Where are Coastside real estate prices headed?  I’m interested in hearing from folks who have some experience as buyers or sellers, or professionals, in this market.

When I look at a chart like the NY Times’s chart of the index of home price to rent ratio <http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif> (which is .(JavaScript must be enabled to view this email address)), I tend to think that we’re not at the bottom yet, but it’s in view.

We have to be careful, because real estate is not one big market, it’s a bunch of regional markets and the trends also vary by price.  But my sense is that prices may still be too high.

There’s plenty of doom and gloom out there, what with talk of higher-quality (than subprime) mortgages starting to go into foreclosure at higher rates.

http://www.nytimes.com/2008/08/04/business/04lend.html?_r=2&hp;&oref;=slogin&oref=slogin

Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

In a conference call with analysts last month, James Dimon, the chairman and chief executive of JPMorgan Chase, said he expected losses on prime loans at his bank to triple in the coming months and described the outlook for them as “terrible.”

On the other hand, David Lereah is pessimistic. I don’t know whether that’s good news or bad.

We’re not at the bottom,” he says. “[People] want it to be near the bottom, but we’re not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There’s still supply out there in abundance … This thing is going to get worse before it gets better.”

Jonathan,

You might be one who has looked into this. Has there been anything out correlating educational level or math ability with mortgage problems?

I have a hunch a lot of the crisis involves people who couldn’t do the fairly simple numbers or read a contract. In other words, people who did not understand the nature or possible consequences of what they were getting into. But this is just a hunch.

Carl May

This shakedown has been rather quick and moderate. The real estate market is much like the equity, debt, commodity markets. However, the last real estate market boom has far exceeded the length than any of these have enjoyed (although gold, copper and palladium are on great run… still not too late for IRAs/401ks, by the way). Real estate markets enjoy longer booms, and typical deal with longer bear markets. I’m shocked the impact hasn’t been as severe. The foreclosure/sub-prime combined over-supply should of provided a bigger double whammy. IMHO. I was a bit more freaked out, acutally last Aug/Sep, as a few credit derivatives hedge fund managers I know were getting reading for a Cat-4 swell. They are up 14% so far in ‘08 so it mustn’t be that bad, or doing their job (for once). The “share of mortgages gone awry, reek of the same naive attitude in dumping money into internet stock at the end of 2000, on margin, or even worse into options. Back then, America was staying at the craps table of retirement funds and investment funds… now it’s around the roof around their head. Darwin in it’s finest hour. There was an understanding, but lack of desire and responsibility on the specifics.. no different than the patrons of a Vegas casino that know the odds are stacked against them, but don’t bother with the math on the house odds.

Regardless… I think everyone is trying to bottom-fish too much here. Unless you are a churning investor, buying a $640K piece of real estate that falls to $600K for a few months or year. If you are moving between regions, than the point is perhaps even more moot. For instance, moving from Moss Beach to Pleasanton, you must be geeked.

“Doom and gloom” sells newspapers… after all, a great story would talk about real estate markets that are doing well. But those stories are hard to find these days.

FWIW, the commercial real estate market has been doing quite well throughout. The NAREIT is going thru a short term pull back, but during all this….. commercial and industrial real estate continues perhaps the longest bull market in the American economy… although gold hasn’t seen any pull back in 10 years, and a magnificient run 5 years. Sell your home, buy gold bars, and rent an apartment I suppose ;-)

Before you start insinuating that people are of below average intelligence try this one on.

I adjust anything like this up a few points, but that’s just me.

California is tied with Mississippi for the third-highest jobless rate in the nation behind Michigan at No. 1 and Rhode Island, according to the U.S. Bureau of Labor Statistics The national unemployment rate was 5.5 percent last month.

“The unemployment rate in the Bay Area increased significantly between May and June,” said Ruth Cavanaugh, a labor market specialist for the Employment Development Department. “For example, the San Francisco metropolitan area had a five percent unemployment rate in June, compared to last year’s 4.1 percent in June.”

THE EMPLOYMENT SITUATION:  JULY 2008
                       
  The unemployment rate rose to 5.7 percent, and nonfarm payroll employment
continued to trend down in July (-51,000), the Bureau of Labor Statistics of
the U.S. Department of Labor reported today.  Employment continued to fall in
construction, manufacturing, and several service-providing industries, while
health care and mining continued to add jobs.  Average hourly earnings rose by
6 cents, or 0.3 percent, over the month.

Unemployment (Household Survey Data)

  Both the number of unemployed persons (8.8 million) and the unemployment rate
(5.7 percent) rose in July.  Over the past 12 months, the number of unemployed
persons has increased by 1.6 million, and the unemployment rate has risen by 1.0
percentage point.  (See table A-1.)

  Over the month, the unemployment rates for adult men (5.3 percent) and whites
(5.1 percent) edged up while the rates for adult women (4.6 percent), blacks (9.7
percent), and Hispanics (7.4 percent) were little changed.  The jobless rate for
teenagers increased to 20.3 percent in July.  The unemployment rate for Asians was
4.0 percent in July, not seasonally adjusted.  (See tables A-1, A-2, and A-3.)

  Among the unemployed, the number of reentrants to the labor force in July
rose by 207,000 to 2.7 million.  The number has increased by 623,000 over the
past 12 months.  The number of unemployed persons who had lost their last job
was about unchanged over the month at 4.4 million, but has risen by 778,000
over the year.  (See table A-8.)

http://www.bls.gov/news.release/empsit.nr0.htm

Tim, that’s very leftfield…

I think .... and I mean that losely, I know where you are going with this. The unemployment rate over this decade is still better than the 90s, 80s, and 70s. The unemployment rate was well over 6% in 2003… where was the housing market direction then? Fill us in on the unemployment and the housing market vs what mostly has constituted careless mortgages by homeowners.

“I adjust anything like this up a few points, but that’s just me.”

Adjust what?
Up a few points… wow. So unemployment is really around 8%. And your economic theory in support of that is….

Interesting information on the housing market can be found here:

http://www.doctorhousingbubble.com/

and here: 

http://patrick.net/housing/crash.html

Dr Housing Bubble and Patrick.net?

Seriously?

A graph showing total debt? How about debt ratios in terms of GPD, average income, etc… among a million other figures. Reminds me of Dark Knight breaking all records.. despite ticket prices higher than ever… last I checked… Gone With the Wind is still the greatest revenue producing film of all times, dollar adjusted. In other words… stats are getting far to easy to create gloom or boom.

drhousingbubble.com… wow. Good to see who actually know who is Dr Housing Bubble, track record, etc… http://www.doctorhousingbubble.com/about

This is lower than Jim Cramer….

Kevin Barron - 06 August 2008 06:56 AM

Tim, that’s very leftfield…

I think .... and I mean that losely, I know where you are going with this. The unemployment rate over this decade is still better than the 90s, 80s, and 70s. The unemployment rate was well over 6% in 2003… where was the housing market direction then? Fill us in on the unemployment and the housing market vs what mostly has constituted careless mortgages by homeowners.

I am sorry. I forgot to mention the obvious. Home equity over the last 10 years. When you factor in over 100%+ rise in home equity and the general idea that it was OK to spend all that equity plus the housing bubble bursting and then soaring unemployment you get massive amounts of sick loans.

I am in no way saying that people didn’t make some bad choices when buying loans. But at the time everyone was doing it. And it was the people you could label as smart that did it first, and actually lots of them made good money from it. It was when the not so well off people saw all this happening around them that they were suckered in by a overly greedy and fraudulent mortgage industry. These people were told not to worry, the market NEVER goes down in California, you will be fine ... Your rate will never outpace the increase in value over the term of your ARM…

It is really hard to blame hardworking people when they are guided buy professional loan officers into doing the wrong thing. It happened at every large credible lender in the country. They are all guilty of it and they are now paying the price.

See in the 70’s - 90’s the housing market booms were only 10-20% and made it so the general populace couldn’t crush themselves in debt the way they could in the most recent bubble. That, plus a totally unregulated, sick lending industry of today made all the difference from then and today.

“I adjust anything like this up a few points, but that’s just me.”

Adjust what?
Up a few points… wow. So unemployment is really around 8%. And your economic theory in support of that is….

U3 is the “official unemployment rate” according to the BLS website. Due to this, it is the current measure of Unemployment that gets focused upon by most media, and therefore the public. It has, over the years, slowly excluded many of the factors that USED to go into how the US reported unemployment. Hence, there has been a gradual decrease in the Unemployment rate that has occurred regardless of what was happening in the Jobs market.

U6, on the other hand, is the broadest measure of Unemployment: It includes those people counted by U3, plus marginally attached workers (not looking, but want and are available for a job and have looked for work sometime in the recent past), as well as Persons employed part time for economic reasons (they want and are available for full-time work but have had to settle for a part-time schedule).

Kevin Barron - 06 August 2008 06:56 AM

Tim, that’s very leftfield…

I ran out of space on my last response to you Kevin.

Continued…

Bottom line is. I don’t think you can just say that “it’s the fault of dumb people making dumb choices”. I could go into way deeper detail but it is late and I don’t really feel like it.

As far as unemployment numbers go I think I explained myself on the typical U3 (media reported) numbers vs reality.
If you need me to go into more detail though I would be happy to elaborate on why I adjust up.

sleepy time…

Kevin Barron - 06 August 2008 07:19 AM

Dr Housing Bubble and Patrick.net?

Seriously?

A graph showing total debt? How about debt ratios in terms of GPD, average income, etc… among a million other figures. Reminds me of Dark Knight breaking all records.. despite ticket prices higher than ever… last I checked… Gone With the Wind is still the greatest revenue producing film of all times, dollar adjusted. In other words… stats are getting far to easy to create gloom or boom.

drhousingbubble.com… wow. Good to see who actually know who is Dr Housing Bubble, track record, etc… http://www.doctorhousingbubble.com/about

This is lower than Jim Cramer….

Any fool can criticize, condemn and complain and most fools do.

Benjamin Franklin

What I see going on in real estate locally and including the County is very much a mixed bag.  Also,  despite all the gloom and doom you hear from the national media,  really doesn’t apply here at least so far. 

The one thing that bears repeating is that real estate is truly local.  What’s happening in San Diego has little impact here.

That being said,  average home prices for the first half of 08 for both the coast and county show a modest 1-2% increase over comparable period last year but are running a touch below full year figures for 2007 (down 1-2%).  But that doesn’t tell the whole story because volume has been declining significantly every year since 2004.  2008 could very well be the lowest number of home sales we’ve seen since the early 90’s and below the road closures in 95 and 06.

Inventory is up but declining this month.  Average selling time is up.  Foreclosures are more common,  especially at the low end and in lower priced towns like Pacifica, Daly City and SSF. Again applies to both Coast and County.

While the aggregate numbers are marginally up,  the comparable sales of the exact same home purchased back in 05 compared to now paint a different picture.  In most cases these homes are selling for less than the purchase price.  And that doesn’t include improvements, closing costs or commission.  I know of a few homes in Ocean Colony where this is so.  A home bought in Arleta Park for $840k couldn’t sell for $720K.  Clipper Ridge,  which has been hit hard with foreclosures,  has homes selling for less.

Soon in the Review,  I’ll be doing a piece on these homes.  Its interesting.

But getting back to how local real estate is.  Yesterday,  I showed homes in the lower price range in Belmont and 2 new listings my clients liked both got multiple offers.  So while things may be slower here,  on the Pensinula they seem to still be hot.  Go figure.

What? Don’t like Dr. Housing Bubble or Patrick.net?

Ok, then try Mr. Mortgage. You’d be surprised what you can learn from these blogs. 

http://mrmortgage.ml-implode.com/

Interesting and informative site but not really relevant to what’s going on here and in the County.

Oh, you mean the idea of people buying houses they couldn’t afford, using exotic loans that should have been illegal, egged on by people who made money of the scam, which bid up prices even further, necessitating even more exotic loans,  “is not relevant to what’s going on here on the Coastside and San Mateo County.”  Sorry, I guess I should have known that kind of thing did not happen here.

Mr. Hyman,

Got anything on trends in median list prices for us—including, of course, list prices for distressed properties in the spectrum?

Luckily,  most of the distressed sales aren’t happening on the Coast.  There are some and more now than 6-9 months ago.  Also most of these properties have common themes.

In other areas like Pacifica, Daly City, and SSF you will find a much greater number..  Go to the East Bay and its even worse.

But San Mateo County has had a lot less foreclosures than other counties.  Part of the reason is that there haven’t been many subdivisions going in which inflate the inventory of homes.

I do agree with you in that there were many excesses with regard to loans and many of these shouldn’t have been approved. 

Carl,  later on I’ll give you info on median prices.  While the numbers may be different from the average prices I use,  the trends should be the same.

That would be median LIST prices, Mr. Hyman. I’m not interested in scales skewed by a more resilient and active upper end, which is what averages and sales prices do in today’s scene. Admittedly, no measure gives an exact picture, but medians do better than averages to show the center of the market and list does better than sales to show what is on the market. And properties like the REOs for sale need to be in the spectrum just as much as the upper end properties if a scale is to be any indication of what is going on in the overall market.

Our MLS does not report Median List Price.  They give average price, median price and percent of avg sales price to list price.  The one drawback with the percent of sales to list price is that it doesn’t include the original list price so the percent is off,  especially when there was a price reduction.

REO’s and short sales are included in the sales figures but can’t be sorted. 

That being said the average price for HMB for first half is $1,112,000 with a median price of $972,000 and homes selling for 93.4% of list price.

El Granada average price is $899,000 with a median price of $830,000 and homes selling at 95.5% of list.

San Mateo County average price is $1,197,000 with no median price reported and homes selling for 98.0% of list.

So,  the previously undefined “price” in your messages is sales price. Not a very good indication of what is going on with overall real estate at this time, as it only tells us about what is selling in spite of all. The recessed middle and lower end of the marketplace, where the screwiest loans were used and list prices have fallen the most, are disproportionately under-represented because property sales are down in those areas.

It’s a lousy time to buy if you aren’t wealthy. People not in the market for a high-end residence should not base their personal analyses on what is going on at the unrepresentative upper end. That is not the real world for them.

Actual sales figures are a very good gauge of what’s going on.  Its certainly better than list prices or what a seller hopes to get.
But these figures have to be looked at in context to other factors.  Over the past few weeks,  I’ve analyzed figures by inventory by price category as well as area, sales figures by quarter and coast and county prices covering several years.

On my website I give info on sales volume by price category covering almost 10 years.  Here you can see the shift from homes under $500,000 towards more expensive ones as the market grew over time.

As far as when is a good time to buy,  that’s up to the individual.  I haven’t seen many people speculating by buying homes to flip them.  That’s too risky.  Most of the people I’ve helped were buying a home because they needed or wanted one.

Nobody has a crystal ball that can predict the future.  But when you look at all the market factors now,  the market is certainly favoring the buyer.  This has probably been the best market from a buyers perspective in many years.  Inventory is high, volume is down, prices are flat and rates are good. 

But if its not a good time to buy then it must be a good time to sell.  So call me and I’ll help you leave.

I’m so tired of the media referring to a housing melt-down when any one who reads the
Wall Street Journal can clearly see that it is a BANKING CRISIS.
The greedy banks nearly fell over each other trying to lend to “Sub-Prime” buyers. Why?
Because the Wall Street folks, (Hedge Funds, etc.) wanted to show a huge yeild to their investors.

It became so neccessary to offer higher yeilds to investors that some banks or lenders
even started pushing buyers with high credit scores into these sub-prime loans just to
earn a higher fee and feed the Wall Street demand. It has been reported that certain segments
of the population were seduced (or shoved) into these riskier loans by unscrupulous lenders.

Eventually, it caught up, as investors and fund managers saw that the payments were not being
made on some of this junk debt. The exotic CDO’s (Colateralized Debt Obligations) created by banks
stopped being snapped up, and even the insurers that backed these hybrid securities started to falter,
as a result.

The first to create these “Blended Investments” - Bear Sterns - was the first to be sold off at fire sale
prices to JP Morgan Chase, and soon was followed by Countrywide (gobbled by BofA) and now,
INDYMAC Bank has failed, Citibank has made headlines as recently as last week, and if you ask me,
Wachovia & Washington Mutual will not be far behind.

Who is it that says “If you’re going to be a pig, you’re bound to get slaughtered”?

So much for my first “post” errrr ......Rant.

Now about Coastside home prices. In any market, well-priced, well-presented
homes sell. It’s the ones with deferred maintenance or un-realistic “List” prices
that seem to sit and linger on the market, or sell for below “Asking” and take
far longer to sell, too.

Some sellers “want” 2005 prices for their properties, and are stuck on an
unrealistic notion that they can still get it. Others, are educated by their agents
and the current market. The “market” will reject their silly price, or, perhaps
another agent will come along with a buyer who will offer a “low” price
(low in the Seller’s eyes) for the home.  Often, at this point, the conversation
gets started, and the negotiation begins.

I can only say that I got my license in 1994 and that winter…Devil’s Slide closed.
Few homes sold during that “crisis”, but…for the savvy purchasers who did buy
at that time, they saw the values rise significantly afterwards. This time may
be like that time, and we may eventually look back and say…“What a great
time to have bought a home!”

So, time will tell, maybe the loan crisis ( & related housing problems) ends up being a
great time to buy before the Tunnel is completed. Believe me, after that tunnel
construction finishes, the towns of Montara and Moss Beach will most likely see
a surge in appreciation as the Coastside becomes more “accessible” in the minds
people living north of the Slide. After all, the “Slide” excuse will be gone!

“But if its not a good time to buy then it must be a good time to sell.  So call me and I’ll help you leave.”

Why would anyone with a clean title and selling at a realistic price use a traditional real estate agent to sell nowadays? We saved roughly $60,000 last year using a perfectly competent (local) discount sales outfit to handle the traffic and forms on the sale of a house in Burlingame.

Last year was much different than this year. But, you’re right. People have options. Thay can for-go using a broker and sell it themselves, possbly saving tons of money, (albeit… investing their own time and marketing dollars).  Others will simply choose the traditional method and hire a professional to handle all the details for them. There is a newer concept to use a minimum service company and do lots of the work yourself, but at a discount fee to be listed in the MLS by a minimum service brokerage. Most people that do this often feel that they have saved money, even if they actually left money on the bargaining table. If it were really that easy, why isn’t everyone doing it?

Funny thing about the minimum service company—they’re not minimum service. They do everything needed and then some. They handle various alternatives like trust sales and net listings for the same price. I did not even want many of the services included in their fee, like MLS and open houses. We left nothing on the table, selling at the peak for the area in Burlingame in which the house is located. There was pressure on as even well-qualified jumbo loans were starting to dry up a year ago, and they expedited the process with all possible haste. Not a single glitch or delay.

Everyone is not doing it because they don’t know about it or think there might be some bases that are not being covered—the latter probably due to the insinuations and PR from traditional realtors. That couldn’t be more wrong; the reduced-fee outfit we used is fully licensed and insured. I have bought and sold several residential properties over the years, and this sale went as well as any. The only way we would have been out a bundle would have been by not using them.

It is my experience most residential sellers of properties with clean titles who study their market over a period of years and who are willing to price at what the market will bear end up knowing as much about the value of a particular property as real estate agents and can price accordingly. For the property in Burlingame I had a certified appraiser and a number of potential listing agents involved, and none came up with a potential list price much different from what anyone can fairly easily do on a straightforward property by studying comparables and market conditions. Of course, those comparables and conditions have to have good data behind them, and that goes beyond the incomplete, fuzzily defined generalities one gets from most real estate agents eager for a listing.

Cid, I figure that you’re somewhat correct in that a major cause of the problem was greedy lenders.  Isn’t it likely that prices rose faster than they otherwise might have, due to higher demand related to the number of basically-unqualified people entering the market?  We see that effect on gasoline prices—a tiny excess of demand over supply allows prices to shoot up.  So now, with all the unqualified people (and some qualified ones!) shut out, prices are dropping to where they probably should have been all along had the market not been deformed by buyers with neg-am loans.

I’m still waiting for neg-am loans to be completely banned.  Unless/until that happens, in my opinion there is no chance of stability in real estate.  Wouldn’t it be fair to say that neg-am loans were the primary cause of the implosion?  I have two rental properties.  I just re-financed one to get out of the neg-am situation.  There is no way that I can keep the other one after the 5-year step of the neg-am loan, unless rates drop significantly and I can re-fi it and not have negative cash flow.  At least these are in one of the only stable real estate markets in California (not the Coastside because I don’t want to have to list them on a Form 700), so I have reason to hope that prices won’t fall.

If state and fed-level politicians had any spine and weren’t owned by big money interests, they’d have banned neg-am loans long ago.

Negative am loans have been around for almost 20 years.  So I don’t think you can put the blame for the foreclosure mess on these loans.  I could see the teaser rates that went adjustable in a few years as the main culprit.

What started the short lived boom we saw in the County was when banks back in mid-2003 said mortgage rates weren’t going lower.  Immediately we saw available inventory of homes decline causing a shortage of supply which then led to the bidding wars that lasted for 2-3 years.  That’s when all the fence sitters jumped into action feeling that they missed the bottom of the mortgage market.

As far as booms go,  this one was pretty short lived.  And don’t forget housing went soft when the Fed raised rates back in 2000 when they thought the stock market and NASDAQ were too high.  Then the market went flat as far as prices went but volume dropped.

Newbie & Mr. Woren,

    It is just my opinion, but I think it was the 2/28 loans that came out a few years ago that had really low teaser rates, but shot up incredibly after 24 months. In fact, those loans were O.K. in the beginning, as home prices were still rising, but borrowers who took out those loans had several problems that they may not have been aware of (AND SHOULD HAVE BEEN TOLD).

1.) They were “qualified” by the lender for the teaser rate only not the eventuall rate going forward. Simultaneously, they were lulled into believing that in two years , when the loan payments and interest rates were set to adjust, that they could simply re-finance out of that loan because the value of their home will have risen by then! (And, that did actually work in the earlier times.)

2.) After making only a minimum payment for 24 months, and the new “adjusted” payment in some cases doubled, they actually owed more than the original loan balance if it was a negative amortization loan. AND, to make matters worse, now there were no new loans available at the teaser rate they originally had qualified for and the housing market price increases were not as great as expected. PLUS, with an even higher loan balance, they could not get an affordable loan now. So they were either stuck paying a higher adjusted payment, taking out a new fixed rate loan at a higher rate and payment - IF they could find one, or letting the house go into default….unless they could sell it fast for the loan amount just to get out of the bad situation.

3.) No one advised them of the worst scenario, (which was recently fixed by Congress) but if they got permission from the lender to sell “short”  they later found that they were taxed on the “forgiven” debt and had to pay taxes on the money forgiven by the bank as if it was ordinary income. This phantom “income” was being taxed as “Debt Relief”. Talk about adding indsult to injury.

When the “First” Bush was in office we had the Savings & Loan crisis, this time Bush “W” has a virtual banking melt-down.  If I were a conspiracy theorist, I’d say something smells fishy here.

http://en.wikipedia.org/wiki/Federal_Reserve

The exotic loans were just one aspect of the bigger problem; a complete collapse of lending standards.

Realtors had to know that many of the people putting up offers on houses in last few years had no business buying a house at those prices.  There’s the famous story of the strawberry picker in Hollister who made $14,000 per year who somehow managed to qualify for a loan to buy a $700,000 house. What did his realtor tell him I wonder? Probably: “real estate is a great investment, prices will only go higher, you can always refinance later.”

Nevermiind about the idea of actually paying off the loan—that’s old fashioned thinking. And when many peope did refinance while prices were still rising, they used the opportunity to extract equity to buy cars, boats, vacations, etc., thus effectively financing their new pickup truck with 30-year loan.

No question that there were many loans made that shouldn’t have.  It was interesting to watch unfold all these creative loan products.  It seemed that if you had a pulse,  there was a loan.

I personally did one $1million zero down sale to a doctor who had high income.  I also represented a few sellers who sold their homes to people with low/no down mortgages.  As their agent,  I only cared about if the buyers could remove their financing contingency.  It is sad that a few of these sales went south. 

Its also interesting in a few of these situations that the buyers went back to the agent who helped arrange these loans.

But over the long term,  real estate has turned out to be an excellent investment.  Only 2-3 times since 1990,  have Coastside home prices dropped.  The slope looks like a flight of stairs with rises followed by periods of plateaus. That’s a pretty good performance.  And that’s before you factor in the generous tax benefits of home ownership

“Nevermiind about the idea of actually paying off the loan—that’s old fashioned thinking. And when many peope did refinance while prices were still rising, they used the opportunity to extract equity to buy cars, boats, vacations, etc., thus effectively financing their new pickup truck with 30-year loan.”

B of A banker to a customer who just mentioned that they had made their last mortgage payment and paid off their house:

“Congratulations. I can get you a great rate on a HELOC.”

I agree that teaser rates are (were?) also a big part of the problem, and should also be completely banned along with neg-am loans.  And Kevin’s blanket statement appears to be correct—there was a complete collapse of lending standards.

That said, how will the major tightening of lending standards affect real estate prices over the short and intermediate terms?  If fewer people can qualify to buy, the law of supply and demand says that prices should drop.  The factor unknown to me in this equation is how much of the excess of demand over supply has been removed here.  For the first time in a decade, there has been a major drop in sewer permit applications in GSD—in FY2007/2008 GSD issued 15 permits for single family residential, compared to a previous average of around 40 per year.  To date this FY GSD has issued 2 permits for SFR.  Steve, how do you interpret this?

If there remains an excess of demand over supply then prices will be maintained.  Once the demand falls below the supply, then you have a Stockton situation with prices collapsing and one of four homes in foreclosure.  (Of course, adding to the Stockton problem is the recent increase in gasoline prices, making it less practical to live in Stockton and work in SF or SJ.  My rental properties are in a location that increases in value as commute costs increase.)

Kevin- YOU SAID:
“The exotic loans were just one aspect of the bigger problem; a complete collapse of lending standards. Realtors had to know that many of the people putting up offers on houses in last few years had no business buying a house at those prices.  There’s the famous story of the strawberry picker in Hollister who made $14,000 per year who somehow managed to qualify for a loan to buy a $700,000 house. What did his realtor tell him I wonder? Probably: “real estate is a great investment, prices will only go higher, you can always refinance later.” Nevermind about the idea of actually paying off the loan—that’s old fashioned thinking. And when many people did refinance while prices were still rising, they used the opportunity to extract equity to buy cars, boats, vacations, etc., thus effectively financing their new pickup truck with 30-year loan.”

Cid’s REPLY:

Yes, some Agents must have known that the buyers may not have been able to afford the homes that were being sold, especially if the buyer’s agents had their buyers in 2/28 loans with a 2 year fixed low low low teaser rate, and knew that it would adjust (probably higher)....

The problem is, as a Listing Agent, you have an obligation to your Seller to get as much as possible for their home, which is why they hired us in the first place. We do NOT have any information on the buyer’s loan details, so we aren’t to be blamed for buyers who either 1.) Lied on their loan application 2.) Worked with a lender that played fast and loose on getting them pre-qualified or 3.) Irrationally expected the RE market to continue upwards forever.

The real problem was, in my opinion, the buyers’ agents that encouraged their clients to get approved by an in-house lender who would assist or “enable” the buyers to look as good as possible on an application by suggesting they increase their real income figures on what were known as Stated Income loans. These types of loans were not scrutinized by the underwriter…for many reasons, because the loan agents is paid a higher yield spread premium (Fee) for placing people in these types of loans, for one thing. AND…Banks were fighting for these types of buyers because WALL STREET firms such as Bear Sterns had investors they could foist them off on as quickly as they were being funded.

I’m sorry, but I blame the banks for creating these types of reckless loan products….AND for shoveling them over to unwitting investors quickly in order to fund even more. They foisted them on buyers, some of who could have qualified for a more conservative type of loan. It was all about greed. If the lenders (banks) had remained accountable, or had to portfolio the loans in-house instead of sending the problem along to others, they would have known sooner, and been more directly impacted by their poor underwriting practices.
Maybe they would have given the borrowers a better shake too, because they knew the loan would go bad on their watch if they did not.

“It is highly probable that a considerable volume of sales recently made were based on credit ratings only justifiable on the theory that flush times were to continue indefinitely….When the process of expanding credit ceases and we return to a normal basis of spending each year…there must ensue a painful period of readjustment.”

From: Persons, C.E. 1930 “Credit Expansion, 1920 to 1929, and Its Lessons.” Quarterly Journal of Economics vol.  45, pp. 94-130.

The tightening of the lending requirements is having the most impact on weaker first-time buyers.  Since real estate is partially based on the premise of people moving up,  you need first time buyers to allow those sellers to move,  etc.

But when this segment comes to a halt,  inventory builds and its harder for people to move up or move on.  You can see this with a large number of homes now available at the low end of the market as well as many short sales and REO’s in this segment.  From a buyer’s perspective,  this is actually good because they have a large selection now to choose from.

As far as Leonard’s comment on a decline in permit applications,  I’m not really surprised.  Land sales have really slowed down to the lengthy permit process and growing fees,  not to mention the aggravation.  Another reason is that in this credit crunch,  its very hard to get land loans.  I’ve used BOA a lot and now they are not offering land and construction loans. 

So without financing,  land sales have slowed to a trickle.

A bleak assessment of the California Real Estate Market:

http://www.nytimes.com/2008/08/24/business/24house.html

?Owning a home is the American dream,? says Jamie Schrole, a Merced real estate agent. ?Everybody was just trying to live out their dream.?

The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.

How long will the economy have to pay the price for that illusion? The experience of Merced, which rose higher and fell faster than nearly anywhere else, suggests that recovery from the national real estate debacle will be painful and protracted.

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as ?the foreclosure price? ? the cost of a comparable bank-owned house ? real estate agents say you might as well not even bother listing your home.

And so most people do not: three out of four existing-home sales in Merced County are now foreclosures, the highest percentage in the state, according to DataQuick Information Systems. The only group for whom selling makes sense, real estate agents here say, are the elderly entering assisted-living facilities, who often have decades of appreciation built into their home?s value.

As Merced goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.

Local markets will not truly begin to recover until their foreclosures are absorbed, but just as few in Merced saw reasons for caution at the height of the boom, hardly anyone is optimistic now. Bank repossessions are accelerating as overleveraged owners see the value of their properties sink. Merced County had a record 523 foreclosures in July, quadruple the rate of a year earlier, according to DataQuick.

The repossessions are accelerating as overleveraged owners see the value of their properties sink and can find no way out.”

An interesting but not new piece and not really really relevant to what’s happening both here on the Coast and County.  While foreclosures are up this year,  they don’t even account for 10% of all the listings.  And they are all concentrated in the lower end of the market,  namely under $800,000.

It is true that this number is understated because not all distressed sales go up for sale for a variety of reasons.

Not that things here are great put home prices are still flat with 2005,  when prices on the Coast hit there all-time high and 2007 for the County.  What is similar is declining number of sales volume and increased selling time and inventory.

I don’t see things tanking here like they did in the Central Valley,  which is partially do to over building.  The lax lending occurred everywhere.  If it was going to happen,  it would have already.  If you look at a 20 year trend of Coast home prices,  it resembles a flight of stairs with the downturns being level.  Only 2-3 times in 20 years have prices here actually dropped with the largest percent declines in 1990-1991 followed by 2006 when Devil’s Slide closed.

What bears constant repeating is REAL ESTATE IS LOCAL.

“increased selling time and inventory”

Which translates to “places are priced too high to sell at the previous rate.” So, being selective and superficial with the numbers results in saying what one wishes to say and not necessarily what apples compared to apples tells one.

The numbers one wants, if one insists on being stuck on sales prices as a sole indicator, are the prices at which properties would sell according tol some comparable time standard. If selling time and inventory” are increasing, those real sales prices are obvious lower than the prices for the fewer sales taking place would indicate. This is but one consideration that makes non-standardized graphs of sales prices (rising, flat, falling, whatever) next to worthless for describing a situation—local or otherwise.

Carl,

I try and look at many factors besides prices to present a picture of what I see going on.  You and several others may look at the same data and come to a different conclusion.

I think sales prices,  not list or asking price,  is a good barometer of what a willing buyer will pay and a willing seller will accept.  Part of the reason inventory has been high and selling time is increasing for the past 1-2 years is because some sellers are unrealistic of what their homes are worth.  There are unfortunately some sellers who bought 1-2 years ago and are finding they can’t get out whole in today’s market.

I think I give the residents here a very complete picture of what is going on in our small real estate market with many charts covering years so things can be put in context.  Over time I cover prices, inventory, volume by price category,  prices by town, selling time, sales price to list price, etc.  I also tell people when I think the markets favors buyers or sellers and I tell them where I think things are going.

Markets move all the time and nobody has an accurate crystal ball.  Look at the unfortunate people who bought Google at $750 when its $300 lower today.

Anyway,  the numbers are what they are.  I don’t massage them to push my agenda.  I think I pitch them down the center of the plate most of the time.  At least that’s my intention.

On growth and politics,  that’s a different story.

Some random thoughts/points:

- Let’s just hope LIBOR stays in check, otherwise the impact from ARMs….. would be like Hurricane Ike, followed up by Hurricane Katrina.

- The layoffs are starting to pile in, and should continue for a few quarters.

- Steve reminds us, in all caps REAL ESTATE IS LOCAL. That’s all fine and good… but funding is national. Plan on up to a few hundred regional banks folding in the near future, so I’m curious where credit liquidity for a 3/2 home will come from, when the likes of GE or Ford can’t get daily float. Once the capital does start to creep back in, the rigor and risk aversion in anyone getting a loan should be comical, at best.

- 40% of home sales in California not too long ago were as investments/second homes/etc… if a certain candidate is elected, you can guarantee those folks will be trigger shy and finding ways for their wealth not be spread around, much less worry about the hit on the gains.