder of our lives. There will be no “rebound.” Why? It’s simple. Wages haven’t really gone up for 25 years. Without the fake wealth of easy credit (option ARM’s & liar’s loans) there is no increase in real income to warrant an increase in median housing prices. And there won’t likely be any in the foreseeable future.
~
So, to all of you who are waiting for a “bottom” to hop in to the market as a buyer, don’t feel pressured. Housing prices will continue to either decline or stay the same for at least another ten or twenty years or until real wages go up.
I can see why a recovery will not happen before 2011, but I’m not sure why there will even be a recovery. Debt is still unwinding in all sorts of ways. Second largest mall owner goes chapter 11. GM is on life support. Chrysler??? Fiat?? (ironic partner) Foreclosures didn’t stop–still accelerating. Citicorp?? Pensions? How many businesses are on the bring right now? How many banks are about to go over the edge? How many hege funds, derivatives? SS Trust Fund? AIG back in black? How about the 401k–Baby boomer’s a full year into retirement age and accelerating. People have lost faith in the market’s. “BNB: California Asks Feds to Back Its IOUs” Who wants to buy a brand new car? Decline in all economic aspects for many years to come. Consumer debt unwinding everywhere. No down side to Fed buying treasuries? Most of us don’t really understand that…or any of the other BS.
Aside from hoping for a bottom and 12 trillion tinkled away expecting us all to get tinkled on by it, how does this go up again? I can see the GS-Club getting richer, but how the rest of us? (Did you know Cramer is ex-GS? Maybe he steers all his lemmings into off-loading GS mistakes…who knows)
Not saying I know–I surely don’t, but at this point we need more that just “a skunk smells better than a paper mill”….”must be the bottom”.
It is true that when prices do stabilize, or hit bottom, more people will be able to afford buying a home. But many people will still be unable to purchase homes because even the new bottom prices will be too expensive for most. America needs to understand that owning a home is not always a “good American Dream”. In the last 3 years, people that have bought homes are enjoying the “American Nightmare”. Mostly brought to you by the Realtors Ass. “pushers”.
Reading this article reminded me the term “soft landing”, which was threw around every other minute early 2008 by the real estate people. It is funny how one term was so popular and than just totally disappeared.
Here in Sonoma/Napa area the median RE is around 500K to 550K with median household income close to 66K, doesn’t take much to figure what’s ahead for this market but its a slow downdraft due to lower interest rates and out of area buyers . Also the higher sales rate for lower REO priced property is similar to what Japan experienced. After the initial 30 to 40% hit RE rebounded for 18 months and then all the buyers were absorbed and the market continued its downward trek finally bottomed price wise at about 80% off peak in the suburbs and 50% downtown .
Great post. Comparing 15% rates vs 4.75% rates is spot on.
I put numbers to similiar rates and their corresponding mortgage payments on my site a few weeks back. Obviously came to the same conclusion: low rates are a reason NOT to buy.
I find it interesting that the main reason the Hope for Homeowners program failed was because lenders were unwilling to reduce the principal of mortgages to current market value. Doing so would have saved them quite a bit of money seeing as how the market has continued to decline and many of the people they could have helped are now in foreclosure. That principal reduction they would not agree to is going to happen at auction or on the open market whether they like it or not. Only difference is they will get less money now than they would have 6 months ago when the plan was released. How many more poor financial decisions will these institutions make? Or does someone know something I don’t and view their decision not to participate in HFH as a smart business move?
@Alan Davis: tell me about it. I got a promotion in January ’08 which came with a $5000 pay boost. That was a huge raise for me, since I’m pretty close to the median wage. But my take-home pay only went up about $40/week. On top of that, where I overpaid by about $200 last year, I had to pony up about $150 this year. So effectively, out that 5 grand, I saw roughly 2.
Dr. HB, I enjoyed your post. I would like to see you, at some point, seriously discuss the inflation prospect in light of the recent super bailout one after another. Though not an economist, I assume the timing of the inflation take off will affect the timing of the housing price bottom. Could you or someone out there provide some insight to this?
@WWang
I’m an engineer, not an economist–so I only work with real math–not voodoo economics math. The way I see it, inflation and deflation are occurring simultaneously, so the effect of each is not obvious. Demand-pull inflation has dropped dramatically, which would indicate deflation. The currency is simultaneously getting weaker, so the benefit of deflation to those with cash is not realized. Prices of everything have different elasticity, and with debt so pervasive, many are not forced to sell. For instance, Woolmarx is the price leader in retail so they set the price floor. Their sales are booming because even hotties in BMW’s and Mercedes and everyone else is trying to save a buck (you’ve surely seen it) so they don’t need to discount. No one else can challenge Woolmarx because they fix the price floor, so only certain items at certain stores are discounted. Lot’s of businesses are flush with cash so they think they can weather the storm another year, so they stand pat. Many RHG owners with shopping-cart and trash-can art are artificially protected from forced selling for a while. Car makers are zombies, but still operating. Banks are still holding massive bags festering feces. If the stalemate breaks either way, it will be horrific. The cleansing cycle of deflation would be my preference to the all-boats-destroyed tsunami of runaway inflation…but that’s cuz I have no debt. Debtors want inflation to minimize their exposure. Guess you can see which way the GS Club is going to take this.
(Actually eng’s. work with imaginary numbers, like the square root of -27, but for real purposes, not to distort employment statistics)
“So effectively, out that 5 grand, I saw roughly 2.”
That seems a bit high, but yes taxes on a median income approach the 50% bracket when you include federal income taxes, CA state income taxes which just went up, social security, medicare, CA SDI. Then if you are median income in CA, and if you didn’t buy years ago, you probably RENT because it’s what your income can afford. So you can also enjoy having nothing but the standard deduction to shield you from these high taxes.
The tax code is only mildly progressive. The CA state income taxes are basically flat after a certain amount and while the federal income tax is progressive, this is partially offset by social security taxes cutting off at a certain point, so it’s much less progressive than it seems. Plus if you earn more than the median income you can buy property and get that deduction, so you actually get more deductions when your richer. Heck yea you need to earn more than the median, even with two median income earners. to buy property in CA. Duh.
I guess the definition of “the bottom” can vary. Is the bottom where declines are contained “middle class” housing? Does it depend on the median price of housing in general?
From a median price perspective, the rate of price declines will increase after 2011 for two specific reasons:
1. Continued global wage arbitrage
2. Age demographic shift
2011-65=1946, the year the American baby boom began. More likely than not, this age group is economically more likely to possess houses worth above $1 million. These are people who are more likely to look towards downsizing residences and may be more likely to sell due to increased health care expenses and other life necessities after retirement. With underwriting standards moving back to reality, how many houses would be up for sale above that magic number versus those who can qualify for funding?
That means we are left with two possible solutions:
1. Prices will plummet at higher end housing and those who bought in early and will take their losses to access cash reserves.
2. An executive type order would be implemented mandating a price floor for houses that fit conditions x, y, and z.
In the second case, we’ll probably see one last refinance orgy. This time it will be in reverse mortgages. We’re more likely to see a decline in house formations and it will become in vogue again for 3 generations to live under one roof. The properties will likely revert to the mortgage company as the baby boomers pass on, but as long as people continue to live longer, the decline can be smoothed out over the course of another 10-15 years. A spin-off benefit from this action would be the containment of the Social Security timebomb.
Nothing specific, suffice to say that when I moved to Orange County in August of 2006 I never purchased property in part because of the Lasner Blog in the OC register to wit Dr. Housing Bubble was a regular contributor. The blog is still useful though there continue to remain some RE zealots. Once the Bubble website was established it became a must read. Thank you Dr. Housing Bubble for placing so much of the current housing/economic status into perspective and being a source of information that I would simply be unable to either compile or comprehend without extensive knowledge. Well done. Pease keep the essays coming…you provide an incredibly important consumer service.
I never like comparison of median income levels bc it is done on a household basis and households have been shrinking (more single familys for one), but in the spirit of the post i will tell a story.
In 1973, the greatest earner in American History was Al Capone in 1927, i believe it has been a while, who earned an estimated $125 million in Income in 1973 dollars. Despite the 70’s inflation this was bested finally in 1989, by Michael Milken who earned an income of $550 million in 1989 dollars by basically owning half of the junk (er, excuse high-yield) bond market. I got some hedge fund research passed to me for 2006 numbers, there were 10 hedge fund managers alone who bested this income number in 2006 and had over $900 million in freakin income. Including such notables as SAC’s Cohen.
aside from buying small countries or sports franchises, you cannot spend a billion dollars in net worth, the interest income alone piles up too fast to spend, and ten passed it in one year! in Income! knowing the historical numbers i am still stunned by this magnitude.
Yes, Buffett and Gates probably made more in certain years, but capital gains, not Income.
Have enough for a big down payment. Prices in Lake Forest are still 5x annual salary. This makes no sense. I still rent. Just paid a bucketload of money in income taxes. Wife wants to buy. I’m trying to convince her to wait just a little bit more. It’s sort of like using hand signals to tell your troops to hold their fire until the enemy is in perfect position for a devastating ambush. Now I need to tell her we’re years away.
Why is it everytime I finish reading your great posts about the Southern California real estate crash, I feel like it’s 5:00 a.m., a massive orgy has justconcluded, the guests have all left, the place has been completely and utterly trashed, and my parents will be coming home any minute?
@Marcus
Seems like all the grownups have gone away forever…all we are left with is half-empty beer bottles with cigarette butts I’m afraid.
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