Yesterday was quite a day. It witnessed the defeat of the housing bailout bill (unless it is resurrected which is probable) and it saw some of the largest one-day declines in stock market history. The credit markets are still frozen, and we appear to be on the brink of a complete meltdown of our financial system. It must be a good time to buy a house... You do have to wonder what buyers are thinking right now.
It is hard to say why some neighborhoods get hit harder than others. Often times it is a combination of factors like age, desirability, amount of toxic financing, etc. The Lakes condo development has been getting hammered by foreclosures because it is old, undesirable, and full of toxic financing. The neighborhood containing today's featured property is new -- which of course means it is full of toxic financing -- and it is in an undesirable location. The peak prices paid here were also WTF high. I have profiled 8 Orangetip and 10 Orangetip before. Both properties are remarkable for the extreme discount from peak pricing. Today's featured property is no exception.
Today's featured property is being offered for 38% off its peak purchase price.
This property is being offered for similar pricing to the two comps I profiled earlier. This one is not likely to get bids over asking.
The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people's inability to distinguish between desire and demand.
Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.
California's residential real estate market is completely controlled by loan terms and the availability of credit. I first discussed this phenomenon in the posts Your Buyer’s Loan Terms and The Anatomy of a Credit Bubble. When credit terms are restrictive, when 30-year fixed-rate conventionally-amortized mortgages are the only available financing product, prices reflect the amounts of money people's incomes can finance under those terms (as they were before the bubble). When credit terms are loose, when stated-income, Option ARMs, low interest rates, high DTIs and other terms and conditions allow people the ability to borrow two or three times the amounts available under restrictive terms, prices in the residential real estate market will be reflective of those terms (as they were in the bubble). Local supply and demand issues may temporarily halt the rise and fall to a new equilibrium level, but supply analysis alone completely fails to predict this new equilibrium or explain how prices got there.
Are you ready for the next Great Depression? How bad with the recession get? What have you done to prepare?
What do you think of this answer:
Astute Observation by WaitingToBuyByAndBy
2008-09-28 01:45 AM
IR, just remember, you asked:
I love irony: We are currently in a recession. Everybody knows it. Yet
the official proclaimer, the National Bureau of Economic Research has
yet to call it. I find it ironic the Calculated Risk blog been calling
recession since last December and most people on the street can provide
anecdotal evidence of recession yet the official government agency has
apparently not made up its mind about the matter.
So we go about our daily lives suspecting times are not as good but not really thinking about it… or acting on it.
Many here witnessed the run up in home prices during the bubble,
knew it to be unsustainable, and realized prices had no choice but to
come back down to earth. Many have also agreed prices will over-correct
running lower than fundamentals for a brief period due to buyer
psychology (fear of being a knife-catcher).
I find it ironic, then, to hear (at least in the recent past) that
while we are in a recession, and there is a chance of severe recession,
it will not be a depression.
Psychologically, we simply do not want to consider such ideas. We
cling to the idea that the government will do its thing, and then the
economy will do its thing.
The media has widely reported over the last few years the economy
has been driven by the American consumer. How many times have you
discovered it was cheaper to buy two of the same item than one? How
many “value-paks” have you purchased. Our economy has traditionally
built upon expansion, but for the last 5-7 years our economy has
actually been depending on it.
The American consumer was able to meet this demand and fuel the
economy for the last few years using Mortgage Equity Withdrawal, Heloc
Abuse, credit cards, and savings depletion, but just as houses can’t
increase in value just because prices go up, our economy can’t continue
to expand on borrowed money. Those days are over.
You might say, sure things are bad for real estate and for Wall Street, but my company is doing business just as it always has.
Now remember, all of those housing bulls kept saying “can’t happen
here” and “all real estate is local” and “there’s no such thing as a
national housing bubble” yet here we are.
If we’re willing to open our eyes and look around: lowest personal
savings rate since the great depression; biggest decline in home prices
since the great depression; highest number of foreclosures since the
great depression; T-bills yielding zero has not occurred since the
great depression; non-banks borrowing from the Fed for the first time
since the great depression;
The currently proposed bailout will be the largest economic intervention by the government since the great depression.
The depression is not coming. Like it or not, it’s here. To coin an
ancient ad for Palmolive dish soap, we’re “actually soaking in it”.
Of course your company’s sector (unless the financial sector) is
probably unaffected by all the commotion, your company probably seems
sound, your job probably seems secure. But wasn’t there that group that
recently got laid off?
Likewise, if you own a house you are probably not bothered by the
equity-destroying comps of your neighbors, that is, until those comps
completely wipe out your equity. Even then, it’s a paper loss unless…
for some reason… you need to move.
The economic dominoes are falling. If we have learned anything in the last year, it’s that nothing is contained.
As you might guess, I’m an occasional reader of this blog and also
CR (and that Nouriel Roubini guy). I don’t mean to be un-American or
panic anybody by calling this a depression. If my claims above are not
true, please correct me.
It’s fair to say we’ll know the housing market is getting better
once the number of foreclosures subsides and starts to diminish.
Likewise, we’ll know the current economic crisis is getting better once
government bailouts start diminishing in size, but if you look at the
numbers you can see we are currently heading in the wrong direction.
I would like nothing better than for all markets to regain
confidence and work through this crisis, but again there is no
foundation for this to happen. By it’s very nature a bailout should not
inspire confidence, it should indicate system failure.
Just as the housing market can not bottom until prices reach
fundamentals, our economy can not heal until its fundamentals are
tested and found to be sound.
This property just reduced its asking price from $849,000 to $699,000. The lender is going to eat another one…
Living the crazy life: Wasn’t this the best part of the housing
bubble? People got to live well beyond their means as their house
served as an additional wage earner. In fact, it was even better than
having another wage earner because there were no taxes taken out with
the HELOC. It was literally free money. Today’s featured property shows
just how this works.
Reflect for a moment on the history we are witnessing. Congress is going to pass a $700,000,000,000 bailout of the banking industry.
In presidential election years, legislation rarely gets through Congress. Everyone is too busy playing partisan politics and posturing for the election to pass laws. Late in the election cycle, Congress goes home to campaign, and nothing gets done. We are at that moment, and yet, despite 90% or more of the electorate being against the bailout, Congress is going to pass it, and President Bush is going to sign it into law. The bill is going to pass with bi-partisan support. This is no small spending bill. We are talking about $700,000,000,000! And we are spending this money when the government is already running huge budget deficits. Amazing!
That kind of bi-partisan support, in the face of overwhelming public opposition, on a bill that large is unprecedented. We really do live in interesting times.
The reason for needing this bill is actually quite simple: our entire banking system is insolvent. The losses hidden in off-balance-sheet investments exceeds the total capitalization of our banking system. If banks were to take write downs of these securities to their true market value (essentially zero,) we would not have a functioning banking system. It is bankrupt.
Imagine a life without banking: no loans, no credit, no commerce, no economic activity other than all-cash transactions. This would not put us into the Great Depression; it would put us into the Middle Ages. This is what Bernanke and Paulson told Congress behind closed doors, and the ramifications of this reality scared them $hitless. As it should. Congress had to act. It ticks me off, just like it does everyone else, but they had to act.
Now, we the taxpayers of the United States of America are going to have to pay for the reckless irresponsibility of those greedy and sometimes clueless individuals who were in charge of our financial system. This is the end game all of us writing about the housing bubble feared most. The responsible are going to pay for the irresponsible. Actually, it is worse than that -- the responsible and the children and grandchildren of the responsible are going to be paying for the Great Housing Bubble. It is a reality we are going to have to accept. What is done is done.
Unfortunately, this will probably not be the end of the bailouts. Today, WAMU is being taken over by the JP Morgan. If the deal had not been reached, it would have been the biggest banking failure in history. It would have bankrupted the FDIC which would also have been looking for a federal bailout. Perhaps this bill will prevent other bank failures, or perhaps not. We dodged the WAMU bullet, but I wonder what back-door bailout prompted JP Morgan to buy an insolvent bank? The US auto industry will probably also get a bailout.
I want my bailout too. I wonder when they will be sending out the next round of stimulus checks...
For today's featured property, we are going to look at another Turtle Ridge Dreamer. With all the discussion about a housing bubble, a massive government bailout, a severe recession and the utter collapse of our banking industry, it sure seems like a good time to sell a house. And although this house was purchased in 2004, it surely must have appreciated 60% since then. WTF!
Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. Pwned has many definitions, but it generally refers to a state of being defeated and helpless. People who paid bubble prices or HELOCed themselves into a massive debt are pwned by their houses and the housing market. I first wrote about this in America’s Debtor Prisons. Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family's future. It isn't going to turn out well for them.
Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation -- if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependant lifestyle is not going to happen any time soon -- if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.
Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can't decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.
Today's featured property is in the "borrowed much" category of housing bubble participants. These people did not make the mistake of buying at peak prices. In fact, they bought at the bottom of the last cycle. However, they too drank the kool aid, and now they have lost their home and their wealth. Another casualty of the Great Housing Bubble.
In the next week or two, Hank Paulson is going shopping with a $700,000,000,000 credit card courtesy of Congress and the Federal Reserve. What is he going to do with that money? How wisely will he spend it? He faces a dilemma that has no resolution. If he pays fair market value for the securities he buys, he will fail to recapitalize the banks, and the economy will continue its downward spiral into the crapper. If he overpays for the securities to recapitalize the banks, the taxpayers will lose a great deal of money, and he will be accused of favoritism by just about everyone. So what should he do? Look out for the taxpayers, flush the economy and plunge us into a depression? Or does he screw the taxpayers and enrich his buddies and save the economy? Is this a false dichotomy? I don't think so. I am glad I am not the one making these decisions. In the end, all of his actions will be justified as "necessary" to save the economy, and the justifications may accurately characterize the situation. There will be no way to know. The severity of a problem you avoid is always an unknown open to speculation.
In yesterday's post, I reminded everyone of the reasons we are in this mess in the first place. When you strip away all the complexities and look to the root of the problem, you find individual borrowers like today's that took on more debt than they can handle. If this had not occurred, if people had not overpaid, HELOCed and generally over borrowed, prices would not have bubbled. Everyone would be making their house payments, and none of this would have happened.
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