Whenever I read Calculated Risk’s blog, besides being impressed with a man who is much smarter than I am, I am always struck by the fact I am getting his opinion at all. Everyone has an opinion, but some opinions are better than others. The opinions at Calculated Risk should be paid for as consultancy, but he offers them up free-of-charge as a public service.
Aren’t blogs great?
One of the great things about blogs is that it gives an outlet for ideas which would never have seen the light of day years ago. There are many people who saw this crash coming (see letter below), just like there were probably many people who saw the last one coming as well. In the past, there was no forum to get this information into the public realm. The National Association of Realtors through their advertising clout used to controlled the flow of information regarding the housing market: Not anymore.
I receive email from many people asking me about my opinions on the market or whatever. I thought this one was interesting, so I thought I would share it will all of you.
To keep everyone anonymous, I have edited the letter wherever you see parenthesis.
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Hi,
My wife and I really love your blog. She accurately accuses me of being a dung-sniffer with my sometimes negative views, but the housing market collapse was something we both saw coming.
We bailed out of Woodbridge in April 2004. I cant tell you how many of my Irvine friends told me then, and still tell me, that I was crazy to think that house prices could drop–level off possibly–but NEVER drop. I have even been bad-mouthed by someone that took my advice to sell a condo that they were moving up from in 2005 rather that keep it. I would have never imagined the lunacy of lenders and buyers to begin signing up for caustic loans beginning that year, further driving up prices.
I guess I don’t share the same sentiments as some of your readers regarding home sellers. I don’t have any charity towards the flippers and I see them as losers who happened to discover a way to make a quick buck with little risk. These are not real business men who have a lot at stake. I think the majority of them will, or would have, just walked away from any losses regardless of what promises they made. On the other hand I don’t rejoice in another’s misfortune even when they bring it on themselves, much like the speeding motorist getting ticketed on the roadside..unless his behavior is reckless to others.
While I am shocked that people will not educate themselves at all when it comes to the biggest investment they will ever make, and instead just listen to that NAR propaganda, I still feel sorry for them..maybe because they are stupid?
The main reason for writing you today is to point out 2 very different types of sellers. I know both of these people, they live on the same street in Woodbridge.
The first bought in 1997 and has his house listed at a 2005 price. The house is in great shape, but still it sits. Unless there is a HELOC he wont get hurt.
The other one is a guy ( with family) that moved to Irvine in 2003 for the schools. They sold their house (elsewhere) and rented in Irvine, he asked my advice back then and I told him to keep renting. He would periodically ask me the same question and I gave him the same answer..rent. One year after we moved they must have bought into the belief that trees grow to the sky and bought with no down payment..something I would have never imagined for someone who is (smart) and very conservative. I guess he found out that the $5.5k/mo payment is too much and listed it last month with an out of area agent for $60k more than he paid. Not a knife catcher, this poor guy just keeps taking bad advice from realtors and it will eventually cost him everything.
Do I offer any advice now? Heck no! Been stabbed in the back already. What would I tell them? #1 needs to drop his price $100k, dump the agent who is not spending any money on marketing, list it on the MLS, Craigslist, YouTube, WWW, and offer a 5% commission to the buyers agent. And the $100k is only if he would have done it 2 months ago. Next spring it will be >$150k.
#2…uh well. I am torn since I feel bankruptcy is a license to steal. He will take a $200-$250k hit on this place due in part to condition. The first thing he needs to do is to contact the 2nd mortgage holder and tell them he will be bringing them some short sale offers, then do all of the above with at $225k price reduction….then pray! Alternatively he can just mail in the keys.
I feel really bad for #2 and I think I could help #1, These are both good friends. What would you advise?
Once again I enjoy keeping tabs on the market down there and I really get a kick out of the wit you and your readers often post. Most of all I like the feeling of vindication I get from your blog.
Thanks
(anonymous)
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I replied:
Thank you for writing. It is comments and emails like yours that keep me going. If you didn’t see it, I think you might enjoy The Reservoir of Schadenfreude, you are not alone in your frustration with advising people who refuse to see the obvious.
I think the course of action you advised these would be sellers is right on. Perhaps the only thing I might add is to tell them to come read the analysis posts on our blog to help them feel comfortable with what you are telling them. Sometimes when people read something from a disinterested third party, it carries more weight, and some people just need a bit more convincing that the market is going to crash.
Beyond that, I would just offer up your advice when asked, and avoid the topic otherwise. You can only lead a horse to water…
It is clear that if someone wants to sell a house in the next 3 months, they need to price 25% below 2005 comps. I would tell both of your friends this “opinion” and let them figure the rest out.
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Great letter! This is interesting. When things were headed up and up, seems like everyone in SoCal was all having one big party and everyone was in the club. Now, things are heading down and friendships are souring over the mere mentioning of home prices heading down. I do not live in CA, but it is so obvious from everything I read. This is absolutely ridiculous that people are now getting pissed off at each other over EQUITY IN THEIR HOMES. Even if they are not selling right now, just pointing out that the home is heading down in value is an insult?? I guess that means they are pointing out that my home can HELOC a bigger Benz than your house can.
The psychology behind all of this is seriously interesting. I am considering heading out there for a while just to immerse myself in this current climate to study it from a midewesterners point of view. Maybe a basis for a future dissertation or something and it is great because it is heavily based in both economics and pure psychology.
You are right that there is far more psychology at work than economics, SoCalWatcher. It is amazing to see how offended some people become and how quick they are to suggest you are insane to believe in something that is mathematically inevitable! It is almost like the world when they thought the Earth was flat: an utterly absurd idea. Even the ancient Greeks knew better, but people harbored the idea and killed folks who suggested otherwise.
What is interesting to me is how many people stick together in denial and ask as though any suggestion that the market may correct is a betrayal to all of their friends. A crash is only possible if you entertain the idea, they believe, and as long as everyone is united in talking up the market at all times, it WILL continue to climb at ridiculous rates in perpetuity.
If you point out that housing has outstripped affordability and prices have no where to go but down, you get labeled as a socialist. “Why do homes have to be affordable?” Well, technically they don’t if no one ever sells a home. But many of the people who own the homes right now can’t afford them! And many of us who can afford them even at their wildly inflated prices got completely out of RE a year or two ago. What does that suggest to you?
SoCalWatcher,
Did you see Southern California’s Cultural Pathology. As a Mid-Westerner you will particularly appreciate it. As a displaced Mid-Westerner myself, I am always amazed at the behavior I see here.
It reminds me of “The Secret.” There is a lot of Truth in “The Secret,” but there is also the strange misconception that somehow a financial market will respond to wishful thinking.
The letter is interesting in that it illustrates how impossible it was to “time” the top of the market.
The author says they bailed in April 2004. They probably thought the market couldn’t get any more insane. However, negam’s were introduced then and the party continued for another 2 years.
I wholeheartily agree with you that the internet is a great place to get information unbiased by parties with money/power (i.e., the NAR). I wonder how many financial lives would have been saved had the analyses available on this blog been available back then. I am not aware of any publications that use fundamentals to tie incomes to rentals to house prices as described in the analyses on this blog. Perhaps they are taught in city-planning courses.
Early in this bubble I had to use something else to determine that house prices are absurd: COMMON SENSE.
Or as Hemmingway used to say, a built-in BS detector!
Some psycology and denial.
My business partner has a bunch of cash tied up in
http://www.rescapfunds.com Our CPA does too.
This is a REIT. Subprime CA. Second Mortgages.
11% Interest paid monthly.
When I mentioned that they may be in some danger
of losing their investment because some of those loans are
not secured buy the over inflated home values anymore.
And that the 10 month supply of homes is rising even further.
They both told me I am out of my mind. And should not spread that
kind of bad information. My CPA was really mad at me for being
a bit bearish.
I think giving advice to others is always difficult. What I admire about this blog is that you give analysis of why you think the way you do and then ultimately let the reader decide on his / her own.
I have avoided giving direct advice to others after getting into a very heated debate with an agent in Del Mar who even after he conceded that if prices continue to rise less than 2% of people could afford a home, still insisted prices would go up up and away. This is not a rational purchase — it is a very emotional one — just as many of the purchases in dot com companies became in the late 1990’s.
What I do now is simply give people links to the various sites and let them reach their own conclusions. So thank you for this site and your time — it has helped me and numerous others make more informed decisions. Ultimately we may be wrong — perhaps something from left field stops a fall in prices but as with anything in life, you can’t look for that certain bet — there are none — you play the odds and right now I feel the odds are well against the house (pardon the pun)
It is a funny thing how the emotional side of owning a home can have on someone. My best friend who recently got married needs to find a place or renew their lease in August. His wife really wants to own a place and I think they have been looking into it. When it came up in conversation a few weeks ago I told them no I will not allow you to buy a home right now. I said you would be better off just giving me a $100k because at least the money wouldn’t just disappear. The look of frustration on her face is the same look that I have seen for the last two years.
So I had told them about a very nice detached condo that was in foreclosure in eastside Costa Mesa. They went and checked it and said that it was really nice from the outside. A month later the bank took it back and I reminded them that it sold in 2003 for $630k and the bank wanted $520k for it at the auction. As long as the inside was decent it should have sold at that price but it didn’t. They were shocked and I think they will be renting for a while longer.
Even the HELOC may not be a killer. It depends on when it was opened and how much is owed.
We have a HELOC but even if we took all the money out, our home would have to crater by 50% before we got anywhere close to the original terms.
So your #1 friend may not be serious about selling. Is he selling because he wants to cash out or because he needs to.
Maybe he should think about putting a new coat of paint on the house, buying some nice cigars and kick back in his backyard for a few years.
I though SoCal was not just the ONE place. Las Vegas, Phoenix, Miami, etc…. those places were crazier, huh?
The negAmortization and 100% financing were spread all over too, huh?
I would guess that other markets started to crater earlier, now it our turn.
You are probably (hopefully) right about the HELOC, if he even has one I would guess it is small. No new escalades that I am aware of.
I am pretty sure he is serious about selling. They want to relocate to another state and have visted/researched the new area. Since he will be definately trading down in price where he is going he should price this house to sell.
As tough as it is to watch I have decided, with wifes input, to just stay out of it. His house is in nice shape, well maintained, painted and clean but sitting. I am sure he is starting to figure it out.
I have a friend right now who is trying to sell his house in Corona. I told him initially to drop the price 100K as he was trying to sell it at the 2005 price. He got very defensive and said “No way, my neighbors would kill me! [as he would lower the comps].” Anyways, he lowered it by 25K last month. It has been sitting there for 5 months now with no sign of going into escrow. He has about 150K left in equity if he sells at his current price, but I hope he doesn’t end up losing it all.
IR, I read that entry a while back and found it interesting. This seems like a complete case of groupthink combined with elitism. I don’t think paying too much for a house just mere because I got a loan approved means I have joined any special club other than getting IDIOT tatooed on my forehead and NOD taped to my door.
I realize the SoCal shallowness is one thing, but the combined with financial ignorance is going to cause the bottom of the state to fall in the ocean.
I think even the illegals are changing their last names to “Jones”.
“No way, my neighbors would kill me! [as he would lower the comps].”
So what? He’s moving anyways. Besides, I would not let my neighbors throw me down the mountain that they carried me up to the top of…
interesting reading this blog…i was one of those buying into the hype back in mid-2004, but I actually had a reason to live here vs. flipping (wife works in Irvine, i’m currently a graduate student at the local university). Our 6.5% ARM adjusts in 2011, we’ve successfully rented the other two bedrooms out to students (with plenty of demand for them) which covers half the mortgage… I understand the emotional side to things…it’s a bit painful hearing of the listings around here rolling back to ’04 prices (i mean, when my friends buy this or that and got it for cheaper, a part of me goes “oooh ouch!”)
so as much as i respect this blog and enjoy reading it…maybe i should stop and wait until 2011 when we plan to refinance or sell. it’s tough disconnecting the current market craziness with the fact that i actually live in one of these units. this blog makes me feel like a loser! even though we have purpose/are happy/will be happy here for at least another 4 years.
I was thinking the same thing, but I didn’t say it because it seemed to me that he was looking to only defend his position at all costs. He probably would have gotten angry, so we just don’t talk about housing at all anymore.
Ah yes, the “Secret.” That’s a great analogy, IrvineRenter, and Californians with our new age philosophies love to think that we can control the universe and that we are entitled to infinite appreciation and market returns by virtue of our mental exertions alone, by force of will, bending the economy to our whims.
What happens, though, when hundreds of thousands of people are willing themselves out of Southern California because they are so sick of the pollution and insanely tiny property lots and ridiculously crowded neighborhoods and streets? What happens when more people are envisioning a housing crash than are envisioning infinite growth? What happens when Mitt Romney and Hillary Clinton are both using the full force of their divine wills to cause something specific to happen, like them getting elected as President of the United States?
People out there are “willing” the universe to do inconsistent and mutually exclusive things. Only one person becomes president in 2008. Either the market continues to drop or it reverses and returns to the irrational exuberance of 2004. Both cannot happen. Perhaps the crash of the dotcom bubble occurred because too many people learned “The Secret” and used it against others using it as well! (wink)
Many bearish market observers think 2011 will be near the bottom of the housing market for this cycle.
My advice is to think about your situation now! Don’t delay.
What is “The Secret”? I clicked on the link, but it was just an ad with no explanation.
CA,
Part of the purpose of this blog is to make people aware of the market situation and help them make decisions that are in their own best interest. If you are not currently underwater, you may want to consider selling while you can. In 2011, when you need to refinance, you may be unable to do so which may cost you the home if you cannot make the new payment. Of course, by then you may have a new, high-paying job and everything will be OK.
You just need to consider the possible outcomes in 2011. Most of us at this board are under the opinion that prices will be lower then. Don’t bury your head in the sand because you may not like what you see when you start to look around again. Don’t feel like a loser. Many people fell victim to the hype and hysteria of the bubble. Make good decisions now, and everything will turn out OK.
And that is sad the people are getting worked up over something like RE. Another relationship strained… 🙁
awgee,
Here is the wikipedia on it: http://en.wikipedia.org/wiki/The_Secret_(2006_film) .
It seemed like a well marketed self help film that was didn’t offer any real “help.”
I was going to say that I thought Awgee’s comment: “but it was just an ad with no explanation.” was rather accurate.
If his wife is working and he’s still in school, in four years he ought to be able to bring in more money. After all, grad students are considered to be slave labor by the faculty. So his current loan payment might be doable when it indexes out of the teaser rate.
If they’re currently getting half the mortgage paid, and money is not really currently an issue, then a good idea might be to run -don’t walk- and see if the lender might want to refi into fixed terms today.
The bottom line is that by selling now they would lose money too. Perhaps it might be better to reason with the lender and renegotiate while the “market price” has yet to drop. That and the fact that they are in good terms with the lender payment wise might prompt the lender to remove this issue off their books now.
ok i couldn’t resist coming back and i dug up my old comment! thank you tonye, IrvineRenter, and and sunsetbeachguy for your comments and insight. you’re right, i shouldn’t bury my head in the sand with all this info. I will surely read on…I’m thinking of getting my RE broker license and acting as my own broker, or a buyer’s agent for my friends and not charge much. It seems easy enough.
My wife and I really like living where we are and the mortgage is fine for us, even with just one room rented out. In all likelihood, we will refinance sometime in ’09, ’10, or ’11 to a regular fixed rate and stay put indefinitely. I’m *hoping* my income will ramp up within the next 2-3 years. We both love the 10 minute drive to work (sure beats driving down the 405 from huntington beach/westminster to irvine).
after that nasty commute, we’re more than willing to give up having a lawn/yard/detached “normal” home if it means not having intense road rage twice a day. Perhaps in the next run up on housing we’ll sell and take off! We really have our eyes on a detached home along the 73 corridor in south county…perhaps if there are kids at that point.