Bush Offers Help to Overwhelmed Mortgage Holders
by Chris Arnold
All Things Considered, August 31, 2007 · Responding to the growing wave of mortgage foreclosures, President Bush announced measures Friday that could help some troubled borrowers keep their homes. Democrats have criticized the president as being slow to act.
Economists estimate that up to 2 million people around the country could lose their home in the ongoing turmoil surrounding so-called subprime mortgages.
Adjustable Loans Go Through the Roof
The president started his Rose Garden speech on a glass-half-full note, saying that changes in the mortgage industry in recent years created a record level of homeownership.
But President Bush then noted that there also have been "some excesses in the lending industry." He said one of the most troubling developments has been the increase in adjustable-rate mortgages, which start with a low interest rate and adjust higher after a few years.
Many of these exotic adjustable loans are rising — to 11 percent or higher — and are adding hundreds of dollars to borrowers' monthly payments.
President Bush said that the growth in adjustable-rate mortgages has led some homeowners to take out loans that are larger than they can afford. Some borrowers may have been overly optimistic about home prices, while others may have been confused by the terms of their loans or misled by irresponsible lenders.
No Bailout
The president said he does not want to "bail out" homebuyers or lenders who were reckless. But he said he wants to help responsible homeowners who got stuck.
One measure that goes into effect right away uses the Federal Housing Administration to help people refinance into loans with better terms.
Most lenders won't offer new loans to borrowers who have fallen behind in payments after their loans adjusted higher. But if the FHA insures a new loan, the borrower can refinance.
Another measure that needs congressional approval would waive a tax that homeowners pay if a lender forgives part of their loan.
Proposals Help Only Small Fraction of Those in Trouble
The FHA estimates that the Bush proposal would help an additional 80,000 homeowners to refinance.
Mike Calhoun, president of the nonprofit, nonpartisan Center for Responsible Lending, says that number might sound like a lot, but it underestimates the full extent of the problem.
"Even the Bush administration acknowledges that several million homeowners face large payment shocks and the threat of foreclosure in the upcoming year," he says.
Calhoun says the administration's response would need to increase by at least ten- or twentyfold in order to address the full problem.
The Holy Grail: Loan Modifications
Calhoun says the real hope for the bulk of the homeowners in trouble is for the lenders and servicing companies to renegotiate the loans to make them affordable.
President Bush strongly urged lenders to work with homeowners.
"I believe lenders have a responsibility to help these good people to renegotiate so they can stay in their homes," Bush said.
But housing advocates say such statements alone don"t have a lot of teeth. And they say the president and others in Washington need to do more than just ask lenders to work with homeowners.
Bruce Marks heads up the Neighborhood Assistance Corporation of America. The group is working with borrowers who Marks says are stuck in unfair loans.
He says his group has submitted more than a thousand requests for loan modifications to major lenders and loan servicers, asking them to restructure the loans to make them more affordable.
"They're not doing it," Marks says. "Right now, the lenders are only giving lip service. The regulators are giving lip service, and the president and Congress are letting them off the hook."
Stronger Medicine May Be Coming
Much of what the president set forth Friday has already been proposed in the House and the Senate. Housing advocates say much stronger measures are emerging in Congress. Some would make it harder for lenders to foreclose without first working in good faith with borrowers.
Friday, August 31, 2007
Mortgage Crisis will be extended, Fed chief says
US mortgage crisis will be extended, Fed chief says
Washington - More US homeowners are likely to default on risky loans over the coming months, extending uncertainty about US economic growth, Federal Reserve head Ben Bernanke said Friday.
The US central bank "stands ready to take additional actions as needed" to fight turmoil in financial markets caused by the meltdown of much of the US subprime mortgage market, the Fed chief said."Global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans," he said in a speech in Wyoming.In a strong indication of government worry over the roiling US mortgage crisis, US President George W Bush was preparing later Friday to propose a federal aid programme for high-risk borrowers and low-income homeowners.Bernanke made plain there would be no Fed bailout for failing lenders or investors stuck with losses, saying that "is not the responsibility of the Federal Reserve."He gave no sign of whether the Fed might cut its benchmark interest rate to help boost the US economy"Inevitably, the uncertainty surrounding the outlook will be greater than normal," he said at an economic conference.Lenders have pushed subprime loans to the least creditworthy borrowers, helping many Americans buy homes and driving up home prices in the last few years.A sharp slowdown in US homebuilding, a drop in home values and rising interest rates have forced many of those homeowners to default on their mortgages, squeezing the financial companies that made the loans and leading to a broader, global credit crunch.Bernanke warned that the crisis was far from over."With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further," he said.And the number of unsold new US homes remains high, "suggesting that further declines in homebuilding are likely," he said. dpa
Washington - More US homeowners are likely to default on risky loans over the coming months, extending uncertainty about US economic growth, Federal Reserve head Ben Bernanke said Friday.
The US central bank "stands ready to take additional actions as needed" to fight turmoil in financial markets caused by the meltdown of much of the US subprime mortgage market, the Fed chief said."Global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans," he said in a speech in Wyoming.In a strong indication of government worry over the roiling US mortgage crisis, US President George W Bush was preparing later Friday to propose a federal aid programme for high-risk borrowers and low-income homeowners.Bernanke made plain there would be no Fed bailout for failing lenders or investors stuck with losses, saying that "is not the responsibility of the Federal Reserve."He gave no sign of whether the Fed might cut its benchmark interest rate to help boost the US economy"Inevitably, the uncertainty surrounding the outlook will be greater than normal," he said at an economic conference.Lenders have pushed subprime loans to the least creditworthy borrowers, helping many Americans buy homes and driving up home prices in the last few years.A sharp slowdown in US homebuilding, a drop in home values and rising interest rates have forced many of those homeowners to default on their mortgages, squeezing the financial companies that made the loans and leading to a broader, global credit crunch.Bernanke warned that the crisis was far from over."With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further," he said.And the number of unsold new US homes remains high, "suggesting that further declines in homebuilding are likely," he said. dpa
Tough Love from Bernanke as Bush unveils Band-Aid
'Tough love' from Bernanke as Bush unveils crisis mortgage aid
WASHINGTON (AFP) — Federal Reserve chief Ben Bernanke pledged Friday to act to limit the spillover of a credit crunch on the broader economy as the White House unveiled aid to homeowners facing foreclosure.
The two separate announcements were aimed at easing a housing crisis that some fear could derail the US economic expansion by causing credit markets to freeze up further.
Bernanke, in his first public remarks since global markets were roiled by fears of a liquidity crisis, said the Fed wants to avoid "further tightening of credit conditions," which could have "adverse effects on consumer spending and the economy more generally."
Markets viewed the remarks as opening the door to a potential interest rate cut that could lower overall borrowing costs and stimulate credit markets.
"The (Fed) continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Bernanke said.
Stephen Gallagher, economist at Societe Generale in New York said the Fed "continues to embrace the market with tough love, but will do what is necessary," including a cut in the federal funds rate if necessary, on September 18.
Analysts said Bernanke does not want to be too quick to cut rates, for fears of sparking inflation and to be seen as bailing out investors who made risky bets.
But Robert DiClemente, economist at Citigroup, said he believes that "the speed and magnitude by which the overall financial setting has deteriorated are consistent with downside risks ... that justify policy (rate) action."
Meanwhile, President George W. Bush outlined a series of actions aimed at averting foreclosure for distressed homeowners, many of whom are facing a crisis as adjustable-rate mortgages are reset to reflect higher rates.
One measure announced by Bush would allow homeowners with a good credit history but who cannot afford their current payments to refinance into federally insured mortgages, likely at lower rates.
He also encouraged lenders to try to work out payment arrangements with financially strapped homeowners and urged Congress to pass additional relief measures.
However analysts said the measures would only affect a small fraction of the estimated two million homeowners facing foreclosure.
Bush insisted the federal government has only a "limited" role to play in helping millions of people now struggling to hold onto their homes amid rising interest rates and was not promoting "a federal bailout" of speculators and unscrupulous lenders.
Bernanke, speaking at a Fed symposium in Jackson Hole, Wyoming, did not directly speak about the next move on interest rates, but appeared to be aiming to allay concerns that the Fed would do nothing to prevent a broader credit crunch that drags down the economy.
But DiClemente said Bernanke's comments "reinforced expectations of an upcoming reduction in the funds target."
The bank has kept its main federal funds rate at 5.25 percent for over a year but on August 17 cut the discount rate for direct loans from central bank a half-point to 5.75 percent in an effort to promote credit flows.
Bernanke said incoming reports suggest the world's biggest economy "continued to expand at a moderate pace" as the third quarter began.
But he noted that the outlook has become somewhat murkier in view of the financial market turmoil of recent weeks.
Data released Thursday showed the US economy grew at a solid 4.0 percent pace in the April-June quarter, but analysts say they expect a sharp slowdown in view of the credit tightening.
Because of the tight credit conditions, Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna said in a note to clients that the Fed is likely to cut its base rate by a quarter-point in September and by the same amount in October.
"The current medicine (of easier discount window lending) has not worked," they said.
"The asset-backed commercial paper market has remained completely frozen. If this situation continues a much broader credit crunch could develop, which would have serious negative consequences for the economy. The Fed will not take this chance."
WASHINGTON (AFP) — Federal Reserve chief Ben Bernanke pledged Friday to act to limit the spillover of a credit crunch on the broader economy as the White House unveiled aid to homeowners facing foreclosure.
The two separate announcements were aimed at easing a housing crisis that some fear could derail the US economic expansion by causing credit markets to freeze up further.
Bernanke, in his first public remarks since global markets were roiled by fears of a liquidity crisis, said the Fed wants to avoid "further tightening of credit conditions," which could have "adverse effects on consumer spending and the economy more generally."
Markets viewed the remarks as opening the door to a potential interest rate cut that could lower overall borrowing costs and stimulate credit markets.
"The (Fed) continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Bernanke said.
Stephen Gallagher, economist at Societe Generale in New York said the Fed "continues to embrace the market with tough love, but will do what is necessary," including a cut in the federal funds rate if necessary, on September 18.
Analysts said Bernanke does not want to be too quick to cut rates, for fears of sparking inflation and to be seen as bailing out investors who made risky bets.
But Robert DiClemente, economist at Citigroup, said he believes that "the speed and magnitude by which the overall financial setting has deteriorated are consistent with downside risks ... that justify policy (rate) action."
Meanwhile, President George W. Bush outlined a series of actions aimed at averting foreclosure for distressed homeowners, many of whom are facing a crisis as adjustable-rate mortgages are reset to reflect higher rates.
One measure announced by Bush would allow homeowners with a good credit history but who cannot afford their current payments to refinance into federally insured mortgages, likely at lower rates.
He also encouraged lenders to try to work out payment arrangements with financially strapped homeowners and urged Congress to pass additional relief measures.
However analysts said the measures would only affect a small fraction of the estimated two million homeowners facing foreclosure.
Bush insisted the federal government has only a "limited" role to play in helping millions of people now struggling to hold onto their homes amid rising interest rates and was not promoting "a federal bailout" of speculators and unscrupulous lenders.
Bernanke, speaking at a Fed symposium in Jackson Hole, Wyoming, did not directly speak about the next move on interest rates, but appeared to be aiming to allay concerns that the Fed would do nothing to prevent a broader credit crunch that drags down the economy.
But DiClemente said Bernanke's comments "reinforced expectations of an upcoming reduction in the funds target."
The bank has kept its main federal funds rate at 5.25 percent for over a year but on August 17 cut the discount rate for direct loans from central bank a half-point to 5.75 percent in an effort to promote credit flows.
Bernanke said incoming reports suggest the world's biggest economy "continued to expand at a moderate pace" as the third quarter began.
But he noted that the outlook has become somewhat murkier in view of the financial market turmoil of recent weeks.
Data released Thursday showed the US economy grew at a solid 4.0 percent pace in the April-June quarter, but analysts say they expect a sharp slowdown in view of the credit tightening.
Because of the tight credit conditions, Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna said in a note to clients that the Fed is likely to cut its base rate by a quarter-point in September and by the same amount in October.
"The current medicine (of easier discount window lending) has not worked," they said.
"The asset-backed commercial paper market has remained completely frozen. If this situation continues a much broader credit crunch could develop, which would have serious negative consequences for the economy. The Fed will not take this chance."
Sub Prime Lending and Shady Mortgages
Hooray for the Market!
Subprime Lending and Shady Mortgages
By MATT VIDAL
Does anyone remember corporate ethics? This was the big economic issue after the collapse of Enron, WorldCom and other major companies at the beginning of the 21st century. Books were cooked, winks and nods acknowledged.
Enron and WorldCom used a range of fraudulent accounting practices: hiding debts, lying about profits, backdating contracts, understating costs, etc. Ultimately, both the energy and telecommunications sectors each saw one of their largest companies go bankrupt. The WorldCom bankruptcy was the biggest in US history.
We've gotten over that. The problem was one of corporate ethics, and it has been fixed some corporate governance legislation, criminal prosecution and moral outrage.
But the bad apples are back, this time in mortgage lending rather than accounting. Financial markets are currently reeling from a meltdown in the mortgage lending market, following shady financial dealings in the so-called subprime market, which serves borrowers with bad credit history.
The story in the mortgage lending sector is largely the same as in the earlier accounting scandals: shysters using opaque, complex financial instruments to conduct transactions, pump up markets, and manipulate hard working people.
The financial instruments in the subprime lending market are numerous and often esoteric. In the category of straight-up manipulation, we have questionable lending tactics that include offering home loans to borrowers who have no down payment, interest rates with low introductory levels that soon shoot to double digits, and prepayment penalties.
As recently reported by the New York Times, the country's largest mortgage lender, Countrywide Financial, steered subprime borrowers into higher-cost loans -- more profitable for Countrywide and more expensive than necessary for homebuyers -- by using a computer system that excluded the cash reserves of borrowers.
At Countrywide and many of its competitors, mortgage lenders repackaged these shady loans and used them to back securities sold to investors. These mortgage-backed securities, which contributed to the housing market bubble, have come to wreak havoc in the credit markets. The crisis has intensified in recent weeks as major Wall Street hedge funds that had invested in mortgage-backed securities began to flop.
Questionable lending in the subprime market grew in a context of soaring real estate prices that gave a false sense of security to potential borrowers and homeowners. A steady stream of hot air fueled the housing markets, while seasoned investors happily bet away.
The warning signs were there -- the explosion of dubious mortgages followed by increasing bankruptcies -- and, indeed, a few hedge fund managers predicted the mortgage market meltdown and accordingly bet against subprime loans. Most investors, however, went along for the ride.
Countrywide was able to continue its subprime-driven strategy in large part because it was backed by banks and investors willing to give it a seemingly endless supply of money. After the contradictions of purely credit-driven growth came to a head, Countrywide's share prices began to tumble and it had to secure over $11 billion in emergency loans.
What should be made of all this? For starters, consider the recent attempts to privatize social security. The current regime of goons in the White House tried to implement the long-standing conservative goal of taking the retirement security of the majority of the country's workers and throwing it to the vicissitudes of the market.
The example of the mortgage market is instructive. It reminds of what capitalist markets consist: wild fluctuations, bubbles and drops, caused by extremely complex interdependencies in the political economy that are hard to understand, even for experts.
Schemers and cheaters trying to find opportunities to screw hard working people are an inevitable part of the system. But they distract attention from the economic system's structural problems.
At an immediate level, the mortgage market crisis provides a reminder that turning social security over to the market is a bad idea.
At a deeper level, we can see that it's not really the free market after all. Sure, people are exchanging things and the forces of supply and demand are felt.
But many of the forces behind these market fluctuations are institutional: Very complex financial instruments; winks and nods from regulators, analysts and auditors; and a whole range of economic transactions that are based on social conventions, unwritten rules, and long-term relations between key organizations and individuals.
More importantly, a key lesson here is not simply that "the market" is actually constituted at many levels by social institutions. Much of market behavior is driven more by the dynamics of capitalist organizations, rather than supply and demand creating efficient outcomes through price signals.
Why did major capitalist organizations such as Countrywide delve so aggressively into the subprime market? Quite simply, because the profit margins on subprime loans were higher than loans to prime investors. This is why we should expect schemers and cheaters, because at the end of the day, the name of the game is not efficiency-enhancing markets but profit-seeking organizations and individuals.
We are told, over and over, that it's really all about the market, that this is the governing institution. But as left critics have been saying since Karl Marx, this line is simply part of the bourgeois ideology that works to mystify true workings of the economy.
The action is in organizations (and individuals) competing for profits. And whether these organizations seek their profits in the financial, manufacturing or service sector, they are the building blocks of an economic system that, in its regular workings, leaves not only scandal, but unemployment, underemployment, inequality and poverty in its wake.
Matt Vidal is pursuing his doctorate at the University of Wisconsin in Madison. He can be reached at: mvidal@ssc.wisc.edu
Subprime Lending and Shady Mortgages
By MATT VIDAL
Does anyone remember corporate ethics? This was the big economic issue after the collapse of Enron, WorldCom and other major companies at the beginning of the 21st century. Books were cooked, winks and nods acknowledged.
Enron and WorldCom used a range of fraudulent accounting practices: hiding debts, lying about profits, backdating contracts, understating costs, etc. Ultimately, both the energy and telecommunications sectors each saw one of their largest companies go bankrupt. The WorldCom bankruptcy was the biggest in US history.
We've gotten over that. The problem was one of corporate ethics, and it has been fixed some corporate governance legislation, criminal prosecution and moral outrage.
But the bad apples are back, this time in mortgage lending rather than accounting. Financial markets are currently reeling from a meltdown in the mortgage lending market, following shady financial dealings in the so-called subprime market, which serves borrowers with bad credit history.
The story in the mortgage lending sector is largely the same as in the earlier accounting scandals: shysters using opaque, complex financial instruments to conduct transactions, pump up markets, and manipulate hard working people.
The financial instruments in the subprime lending market are numerous and often esoteric. In the category of straight-up manipulation, we have questionable lending tactics that include offering home loans to borrowers who have no down payment, interest rates with low introductory levels that soon shoot to double digits, and prepayment penalties.
As recently reported by the New York Times, the country's largest mortgage lender, Countrywide Financial, steered subprime borrowers into higher-cost loans -- more profitable for Countrywide and more expensive than necessary for homebuyers -- by using a computer system that excluded the cash reserves of borrowers.
At Countrywide and many of its competitors, mortgage lenders repackaged these shady loans and used them to back securities sold to investors. These mortgage-backed securities, which contributed to the housing market bubble, have come to wreak havoc in the credit markets. The crisis has intensified in recent weeks as major Wall Street hedge funds that had invested in mortgage-backed securities began to flop.
Questionable lending in the subprime market grew in a context of soaring real estate prices that gave a false sense of security to potential borrowers and homeowners. A steady stream of hot air fueled the housing markets, while seasoned investors happily bet away.
The warning signs were there -- the explosion of dubious mortgages followed by increasing bankruptcies -- and, indeed, a few hedge fund managers predicted the mortgage market meltdown and accordingly bet against subprime loans. Most investors, however, went along for the ride.
Countrywide was able to continue its subprime-driven strategy in large part because it was backed by banks and investors willing to give it a seemingly endless supply of money. After the contradictions of purely credit-driven growth came to a head, Countrywide's share prices began to tumble and it had to secure over $11 billion in emergency loans.
What should be made of all this? For starters, consider the recent attempts to privatize social security. The current regime of goons in the White House tried to implement the long-standing conservative goal of taking the retirement security of the majority of the country's workers and throwing it to the vicissitudes of the market.
The example of the mortgage market is instructive. It reminds of what capitalist markets consist: wild fluctuations, bubbles and drops, caused by extremely complex interdependencies in the political economy that are hard to understand, even for experts.
Schemers and cheaters trying to find opportunities to screw hard working people are an inevitable part of the system. But they distract attention from the economic system's structural problems.
At an immediate level, the mortgage market crisis provides a reminder that turning social security over to the market is a bad idea.
At a deeper level, we can see that it's not really the free market after all. Sure, people are exchanging things and the forces of supply and demand are felt.
But many of the forces behind these market fluctuations are institutional: Very complex financial instruments; winks and nods from regulators, analysts and auditors; and a whole range of economic transactions that are based on social conventions, unwritten rules, and long-term relations between key organizations and individuals.
More importantly, a key lesson here is not simply that "the market" is actually constituted at many levels by social institutions. Much of market behavior is driven more by the dynamics of capitalist organizations, rather than supply and demand creating efficient outcomes through price signals.
Why did major capitalist organizations such as Countrywide delve so aggressively into the subprime market? Quite simply, because the profit margins on subprime loans were higher than loans to prime investors. This is why we should expect schemers and cheaters, because at the end of the day, the name of the game is not efficiency-enhancing markets but profit-seeking organizations and individuals.
We are told, over and over, that it's really all about the market, that this is the governing institution. But as left critics have been saying since Karl Marx, this line is simply part of the bourgeois ideology that works to mystify true workings of the economy.
The action is in organizations (and individuals) competing for profits. And whether these organizations seek their profits in the financial, manufacturing or service sector, they are the building blocks of an economic system that, in its regular workings, leaves not only scandal, but unemployment, underemployment, inequality and poverty in its wake.
Matt Vidal is pursuing his doctorate at the University of Wisconsin in Madison. He can be reached at: mvidal@ssc.wisc.edu
Monday, August 27, 2007
Helping Homeowners
As a member of the California Association of Mortgage Brokers, I am concerned about the state of the industry and the public perception of our members.
Our members are feeling the pain of this blight on the industry. This is a systemic crisis, not a momentary 'correction'. Looking at the amount of devastation that could happen, I call upon members of the industry to look forward to solutions to this mess. It is not going to happen overnight. What we need are ways to bring sanity back and resolve the situation.
Our members are feeling the pain of this blight on the industry. This is a systemic crisis, not a momentary 'correction'. Looking at the amount of devastation that could happen, I call upon members of the industry to look forward to solutions to this mess. It is not going to happen overnight. What we need are ways to bring sanity back and resolve the situation.
State of the Housing Market
State of the Housing Market: Update From Schahrzad Berkland
Jun 04, 2007 -- In an effort to bring quality information to our growing readership about the state of the housing market, we will be featuring a series of interviews with various housing market experts around the nation. Each expert will be commenting on their respective market. Our first update on the housing market comes from Southern California housing expert Schahrzad Berkland.
Sick and tired of inaccurate housing reports, Schahrzad Berkland started The Berkland Group, a consulting firm which provides straight talk about the Southern California housing market. You can see Schahrzad's housing forecasts on californiahousingforecast.com.
Thank you for taking time to complete this interview, Schahrzad. We are very excited to share your views and data on housing with our readers. Can you let everyone know how long you have followed the housing market in Southern California?
Since October of 2005.
In your opinion, what are the biggest problems in the So Cal housing market right now?
Excess prices and risky loans: CA's prices are far removed from their fundamentals of wage and rent multiples. A large percentage of the population lives in California, and the banks are very exposed to CA real estate--so there is a lot of paper profits and risky bank loans, whose collapse will ripple through the entire country.
Wages: Salaries here are not high enough to truly afford the homes, so in CA we resorted to risky financing. In San Diego, 68 percent of all mortgages in 2005 and 2006 were IO or ARMs. People cannot afford their homes, so they are renting them from the bank, thinking they own them. This is happening in California more than anywhere else, which means the dollar amounts involved in overpriced homes and loans-about-to-go-bad is so much higher. For this reason, California is where you'll find the most risky loans, the highest mortgage equity withdrawal, and the greatest impact of all that consumer spending from the housing ATM.
Population loss: The cost of housing is so high that people are leaving in droves, moving inland or to cheaper states. (See #1 below.)
Job growth: Employment growth is too dependent on real estate.
Looming foreclosure crisis: With no skin in the game, people in foreclosure now are not even listing their homes for sale. They don't even have 6 percent equity to hire a realtor. So they live rent free for 7 - 9 months until evicted after auction. Foreclosures will go through 2 waves through 2012. For more info, see the chart on my homepage: californiahousingforecast.com
Some recently published news stories have lead readers to believe that wealthier neighborhoods in California are not experiencing the same housing market issues as other neighborhoods. Are the problems really limited to a specific group of people, i.e. the poor to middle class?
Even the wealthy are in over their heads, with rising property tax liens, cash-out refinancing, and foreclosures. I'll just give you one example of each. In Maderas golf course community, where some of the Padres players live, we've got a half dozen 2004 tax liens on $2 - $3 million homes. A guy on the water in Encinitas took out a $1 mil HELOC last year...
I go through hundreds of listings through the MLS, foreclosure.com, and ForeclosureRadar.com. One thing is clear: the more expensive the home, the more cash was taken out. It is rare to see anyone who abstained from the housing ATM. Last, foreclosures are rising all over the city. While they are highest in new subdivisions (because you had entire communities who got 100 percent financing at the peak of the market with short-term teaser rate loans that are resetting), they are rising in middle and upper income areas too.
Is there anyone in particular to blame for these problems?
The Federal Reserve created and nurtured the housing bubble. They ignored all the Homeowner Relief Acts and other banking legislation, all predatory lending guidelines. They wanted the stimulus of cash-out refinancing, to avoid a recession in 2001 from getting worse. So who knows what they have in store for an encore. Just like the housing bubble covered up the stock bubble collapse, what is the next bubble? The Fed is printing money at 10 percent per year, creating high inflation is anything that is not imported from Asia. So consumer goods are cheap, but prices are rising for US services like education, healthcare, oil, and food. What's next?
Do you think what we are seeing now is normal bubble behavior? For example, do you think the current bubble in California is similar to the housing bubble that occurred in Japan?
I have not studied Japan, but Dr. John Talbott discusses this in his book Sell Now. Their prices kept going up, but then reached a maximum when their elderly population reached 12 percent of the total. Also, Japan's Ministry of Finance didn't want the banks to write off all their bad mortgage loans, so they kept it covered up, letting the losses be offset by income over a 10 year period. With all those losses to cover, banks had to be more conservative, and lending really dried up. Too much saving means low consumer spending.
Do you see the same thing happening in California?
CA economy will stall as cash out refis dry up, property tax and sales tax falls. House prices will fall further once reality sets in after the recession is realized. We are already in a recession, but it is not yet reported in the media. Q1 GDP growth for US was 0.6 percent. This quarter could be well negative already.
Can the Fed balance everything out?
The Fed will panic and lower interest rates. They will do the wrong thing. They don't want to learn anything or make a long-term solution. I am sure they are terrified of a banking crisis and credit crunch, as our entire economy is addicted to ever rising access to credit. If you take away credit cards from Americans, our economy will melt down immediately. People just don't have money from their productivity or savings to even pay their basic living expenses. So the Fed is worried, but they won't learn a thing. They will just keep printing money at 10 percent a year and create another asset bubble.
Remember, the Fed is not a government agency, but a consortium of private banks. This would be a good research project for a media organization: who are the shareholders of the private banks making up the Fed, and what is their mission? The Fed is operating outside the Constitution. Our Founding Fathers explicitly stated that only gold and silver could be legal tender, because they had used paper money before and it caused such severe depressions that they did not want us to go through that again. So the interests of the shareholders of these huge banks, which by the way is secret (nobody knows who they are), are not aligned with the interests of the American citizen...so they will do what makes them richer.
So the right thing to do is...?
The right thing to do is stop printing so much money, and only spend what we earn. We have to pay down our debt and stop making entitlement promises that cannot be kept.
There are optimists who think Southern California will defy the housing downturn because the area is such a desirable place to live. What do you think of this view?
Two things:
One: CA has always been desirable, but just because people want something doesn't mean they can afford it. After all, if it's so desirable, why are people leaving in droves? CA houses now cost over twice as much as they used to compared to salaries. Despite all that exotic financing, people are simply priced out. Wages have not kept up. So people are voting with their feet, and walking away from 'desirable CA'. So they are leaving high-priced cities in CA in droves. Last year, per the US Census Dept, 40,000 people left San Diego, 229,000 left LA, 42,000 left San Francisco, 6,800 people left Santa Barbara, and 8,400 left Ventura County. In contrast, 63,000 moved to the Inland Empire last year.
I have a good one for you: whiskey is so desirable among alcoholics, that grocers can charge whatever they want...people will pay it. Guess what! Alcoholics switch to wine or tequila or beer. So people only pay what they can afford or are willing to pay, and then they switch products. In the case of housing, they buy a house in Kansas. My realtor friend was showing 5 houses one weekend, and every seller was planning to leave and buy a mansion with his CA sale proceeds, in a cheaper place.
Two: Stricter lending puts a cap on what people can pay. That forces prices down. People are getting turned away by lenders, so they can't buy, even if they want to. Now we have lower demand as buyers are priced out, turned away by lenders, or leaving the area. So sales are way down. To make matters worse, sellers keep adding more homes for sale. Foreclosures are projected through 2012, so we're going to have lots of homes for sale for many years to come.
If half of all buyers could get $600,000 loans with no money down, but now half of all buyers can only get $250,000 loans because they need a down payment, anyone who wants to sell must lower their price down to that $250,000 level. So prices will need to drop to the point where a teacher can buy a small single family home on 2.5x her income.
Exactly how far do you think prices will drop in each of the following counties: Los Angeles, Orange, San Diego, and San Bernardino?
Prices will fall in half. We'll go back to 1999 prices. It could be worse. Don't be surprised by my statement. Let's just look at what happened in the 1980s and 1990's downturns. It's easy enough to look up at the County Recorder Office, or on the MLS, but neither the County Recorder, nor the realtors, wants to advertise the ugly truth: CA has 15 year housing cycles and prices fall 30 percent to 50 percent in a downturn.
I have many examples. I'm talking about homes in Laguna Niguel, Encinitas, Del Mar, La Jolla, Poway, Pacific Palisades.....the most desirable properties, which are still rising now by the way, fell 40 percent in the last downturn. The media needs to start asking realtors this tough question: 'How much did superior properties fall in the last housing downturn?' When I posed this question on a Carlsbad realtor's blog, he blocked my internet address.
So it's not a question of what I think will happen to prices. It's a matter of fact what actually does happen to prices. History tells us.
Your estimates probably aren't far off from what many people think, but they are quite a bit different than the estimates presented in the media. Is there something they're not telling us?
Nobody is going to give you the straight scoop on CA's housing bubbles. Realtors and mortgage brokers need their commissions; journalists are English majors and don't even have access to the MLS so they rely on realtor salesspeak; economists are paid by governments or investment banks so they have to keep quiet; and local municipalities try to promote growth of their region.
Gregory Smith, the San Diego County Assessor, is promoting real estate purchases...he's encouraging more fools to enter the pyramid scheme. This housing market is in a bubble, and no public official should be encouraging anybody to buy homes right now. Of course, he might be worried about falling property tax revenue, but the rising tax default rates are worse in the long run. In the 1990's, our property tax default rate was near 5 percent. This time housing prices climbed much higher.
There has been talk of a recession caused by housing, but for the most part, the mainstream media has been quoting economists who don't think there will be a recession. Is this another case of not getting the straight scoop or are economists optimistic for the most part?
Economist Dr. Dean Baker wrote that economists never predict a recession, saying 'I happened to get a copy of the Blue Chip top 50 forecasters' projections for 2001, dated Sept. 2000. Not one forecaster in this group projected a recession. In fact, the lowest growth projected by any of them for 2001 was 2.4 percent. Keep in mind, the stock market had already begun to unravel at that point, so it shouldn't have been too hard to imagine that there would be some economic impact.'
What about median home price tracking-a method most media outlets use to report the market? You mention on your website, californiahousingforecast.com, that median prices, average prices, and $/sq ft measurements are useless indicators of what is really going on in the market. Can you tell us why?
The median, average, and $/sq ft measure the prices of homes which sold that particular month. First time buyers are priced out, or they can't qualify for a loan, so now we have fewer cheap homes selling. The snapshot of sold homes has really changed. How can we measure the median or average price of a basket of produce when one month people are buying mainly apples, and the next month they are buying mainly mangoes and blueberries? We can't! The high end homes are 50 percent more of the market, so they are skewing the data up. They used to be around 6 percent of sales, and are now around 9 percent of sales.
The $/sq ft is falling for the same reason that the median is going up. I know that sounds backwards, but it's correct as written. Remember, our sales mix has a smaller portion of starter homes now. The low end is priced out and can't get loans. The rich are still buying, so they are skewing all the data.
Big homes cost a lot less per square foot, because land is a fixed cost and due to economies of scale. A 1000 sq ft house is $400/sq ft, while a 3000 sq ft house is $300/sq ft. See what happens when you have more homes at $300/sq ft? The $/sq ft goes down when you sell more big homes. So we are measuring the distribution mix again. Some people think they are analysts, because they see a number go down and jump to the conclusion they finally found a way to measure the price drops. This is why I scolded Rich Toscano publicly. You may know, or not, that I emailed him privately several times before going public. But anyway, it's a distribution number.
Here's another problem: any method which uses sold homes to measure the prices of all homes, will always be wrong. You cannot know the price of a house that didn't sell, because it has not sold yet. And in this market the homes that didn't sell will have to be severely discounted. So you can't know the price of homes not on the market, or those languishing on the market, based on those that sold. The homes that sold are the cream of the crop.
How can you know the price of the 2000 sq ft house on the highway that ain't gonna sell in this market where buyers have a ton of choices, based on the price of the 2000 sq ft house with a stunning kitchen, next to a park in the beautiful subdivision down the street? They are both 2000 sq ft homes, on the same size lot. The buyers are going for the good one, and leaving the bad one behind. The spreads between good and bad are getting bigger. Mr. Highway has to take a huge deduction if he wants to sell.
In a hot market, everything sold, so the sales prices accurately reflected the value of the entire market. But in a weak market like we have now, only the good homes sell. So by measuring only the sold homes, now we've shifted our data collection to the good homes. We don't know the value of the bad homes, because they are not selling. If you want to improve the median, then make every homeowner lower his price to the place that his house would sell, and then see how much the median drops.
What about the Office of Federal Housing Enterprise Oversight? They claim that their house price index provides more information and is more accurate than other indices.
The OFHEO index has problems too, which I explained on my site. Just one: it does not measure the huge amount of remodels. Every one of my friends tore out her kitchen or put in a backyard barbeque with those nice Viking outdoor barbeques and refrigerator. Of course the house will sell for more now than 5 years ago! But it's not because housing prices are rising! The OFHEO and Case-Shiller indices are not adjusting for that at all, they can't. They're just using county sales records. So again, the house with the $60,000 kitchen upgrade will sell, but the one next door with original 1980 kitchen will not. So it seems like the housing price is going up, but really you are paying more for that kitchen.
All housing metrics use data from sold homes...so that is a lot cheaper than hiring appraisers to do walk-throughs on thousands of homes. I doubt anyone is going to devise an appraisal methodology. Where is the incentive? Who would pay for it?
The ONLY way to measure housing prices is an appraisal method. Someone needs to design a sample set of homes and appraise them every quarter. The appraiser must do a walk-through appraisal, so he can adjust for remodeling. This would be expensive.
What indicators should investors and the everyday homebuyer be using? Where can they get reliable info?
What people need to do is watch the number of homes listed and sold in their neighborhood. As long as listings are increasing and sales are falling, prices will come down. Only 10 percent of homes are selling, so people who want to sell, have to lower their price, and inevitably, will set the new price for the area.
You can get home sale and listing info from your realtor. Don't let them sweet talk you into buying a home. Insist on knowing this data:
How low did housing prices fall in the last downturn? You have to see samples of homes which sold in two specific time periods: 1989-1990 and again 1995. There will be some. You need to see those.
Figure out months supply. Ask your realtor for sales and inventory data for that area. Sales/inventory = months supply. As long as that is above 4, prices have to come down.
Wait to see how badly the foreclosure wave pummels the market. Do not buy any real estate until the ARM resets are behind us. The bulk of ARM resets ends in 2008, so a one year lag means the highest REOs will be at the end of 2009. You might get a great buy then. But the foreclosure wave will continue, as the prime borrowers hit their resets on their 7 year IO loans in 2011. I am waiting to see how much prices get pummeled after my friends in their $1.5 - $2 million homes have their loans reset. So wait to buy until after the REO wave is over.
When do you think the market in So Cal will finally bottom out?
Not before 2012. CA real estate cycles are 15 years long: 5 - 7 years up, 5 - 7 years down.
There is not one clear month for the top of the housing bubble, since the top happens in waves, starting with the lowest end and working up, over 3 years. Condos peaked in the spring of 2004, single family homes peaked in the spring of 2005, and the prime properties in Carlsbad and on the water are still rising.
How can people watch for the bottom? Or more precisely, how will they know when to buy?
People should keep reading blogs and my forecast. Watch for the foreclosure wave to end, and when panic is high and nobody wants anything to do with real estate, then go in and buy. I bet all the people reading this, who are waiting for prices to drop, won't want to buy once prices have dropped. The people reading blogs are priced out...they are not market timers like me. Some sold and are renting, like me. Many are first time buyers, who are waiting for prices to come down to their comfort level. But those same people will be scared to death to buy after prices have gone in half...foreclosures are everywhere, as they will be afraid of further price drops.
When I see sales pick up after the foreclosure wave is finished, then it' time to buy. Look for the market to completely wither and die, and then start showing signs of life.
On the other side of the coin, what can sellers do to avoid losing their shirts?
Sellers are hurting themselves with false pride. They really need to look at the comps and go look at other homes in their price range. They'll find they are overpriced, and their home won't sell. When they are overpriced, they won't even get anybody to come through the door to look at the home. So no traffic means no sale. If you can't get traffic, how can you sell? If every seller would lower their price by 10 percent to get to where they need to be, they could have a chance at selling their homes.
Jun 04, 2007 -- In an effort to bring quality information to our growing readership about the state of the housing market, we will be featuring a series of interviews with various housing market experts around the nation. Each expert will be commenting on their respective market. Our first update on the housing market comes from Southern California housing expert Schahrzad Berkland.
Sick and tired of inaccurate housing reports, Schahrzad Berkland started The Berkland Group, a consulting firm which provides straight talk about the Southern California housing market. You can see Schahrzad's housing forecasts on californiahousingforecast.com.
Thank you for taking time to complete this interview, Schahrzad. We are very excited to share your views and data on housing with our readers. Can you let everyone know how long you have followed the housing market in Southern California?
Since October of 2005.
In your opinion, what are the biggest problems in the So Cal housing market right now?
Excess prices and risky loans: CA's prices are far removed from their fundamentals of wage and rent multiples. A large percentage of the population lives in California, and the banks are very exposed to CA real estate--so there is a lot of paper profits and risky bank loans, whose collapse will ripple through the entire country.
Wages: Salaries here are not high enough to truly afford the homes, so in CA we resorted to risky financing. In San Diego, 68 percent of all mortgages in 2005 and 2006 were IO or ARMs. People cannot afford their homes, so they are renting them from the bank, thinking they own them. This is happening in California more than anywhere else, which means the dollar amounts involved in overpriced homes and loans-about-to-go-bad is so much higher. For this reason, California is where you'll find the most risky loans, the highest mortgage equity withdrawal, and the greatest impact of all that consumer spending from the housing ATM.
Population loss: The cost of housing is so high that people are leaving in droves, moving inland or to cheaper states. (See #1 below.)
Job growth: Employment growth is too dependent on real estate.
Looming foreclosure crisis: With no skin in the game, people in foreclosure now are not even listing their homes for sale. They don't even have 6 percent equity to hire a realtor. So they live rent free for 7 - 9 months until evicted after auction. Foreclosures will go through 2 waves through 2012. For more info, see the chart on my homepage: californiahousingforecast.com
Some recently published news stories have lead readers to believe that wealthier neighborhoods in California are not experiencing the same housing market issues as other neighborhoods. Are the problems really limited to a specific group of people, i.e. the poor to middle class?
Even the wealthy are in over their heads, with rising property tax liens, cash-out refinancing, and foreclosures. I'll just give you one example of each. In Maderas golf course community, where some of the Padres players live, we've got a half dozen 2004 tax liens on $2 - $3 million homes. A guy on the water in Encinitas took out a $1 mil HELOC last year...
I go through hundreds of listings through the MLS, foreclosure.com, and ForeclosureRadar.com. One thing is clear: the more expensive the home, the more cash was taken out. It is rare to see anyone who abstained from the housing ATM. Last, foreclosures are rising all over the city. While they are highest in new subdivisions (because you had entire communities who got 100 percent financing at the peak of the market with short-term teaser rate loans that are resetting), they are rising in middle and upper income areas too.
Is there anyone in particular to blame for these problems?
The Federal Reserve created and nurtured the housing bubble. They ignored all the Homeowner Relief Acts and other banking legislation, all predatory lending guidelines. They wanted the stimulus of cash-out refinancing, to avoid a recession in 2001 from getting worse. So who knows what they have in store for an encore. Just like the housing bubble covered up the stock bubble collapse, what is the next bubble? The Fed is printing money at 10 percent per year, creating high inflation is anything that is not imported from Asia. So consumer goods are cheap, but prices are rising for US services like education, healthcare, oil, and food. What's next?
Do you think what we are seeing now is normal bubble behavior? For example, do you think the current bubble in California is similar to the housing bubble that occurred in Japan?
I have not studied Japan, but Dr. John Talbott discusses this in his book Sell Now. Their prices kept going up, but then reached a maximum when their elderly population reached 12 percent of the total. Also, Japan's Ministry of Finance didn't want the banks to write off all their bad mortgage loans, so they kept it covered up, letting the losses be offset by income over a 10 year period. With all those losses to cover, banks had to be more conservative, and lending really dried up. Too much saving means low consumer spending.
Do you see the same thing happening in California?
CA economy will stall as cash out refis dry up, property tax and sales tax falls. House prices will fall further once reality sets in after the recession is realized. We are already in a recession, but it is not yet reported in the media. Q1 GDP growth for US was 0.6 percent. This quarter could be well negative already.
Can the Fed balance everything out?
The Fed will panic and lower interest rates. They will do the wrong thing. They don't want to learn anything or make a long-term solution. I am sure they are terrified of a banking crisis and credit crunch, as our entire economy is addicted to ever rising access to credit. If you take away credit cards from Americans, our economy will melt down immediately. People just don't have money from their productivity or savings to even pay their basic living expenses. So the Fed is worried, but they won't learn a thing. They will just keep printing money at 10 percent a year and create another asset bubble.
Remember, the Fed is not a government agency, but a consortium of private banks. This would be a good research project for a media organization: who are the shareholders of the private banks making up the Fed, and what is their mission? The Fed is operating outside the Constitution. Our Founding Fathers explicitly stated that only gold and silver could be legal tender, because they had used paper money before and it caused such severe depressions that they did not want us to go through that again. So the interests of the shareholders of these huge banks, which by the way is secret (nobody knows who they are), are not aligned with the interests of the American citizen...so they will do what makes them richer.
So the right thing to do is...?
The right thing to do is stop printing so much money, and only spend what we earn. We have to pay down our debt and stop making entitlement promises that cannot be kept.
There are optimists who think Southern California will defy the housing downturn because the area is such a desirable place to live. What do you think of this view?
Two things:
One: CA has always been desirable, but just because people want something doesn't mean they can afford it. After all, if it's so desirable, why are people leaving in droves? CA houses now cost over twice as much as they used to compared to salaries. Despite all that exotic financing, people are simply priced out. Wages have not kept up. So people are voting with their feet, and walking away from 'desirable CA'. So they are leaving high-priced cities in CA in droves. Last year, per the US Census Dept, 40,000 people left San Diego, 229,000 left LA, 42,000 left San Francisco, 6,800 people left Santa Barbara, and 8,400 left Ventura County. In contrast, 63,000 moved to the Inland Empire last year.
I have a good one for you: whiskey is so desirable among alcoholics, that grocers can charge whatever they want...people will pay it. Guess what! Alcoholics switch to wine or tequila or beer. So people only pay what they can afford or are willing to pay, and then they switch products. In the case of housing, they buy a house in Kansas. My realtor friend was showing 5 houses one weekend, and every seller was planning to leave and buy a mansion with his CA sale proceeds, in a cheaper place.
Two: Stricter lending puts a cap on what people can pay. That forces prices down. People are getting turned away by lenders, so they can't buy, even if they want to. Now we have lower demand as buyers are priced out, turned away by lenders, or leaving the area. So sales are way down. To make matters worse, sellers keep adding more homes for sale. Foreclosures are projected through 2012, so we're going to have lots of homes for sale for many years to come.
If half of all buyers could get $600,000 loans with no money down, but now half of all buyers can only get $250,000 loans because they need a down payment, anyone who wants to sell must lower their price down to that $250,000 level. So prices will need to drop to the point where a teacher can buy a small single family home on 2.5x her income.
Exactly how far do you think prices will drop in each of the following counties: Los Angeles, Orange, San Diego, and San Bernardino?
Prices will fall in half. We'll go back to 1999 prices. It could be worse. Don't be surprised by my statement. Let's just look at what happened in the 1980s and 1990's downturns. It's easy enough to look up at the County Recorder Office, or on the MLS, but neither the County Recorder, nor the realtors, wants to advertise the ugly truth: CA has 15 year housing cycles and prices fall 30 percent to 50 percent in a downturn.
I have many examples. I'm talking about homes in Laguna Niguel, Encinitas, Del Mar, La Jolla, Poway, Pacific Palisades.....the most desirable properties, which are still rising now by the way, fell 40 percent in the last downturn. The media needs to start asking realtors this tough question: 'How much did superior properties fall in the last housing downturn?' When I posed this question on a Carlsbad realtor's blog, he blocked my internet address.
So it's not a question of what I think will happen to prices. It's a matter of fact what actually does happen to prices. History tells us.
Your estimates probably aren't far off from what many people think, but they are quite a bit different than the estimates presented in the media. Is there something they're not telling us?
Nobody is going to give you the straight scoop on CA's housing bubbles. Realtors and mortgage brokers need their commissions; journalists are English majors and don't even have access to the MLS so they rely on realtor salesspeak; economists are paid by governments or investment banks so they have to keep quiet; and local municipalities try to promote growth of their region.
Gregory Smith, the San Diego County Assessor, is promoting real estate purchases...he's encouraging more fools to enter the pyramid scheme. This housing market is in a bubble, and no public official should be encouraging anybody to buy homes right now. Of course, he might be worried about falling property tax revenue, but the rising tax default rates are worse in the long run. In the 1990's, our property tax default rate was near 5 percent. This time housing prices climbed much higher.
There has been talk of a recession caused by housing, but for the most part, the mainstream media has been quoting economists who don't think there will be a recession. Is this another case of not getting the straight scoop or are economists optimistic for the most part?
Economist Dr. Dean Baker wrote that economists never predict a recession, saying 'I happened to get a copy of the Blue Chip top 50 forecasters' projections for 2001, dated Sept. 2000. Not one forecaster in this group projected a recession. In fact, the lowest growth projected by any of them for 2001 was 2.4 percent. Keep in mind, the stock market had already begun to unravel at that point, so it shouldn't have been too hard to imagine that there would be some economic impact.'
What about median home price tracking-a method most media outlets use to report the market? You mention on your website, californiahousingforecast.com, that median prices, average prices, and $/sq ft measurements are useless indicators of what is really going on in the market. Can you tell us why?
The median, average, and $/sq ft measure the prices of homes which sold that particular month. First time buyers are priced out, or they can't qualify for a loan, so now we have fewer cheap homes selling. The snapshot of sold homes has really changed. How can we measure the median or average price of a basket of produce when one month people are buying mainly apples, and the next month they are buying mainly mangoes and blueberries? We can't! The high end homes are 50 percent more of the market, so they are skewing the data up. They used to be around 6 percent of sales, and are now around 9 percent of sales.
The $/sq ft is falling for the same reason that the median is going up. I know that sounds backwards, but it's correct as written. Remember, our sales mix has a smaller portion of starter homes now. The low end is priced out and can't get loans. The rich are still buying, so they are skewing all the data.
Big homes cost a lot less per square foot, because land is a fixed cost and due to economies of scale. A 1000 sq ft house is $400/sq ft, while a 3000 sq ft house is $300/sq ft. See what happens when you have more homes at $300/sq ft? The $/sq ft goes down when you sell more big homes. So we are measuring the distribution mix again. Some people think they are analysts, because they see a number go down and jump to the conclusion they finally found a way to measure the price drops. This is why I scolded Rich Toscano publicly. You may know, or not, that I emailed him privately several times before going public. But anyway, it's a distribution number.
Here's another problem: any method which uses sold homes to measure the prices of all homes, will always be wrong. You cannot know the price of a house that didn't sell, because it has not sold yet. And in this market the homes that didn't sell will have to be severely discounted. So you can't know the price of homes not on the market, or those languishing on the market, based on those that sold. The homes that sold are the cream of the crop.
How can you know the price of the 2000 sq ft house on the highway that ain't gonna sell in this market where buyers have a ton of choices, based on the price of the 2000 sq ft house with a stunning kitchen, next to a park in the beautiful subdivision down the street? They are both 2000 sq ft homes, on the same size lot. The buyers are going for the good one, and leaving the bad one behind. The spreads between good and bad are getting bigger. Mr. Highway has to take a huge deduction if he wants to sell.
In a hot market, everything sold, so the sales prices accurately reflected the value of the entire market. But in a weak market like we have now, only the good homes sell. So by measuring only the sold homes, now we've shifted our data collection to the good homes. We don't know the value of the bad homes, because they are not selling. If you want to improve the median, then make every homeowner lower his price to the place that his house would sell, and then see how much the median drops.
What about the Office of Federal Housing Enterprise Oversight? They claim that their house price index provides more information and is more accurate than other indices.
The OFHEO index has problems too, which I explained on my site. Just one: it does not measure the huge amount of remodels. Every one of my friends tore out her kitchen or put in a backyard barbeque with those nice Viking outdoor barbeques and refrigerator. Of course the house will sell for more now than 5 years ago! But it's not because housing prices are rising! The OFHEO and Case-Shiller indices are not adjusting for that at all, they can't. They're just using county sales records. So again, the house with the $60,000 kitchen upgrade will sell, but the one next door with original 1980 kitchen will not. So it seems like the housing price is going up, but really you are paying more for that kitchen.
All housing metrics use data from sold homes...so that is a lot cheaper than hiring appraisers to do walk-throughs on thousands of homes. I doubt anyone is going to devise an appraisal methodology. Where is the incentive? Who would pay for it?
The ONLY way to measure housing prices is an appraisal method. Someone needs to design a sample set of homes and appraise them every quarter. The appraiser must do a walk-through appraisal, so he can adjust for remodeling. This would be expensive.
What indicators should investors and the everyday homebuyer be using? Where can they get reliable info?
What people need to do is watch the number of homes listed and sold in their neighborhood. As long as listings are increasing and sales are falling, prices will come down. Only 10 percent of homes are selling, so people who want to sell, have to lower their price, and inevitably, will set the new price for the area.
You can get home sale and listing info from your realtor. Don't let them sweet talk you into buying a home. Insist on knowing this data:
How low did housing prices fall in the last downturn? You have to see samples of homes which sold in two specific time periods: 1989-1990 and again 1995. There will be some. You need to see those.
Figure out months supply. Ask your realtor for sales and inventory data for that area. Sales/inventory = months supply. As long as that is above 4, prices have to come down.
Wait to see how badly the foreclosure wave pummels the market. Do not buy any real estate until the ARM resets are behind us. The bulk of ARM resets ends in 2008, so a one year lag means the highest REOs will be at the end of 2009. You might get a great buy then. But the foreclosure wave will continue, as the prime borrowers hit their resets on their 7 year IO loans in 2011. I am waiting to see how much prices get pummeled after my friends in their $1.5 - $2 million homes have their loans reset. So wait to buy until after the REO wave is over.
When do you think the market in So Cal will finally bottom out?
Not before 2012. CA real estate cycles are 15 years long: 5 - 7 years up, 5 - 7 years down.
There is not one clear month for the top of the housing bubble, since the top happens in waves, starting with the lowest end and working up, over 3 years. Condos peaked in the spring of 2004, single family homes peaked in the spring of 2005, and the prime properties in Carlsbad and on the water are still rising.
How can people watch for the bottom? Or more precisely, how will they know when to buy?
People should keep reading blogs and my forecast. Watch for the foreclosure wave to end, and when panic is high and nobody wants anything to do with real estate, then go in and buy. I bet all the people reading this, who are waiting for prices to drop, won't want to buy once prices have dropped. The people reading blogs are priced out...they are not market timers like me. Some sold and are renting, like me. Many are first time buyers, who are waiting for prices to come down to their comfort level. But those same people will be scared to death to buy after prices have gone in half...foreclosures are everywhere, as they will be afraid of further price drops.
When I see sales pick up after the foreclosure wave is finished, then it' time to buy. Look for the market to completely wither and die, and then start showing signs of life.
On the other side of the coin, what can sellers do to avoid losing their shirts?
Sellers are hurting themselves with false pride. They really need to look at the comps and go look at other homes in their price range. They'll find they are overpriced, and their home won't sell. When they are overpriced, they won't even get anybody to come through the door to look at the home. So no traffic means no sale. If you can't get traffic, how can you sell? If every seller would lower their price by 10 percent to get to where they need to be, they could have a chance at selling their homes.
Subscribe to:
Posts (Atom)
