When I first started writing for the Irvine Housing Blog in February of 2007, I wrote a series of posts culminating in Predictions for the Irvine Housing Market. I updated that post in I Was Wrong, Its Worse... When I first suggested that prices might crash, there was a certain amount of incredulity in the very idea of a dramatic price crash. In order to float the idea with a minimum of being called crazy, I wrote a post titled, What if Prices Dropped to Fundamental Values. In that post, I presented a series of projections for the Orange County median home price. I put it out there as a hypothetical because I was afraid predicting a catastrophic crash would cost me credibility with readers. Even this hypothetical was shocking to many (read the comments and you will see).
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How crazy did people think I was?
"Let’s not get too carried away. First of all we probably should not
really make economic prediction more than one year ahead. As
IrvineRenter said, this is just an “what if” analysis. It makes an
interesting game for bubble sitters but IMO we should not read too much
into it."
"I am not agreeing that the blow off downturn will look as drastic."
"I have been following all your posts for quite sometime. I think your price dropping theory is way too unrealistic." I hate to tell you who said that one...
"After tweaking your model, it seems that prices would need to fall
30-35% to return to fundemental values, not 50%. Considering the
factors above, it seems likely that once prices started falling by
significant margin that the pool of sellers would start to dry up.
Only folks that absolutely were forced to sell would consider it, which
would look more like a long, slow leak than a collapse."
"I just don’t agree it will be as bad as you think. I *hope* you’re right ... but I just don’t see it."
"If I had to guess, I’d say 15-20% overall drop in housing values over the next 2-3 years max."
"While I agree wait for a couple of years (may be two) is a good idea, but I just can’t image the prices will gone down so much."
"Your long-term forecast appreciation is just pure speculation."
Sorry Cassandra I misunderstood Now the last day is dawning Some of us wanted but none of us would Listen to words of warning
So how did I do with my crystal ball? Well, DataQuick just released some updated numbers, and with the help of Jon Lansner and Lee in Irvine who has been tracking DataQuick numbers, I can provide an update:
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As you can see (consistent with the theme of I Was Wrong, Its Worse...) I was too conservative in with my dire predictions. At the time, I was predicting an unprecedented drop in prices. I did feel I was being conservative despite the conventional insanity of the day. I did not believe the median could drop so quickly. Perhaps I should have stood behind my predictions in How Bad Can Bad Get?
Today's featured property is a short sale in Woodbury. Irvine is a bit behind the rest of OC with its price drops, but with the ARM Problem still facing us, a problem 60 minutes just discussed at length, it certainly looks as if prices will continue to fall...
We are starting to see an interesting phenomenon in the housing market: knife-catchers changing their minds. The first one I noticed was in Quail Hill back in October. It was purchased by a flipper who put a large sum as a downpayment but then tried to sell quickly at a breakeven price. The only reasonable explanation is that it was purchased as a flip, and the owners changed their minds.
Changing your mind on a stock purchase is relatively easy. Stocks are very liquid, and transaction costs are very low. However, changing your mind about a real estate transaction is not so easy. Real estate is very illiquid in a declining market, and the transaction costs are very high. If you quickly change your mind about real estate, you will lose money. Of course, it is common to price it just above your purchase price and hope someone just a little more foolish than yourself comes along to bail you out. In a declining market, the greater fool is harder to find.
In the world of large real estate transactions, buyers do an enormous amount of due diligence to completely understand what they are buying and the state of the market they are buying it in. It is not uncommon for buyers to spend hundreds of thousands of dollars on property research and still walk away from the transaction. This is prudent because wealthy real estate investors know how illiquid these investments are, and they know how costly it is to change their minds later. Small-time residential real estate speculators know none of this. For many, the extent of their due diligence is walking the property with a salesman. Some will get the necessary inspections to accurately determine the status of the property, but many will not. Most amateur speculators simply don't care: real estate always goes up you know.
The comedy of errors is amusing to us, but it must be very troublesome to the speculators who lose tens or hundreds of thousands of dollars of their own money. Many of the knife catchers who have been speculating have invested large downpayments, mostly because the banks wisely forced them to. The bagholders for the next leg down in the markets will be the knife catchers, and the money lost will be their own.
Today's featured property is one such knife catcher who appears to be changing his mind on the viability of this investment. Is it too late?
Everyone seems to be worries that prices will never fall to affordable levels, despite the fact we are witnessing unprecedented price declines everywhere. Those of you desirous of a high-end Irvine property have not seen the price drops you would like to see, so you conclude they will never get there. If you widen your view a bit, you see properties declining in value all around us and even within Irvine at the low end.
If you are watching the high-end market, these will be the last to fall because this is where knife catchers are most active. The high-end watchers of the IHB are a microcosm of the market. Even among this group, there are people willing to jump in at different price points. Each person capable of buying has a different degree of kool aid intoxication. Each potential buyer has a different tolerance for fear of being priced out -- which is still the primary motivator of knife catchers. If you only make lowball offers, you may never get filled, and you will never own. This reality gets amplified into the fear of being priced out, and through this fear, people raise their bids.
Pause for a moment... Reflect on the emotions you felt when you read, "If you only make lowball offers, you may never get filled, and you will never own." Did you feel the fear? How strong is it? Will you act on this fear? If you are introspective enough to have these emotional awarenesses, you can gauge your own level of kool aid intoxication. We are all different, and the most fearful are the most likely to become knife catchers.
Personally, I rely on my analytical skills to keep my emotional responses under control. I have faith that market pricing will fall to levels consistent with rental parity. It is a faith backed up by market data pertaining to previous market bubbles. I also recognize that even if prices do not reach rental parity, and if I never own, I will be better off financially by renting. It is a win-win. Intellectually, I recognize this truth. Emotionally, I have to let go and trust my intellect. It isn't always easy.
For those who have been waiting for prices to reach rental parity, there are still signs the market is heading that direction. Before we get "there," we need to identify what "there" is. In a stable real estate market, rental parity is a general guide, but not all market segments stabilize at rental parity. The low end, composed of undesirable condos and other properties where owner-occupants are rare often trade at prices below rental parity. The less desirable it is, the closer it trades to investor cashflow levels (GRMs from 100-120). The median type property that owner occupants desire trade near rental parity. This is particularly true for "starter homes," those nicer condos and small 3/2s. The above median properties often stabilize just above rental parity (+10%.) This happens for a number of reasons: 1. The longer ownership period of these homes justifies a higher investment premium. 2. The limited supply makes them scarce. 3. Rents are more variable at the high end as most people who can afford the higher rents generally own instead.
In the market bubble of the late 80s, the low end of the market got bid up to rental parity, and the high end was pushed well above. When prices crashed in the early 90s, the high end crashed first, then the low end got hammered. With the low end already at rental parity and within levels of affordability, it made sense for the high end to crash first. Once the more desirable properties were at rental parity, there was an exodus from the low end that caused prices there to plummet. I mention this because I believe this is how the next stages of the drop will play out.
Since the Great Housing Bubble saw an unprecedented degree of price inflation, both the low end and the high end prices became elevated far above rental parity. As the low end comes down to rental parity, it is starting to find some support. At this point, we are looking much like the market in 1991 -- the low end is nearing rental parity, and the high end is still grossly overpriced. If history repeats itself, the low end may stabilize temporarily near rental parity while the high end declines. Once the high end drops to rental parity, the low end will take another drop down to investor cashflow levels. Is it going to happen that way? Who knows, but that is my best guess.
Today's featured property is a 3/2 that appears to be at rental parity here in Irvine.
There is a new, non-commercial site I want to recommend everyone go check out: Loanzen.com. From the website, "Welcome to Loanzen — the community-driven mortgage information site (100% anonymous and free.) I recently applied for a loan and the broker attempted to tack on all sorts of absurd fees. I had no idea what was fair. So, I created Loanzen: A place where you can share the actual rates and fees you're getting from lenders. By sharing your deal, you help the community and also get valuable comments back on your individual deal."
It is exactly what it says. People anonymously submit the terms of loans they have been offered, and other people comment on whether or not it is a good deal. I think it is a fantastic way for people to help each other out. In particular, it should help people from being screwed by unscrupulous brokers pushing them into a bad loan just to make a few extra bucks. The commenters often know where the best deals can be found, and they can point the borrower to a better deal somewhere else. I think this site is a great idea, and I hope it catches on.
Have you noticed there are a large number of homes for sale in Shady Canyon? Why is that?
Of all the new neighborhoods in Irvine, I thought this one would have the least selling pressure, not because it isn't ridiculously overpriced, but because typically in the over $2,000,000 price range, the buyers really are rich and have the reserves to weather a storm.
In a normal real estate market, new neighborhoods see almost no resale activity for at least 3 years because people buy new in anticipation of living there for many years. There are always people that need to move for unexpected reasons, but for the most part, resale activity should be very low in new neighborhoods. The fact that all of Irvine's relatively new neighborhoods are showing high turnover speaks to a couple truths:
The owners are all overextended and cannot truly afford their properties.
Many bought with the intention of flipping and never intended to live there long term.
I suppose no amount of buyer/flipper/speculator stupidity during the bubble should really surprise me, but flipping multi-million dollar mansions? That is stupid. First, wouldn't a very rich individual want to design and decorate their own place? Why would they pay a flipper a premium for something they will probably redo? Second, how many people capable of buying these homes are out there? Even in the gross stupidity of easy credit, there were not many people getting $10,000,000 loans to buy houses, and the number of people with that kind of cash is very limited. Third, how much carry cost does the flipper endure on a property like this? Can you imagine making the debt service payments on a $10,000,000 loan waiting to sell the property?
Anyway, for whatever reason, many properties are for sale in Shady Canyon, and in all likelihood, prices are going to drop there significantly. It is just a matter of time.
Located within the prestigious guard gated community of Shady Canyon,
this spectacular sprawling five bedroom custom estate captures the
serene rolling hillside views of Shady Canyon. The 13,500 sq. ft.
residence features exquisite high-end finishes and reclaimed products
throughout. From the motor court entrance with reclaimed French pavers
to the subterranean wine cellar connecting the residence to the pool
house and home theater, no expense has been spared in this truly
breathtaking estate. The gourmet kitchen provides an ideal central
location for family to gather and offers Carrara marble counters, a
walk-in refrigerator, gourmet appliances, a service kitchen & large
center island with a pop-up television. A beautiful pool, pool house
and home theater provide hours of entertainment and includes an outdoor
kitchen, with barbecue, pizza oven, dishwasher & built-in heaters.
The surrounding vineyard provides two barrels of wine at harvest.
In
New Book, The Great Housing Bubble, Lawrence Roberts Offers Buyers Advice On
Real Estate Negotiation During A Price Decline.
According to
Lawrence Roberts, the Housing Bubble Cassandra, the dynamics of real estate
negotiation has completely changed over the last two years. In his book, The
Great Housing Bubble, he provides specific recommendations to buyers for taking
advantage of their new power.
Irvine, Calif., Dec.
12, 2008 – Lawrence Roberts, author of “The
Great Housing Bubble,”
observes that “In a buyer’s market, the buyer has the power in a negotiation.
Buyers should take advantage of this power and negotiate the lowest possible
price. Since the price determines the loan amount and often the taxes on the
property, the buyer benefits through lower interest costs and lower taxes by
minimizing the purchase price.”
Roberts advises
buyers to make their first offer their best offer. He says, “This is the most
counter-intuitive part of buying in a buyer’s market. Ordinarily sellers, or
more accurately the seller’s realtor, try to create a sense of urgency to buy
the house.” He goes on to outline the procedure for buyers to pay the lowest
possible price for real estate.
When asked about
his motivation for writing “The
Great Housing Bubble,”
Roberts responded, “Sellers have the marketing machine of the National
Association of Realtorsto help them. Buyers have few sources of
unbiased information to assist their decision. Part of the purpose of this
writing is to educate both buyers and sellers on the realities of the
residential real estate market.”
Roberts has not
been popular with the National Association of Realtorssince he suggested that realtors should be
subject to oversight by the Securities and Exchange Commission regarding the
false statements they routinely make concerning the investment potential of
residential real estate.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
But the hills that we climbed were just seasons out of time.
House prices in our local real estate market, like prices in many others, climbed a mountain of debt to heights they should have never seen. There will be a time when those prices are justified -- perhaps 20 years from now -- but seeing those prices in 2006 was a season out of time.
Friends, Irvinites, countrymen, lend me your ears; I come to decry the housing bubble, not to inflate it. The evil that men do lingers on through a devastated economy; the good is oft interred with their foreclosure. So let it be with the housing bubble. The noble Irvine Renter hath told you that homedebtors were greedy. If it is so, it is a grievous fault, and grievously have homedebtors answered for it.
To everything there is a season. A time to gain, a time to lose. A time to time to laugh, a time to weep. A time to build up, a time to break down. A time to dance, a time to mourn.
The Great Housing Bubble is over. It is time to move on. The Ponzi Scheme has collapsed. The lifestyle of mortgage equity withdrawal has come and gone. The dream of endless appreciation is a fantasy gone awry. Winter is upon us.
We had joy, we had fun, we had seasons in the sun. But the wine and the song, like the seasons, all have gone.
So where do we go from here? It is pretty frightening when you consider all the analogies of our current situation are to the Great Depression. It is clear that what is to come is going to be very bad, and we have not seen the worst of this yet. Our elected officials and the bureaucrats at the Federal Reserve are doing all they can to straighten out this mess. Hopefully, their meddling in the financial markets will not do more harm than good. I have my doubts. What happens is largely out of our hands. Even the people who are supposed to be in control are not. They more they try to reassure us, the more anxious I become. If events were under control, no assurance would be necessary.
It is natural to become reflective in a time like this. It is a good opportunity to reassess what is important and what is not. Most people are being forced to sacrifice possessions and pretenses of wealth. For some people, their attachments to these objects and illusions will cause them a great deal of suffering. For others, being released from these attachments will be a spiritual blessing. Difficult economic conditions create circumstances of loss and mourning. How we deal with these circumstances speaks to our character, and if we learn its lessons, it will reveal the path to true happiness, contentment and feelings of abundance.
Today's featured property is a new condo sporting a significant discount. We have profiled another property in this neighborhood. Whoever owns it now cannot be happy with this new comp.
How can I respect your crime When all you criminals whine They bought and sold you, run on, run on
The conforming loan limit through the GSE's is currently limited to $625,000 in our area. This is down from the $729,750 temporarily allowed under the Economic Stimulus Act of 2008. Any loan larger than this amount is considered a jumbo, and jumbo loans carry a higher interest rate. The current spread on a 5/1 ARM (a method of financing I do not recommend) is only 9 basis points; however, the spread on 30-year fixed rate loans is 130 basis points. Also, jumbo loans generally have higher downpayment requirements than conforming loans. All this means that the jumbo loan market is thinner because fewer buyers have the cash for the downpayment or the income to qualify.
Since our real estate market is collapsing from the bottom up, the slice of the market starting to show stress now is the bottom of the jumbo market -- $685,000 to $900,000. Homes priced to sell in this range are having a hard time finding buyers, and prices are starting to drop. Today's featured property is a short sale priced at $775,000. It recently dropped its price $80,000 in an effort to chase the market.
My home is kind, man it pays to be blind
I want to share with you a couple of recent experiences I had that demonstrate to me the power of conformity and denial.
I have been arranging to speak at various groups active in my industry. There are a great many even in my industry that do not fully understand what is happening and why. One of these groups told me they would like to have me as a speaker, but only if I am planning to give a Pollyanna message of hope. Well, there is always hope, but the reality is not particularly positive, so I will not be speaking there any time soon. The reason is simple. They are in denial, and they want to maintain that even at the expense of seeing reality. I can not and do not live my life this way, so it is difficult for me to relate to this mentality, but I do understand their desire for denial and the reason for their enforced conformity.
I subscribe to a reporter lead service to try to generate free publicity. Yesterday, I had a phone interview with a reporter doing a story on people who cannot sell who are renting out their houses. I explained to her that those homeowners with a positive cashflow do not have a problem, but many bubble buyers cannot cover their cost of ownership with rents, and they do not have any good options. They can either sell the property today for a loss, or lose money each month until prices come back (which is going to take years). Many, if not most, of the people who try to rent it out will end up in foreclosure anyway. This reporter got upset with me because my message was not positive, and she had to spin this story in a positive light. I didn't know what to say. All I can do it report reality. What she needed was someone from the NAR to tell her that prices will be back at the peak in two years and those who rent out their losing venture will be made whole soon. I couldn't say that because it is not reality. Even the media is under pressure to conform to the culture of denial.
I have often wondered why our government sets up its method of reporting recessions so that it isn't announced until it is almost over. Now that I see the powerful need for denial among the populace, I think I understand.
