Wednesday, February 6, 2008

What inning are we in?

I apologize to the non-sports fans for the baseball metaphor, but I think it is apt. Some think we are near or at the bottom in part because of the recent Fed interest rate decreases. Some think we will sink to depression era lows. Will we drop from a 68% home ownership rate to the more historical rate of 64%? (This would mean that about 5.25 % of all homeowner’s now, will lose their homes and become renters.) As some of you already know, my guess, and I admit that is all it is, is that we will generally return to historical inflation adjusted prices and historical affordability levels. Both suggest a total decline of about 50% from our 2005 highs. If true, at least locally where we have seen price declines of about 25% already, to me that would mean we are in about the 5th inning. However, there is good historical evidence to suggest that a collapsing bubble will over-sell to the downside (past the historical mean prices) just as the bubble was over bought. Current prices reflect only one year of ARM resets (and the foreclosure of a lot of liar loans that most think were just equity scams to begin with), and we have 3-4 more years of resets left. Does that mean we are only in the second or third inning?

So my questions are: What inning do you think we are in now? While no one can know where we are headed in terms of real estate prices, what is your guess as to what statistical measure is most predictive of where prices will bottom? Or is the worst over with the Feds attempts to flood the market with cheap money? Or will politicians freeze resets for 5 years (more on this tomorrow) and save the day?

26 comments:

snoop dog said...

We are in the fifth inning right now.Times are going to get tough.I have a new album comeing out so get out and buy the noise dog.It will take your mind away from all the stress of bubble talk.Have you guys seen the homeless camp starting up down by natomas off of I-5? That place is going to get huge soon.

Looking in EDH said...

I think we are in the 4th quarter.

We are hitting a point where the buyers of 2003 are in a pinch.

I can tell you this first-hand. I am renting a place and have just noticed that the landlord's name is showing up in the Pre-foreclosure list.

I have been at this house about two and a half years and have been expecting this. There are plenty of other rentals in EDH, so it is not a major concern to find another place. I am going to buy sometime in 2009.

I think my $3K deposit on this rental will probably be usurped by this landlord. I am not clear on the sequence of a foreclosure process, but I think it will be at least 90 days before the bank decides to sell the place (unless the NOD is brought to order by the landlord or a short sale agreement takes place).

I am hoping to time this so that I don't have to move before the school recess.

In any event, I will try to time it such that I use the deposit as the last month of rent -- I don't think the landlord is going to coorperate on this. They live in Elk Grove, so it is my impression that they are in real trouble.

Any suggestions?

Paul said...

Timing: From my observations of the foreclosure process, from NOD to sale is taking about 6 months. Some more, some less.

Deposit: I have a friend who is going to small claims court to attempt to recover his deposit, in the exact same situation.

Consider: Waiting for the bank to own it. The bank will have to evict you ... something of a hassle for the bank. Tell the bank you will move without eviction and leave the property clean and neat, if the bank will (a) let you stay for a predetermined period of time paying rent, or (b) a predetermined time to consume your $3,000 deposit.

Homes in EDH: There is an absolutely beautiful (to Mrs. Paul and me) home for sale in north Ridgeview for a mere $2.1 mil. I wanting till the price comes under $500k! :-)

sacramentia said...

2.1M for 500k! I really hope it doesn't get that bad.

looking in EDH...that sounds like such a hassle. If I were in your situation the first thing I would do is pick up the phone and call the landlord. Ask them what is going on, and have a solution in mind that gets you your $3k and makes the landlord's life easier too. Good luck.

Cmyst said...

We're in the top of the 5th. The economy is stressed to the max, and I don't know how much longer the feds can keep peddling. Yesterday the stock market plummeted, but we were all so giddy about Super Tuesday that many didn't notice.
My feeling is that the economy is going to get much worse, much quicker and that the next wave of resets and foreclosures will bring housing down to near norms -- it won't be the absolute bottom, but it will be a lot closer to 2000 pricing than 2004 pricing. This is all just very casual speculation from a person who does not earn a living in the financial or the real estate biz.
Politically, the next Prez will inherit a huge mess but I think nearly the entire electorate will be aware that is what it is: an inherited mess. I still maintain that freezing interest rates will do little good, because the pols have made the same mistake as the banks and investors: they believed that people would give up everything to save their "home". Only when you turn housing into an investment, it's no longer a "home". There was so much more speculation than they wanted to believe; as SMF has pointed out, we are way overbuilt. People aren't stupid, and unlike the REIC they realize that the only options aren't owner vs. homeless. You can live a good life, keep your car, eat fairly well and continue your lifestyle (if you have a job) if you rent. Owner-occupants as well as owner-speculators will continue to mail in the keys, no matter what great deals the pols cut them -- unless of course, they just buy those $.99 houses in Cleveland and Detroit and give them to people. Which honestly would probably be a better use of taxpayer money.

Paul said...

Sacramentia: I seriously doubt that $2.1 mil will come down to under $500k ... That would be too depressing even for me. I was being facetious about what it would take to reach our affordability level. I know, I said the "A" word (affordability). How un-American am I, expecting to buy a house that we can actually afford? :-)

Mike said...

4th or 5th quarter. Even with the spring bounced I am seeing, we still have a long way down to go.

The only wild card is the government. They are doing everything possible to prolong the bubble crash (Slashing Rates/Bail Out proposals, etc.) If the government is successful, it could drag this out even longer and I could be a renter for 3-4 more years (Ouch!)

I am seeing areas that are approaching near $100/sq ft and interest rates are very favorable now. I am tempted to jump in at this point, especially if the government drags this crash out and I have to rent for 3-4 more years.

Patient Renter said...

Believe it or not, we're in the 3rd inning. The Credit Suisse chart proves this:

http://patrick.net/wp/wp-content/resetchart1.jpg

Patient Renter said...

Looking in edh: Where did you see this pre-forclosure list? I'd like to keep an eye out for my landlord's name.

Paul: When did any part of Ridgeview become "North"? It's a small area.

Paul said...

Patient Renter:

Preforeclosure list: One of many, but I use foreclosure.com. The "preforeclosure" tab includes owner's name.

North Ridgeview: My term, not anything I have ever seen. I just didn't know the name of the subdivsion itself (gated community).

smf said...

I don't know what inning we are in. The total amount of fraud that occurred was enough to make things cloudy. Since this whole bubble thing was global, the overall effects to the economy are cloudy as well.

"2.1M for 500k! I really hope it doesn't get that bad."

The problem with EDH is the amount of high-end speculative properties that were built. And one point, large home prices may have to come down way lower to offset the much higher monthly utilities bill they incur.

Patient Renter said...

"North Ridgeview: My term, not anything I have ever seen."

Haha, Ok. Just wanted to make sure the Realtors hadn't introduced some new term.

HOUSE2008 said...

home for sale in north Ridgeview for a mere $2.1 mil. I wanting till the price comes under $500k! :-)

YES! Then again that would stink for many of the h/o that are legit.MAN! that would be crazy good deal though.

My wife & I joked about a "rich" family member leaving us a huge $10million mansion. But the irony is we wouldn't even be able to afford it let alone heat it! Oh well, I'll take a 750$ home for 250k though ;).

Observant One said...

Uh, yeah, sure, prices in EDH will fall another 80% from here, such that you get that 2.1MM home for $500K. Not.

Now, please put down the bong and get real.

You guys are dreaming about falling prices just as much as those who used to crow about prices rising forever. I have nothing against wishful/delusional thinking, but sheesh! Rather than indulge in the same thinking that those on the way up have been chastised for, why not focus on the fundamentals and at what price level fundamentals are at or approaching balance. Also, keep in mind that price declines are not universal within a region. Certain areas will get hammered (e.g. Natomas and Elk Grove), and other areas will not be impacted as deeply (EDH, Folsom, Land Park, Gold River, etc.).

And Paul, sorry, but I feel that's poor advice with respect to approaching the bank in that manner. If, as you suggest, you essentially make an implied/ veiled threat to the bank that you will -not- leave willingly and without damaging the property, then don't be surprised if you do not get a desired response.

By the way, it's 110 days to complete a non-judicial sale in California. 90 days for the NOD, and 20 days for the NOS.

smf said...

"Uh, yeah, sure, prices in EDH will fall another 80% from here, such that you get that 2.1MM home for $500K. Not."

What happens when you build 30 homes when only 10 were required? How do you sell it when there are not enough people in the state to buy them all?

"Certain areas will get hammered (e.g. Natomas and Elk Grove), and other areas will not be impacted as deeply (EDH, Folsom, Land Park, Gold River, etc.)."

I have already seen homes in EDH and GR that are back to 2004 prices, AND NOT SELLING.

Looking in EDH said...

Patient Renter:

You can get a free scan from "foreclosure.com" (NOT foreclosures.com). Just tab over to the "preforeclosure" section and you can get the name of the person who is defaulting.

Paul: I think the "north ridgeview" locale you are referring to is Kalithea -- it is indeed a nice neighborhood. I don't see it deflating to the level you are wishing for ...

Paul said...

I thought I was being funny when I said I was waiting for the $2.1 mil house to be $500k. But so that all may rest easier, I just checked on the MLS and it is "pending sale" so it appears that I'll have to cross that one off the list.

Looking in edh: Thanks for catching my mistake.

HOUSE2008 said...

Observant One said...

Now, please put down the bong and get real.

Brahaha! Snoort. :)

Your right of course. Just give me a fair deal. I'll be happy with that.

Observant One said...

Paul, I anticipated that your 2.1MM to 500K comment was made in jest, especially given the comments in your original post about your view of 50% off from the 2005 peak based on fundamentals, etc. My reality check was directed primarily to those who seemed to take it somewhat seriously.

At any rate, the interesting thing to me is, given that the general Sacto area price level now is 30 to 35% below the 2005 peak (not sure where you came up with 25%), your position seems to be that things essentially are within 10 to 15% of a bottom. If so, considering that things now may be within shouting distance of the 'red zone' (i.e. within 10%) and that rates again are at historic lows, is it sensible for those buyers sitting on the sidelines to actively look for opportunities to move on the 'right' property in the 'right' location? That's a rhetorial question; the answer will vary, depending each person's objectives and circumstances.

SMF, what will happen is what already has been happening for over 2 1/2 years -- new construction will plummet and prices will decline to bring things back into balance (and if you think prices will decline another 80% from here, then you should forget about everything other than heading to a bunker in the hills that is well stocked with water and freeze-dried food).

I keep an eye on the custom homes in Serrano in EDH. In 4Q2007, the inventory of such homes was at 40 to 45. It currently is at 30 to 35. It may tick up some as we move further past year end and into the spring (those homes taken off the market will come back on, etc.). But it's far from exploding out of control, new construction has ground to a vertible halt (pretty much now is just completion of new homes started months ago), and there aren't any foreclosures on the radar screen. Areas will be affected differently; this is a desirable area and, while it has declined, it has been at a lesser rate than other areas.

As for the homes in EDH and GR you see that aren't selling, I'm curious to know the particulars. Are you perhaps talking about the wanna-be GR homes in such places as Gold Station? Or Perhaps the one on S. Carson that's a short sale at 350K, but which does not have lender approval (hey, any owner can put out a sale price without any authority for whether it will be consented to by a lender). By the way, the latter one backs up to Hwy50 -- one of the 'little' details you won't find out about on MLS...

PeonInChief said...

Everyone should head over to patrick.net and read my "Tenants and Foreclosure: The Crucial Questions" (or at least know where it is,in case someone you know is faced with this). I tried to answer all the most important questions there; all the info is available on the net, but it takes some real searching to find it.

First, it can take from four months to a year from the "Notice of Default" to the sale of the building (the sale where the lender usually takes it back). It depends on any negotiations taking place, how fast the bank moves etc. If your landlord is showing up on the pre-foreclosure lists, that means that he's already two or three months behind on his mortgage and the "Notice of Default" has already been filed with the county recorder.

The next step will be the "Notice of Trustee" sale. This notice should be posted at the property. The notice should be posted at the property. At that point you'll have about two months before you have to vacate the house--20 days more or less until the trustee sale and another 30-days (assuming the bank gives notice right away) before you have to move.

As for your security deposit, if your present landlord doesn't return the deposit to you at the time the building is sold, the lender should return it to you. If you don't get it back, you can sue the lender and your landlord for the return of same (although you'll probably have more success with the lender, since the lender will have money) in Small Claims Court.

smf said...

"But it's far from exploding out of control"

The out of control explosion already happened. Again, if you built 20 mansions for 5 possible buyers, you are screwed. There are a lot of newer high end homes around Sacramento.

Some have disappeared, only to come back much later.

Take a look at this high end home in FO Village, #70106494. Originally listed at $1.5 million, a terrible flip attempt.

This is one in (the good part) of GR, listed BELOW its 2004 sell price and still not selling, #70088778.

Here are some other GR losses:

#70119491
#70123156

"I keep an eye on the custom homes in Serrano in EDH."

Good for you! My father is ready to put up his spec. mansion for sale soon. Problem is that Serrano is FULL of spec. mansions.

"Paul, I anticipated that your 2.1MM to 500K comment was made in jest"

Sure it was in jest, but no one has responded to my question about what happens when you have more houses for sale than people available to purchase them, at any price.

Paul said...

Observant One: My 25% guess-timate was measured by the regional 25% decline in average price per square foot by radarlogic (from about $255 to about $185) and my local area (CP) where the same model of tract homes have declined from about $550k to about $425k. I don't watch Sacramento prices per se, but do monitor the Sacramento region statistical data. All of the data has inherent flaws in measuring "average" (in contrast to median), but its what is available. CP appears to be lagging Sacramento, but that isn't too surprising.

I suspect the custom end of Serrano is like other higher end areas ... less REOs so less pricing pressure and a lag in declines. I also monitor Carmel REO activity, where median is +$1 million, and even there, there are REO's (very few) but still significant peak-to-present overall price declines.

Sippn said...

The high end market is always relativly slow compared to lower prices - its a bell curve.

My brother today was researching REOs above $1 mil, 4 county area.... 2. Above $800k, about a dozen.

That flipper in Fair Oaks Village - whoops. Pretty good buy now!

Looked at an unfinished REO in Cameron Park, 2 acres, unpermitted pool, tons of concrete, unpermited additions, lousy workmanship, etc. for $435K, called the agent who is submitting 6 offers to the bank today.

There's no buyers!

smf said...

Sippn:

Have some fun by figuring out how many mansions have been built since 2003.

The amount is staggering.

Paul said...

A final comment. This morning's Wall Street Journal reports that Chairman Bernanke opined this week that the "worst" of the housing market decline, is still ahead of us. Considering that the Feds apparently did not see this coming with their free money policies, I wonder if this is a contrarian indicator that the price declines are over ...

Observant One said...

Paul, thanks, and I agree that per square foot is a better measure than median (though, yes, any of the measuring sticks have certain flaws). If memory serves me, Radar Logic generally tends to be a couple/few months behind current, so that may also bear on things.

Smf, if your position is that the out-of-control explosion [of inventory] already has happened, then I'll point you right back at my post above -- the inventory of Serrano custom homes was 40 to 45 in Q42007 and currently is 30 to 35. You're going to need more beef for your sky-is-falling disposition. And I hope the rationale is more credible than your previous admonition above that "large home prices may have to come down way lower to offset the much higher monthly utilities bill they incur."

And yes, I did answer your question above...

I'm sorry to hear about your father's undertaking. I think we all can agree that it's not a good time to be having to bring a spec home on the market.