Predictions for 2009

Happy New Year — ABBA

On January 1, 2008, I wrote a post titled Predictions for 2008. You can go back and review it to see how well I did.

As a recap, I would like to share with you a couple of charts from 2008 for Irvine and OC:

OC Actual versus prediction

Click for larger image

Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:

  1. 2008 will see the worst single-year decline in the median house price ever recorded
  2. One or more of our major financial institutions and one or more of our major homebuilders will fail
  3. A severe local recession
  4. I predict we will see many more angry homedebtor’s troll the blog

I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.

However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year. This does not mean we will be at the bottom. These interest rates are artificially low due to the “quantitative easing” by the Federal Reserve. This policy may persist for some time, but it is not likely that sub 5% interest rates will be around for buyers 7-10 years from now when 2009 buyers go to sell their property. That creates the issue with Your Buyer’s Loan Terms.

With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation. This will bring out all the bottom callers. Everyone will be cheering the Federal Reserve, and many will believe the worst is over for the housing market. This will cause some major emotional gyrations for desperate homedebtors. Those who had moved from denial to fear will likely move back to denial for a time.

Remember, the loans that reset this year will take a year or more to become foreclosures. The real problems caused by all the resets will not be apparent this summer. We will likely see a large number of short sale listings, but as we all know, these rarely consummate a transaction. It is only the presence of these short sales listings that will remind us of the impending disaster when the ARM reset problem becomes a tsunami of foreclosures. When these foreclosures start hitting the market in larger numbers, and the market rally is reversed, all of those who call the bottom this summer will act surprised. Ignorance is bliss.

Not to get too far ahead of ourselves, but 2009s bear rally will be wiped out by the first wave of foreclosures. I foresee 2010s bear rally being knocked back by continuing foreclosures and the much-anticipated rise in interest rates when the FED stops quantitative easing as the recession abates. The rally in 2011 will be tepid, but at least it will be for real. For 2012-2015, appreciation will be less than 5% each year as the overhang of foreclosures and a sputtering California economy keep prices in check until Californian’s lose their minds again and inflate another housing bubble.

In my opinion, these artificially low interest rates will simply guarantee that house prices overshoot fundamentals to the downside because the fundamentals in this instance are illusory. The low interest rates will prompt some people to buy, and this increased buying activity will stop prices from falling as much as they would have without the subsidized interest rates. However, very few people currently qualify for these loans. Loan terms are getting tighter all the time, and the buyer pool is very restricted. People talk about the conservative lending terms as if they are too tight. This is nonsense. We are still not at pre-bubble loan terms (20% down, 28% DTI, high FICO, etc.) and until we get there, loan terms will continue to tighten. The diminished buyer pool when combined with increased foreclosures creates an imbalance between supply and demand which will push prices lower.

Many people erroneously believe that low interest rates are going to save the housing market because the loan resets are not going to lead to foreclosures. As I outlined in the ARM problem, the payments are going to increase even if the interest rate remains the same due to the amortization recast. If you want a more detailed explanation from Mr. Mortgage, I suggest you read Pay Option ARMs – The Implosion Is Still Coming Despite Low Rates and Low Mortgage Rates to Spur New Wave of Defaults. The idea that low interest rates are going to save the housing market is another in our ongoing series of denial fixes being fed to a weary populace. It is all bull$hit.


Last year I predicted that we would see banks and homebuilders go under. We did see several banks including WAMU bite the dust. This trend will continue. All of our banks are basically insolvent. Only creative accounting practices and huge amounts of borrowing from the Federal Reserve is keeping them afloat. Even the huge infusion of money through the TARP program is not going to save them. There will be many more failures and consolidations in 2009.

One surprise from 2008 was the lack of bankruptcies and consolidations in the homebuilding industry. Ordinarily, during a recession, the weak companies go out of business or are absorbed by stronger ones. In my opinion, the reason we have not seen this yet in the homebuilding industry is because there are no strong ones, and there is no reason to consolidate or expand while housing starts and sales continue to decline. I think 2009 will be different. In the second half of 2009, the homebuilders will start to rebound. If past history is any guide, the recession will bottom when housing starts bottoms. This is when the industry will begin to consolidate.

I believe we will see massive consolidation in the homebuilding industry. During the 80s and 90s the homebuilding industry was dominated by small, private builders. Many of the small fry were wiped out during the recession of the 90s. During the 00s, we witnessed the rise of the national homebuilders as the dominant market force. I believe we will see consolidation into an industry dominated by a few big names with a few small privates picking up the scraps in various markets.

Last year I predicted a severe local recession. I did not have the courage to predict a severe national recession. Perhaps I should have…

IHB Get Together 2

I do not have a prediction about angry homedebtors. As the market shifts from denial into fear, there is a widespread acceptance of the reality of a housing bubble. Most trolling comes from people trying to maintain their denial (if you want to study this phenomenon, I suggest you read this forum thread). With acceptance comes less anger and trolling. However, I have recently launched an article marketing campaign that likely will catch the attention of realtors across the country. We may see a few of them stop by to explain to us why we don’t know what we are talking about. That should be amusing.

Today’s featured property was brought to my attention from a reader. It is a typical Irvine property struggling with a typical Irvine debt load. I predict we will see this house for sale as REO in a year.

4152 Homestead St front 4152 Homestead St kitchen

Asking Price: $719,000IrvineRenter

Income Requirement: $179,750

Downpayment Needed: $143,800

Monthly Equity Burn: $5,991

Purchase Price: $475,000

Purchase Date: 10/15/2003

Address: 4152 Homestead, Irvine, CA 92604

Beds: 5
Baths: 3
Sq. Ft.: 2,089
$/Sq. Ft.: $344
Lot Size: 5,000

Sq. Ft.

Property Type: Single Family Residence
Style: Traditional
Year Built: 1972
Stories: 2
View: Trees/Woods
Area: El Camino Real
County: Orange
MLS#: P655066
Source: SoCalMLS
Status: Active
On Redfin: 113 days

Unsold in 90+ days

entertainment home with one bedroom and one bath on the main floor. All
upgraded kitchen, bathrooms, flooring throughout, and great master
bedroom w/upgraded bath. 5-year-old tile roof new furnace, newer water
heater, newer kitchen appliances, newer French doors, all new windows,
great size yard and side yard, (back yard that feels like a park).
Walking distance to a great part, all shopping and restaurants off
Culver. Close to schools. Living room w/vaulted ceilings and fireplace.
Family room w/built-in wine cooler, formal dining room, breakfast bar.
Great Cull-De-Sac location. Inside laundry with plenty of storage for a
big family. Just a great house to live in with lots of windows that
bright up the house. Walking distance to a great park. Great schools
have made this neighborhood very popular.

bright up the house?

At least this description tells us where some of the HELOC money went.

  • Today’s featured property was purchased on 10/15/2003 for $475,000. The owners used a $380,000 first mortgage and a $95,000 downpayment.
  • On 11/5/2004 they refinanced with a $530,000 Option ARM.
  • On 5/3/2006 they opened a HELOC for $150,000.
  • Total property debt $680,000 plus negative amortization.
  • Total mortgage equity withdrawal is $300,000 including their downpayment.

This house is typical of the entire Irvine housing market. The owners doubled their debt (which is about average from what I see with houses for sale), they are overextended, and they are listing their house for a wishing price that will bail them out of their financial dilemma. It looks as if they have solicited a relative to sell their house for them, probably for a discounted commission. Based on their asking price (which the market is telling them is too high), they are priced to cover their loan obligations. They will hold to this fantasy as long as possible, but when the payments overwhelm them — probably when their Option ARM recasts — they will give up and lose the house in a foreclosure. Properties like this one represent “overhead supply” that must be cleared out before there is any possibility of price appreciation.


No more champagne
And the fireworks are through
Here we are, me and you
Feeling lost and feeling blue
It’s the end of the party
And the morning seems so grey
So unlike yesterday
Now’s the time for us to say…

Happy new year
Happy new year
May we all have a vision now and then
Of a world where every neighbour is a friend
Happy new year
Happy new year
May we all have our hopes, our will to try
If we don’t we might as well lay down and die
You and I

Sometimes I see
How the brave new world arrives
And I see how it thrives
In the ashes of our lives
Oh yes, man is a fool
And he thinks he’ll be okay
Dragging on, feet of clay
Never knowing he’s astray

Keeps on going anyway…

Happy New Year — ABBA

39 thoughts on “Predictions for 2009

  1. Gindy

    The discounted commission shows. The least the agent could do is not put multiple pictures of the same things on the house’s selling site.

  2. Adam Smith

    Quantitative Easing Won’t Work

    In a Liquidity Trap although Saving (S) is abnormally high investment (i) is next to 0. The Keynesian Paradigm I=S is not verified.
    The purpose of Quantitative Easing is to lower the yield on savings but it doesn’t create $1 on investment. It does diminish the yield on long-term Treasury Bonds but marginally lowers the asked yield on savings.

    This and other issues are explored in our Tract:

    A Specific Application of Employment, Interest and Money


    This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

    It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

    It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes’ Liquidity Trap…

    It shows that no fiscal or monetary policy, including the barbaric quantitative easing will get us out of depression.

    It shows that Adam Smith, John Maynard Keynes, Karl Marx and Alan Greenspan don’t contradict each other but that they each bring a meaningful contribution to a same framework for understanding macro economy.

    It proposes a credit free, free market economy as a solution that would correct all of those dysfunctions.

    In This Age of Turbulence People Want an Exit Strategy out of Credit, an Adventure in a New World Economic Order.

    Read It.

  3. NoWowway

    I see that they have removed the popcorn ceilings and have added recessed lighting. At least downstairs.

    No pictures of the bedrooms. Didn’t they advertise a terrific master bed?

    Those trees in the back yard will not allow grass to grow under them. They tend to make a mess year ’round with their leaves and little red pepper balls that drop everywhere. If there is a pool/s on the other side of the wall your neighbors will expect you to be responsible for keeping your trees trimmed and on YOUR SIDE OF THE WALL at your expense. And they will bitch if you don’t because those trees really clog up the pool filters and generally make a huge mess in other yards, as well as your own. Oh yeah, and the root systems for those trees tend to go rogue and tear up walls and concrete pads – not just contained in your yard, but can affect your neighbors as well.

    There was a real class of asshats that bought up properties in our older neighborhood the past five years. They acted completely entitled and many of them had very marginal jobs. Some of them have capitulated and have been replaced by unassuming asian buyers. I think today’s property kind of explains what was going on and how the debtload the homes may/probably have on them allowed some real jerks to live large and beyond their means. It really gave way to very aggressive know-it-all attitudes in our schools, kids sports teams, HOA meetings etc… There are four families that I will enjoy seeing the moving truck in front of their homes. I am now convinced that it is just a matter of time.

    There REALLY IS a difference in attitudes between people who didn’t put in the work to actually own a home within their means and people who had the discipline to buy and own responsibly.

    1. IrvineRenter

      “There REALLY IS a difference in attitudes between people who didn’t put in the work to actually own a home within their means and people who had the discipline to buy and own responsibly.”

      This is the difference you used to see between owners and renters in a neighborhood. Apparently, “owners” who put no money down, have no equity, and made no sacrifices for ownership are not any different than renters. Hmmm…

      1. tlc8386

        I think our neighbors had a heart attack to see the renters fixing up the place–LOL–Then they saw how we live and must of thought we owned a home either flipping it or doing a heloc and walking away like everyone else–No sorry just a regular old honest person if any exist any more! Only problem we still don’t really fit in. OH well that is the way it goes!!

        I have an idea though why can’ we buy some property and build our own homes–like Green types. Is there any property we can own? I am at the point where I would rather build my own–at least I would not be over spending for some termite old falling apart house totally over priced for what it’s worth.

        Is there such a thing or does IAC own everything???

  4. NoWowway

    Wow, IR. That thread with angry Janet is something else.

    I don’t see my asshat neighbors getting all publically angry like that… they are more into slinking away.

    1. The Moar You Know

      Boy, it really is, and she just keeps coming back for more. I haven’t seen anyone self-pwn like that since Budd Dwyer.

  5. ocbear

    Long time lurker, first post here.

    I have been watching the beach areas for the last year and have seen three types of transactions. The first is the REO which is listed low and gets multiple bids. Most of these usually sell for above asking. If the REO is not listed low it sits.

    The second type is the above average home priced in the average house range. These sell for about 95% of list.

    The third type is what confuses me the most: A house that sits on market for a long time, maybe gets a 20K reduction and then sells for 103% of original asking. I suspect there is some form of FHA fraud going on with these. I believe that an FHA can get up to 3% back for repairs and up to the begin of this year only required 3% down. I have suspected these transactions are using some form of hard money loan seasoned for 2 months and then are repaid with the ‘repairs’ funds. These transactions always sit pending for quit a while (enough to prove 2 months of funds). My hope is that these transactions go away with the CalFHA being suspended because of the budget crisis.

  6. idrnkurmlkshk

    Hi Janet,

    I havnt been following the issue you are having with IR, but what points are you specifically looking for facts on? In order for the truth to be known, everyone should tone down blog-trash talk.

  7. ipoplaya

    IR, I don’t believe Irvine’s price declines were as large as you predicted for 2008. You were thinking 12% in 2008, which looks to be more like 8-10%, and another 16% in 2009…

    So if the median declines for Irvine in 2009 won’t be as high as 2008, are you now thinking maybe only 6-8% off in 2009 for Irvine for a two-year total of 16-18%?

    1. IrvineRenter

      I haven’t seen the final numbers on 2008, but I thought it was worse than 8%-10%. I think we will see another 10% in 2009. Interest rates will work to support prices. It all depends on how much supply is forced on to the market, and how many people will qualify under the new terms. Prices are still too high, but if supply remains low and there are enough knife-catchers qualified to buy up the inventory, prices may remain supported at elevated levels.

      1. george8

        It is likely that the government will employ desperate and reckless means to artificially suppress ALT A and ARM reset pains. Therefore the decline may be put off a little longer as projected.

        1. Priced_Out_IT_Guy

          This is my assumption as well. I don’t think you can predict the future at this point because the recklessness we’re going to see by our government in 2009 will be unprecedented.

          Once the ARM problem comes to full light the government will figure out some way to ease the reset burden by stealing from the general public and giving to the ones that helped cause this mess through tax subsidies in some way shape or form.

          Personally I foresee a continued drop in pricing in the two markets I follow: OC and North County SD. OC is still way overpriced for first time buyers and north county SD is still a bit overpriced but quickly approaching rental parity. As a first time buyer I am still planning to delay my purchase until 2010.

          1. Perspective

            “…by stealing from the general public…”

            They’ve been stealing 40%+ from me & the Mrs. for years.

        1. ipoplaya

          The Cyberhome figures include Nov and Dec 2007, which were big decline months for Irvine as well as the rest of the country.

          If you look at Case-Shiller data, those two months were 2 of the largest 3 months of declines. I think in calendar 2008, Irvine would be lucky to be off 10%, especially with closing prices up in December…

  8. Orcian

    Last week (Dec. 25) in the OCR, there was an article about Mission Viejo’s Life Church, and problems its members are having. The article mentions that at least 25% of the 2,000-member congregation faces foreclosure. Phil Munsey, the founding pastor, said, “We have people in nice homes and cars that can’t afford groceries. It is the Orange County dilemma….” I wonder how many in Irvine are in the same boat. Hard to tell, because everyone seems to be doing so well. Many that we know spend (borrow?) a lot more than we do on “stuff.” I guess we will know more as the next couple of years unfold.

  9. Orcian

    I don’t blame IR for deleting your posts, Janet. If he spent all of his time battling delusional minds, he’d have no time for his family.

  10. newbie_2009

    Happy New Year!

    Hi, I am a newbie and looking to buy in 2009 or 2010. Just have some questions about the medium “home” price prediction for Irvine:

    1. Is the medium “home” price for SFR only or does it include the condos as well?

    2. What’s a medium “home” like in Irvine? i.e. how old is it and how big it is?


    1. IrvineRenter

      The median home price will include all transactions. The median is exaggerating the decline in prices right now because most of the activity is at the bottom of the market.

      A median home in Irvine is a large 2/2 or a small 3/2 most likely a condo. SFDs, even the small ones, are the minority in Irvine.

  11. alan


    I have a HELOC which I opened but didn’t abuse, there good to have for the rainy day. Citibank cut my line in 1/2 last yr but it’s still a good amount. After the most recent interest cut, my rate on my HELOC is 2%.

    Currently I’m getting 3.7% on my savings at Indymac so here’s a situation where I could tap my HELOC, move it into a savings account and make money. I never thought anything like that would happen.

    1. maliburenter

      I have received a stream of offers from BofA to borrow at 1.99% unsecured. I can get a higher return on a CD at BofA.

      There might be some sort of regulatory capital calculation going on. Since banks have leverage ratio requirements, if I borrowed $10,000 and put it back in the same bank, their capital ratios would look better.

    2. IrvineRenter

      This is exactly the situation the FED hopes to create. The easiest way to stimulate borrowing is to pay people to do it. I know it sounds facetious, but I am totally serious.

  12. Hal

    I’m in Florida and the housing market is hurting here big time too. I think you’re right that we will see prices continue to fall but not as much as in ’08.

    Though I think it could be possible for something even worse after watching I.O. USA video and it scares me quite a bit as we go into the new year.

    Here’s another video from the Wall Street Journal worth looking at: How Iceland Collapsed.

    I think a lot of people are going to be turning toward saving money. And gold probably will be one of the modes to that end because I think the dollar will be toast. I see from ExactPrice that gold is taking off after close today and is at 883.90 right now. Given it all I am beginning to wonder if Peter Schiff’s prediction isn’t right about it going through the roof in ‘09. He claims $2,000 an ounce will likely be hit.

    Well, I guess that’s my predictions. I know one thing I resolve to do, and that’s cut back and save money.

    1. Priced_Out_IT_Guy

      Don’t cut back and save money–do your damned patriotic duty and spend like a playboy in Vegas with an AMEX black card. If you don’t do what’s right the era of $5,000 leather sofas, $4,000 flat screen TVs, and $85,000 domestic tank SUVs will disappear and never return.

  13. dafox

    Here’s some fun chart porn
    Blue = Current LA Case Schiller as of Oct 08
    Yellow = If the bubble were mirrored from the top, thats what the 2nd half would look like
    Red = Mirrored, but from the current location (~179 on the index)
    Green = +3%/yr starting from Jan 87

    3 things that this shows me:
    1. The fall has been faster than the rise
    2. the red/green crossing point is Nov 2010
    3. Peak prices wont be seen for LONG time. at least past 2025.

  14. nefron

    I agree with george8 and Priced_Out. You do not know to what lengths our government will go to support the real estate financial complex in this country. We are all hoping that the market will be left alone as much as possible to self correct but I think that you cannot rule out major tinkering/bank arm twisting by the government to blunt the effect of the ARM recasts. Not that I’m in favor of it. I need prices to go down. But I’m not optimistic. The loud-mouthed, self-absorbed, self-entitled have a way of getting what they want in this country.

  15. tlc8386

    You have to ask yourself where are the jobs that are going to support Irvine–This alone will continue to decline given the financial meltdown.

    The city needs to cut back and fire some of their over paid employees–time to cut back Irvine and get back into reality.

  16. Paul Pencikowski

    IR… You have a fundamental error on your “home-price meets rent-cost” chart. You show a rising rent-price line. Recent (6-month at least) empirical data shows rents *falling* (at best “steady”). IAC is reducing rents and (horrors!) offering 15-month leases.

    IAC is being hit by falling rent-prices of personally-owned condo’s, and must compete.

    1. IrvineRenter

      Yes, when I originally did the projections, I did not factor in how much the downturn in the economy would impact rents. Firming rents will be the first sign of the recession ending.

  17. Edmonton Real Estate

    I think 2009 will start to level out around the end of the year, but it will be tricky for some people before then. I wouldn’t expect property values to do anything but drop in the meantime.

    Ryan Philipenko – Real Estate Edmonton

  18. SD Kate

    Some of us delusional homeowners have stopped drinking the kool aid! I grew up in South Orange County, moved to San Diego for school, got married, and started looking to buy a home.

    We totally drank the kool aid, believed if we didn’t get in now, we were missing out and bought in 2005 with little money down. (5/1 interest only arm 1st, fully adjst interest only 2nd). 1 year later, we refinanced into a 7/1 arm and fully amitorized 2nd, and took no money out. My husband was graduating from law school, and our hope was to re-fi at the end of the fixed period, or with the huge bump in income we expected to have, be able to afford the difference. We weren’t chugging the kool aid, just drinking too much.

    We split in October, and now I don’t have 1/2 the money for the mortgage, so I’m going through bank hell right now. It’s my own damn fault for not doing my homework, and I don’t expect a bailout. (I wouldn’t say no to one of course, but I don’t expect it or feel ‘entitled’ to it.)

    Anyway, my point is that not all of us idiot homeowners are angry! I read to educate myself for next time. Plus, it’s nice to see there were people who were a lot stupider than I was.

    I’m willing to take most of the blame for this, and will be paying for it with my credit. There definitely were some other factors, my lender told me, “Oh, you can’t get a good house for that amount, you can qualify for $100k more”. We said, “No, we can only pay x per month, we’ll find something for that.” Which was one of the few smart things we did do!!

  19. North Myrtle Beach Condos

    I think 2009 will start to level out around the end of the year, but it will be tricky for some people before then. I wouldn’t expect property values to do anything but drop in the meantime.

    There REALLY IS a difference in attitudes between people who didn’t put in the work to actually own a home within their means and people who had the discipline to buy and own responsibly.I have an idea though why can’ we buy some property and build our own homes—like Green types. Is there any property we can own? I am at the point where I would rather build my own—at least I would not be over spending for some termite old falling apart house totally over priced for what it’s worth.

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