Remember during the bubble rally when everyone was in love with real estate? Turns out it was an infatuation. The fickle homeowners who sought to possess real estate at any price are now dumping their lovelorn properties en masse. Of course, it is easy to become infatuated when something or someone is making your dreams come true. All people had to do was buy a property and begin extracting and spending all the free money it provided. Now that the market has reversed, and people are saddled with crushing debts, and the property is no longer providing free money, it is easy to see why the object of their infatuation has lost its luster.
Today's featured property is another casualty of the low end of the market. There is much less denial at the low end, and much more carnage -- for now. The married woman who bought this as her sole and separate property has some of her own money in the game, so she showed more resilience than those who bought with 100% financing. You see, with any market price collapse, it starts with the weakest hands -- those that paid way too much and have little incentive to hold on. When these people sell, it drives prices lower and distresses a whole new group of market participants -- people like today's owner that have some money in the game, but not very much. The people who put 5%-10% down who are currently underwater will be the next group to give up. Of course, this will distress those who put more money down or purchased even earlier. Eventually, all of those who are overextended or deeply underwater will give up and capitulate to market forces.
The carnage in the real estate industry has been truly remarkable. I know many people who work in design, development and homebuilding who are out of work. Statistics have more meaning when you know the people it represents. I have had my own stresses and worries which are ongoing. Right now, I am one of the lucky ones who still has a job. The weeping in the real estate industry is a side effect of the larger problem with declining home prices. That problem has people weeping from all walks of life, and for most of them, it will get much worse before it gets any better. The crash of housing prices is a catastrophe for everyone who is overextended on their mortgages, and that is a great many people. Many are still in denial, but at some point, the denial will give way to acceptance with periodic bouts of weeping along the way.
It must be easier for those who used 100% financing to reach acceptance. They are not losing any of their own money, only their credit score. When subprime rebounds in a few years to service these people, those that saved money while they rented may become homeowners again. Today's featured property owners are a typical profile of bubble buyers. They bought toward the end of the rally with 100% financing, and now that values have declined, they are walking away and letting someone else absorb the losses.
The movements of financial markets are very mysterious and notoriously difficult to predict. Where will the stock market be today? Up or down? Your guess is as good as mine. Of the various types of financial markets, residential real estate markets are probably the easiest to predict because they trend for long periods of time. Of course, the difficult part is predicting when they will reverse. I thought our local real estate market would reverse in 2004, but the widespread sale of the Option ARM delayed the crash for two full years.
The top of the market is relatively easy to identify after the fact. When sales fall off a cliff, prices will soon follow. The bottom is a bit trickier. Sales volumes will pick up at the bottom, but it will also pick up in the false rallies leading to the bottom. Upticks in prices are not telling either because bear rallies have that feature as well. The relationship between price and rent is a good indicator. It predicted the last two bottoms, but if the price-to-rent (GRM) is at historic lows, we may not necessarily be at the bottom because inventories and foreclosures may be very high. In fact, I am of the opinion (and I am not alone) that we will have an overshoot of fundamentals based purely on supply and demand problems due to the REO inventory. Too many people borrowed too much money, and these owners will need to be flushed from the system before it is over.
Personally, I will not try to time the bottom tick of the market. I will buy when I can save money versus renting. In fact, I would prefer to buy before the bottom when inventories are high because I will have the widest selection of properties to chose from. If you wait until the bottom is clearly in the rear view mirror, inventories will be low, and you may not find the property you want (don't worry, you will not be priced out forever.) The previous bottoms gave about a 3-5 year window of opportunity before prices rose to valuations that were too high relative to rents. This time, the window of opportunity may be longer. The ARM reset problem will persist into 2012, and it will take another 2 or 3 years for all the foreclosures to work their way through the system. I may buy in 2010, but I will not expect to see any appreciation before 2015. That will not matter to me because I will be saving money each month versus renting, and I don't plan to sell any time soon.
Today's featured property is as mysterious as the markets. It was only listed yesterday, and there are no pictures. Perhaps they will be up by the time this post airs.
We all want affordable housing. There are numerous government programs designed to provide low-cost rental and ownership properties to people in all walks of life. Lenders, builders, realtors and buyers all benefit from affordable housing because affordability means an increase in transaction volumes and more money into the pockets of those dependant on the real estate market. The difficult problem with affordable housing is how to provide it without making it unaffordable. Finance is not the answer.
Most of those who worked in the mortgage business really believed the "financial innovation" meme. I have contended that the entire idea is a fallacy. At its core, the belief among financiers is that affordability products reach more customers and permit home ownership for a larger number of people. The statistics during the Great Housing Bubble seem to warrant this enthusiasm.
Home Ownership Rates from 1984-2005
Unfortunately, increasing the home ownership rate also dramatically
increased prices and created an unsustainable bubble in both. Why is
that? As with all macroeconomic concepts, it emerges from the
microeconomic circumstances of individual borrowers and buyers. If you
look back to the lending practices which endured the crash of the last
housing bubble in the late 80s, you see that the financing arena was
dominated by 30-year conventionally amortizing loans with 20%
downpayments and conservative debt-to-income ratios. This is the only
loan program that has relatively low default rates even if prices
decline. So what happens when a new "affordability" product is introduced into this stable system?
Detailed stats on the Irvine housing market are something we are always
interested in. The Inventory number in the sidebar comes from
ZipRealty. A chart of those numbers shows some interesting trends. We also have some great resources provided by ipoplaya and IrvineRealtor.
A new resource we just learned about are the Neighborhood Analytics that Redfin launched. Irvine charts available after the jump...
Do you remember the days when a relatively low-priced property would bring out the knife catchers and get bids over the ask? Those days appear to be behind us. The price on today's featured property was dropped $100,000 at the beginning of the month, and it is still there. It is discounted 30% off its 2005 purchase price which likely represents almost 35% off the peak valuation. With another $70,000 to $90,000 off, this property would be at rental parity. Prices are still free fallling, but at least a potential bottoming figure is in sight. To be honest, I did not think we would be seeing prices like this in 2008.
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