Consider what you have just witnessed
Chuck Ponzi August 6th, 2007
If you consider all that has happened over the past week, past month, and past 6 months, it is likely that many of us have never seen before the kind of turning point we have just seen.
American Home Mortgage bit the dust
Accredited Home Lenders is teetering on insolvency
Countrywide warned
Indymac pulled core products
Numerous other lenders are also pulling their main products as well
If we take the logical next steps to what this means for the overall housing market, where does it leave us?
While Gary Watts would like you to believe that all that has to happen is that the FED needs to lower interest rates, the problem is not that easily solved… and I’m not sure we want to solve a problem that the market is currently working on solving anyway.
In addition, many in the housing market will fail to see the turning point and are going to be suspended in the air for another six months like Wile E. Coyote. It won’t be until next year that we really see the freefall in values.
Nowhere in the Constitution does it offer the right of ever appreciating real estate in this country. Neither does it promise that you won’t get hurt for your own stupid decisions.
This is the end of the housing market as it has been for the past 7 years. It is a changed market, and we will likely not see the end of the housing bust for at least 3 or 4 years from now at the very soonest. With all of the lending losses, it will be very unlikely that lending would approach the reckless abandon it achieved over the past few years any time in the forseeable future. Even the FED can’t save this now. It would be as they say “Pushing on a String”. lenders do not need to lend money if they do not want to, or if they percieve the risk to be too high. Lenders are not worrying about interest at this point, they are worried about principal.
Homesellers, I warned you, if you didn’t listen, it was your own fault, and now you are stuck.
No, the best thing for this market, and for the economy overall is a monumental housing crash. All houses immediately marked down 30-40% throughout SoCal would just about put us right with where we should be considering household formation, interest rate risk, personal incomes, affordability, and consumer debt load.
Sadly, it won’t happen that way. No, today’s sellers agents are as delusional, and as thick-skulled as they come. Transactions will likely come to a screeching halt from their already stymied location. The only thing that will move this market is need-to-sell inventory by the way of foreclosure forced sales and short-sales. Now it’s time to get down and dirty with the housing bubble.
Collectively, we could have all avoided this point, but individually, we did what each thought was the best for us and it has failed. No amount of public preaching from a blog telling people to ready themselves for the coming crash would have changed many people’s minds. I only hope that some readers have read, understood, believed, and acted upon the recommendations. You have been saved. The lemmings coming after you have only the cliffs of insanity, and the cold, hard rocks of reality below.
On the other hand, depression about (not) owning a home in Southern California occasionally grips even me. Even knowing all of the pain to come (it was a certaintly last year and the year before, so it’s still a certainty), I’m not confident that I’m interested in waiting it out here. Many of the people our age have left the area, leaving a swath of people 5 years older or 3 or 4 years younger than us. The older ones don’t understand the predicament since they don’t have it, and those younger don’t have the pressures of a peaking career and growing family. The ones before us are “over the hump”, and those younger haven’t begun looking at the hump. Periodically, I just want to throw in the proverbial towel and say “bag it”, it’s not worth the wait and just work somewhere else. If I weren’t in the middle of some big things at work and I could walk away without harming the company I work for, I would. Alas, by the time my projects slow enough for me to leave, we may already be in a recession with a difficulty finding a new job out of state. I’ll just have to see at the beginning of next year.
My wife is not oblivious to the pressures, she feels them as well. On the other hand, it has made us realize what we don’t like about Southern California (or at least L.A. and O.C., not including S.D. or Ventura), the self-righteous, self-centered, selfish home-trust-fund babies that inhabit not only the dark corners, but the visible ones, and frankly, much of the cry-me-a-river-my-house-lost-10K-but-went-up-400K-before-that crowd that is 90% of all OC. It all but sickens us with the idiotic drivel that escapes their lips. My god, what a bunch of whiny bitches! And their wives are even worse.
Luckily, our children don’t sense the pressure, or at least not at 3 and 1. Ever feel like a failure? Just spend a few hours with your preschool kids, and it’ll change your opinion. (disclaimer, I’ve heard this only works until they are teenagers)
No, at this point, we are basically in it for the long haul. We’ve gotten over the hardest part being former owners and renters… the back side of the slop is in front of us, and it’s hardly worth leaving at this point with family here, a good job, and security… although that would change with the right job offer. I suppose that we’re not the only ones in this situation, except that if an employer needed us next week, we can break our lease. Most around us would need to sell a house in probably the worst housing market since the Great Depression.
So, all in all, I consider what I have just witnessed, and suppose that there are a number of people just like us. We will get our house someday… regardless of what the “priced out forever” crowd of real estate agents have told us. It is sad to see so many houses in our area begin to fall into an untended mess, but there’s no escaping that many of our neighbors just can’t afford their houses. I can’t imagine anyone wishing ill to them, but when they were driving H3 Hummers and bragging about how much their house was worth, I had to remember that all things would return to the way they were. The financial lessons people are learning now are hopefully strong enough to prevent a repeat, but easy enough to not sink our economy.
If you have any thoughts on staying put/leaving, leave them here.
- Housing Crash , Moving , SoCal
I was forced out of my house when I divorced in 2005. Thank God I let the ex buy me out. He repurchased the place with a 5/1 arm. What a schmuck! I am currently renting and I am waiting impatiently for my chance to buy. I have a nice down payment, but I still can’t afford anything. I have a college degree, make more than the OC median. So, I am bitter that my dream was taken away by the greed and fear of my fellow OC citizens.
I think I can wait a couple more years. I am losing patience, though.
I’m in the same boat, but without any kids. I’ve been thinking that I can just kinda afford a crappy 2bdrm condo in the high 300s, but now the way the market is going, it sounds like that will get me a house in Corona (with a crappy commute to Irvine) by 2009-2010 without getting bent over by condo associate fees. Fortunately the rental market is and will be reasonable for the interim while we wait another couple of years for things to shake out.
We (my wife and I) are actually thinking of selling where we are (Pennsylvania) and moving to SoCal (where I am from).
Even if we can, and we think we can, gain some small return from the home we own now, I seriously wonder if it will ever be enough to finance a home in SoCal given how inflated the prices are.
I grew up in Escondido and would like to move back there. With that said, a dump in the nastiest parts of town sells for $250k or more. In Escondido. And all of the apartments I lived in in my twenties are “Apartment Homes” (who, in the name of Satan coined that term?). Dumps that used to be shabby apartments are now grossly overpriced condos.
I seriously wonder if any adjustment can really put things back to where they should be or if we’ll just see a slight readjustment and an entire generation will learn that not only is home ownership a privilege but a rare one at that.
Where I am now I can still buy a decent home for $150k. Nothing fancy mind you but decent. And we were looking at, just for fun, Rochester New York where you can have your choice of homes for $70k.
No, I don’t expect Southern California to ever hit the prices of upstate New York and Central Pennsylvania but I do tend to think that we’re so far out of whack that the market can’t really balance itself again.
Someone tell me I’m wrong and why. I’d like to think otherwise.
Timing is essential with real estate investments. I support Chuck’s theory that we may be heading into a really great period for home buying. However, it will be difficult and require some time before we see the downside effect of all the ills created over the past few years. Homes prices have moved down some, but still way over inflated given the demographic support. The Riverside/Corona area is begining to feel the crunch with many homes now below the $200/sq. ft. level (Brand New Homes). I see the OC area adjustment being around $225-$250 if the story holds to what many are saying about correct housing prices. So now, or sometime during the next 12-24 months should be a good period where we will see home prices adjust in alignment with what they should be. Good Luck
my wife and I are in our early 30’s. Make a little over 6 figures; have about $140,000 to put down but just can’t bring myself to do it. Would like to leave calif. we have a 2 year old and are trying for #2. I like warm weather and surfing so my options are limited; maybe florida or the carolina’s. Quality of life hear is a joke!!!
Hallelujah my friend…
You’re speaking the truth! I’ve sat here working my ass off for the last few years trying to hit it big at an Internet startup. And what’s my payoff if I do? If I make a million dollars, I can buy a house! Not a great house, mind you, but a crappy, shabby house in a worse neighborhood than the one I live in now (Brentwood) where I rent a nice apartment for $1900/month.
Everyone’s been telling me to buy and I’ve been pushing back (not that I could afford anything anyways). But now that we’re starting to see the crash coming, I can’t wait! I know it will take a few years and I’m going to be as patient as possible, but it’s going to be fun to watch.
I’ve had so many thoughts of moving out of So Cal (I’m from No Cal, where people are nicer but property values are no cheaper), and it’s really hard for us CA natives to have to think about leaving the best place in the US (at least).
Anyways, thanks for the blog. It’s nice to know I’m not the only one…
Great Post, it is hard to wait, I just renewed our lease but am waiting patiently to buy. At least now i stopped getting pressured from the inlaws as there home has lost around 100,000 in about a year. Now i seem a little smarter for being reluctant to buy at the top of the market. I had to bite my tong just six months ago when my mother inlaw said ” But real estate never goes down” once again great post.
Your sentiments are the sentiments of many recent college grads and the newly married — virtually banned from the neighborhoods of thie childhood and cities/regions of their youth, despite earning more, working more, and recieving more education than our parents.
This current market can’t be sustained and we all are proof of that.
Renters will get their day, yet.
Hello Chuck,
Does the speed seems faster in retorspect then for the last year or two of blogging and seeing it comming? Perhaps since we are watching implode-o-meter we can see the wave growing.
The big problem I see with a rate cut is people are already in a debt death spiral that is out of control.
All the banks can do with so many peole out there is offer more loans and more debt. So they will approach insolvency even faster with even larger losses.
The only people that win with a rate cut are investment banks who might seem lower cost for M/A activity that has marginal benifits for the rest of us.
I have 3 kids and live in a 2 bedroom apartment. It is miserable every day. I can’t wait to buy a house and have some room to walk around. It drives me crazy. Personally I want this crash to be devastating for those greedy ones who kept me miserable for years. It will be fun to offer 300K on a house that was 1 Million in 2006. Our day is coming.
I too felt the pressure of wanting to buy a house, but who cares about owning a home when you can rent for a lot less? Seriously, there’s nothing wrong with renting, it’s not as bad as some people think. It took me a long time to finally realize this, but it makes complete sense especially when prices are so far out of reach.
Even if home values drop by 50% or more, I’ll still rent as long as it’s more economical for me to do so. Buying a home with a higher net monthly cost than renting only makes sense when home prices appreciate. Considering the state of things now and the unknown future that lies ahead, I’d rather not take any chances.
Yeah, I know how it feels. Moved here in fall 2002, rented ever since, and it’s taken until just about this time last year to feel that our income is stable enough to actually consider buying sometime in the next 24 months. We’ve got a downpayment, but the *$%^$ salary just isn’t enough yet, but our time is coming. Am I hoping for an avalanche of pain for many foolish overmortgaged OC’ers? You betcha.
Exact situation for us… We sold our Orange County home in 2005 and moved out-of-state. A year later, my former employer made an offer to bring me back and seeing where the S. California markert was heading, decided to move back and wait it out. It’s becoming more apparent each day with the melt down of the lending industry and those buyers who really didn’t understand the programs. I did get out to a few open houses this weekend just to give our good “Realtor” friends some company, one “Realtor” informed me that we are still in the midst of a bust out year with real estate prices heading higer…. I then asked for some of the Kool-Aid he was serving and seemed pretty offended about my comment. but it’s amazing how they stil spew this crap. I think your right on with the analysis of a 35-40% correction and that’s been my assessment using similar data. Earlier this evening, one of my neighbors (recent home purchaser) was fired up about home prices on recent listings in the neighborhood and kept on insisting that we should call the Realtor and demand an explanation?? With my very watchful eye of real estate activity, I had to inform him that even though the homes were about $60-75,000 less than he paid 8 months ago, many of the homes were REO or buyers who were behind on their payments on top of being deliquent up to 12 months on their property taxes. YOU ARE RIGHT, it is going to be painful for many and those who will not give up on the many ills created during this recent real estate cycle.
Mortgage money is difficult to obtain today unless you are a full doc fannie/freddie loan. The real estate boom was led by cheap money. What should you expect when the cost of money goes up?
This hits the mark! My wife and I are waiting out the market, too- have been for the last 2 years. We earn more than enough to buy ourselves a house in a “normal” market. However, being that I am from SoCal, and not interested in leaving, we have chosen to stick it out by renting an apartment where we have bums picking through our trash every morning looking for cans or bottles. Way to go for two people such as ourselves who each earn 6 figures, have dual graduate degrees, and are, for the most part, frugal.
Yup, only in Cali….
Me and my wife are just married and hitting our 30s, and though we’ve felt some pressure to buy a place, I really just can’t ever see doing it in Southern California. Our combined income is about 120. By conventional standards, that would put us in the 250k range for a house we can afford, but I’d be hard pressed to find even a 1BR condo that can be had for that much.
For now we’re renting a 1BR in Santa Monica for half of what the mortgage would be and that’s fine with us. But in a few years when we’re really going to want a place of our own, I’m afraid we too are going to be outta here.
Making huge sacrifices so we can afford a house above our means or commuting an hour or more to work isn’t worth it to me.
Let me tell you a complete follow through story, no speculation on what if, just facts.
I lived in OC for 20 years. We were very comfortable in our apartment. New car, adequate toys, kid was 11 years old and doing well, I made 4 times the average wage in 1989. We succumbed to the ‘priced out forever’ talk.
Sold the ‘61 corvette used it as down payment so we wouldn’t touch our cash and bought AT THE EXACT TOP OF THAT MARKET! House went from 80k to to 160k in one year 1988. We bought it at the 160k in 1989 [or close. I don't remember exact year]. It went to 230k in about 6 months more, then it dropped to 120k and sat there for 9 years! We refied out of our 11% variable, had to bring $15k cash to that party because we were buried. 160k plus this 15k is 175k.
We wanted to move, but no buyers [as I made more than most this home became the proverbial 'diamond in a goats ass'. I spent more on lawn care than most in my neighborhood netted]and we couldn’t afford to lose any more cash. Nothing like leaving 30k behind to start a new life somewhere else, so we waited. Oddly, it sold in Oct 1998 another historic downturn. We got 170k, flipped back 10k toward the down when the buyer came up short. Luckily the fixed we refied to was 15 years so we had 100k in equity by then.
We moved out of State, bought a great house for 61K and live there still. Lake view, corner lot, temperate to hot AZ weather.
Punchline; skip purchasing the house and just bail. Until we got this home I would tell everyone I met that I was the only person I knew that was sorry they were a homeowner. All agreed that indeed they had never heard of such a thing. If I had rented I would of had the same 100k but could of bailed about 9 years earlier. A house can be a huge burden. I have the strongest mariage imaginable, but that Anaheim house rode us hard. I didn’t even know what happy was. I sure do now.
The thing I’m proudest of; OC is just a haze. Kinda like reading the blurb of a book in the airport bookstore. Sounds bad, didn’t buy it, but the story will possibly ring a bell somewhere. I often forget we ever lived there. It’s how I like it best.
Prologue; We recently went back to OC to see my ‘born and raised’ OC daughter. It’s amazing how much slower everyone drives than we remember, and just how quickly we fell back into it all. SkyKing blasts at 90mph across 6 lanes of traffic, that ‘tink’ sound as you clip a bumper at 85mph….
It is interesting to see how many people are in the same boat. My wife and I came back to Rancho Cucamonga area with my two munchkins about a year ago.
We are renting in Rancho and are thinking of going to a new home builder and just low-ball them and see how much they are willing to dicker. I went to some models… plenty of homes available and the prices actually have come down dramatically since last summer. Unfortunately the new home prices, at say, KHOV, have dropped from totally insane to only moderately insane. They are going to learn very soon that so few can afford their prices that they will have to drop them even more to generate interest.
I’ve basically given up on buying a used house. The reason is that the prices are way too sticky on the way down and the houses really aren’t that nice. The old old ones need so much updating, I just can’t see paying the inflated prices. They have larger lots going for them. The newer houses are all on tiny lots and packed in so tight you can smell your neighbor’s intestinal gasseous effluent. The tiny back yards are a big turn off for us. Why would I dump my money into an old house when I can spend only minimal amount more to have something new?
I remember my brother, who purchased in Temecula back when people were out bidding each other for every little shack they could find. His comment was pretty much every seller was an a**ho**. Well, kids, what goes around, comes around.
The only offer sellers are going to get from me is a low ball, and probably for most sellers right now, that’s the ONLY offer they are going to get.
I’ve met some “realtors” who say that their sellers are angry. Nothing has changed, apparently.
My wife and I basically have a similar empassioned conversation nightly about income, priorites, are we going to stay in So. Cal?, job security, etc.
And then we talk about sacrifice. How much luxury do we sacrifice to have walls of our own to decorate? Are vacations necessary every year like we had dreamed about? Private or public school for the girls? If we spend 750K on a house, our lives will be so much less comfortable than we planned.
We are strongly itching to buy a house, my wife especially. We like to have our ducks in a row… things set, school district determined. That said, there is no way we are going to buy until sellers come to their senses. Eventually they will be forced to. In the mean time, we’ll go see Go Diego Go! in the Kodak theater, not having to worry how we will pay for tickets.
Ditto on that. If all of us First Time buyers refuse to buy (or can’t without a suicide loan) then the prices will come to meet us.
I agree that prices will drop and prices are too high but realistically they will never fall 50 - 70% in SoCal. There’s just too much demand and too many people earning 200K+ for that to happen. Please don’t accuse me of being a troll, I’m in agreement, I just think there needs to be a reality check on expectations of where this will land.
Prices will never fall 50% or more just because it’s SoCal? It is sad to see how many people forget history - even those who have been burned in the past. You must also consider that this bubble is UNLIKE ANYTHING THAT HAS EVER HAPPENED BEFORE. The consequences are unknown.
Earning 200K+ doesn’t mean a thing when you’re in way over your head. There is a small percentage of people who are smart and living within their means, but the big majority of Southern California is not.
The whole system has been delicately balanced in equilibrium for the past several years, and it’ll only take a few small events to bring about some major changes. I’m not a doom and gloomer, but realistically there is no way this thing will sustain. 50% price drops from current levels are still beyond affordability for most people.
I am among the small percentage of people in Southern California who are smart and are living within their means. As a former homeowner currently in his early 50s whose last residence was a house in the northwest San Fernando Valley (sold in July 2004 and purchased in June 1999 with a sales price more than double the purchase price), I no longer have to work for a living. I am living on a pension and on my non-retirement account savings. The overwhelming majority of my retirement account savings, which includes the mortgage paydown and profit from the sale of the house, cannot be touched for the next 8 1/2 years, which is great because I cannot be tempted to touch that savings. Although living in this manner does require a lot of discipline, I do not worry about money. I am single, never have been married and never had any children, and am living on less than $2000 per month. People who live over their heads created their own situations. It is up to these people to deal with their situations. Fortunately for me, I do NOT live over my head.
Luka,
While I don’t believe they will fall that much in the median statistics, it is very possible, and I would consider it likely for it to fall 50% in at least several places.
There are a number of scenarios that I can currently see as possible that would cause the adjustment to be as much as 50% in the median as well.
We all should be care of using the “never” word. Never say never.
Chuck Ponzi
230k [model match sale]
120k appraisal 2 years later, this was
my house in Anaheim 1989.
I’ll for sure say that this isn’t 50% but it sure was close. Took 8 years to come back.
Average house for any neighborhood must have a mortgage of 3.6 times annual wages. PERIOD. Need more house, put more down. It’s easy math, it’s factual and that’s the way it is when you can’t lie about your income.
Average OC income {I’m not going to look it up} is 60k+-
$60kx3.6=$216k
216k HAS to be the average mortgage in the average neighborhood, or you just do not budget and will fail.
Nicer neighborhood, bigger mortgage. lesser neighborhood, less mortgage. You put the bigger down to afford the nicer house.
If rates go up, houses must come down and the mortgage amount allowable goes down.
Rates go down than mortgage amount can go up.
It’s simple. The payment must always stay the same or you fail to budget and you lose the house.
I have been looking at both rental and resale homes in the Costa Mesa area and I recently noticed some new 3 bedroom homes for rent in the high $3000s or low $4000 that were listed on the MLS for months. So if we start having these actually get rented for this then won’t rents rise to cover costs while housing slides to meet somewhere in the middle? Say 25% off peak?
Interesting comments from people around my age (early to mid 30s). I grew up in San Diego, went to grad school back east, and came back here in 2002. Watched with great anxiety as prices rose, but didn’t see any economic fundamentals to support the price increase (OK - low interest rates may have sparked the first year or two, but that didn’t last - easy credit was the cultprit, as we’ve all seen). Felt even worse about not owning after my daughter was born in 2005 and I wanted to give her a home like I had. I’m so happy I resisted the temptation to bite off more than I could chew - something almost all of my friends did and recommended for me. Now I think things are permanently damaged for the rest of us. The SD that I knew growing up - laid back, small, fun, working-class - seems like a distant memory as greed has settled in. I would love to live here for the rest of my life, but So Cal is nothing special. The beach is nice, but only during the week away from the crowds of the summer. I loved my small town back east, especially for kids. Looked at a house last year that is still for sale, but the owners won’t budge on price. What is going to happen to them and us?!
Our story is that we are just starting out as a family but older than most here. 40’s with two little ones. As singles we both lived in LA County’s priciest zip code, renting, and as a family we have opted to stay here and continue renting. Of course we are hungry for a home we own. Where we live, one street separates the $3 million homes from the $1.5 million condos. Now, with decent income and $200k saved for a down payment, we are revolted by the asking prices for run-down condos. Things are on the market longer, realtor signs on weekends clog the boulevard street corners so thickly you have to hopscotch around them. Zillow any property on the condo market and you can see that the asking is twice what it sold for anytime between 2001 and 2004. As the shopping fatigue sets in, we wonder if — even with a market adjustment — this is a city we want to invest in.
FYI — we did a survey on one of our message boards inquiring of other families, “How DO you do it? How DO you afford the mortgage, the Range Rover, the Benz coupe…” We got a mix of answers — three-quarters of the respondents were in the same boat and wondering the same thing and experiencing the same level of exasperation as us. The remaining quarter said that for them it was a combination of getting help from family and having high incomes. As others have said, even with a high income, how can you carry $10k/month mortgage? The high earners we know seem to be more cash poor than we are.
Don’t buy in So.Cal. Not only are the houses way over priced, I truly feel there will be riots due to immigration crackdowns coming soon. Save your money in a FDIC insured account and retire someday in a really nice place. Maybe find where you want to retire someday and buy a home or land there right now so you will be ready when the day comes. This will make you forget about not having a home now, as you will be planning and dreaming of your retirement home. Good luck to you !
Bill S.: Let’s not forget about the riots that occurred in Los Angeles during the spring months of 1992. Let’s also not forget about the earthquakes that occur periodically, such as the Northridge Earthquake of January 17, 1994. Although I live in an relatively safe part of Los Angeles, I am just renting a one-bedroom apartment currently. When I purchase my retirement home about 13 1/2 years from now, it is highly likely that my retirement home will be in another state.