Shadow Inventory Signals Three Years of Falling Prices

Working through the inventory of distressed properties will likely take several years. Many forecasters are now warning of a three-year slide.

133 Danbrook kitchen

Irvine Home Address … 133 DANBROOK Irvine, CA 92603

Resale Home Price …… $300,000

Don’t tell me how life is

Cause I don’t really want to know

Don’t tell me how this game ends

Cause we’ll just see how it goes

Catch me when I fall

Or you’ll need me when I’m not here at all

Miss me when I’m gone again, yeah

I’m going down in flames

I’m falling into this again

3 Doors Down — Going Down in Flames

Is the US housing market going down in flames again. A precipitous drop in 2008 was temporarily halted by a massive government effort, but with the market props removed, it looks like house prices are going to resume their decline.

U.S. home prices face three-year drop as inventory surge looms

By John Gittelsohn and Kathleen M. Howley

(c) 2010 Bloomberg News

Wednesday, September 15, 2010; 12:24 AM

Shadow inventory — the supply of homes in default or foreclosure that may be offered for sale — is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody's Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners.

"Whether it's the sidelined, shadow or current inventory, the issue is there's more supply than demand," said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. "Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year."

When many people read predictions like that, they dismiss it as just another opinion. There is a reason analysts believe this. Why do markets work that way? Why will it take three or four years to bottom and why will appreciation be so slow thereafter?

A good example to look at is the farmland price bubble of the 1970s — a bubble that took 20 years to reach its peak in nominal dollars. When a bubble bursts, sellers accumulate as everyone tries to bail out before prices fall further. The inevitable foreclosures plus those who purchased at higher price points form an overhead supply that must be liquidated before prices can go back up. The weight of this inventory if left unchecked will push prices well below the previous equilibrium as is now happening in Las Vegas. Over time this inventory is sold, and the weight of this inventory lessens, and prices can slowly begin to rise. It is only after all this inventory is purged can prices resume a level of appreciation equal to wage incomes.

Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.

Sales of new and existing homes fell to the lowest levels on record in July as a federal tax credit for buyers expired and U.S. unemployment remained near a 26-year high. The median price of a previously owned home in the month was $182,600, about the level it was in 2003, the National Association of Realtors said.

There were 4 million homes listed with brokers for sale as of July. It would take a record 12.5 months for those properties to be sold at that month's sales pace, according to the Chicago- based Realtors group.

"The best thing that could happen is for prices to get to a level that clears the market," said Shapiro, who predicts prices may fall another 10 percent to 15 percent. "Right now, buyers know it hasn't hit bottom, so they're sitting on the sidelines."

Inflated prices make for unmotivated buyers. Wise buyers know that prices are not going up (fools still get duped by realtors), so a deflationary psychology takes over. Buyers should wait because they will get a better deal if they do. Further, if buyers act in unison, the deflation becomes self generated. It isn't until prices fall to the point where renting carries a heavy premium that buyers are pushed off the sidelines.

About 2 million houses will be seized by lenders by the end of next year, according to Mark Zandi, chief economist of Moody's Analytics in West Chester, Pennsylvania. He estimates prices will drop 5 percent by 2013.

After reaching bottom, prices will gain at the historic annual pace of 3 percent, requiring more than 10 years to return to their peak, he said.

"A long if not lost decade," Zandi said.

See Real Estate's Lost Decade.

The national declines likely will be weighed down by more troubled markets. Working through the inventory depends on variables such as local employment and the amount of homeowner debt, said Sam Khater, chief economist for CoreLogic Inc., a Santa Ana, California-based real estate and financial information company. Nevada has the highest percentage of homes with mortgages more than the properties are worth, while New York state has the lowest, according to CoreLogic.

Douglas Duncan, chief economist for Washington-based Fannie Mae, the largest U.S. mortgage finance company, said in a Bloomberg Radio interview last week that 7 million U.S. homes are vacant or in the foreclosure process. Morgan Stanley's Chang said the number of bank-owned and foreclosure-bound homes that have yet to hit the market is closer to 8 million.

Sandipan Deb, a residential credit strategist for Barclays in New York, said prices will drop another 8 percent — to 2002 levels — before beginning a recovery in 2014.

That is a reasonable prediction. The weight of this inventory is too much, and the banks are going to liquidate this inventory eventually, or they will own a great many houses for a very long time.

"On a national level, you have never seen a decline of this sort," Deb said in a telephone interview. "I would caveat that by saying you also have not seen an increase on a national level like we saw from 2002 or 2003 to 2006."

In addition to the as many as 8 million properties vacant or in foreclosure, owners of another 3.8 million homes — 5 percent of U.S. households — said they are "very likely" to put their properties on the market within six months if there is improvement, according to a July survey by Seattle-based Zillow.

"This has the potential to create a sawtooth pattern along the bottom," Stan Humphries, Zillow's chief economist, said in a telephone interview. "Homes begin to sell and a few sidelined sellers rush into the marketplace and flood the marketplace."

The impact of overhead supply is as described above: sellers waiting for price improvement suddenly appear on the MLS when they get a whiff of their wishing price, and as the decline grinds on, sellers have a tendency to become more motivated and lower their wishing prices until they finally capitulate and sell the property for whatever they can get. That is the interaction between the psychology of the individual sellers and the broader market.

If the market doesn't fall to its natural bottom, price gains in the next five to 10 years won't keep pace with inflation as the difference is made up "on the backend," said Barry Ritholtz, chief executive officer of FusionIQ, a New York research company. Price increases that fail to at least match inflation are the same as reductions in value, Ritholtz said.

The Obama administration's effort to help mortgage holders, the Home Affordable Modification Program, or HAMP, is another source of future inventory as owners with new loan terms re- default, Ritholtz said. About half of the modifications done in 2009 were behind in payments by the first quarter of 2010, according to the Treasury Department.

"The belief has been: if we stimulate sales with a tax credit and delay foreclosures with modifications, the market would stabilize," said Ritholtz, author of "Bailout Nation." "We're just putting off the day of reckoning and drawing out the pain by not letting the housing market hit its bottom."

I have the utmost respect for Barry Ritholtz. His analysis is always right on.

Government policy contributed to a recent stabilization in prices that may have been an "illusion," said Zach Pandl, an economist at Nomura Securities International Inc. The S&P/Case- Shiller index of home prices in 20 U.S. cities rose 4.2 percent in June from a year earlier. The measure is a three-month moving average, which means data in the month were still influenced by transactions that may have benefited from the tax incentive.

Even if modifications fail, keeping foreclosures off the market is worth the risk of a delayed recovery, Pandl said.

"It's too painful and too damaging to let it happen all at once," Pandl said from New York.

I still think that contention is nonsense. Everyone who was involved with peddling these stupid market props will look for justification of their failure after the fact. The government props were wasted money and resources. There is no silver lining in that dark cloud.

Owners of about 11 million homes, or 23 percent of households with a mortgage, owed more than their property was worth as of June 30, according to CoreLogic. Another 2.4 million borrowers had less than 5 percent equity in their houses and probably would lose money on a sale after paying broker fees and closing costs, CoreLogic said Aug 25.

In Nevada, 68 percent of homes were underwater in July, with mortgage loans statewide totaling 120 percent of home values, according to CoreLogic. Only 7.1 percent of properties in New York state were underwater, with the total loan-to-value equivalent of 50 percent, the company said.

Brandi Miner, director of marketing for the Georgia Association of Realtors, is holding back on selling her one- bedroom condominium in Atlanta's Buckhead district because she has an underwater mortgage. She paid $155,000 for the property in 2005.

"I'm stuck," Miner said. "I thought it was a stepping stone to a house."

I never quite understood this "stepping stone" idea. If you buy a house because houses are going up in price, both the house you are in and the house you want are going up together. How does buying the stepping-stone house get you any closer? Or is it good enough to stay within reach?

Miner pays about $1,100 a month for her mortgage plus $225 in condo dues, a higher price than she would spend for a three-bedroom house in a good Atlanta-area neighborhood at today's prices, she said. Selling now would cost her $10,000 to $15,000, Miner estimated.

"I'm not $200,000 in the hole, thank God," she said. "But the quarter of the country that's underwater — that's me."

That must make those California borrowers who are $200,000 in the hole realize what fools they were.

Detroit, Las Vegas and Fort Myers, Florida, will take until at least 2020 to return homeowners to positive equity, CoreLogic said in a March report that compared prices in 10 metro areas. Atlanta, Dallas and California's Riverside and San Bernardino counties will need until 2016. The Washington, D.C., area will take the least amount of time, with negative equity disappearing around 2015, CoreLogic said.

CoreLogic is wrong. They assume all markets will bottom at equal times and at prices relative to where they are today. Since many markets never deflated, these must still decline in price before they hit bottom. The low end is close to the bottom, but the mid to high end is not. Further, Riverside County is close to the bottom, and Orange County is not.

The slide in values and record-low interest rates may offer some bargains for property hunters. Prices have returned to historically affordable levels, said Karl Case, professor emeritus of economics at Wellesley College in Wellesley, Massachusetts, and co-creator of the S&P/Case-Shiller index. He estimates a bottom for prices in six months.

"It doesn't take a tremendous number of people to turn the housing market, because only about 5 percent of the stock trades in a given year," Case said in a telephone interview. "There's still a lot of people who are employed, many of whom have been looking for the opportunity to buy."

Case is an example of a homeowner waiting to sell because of low demand. He's seeking to sell the A-frame on 15 acres near Cooperstown, New York, that he bought for $190,000 in 2005.

"I want to keep it if I can't get what I want," he said. "It's a terrific little getaway and I'm not going to give it away."

OMG! That is so embarrassing. Karl Case is a loan owner in denial! Over the last year or so, Karl Case has been inexplicably bullish. Now I understand: he suffers from position bias. He is being influenced by his personal position in the market which he needs to move in his favor. He is not objectively looking at the data and making a sound analysis. He is instead interpreting what he sees based on what he wants to see, and in the process, he is ruining his credibility.

Some indicators show the real estate market has begun to turn a corner. Pending sales of existing houses increased 5.2 percent from June to July, the National Association of Realtors reported Sept. 2. Economists had estimated a 1 percent decline, according to the median of 37 forecasts in a Bloomberg survey.

"The market is starting to show some signs of stabilization," Nicolas Retsinas, director emeritus of Harvard University's Joint Center for Housing Studies, said during an Aug. 31 interview on Bloomberg Television's "InsideTrack." "But a robust recovery is a long time away."

The number of U.S. homes in default or foreclosure fell to 7.04 million as of July 31 from a high of 8.12 million in January, Lender Processing Services Inc., a Jacksonville, Florida-based mortgage servicing company, reported Sept. 2.

Defaulted mortgages as of July took an average 469 days to reach foreclosure, up from 319 days in January 2009. That's an indication lenders — with the help of the government loan modification programs — are delaying resolutions and preventing the market from flooding with distressed properties, said Herb Blecher, senior vice president for analytics at LPS.

"The efforts to date have been worthwhile," Blecher said in a telephone interview from Denver. "They both helped borrowers stay in their homes and kept that supply of distressed properties on the market somewhat limited."

Bullshit. The foolish series of mistakes made by people in our government and their lending overlords has squandered our resources and accomplished nothing — expect perhaps to shift these losses to US taxpayers. The market will not recover faster, nor will it regain good sales volumes until prices are lowered to levels where the inventory can be cleared.

949 Days on the Market

I first profiled this property in the post Mistake 2008. Bank in 2008, this property had already been on the market for nearly a year. Here is your chance to pay $300,000 for a glorified apartment.

  • This property was purchased on 3/25/2005 for $445,000. The owner used a $400,500 Option ARM first mortgage and a $44,500 down payment.
  • Not to worry, on 4/5/2006 he opened a HELOC for $60,000 and likely withdrew his down payment plus $14,500.
  • So far the owner has been squatting for nearly three years.

How does a house spend 949 days on the market?

Date Event Price
Dec 29, 2008 Price Changed $300,000
Dec 16, 2008 Price Changed $340,000
Nov 19, 2008 Price Changed $320,000
Nov 11, 2008 Price Changed $370,000
Jun 06, 2008 Price Changed $375,000
May 15, 2008 Price Changed $399,000
May 13, 2008 Price Changed $419,000
Apr 27, 2008 Price Changed $439,000
Apr 09, 2008 Price Changed $449,000
Feb 12, 2008 Listed $460,000
Mar 25, 2005 Sold $445,000

This is shadow inventory. This is lender denial. This is ridiculous.

How many days on the market will this house see? Are lenders waiting for some buyer to step forward and pay $445,000 for a 1 bedroom apartment condo? This listing may be around in 2020 if they are waiting for that to happen.

This property is scheduled for auction on Wednesday. Perhaps the lender will finally put this listing out of its misery and foreclose. I see no evidence of any attempt at a loan modification, so the lender's failure to foreclose skips the first step of amend-extend-pretend. Based on recent trends, there is an 80% to 90% chance they will continue the extend and pretend dance for another month.

133 Danbrook kitchen

Irvine Home Address … 133 DANBROOK Irvine, CA 92603

Resale Home Price … $300,000

Home Purchase Price … $445,000

Home Purchase Date …. 3/25/2005

Net Gain (Loss) ………. $(163,000)

Percent Change ………. -36.6%

Annual Appreciation … -6.4%

Cost of Ownership


$300,000 ………. Asking Price

$10,500 ………. 3.5% Down FHA Financing

4.52% …………… Mortgage Interest Rate

$289,500 ………. 30-Year Mortgage

$58,768 ………. Income Requirement

$1,470 ………. Monthly Mortgage Payment

$260 ………. Property Tax

$200 ………. Special Taxes and Levies (Mello Roos)

$25 ………. Homeowners Insurance

$225 ………. Homeowners Association Fees


$2,180 ………. Monthly Cash Outlays

-$135 ………. Tax Savings (% of Interest and Property Tax)

-$380 ………. Equity Hidden in Payment

$18 ………. Lost Income to Down Payment (net of taxes)

$38 ………. Maintenance and Replacement Reserves


$1,721 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$3,000 ………. Furnishing and Move In @1%

$3,000 ………. Closing Costs @1%

$2,895 ………… Interest Points @1% of Loan

$10,500 ………. Down Payment


$19,395 ………. Total Cash Costs

$26,300 ………… Emergency Cash Reserves


$45,695 ………. Total Savings Needed

Property Details for 133 DANBROOK Irvine, CA 92603


Beds: 1

Baths: 1 bath

Home size: 822 sq ft

($365 / sq ft)

Lot Size: n/a

Year Built: 2004

Days on Market: 949

Listing Updated: 40423

MLS Number: S521349

Property Type: Condominium, Residential

Community: Turtle Ridge

Tract: Ashg


According to the listing agent, this listing may be a pre-foreclosure or short sale.

Best deal in Turtle Ridge! Better then a model, granite counters, designer paint, berber carpet, upgraded bathroom, and much more. There is a garage with direct access, a fireplace, and air conditioning. This is a primo location with access to Newport Beach, Fashion Island, The Spectrum and the Beach! There is a really nice community pool and spa with clubhouse and nearby walking trails. only way to be in the area for this price! Only one of a few 1 bedrooms every built!

every built? After three years on the market, the realtor can't be bothered to fix this error.

primo location? That sounds professional, doesn't it?

31 thoughts on “Shadow Inventory Signals Three Years of Falling Prices

  1. SanJoseRenter


    I hope that you can do some more digging and make it worthwhile to do milestone updates at 1000 days and 1095 days (3-year mark.) 🙂

    I’m not surprised about house prices falling and credit standards tightening, but extended squatting sure caught me off guard.

  2. anotherirvinerenter

    The 3 years mentioned are a national estimate. Looking at OC and Irvine, can’t this be longer ? Or, considering the fact prices haven’t gone down too much, can it actually be shorter, as price would catch up (downward) ?

    Also your comment about different market is right on, I’m amazed at the difference in low-end vs high-end. Or OC vs IE. I also had a friend about to buy a house in Sacramento. amazing, prices are in the ~<200$sqf for ~3000sqf houses. And it dropped ~30% within 18months.

    I wonder if Irvine is going to see a big drop in the mid range within the next 6months.

  3. winstongator

    The Atlanta woman was referring to the ‘move-up’ market that I’ve seen people mention here, and heard of doing in SoFla. Put 40k down on a 200k home in 2002. ‘Value’ goes to $300k in 2004, sell, take the $140k, and you could put a dp on a $700k home. 700k in 2004 becomes maybe $1M in 2006. Now you have $440k ‘equity in that home. This type of ‘move-up’ helps with down payments, but not with capacity to make payments, as the mortgages went from $160k to $560k.

    This is one reason focusing on down payments and not DTI is problematic. If you think as long as there’s a good DP, then the loan will be OK, then you’re biased towards people who already owned pre-bubble.

    The ‘move-up’ market is a myth that should be shattered. You should ‘move-up’ when either your income has ‘moved-up’, or you want to transfer more savings into your home (using income-produced savings to buy a more expensive home is fundamentally different than using appreciation fueled equity, and distorts markets much less).

    1. SanJoseRenter

      How the “property ladder” used to work was that a young couple would buy a house to fix up, sell it and move up. Repeat.

      Of course, after a few rehabs, many relationships are on the rocks. Living out of cardboard boxes and all.

      With California’s 20% annual house appreciation the math gets sketchy though. You needed to skip over starter homes and go straight for the McMansion or “be priced out forever.”

      My sister “supervised” her husband and he did the house rehab thing for a decade, since she didn’t have the patience for manual labor. 🙂

      I was referring to houses above. I don’t understand how the “property ladder” math works for condos outside Manhattan.

      Condos lard on enough fees to make profitability less likely. They’re popular with young people and those who don’t have the down payment for a real house, but still want to be called a “homeowner” – afraid of “throwing away rent money.”

      Whenever former condo owners talk about their condo sale, they always say they got their money back. I rarely have the heart to ask if their condo fees, property tax, sales commission and interest were covered too.

      1. Anonymous

        Read about a couple for whom that seemed to work. Wife had the steady income with health benefits (nurse or something). Husband was the construction type, his “job” would be to repair a fixer upper and they would move frequently. Seemed to work for them.

      2. winstongator

        That is not the ladder that person was talking about, as it is limited in the percentage of people it will work for, and for the frequency that can be done. What those people are doing is flipping houses – doing the contracting themselves. that is a different market than the general homeowner environment. Also, especially the home flipping shows, the profit due to the renovation is often swamped by the general appreciation of the property – you’d get almost as much gain if you did no rehabbing. Again, that is totally different than real rehabbing of properties, but what you’re describing is a limited slice of the total market.

        As for condos. I’ve seen plenty in SoFla sell for > 75% off 2005/6 peak bubble pricing. So someone who sold then banked…bought then, not so much.

      3. Frank

        Yeah, that’s flipping, not the property ladder. I think the property ladder was with IHB’s “rent-saver” type of owner. When the cost of owning is less than renting, it makes sense to buy and save up money for a down payment. Having increasing property values could be slightly positive, as long as the next house’s price doesn’t increase faster than the stepping stone house. I think some people would then rent out the stepping stone house, but only if it’s cash flow positive.

        I don’t think this is relevant anymore, at least in California.

        1. Anonymous

          Why do people have to move up the property ladder? The number of news stories about those about to retire who went up the ladder to a bigger fancier SFR and then lost their jobs and so can’t pay the mortgage, boo hoo, astounds me. Aren’t you supposed to have paid off your house before retiring? And why do you need a bigger SFR after the kids all grow up and leave the nest? It’s crazy.

  4. winstongator

    The lost interest on this house is close to $75k. How long would it have taken the occupant to save $75k after taxes? Lenders need to do a better job. A rental will kick you out after only a couple months of missed payments because they can, but a bank can’t forcibly evict until post-foreclosure? The ability for a bank to hold a loan at one value pre-foreclosure and a much lower value post-foreclosure is a travesty and any bank getting FDIC benefits should not be allowed to do that.

  5. Swiller

    I love some of the quotes like “Right now, buyers know it hasn’t hit bottom, so they’re sitting on the sidelines.”

    They make it sound like the majority of America is slick investors like Wall St. Yup, we have hundreds of thousands of dollars just waiting to invest in property, but the time isn’t good enough.

    How about the fact WE THE PEOPLE in America will not continue to be debt slaves to the financial world that never gets their hand dirty, and only make money off usury. 6X-10X incomes to purchase the holy grail? I think not, because people ultimately know that life is worth living, and you aren’t doing much living when all your income goes to the BANKSTERS.

    Everyday I get closer to defaulting myself, as I cannot stand seeing my monthly payment be significantly more than rent, while prices dive, and there will be no recovery in time to even re-coup my already lost capital before I retire. The scam has been played, and the responsible, conservative, WORKING are victims. Most like me hold on, but how long can the hamster run?

    1. FoolishRenter

      Realize that we are all one day closer to the grave than we were yesterday. Live for the eternal. Be gentle as a dove but wise as serpent.

      Most of the run up in the market are herd effects and justified by ad hoc arguements to start the stampede by the earlier purchasers-investment houses. the quick wins, the rest loses. Know the difference between s* and shinenola. Beware of those serving s* while calling it chocolate.

    2. MikeInIrvine

      So let me make sure I understand…

      You’re upset that you bought a property and the value went down, and now the bank won’t share in you’re financial discomfort.

      If the price would have risen would you have offered to share some of the profits with the bank?

      Basically you want it both ways. Profits exclusively to you, risks to someone else. The American Way.

      1. Ryan

        Yes. Loans are made on a non-recourse basis in California. Upon foreclosure, the banks only have recourse to the house, not the borrower. That means profits to the homeowner, and risks to someone else.

        Before you start blaming homeowners for this, remember: banks were issuing the 0% down, neg amort., no W-2 needed loans in droves.

        If you want to blame anyone, blame the banks.

        1. MikeInIrvine

          “If you want to blame anyone, blame the banks. ”

          Nice to see personal responsibility is alive and well.

        2. Ryan

          Personal responsibility? Loan documents allow default. It’s not against the law. It’s not a sin. The consequence is you lose your home and your credit is ruined. Everyone involved knows this. If you’re willing to suffer the consequences, the bank agreed it would foreclose only on the home.

          Billion-dollar-sized-banks agreed to this arrangement. Why blame the little homeowner if they act rationally in their best interests?

        3. BD

          Yikes…all after home refinances for HELOC money etc. are full recourse loans in CA.

          Lots of people are going to be suprised that the bank will hound them to hell or at best ‘forgive’ the debt and make them pay income on a 1099 basis.

          Lots of pain to come on that basis.


  6. lowrydr310

    Nevada unemployment rises to 14.4 percent

    If you’re seeing positive cashflow from a house that is rented out, declining values won’t bother you much, but with unemployment this high what happens to your supply of quality renters? How long can your cashflow scenario remain positive?

    IR, I know your bullish on LV RE, but what’s your take on this? To me, it still seems like there’s a lot of downside left in LV.

    1. Ryan

      I was thinking about buying investment property in Las Vegas as well. A ton of homes have already been sold to investors. But what bothers me is there’s still a HUGE shadow inventory in LV.

      Eventually, that inventory will get sold, possibly to more investors. If there’s too many rental properties chasing quality renters, then won’t rental prices drop?

      Why won’t the shadow inventory cause rental prices to drop?

  7. tenmagnet

    This is ridiculous.
    The realtor must be from out of the area.
    Everyone knows it needs to be priced at $288,888 to generate those multiple all cash FCB offers.

  8. bn

    My ex purchased a 3 bedroom condo in the same development in 2006 for $740,000. For a few years she made neg am payments on a option ARM. She did this on an income well below 6 figures. She was in complete denial about the market and her ability to afford this property. In late 2009 I convinced her, with the help of a RE lawer and my tax accountant, that strategic default would be the best option. Her father fought with me about the direction of the market at that time, quoting such luminaries as Eli Broad who stated the market was near a bottom at that time. Overall I lost a tremendous amount of money trying to help her get out of that bad situation. We separated late 2009, so I have no idea if she has had any success negotiating with the bank (B of A formerly Countrywide). She still lives at the address. Chances are she’s still squatting and pocketing the payments.

    1. Laura Louzader

      How can anyone who makes less than $250K a year think she can even halfway afford anything near $740K?

      Nobody who made it past 4th grade is that inept at basic arithmetic. This woman was taking part in the mass delusion promoted by our policy makers and the finance & real estate interests they serve at our expense…. a delusional state borne of 60 years of the greatest affluence the world has ever known, which cannot possibly last forever.

      One pundit out here remarked that Americans are “very childish people who think that if they wish upon a star, their dreams will come true”. We’ve promoted the American Dream (how I absolutely HATE that term!)for 60 years, and the idea that we are somehow a very special country for whom the ordinary terms of existence do not apply, and that we can safely ignore the laws of nature.

      Tens of millions of Americans are now discovering that wishing and “creative visualization” won’t make it possible to defy gravity or make gold out of garbage. As the wonderful science fiction writer Phillip Dick one wrote, reality is what doesn’t go away when you stop believing in it. When people stopped believing in ever-increasing house values, they went away. But the bad debts won’t. Someone will have to absorb them and that would be the rest of us, whose realities are sacrificed to pay for the dreams and delusions of 5% of the population.

      1. FoolishRenter

        Don’t you know that American think they are the world’s best in math. Your math is just not good enough to figure out what all the business models have put forth of increasing salaries and better pension. 🙂
        I’ve had co-worker who were part-time RE and mortage brokers, fume at me when saying no to buy because I did the math and could not affort the property. Just a herd effect in price, some will be left holding the bag (the latter buyers and the latter sellers).

        I guess some animals are created more equal than others.

  9. Anonymous

    That’s interesting about Case’s house. I saw a picture of Shiller’s house (can’t find the link). It was an older modest SFR he bought a long time ago. Definitely looked like just a place to live in, not an investment.

  10. Palmdale Homes

    I have seen house prices drop up to 70% here in Palmdale and yet the builders are continuing to build despite having thousands of empty houses.

    It would seem that the builders have no interest in seeing property values rise.

  11. FoolishRenter

    IR “…The foolish series of mistakes made by people in our government and their lending overlords has squandered our resources and accomplished nothing — expect perhaps to shift these losses to US taxpayers.”

    That why they continue to do the different programs and continue to “fail” by your (IR) standards. The programs are extremely sucessful if you understand the true intent of the new loan assistance programs. They show for the elections that the govt cares for the needed (make squatters) and are trying every measure to fix the bubble problem. Mostly smoke and mirrors to transfer liabilities, while collecting new bank fees.

    I fully understand holding on a property to sell at a later date if the expenses outweights other investments and you get something out of the property. On a free and clear vacation property:
    Oportunity cost: 0.5- 1.5% with the current low interest rates.
    RE Taxes: 1% (if Prop 13 then even lower)
    Maintance: 1%
    Utilities and insurance: $1500

    Income: Short-term rents and virtual income personal usage (saved vacation money).

      1. FoolishRenter

        I’m using short-term rates. Who knows what will happen in 2 years, yet alone in 30 years?

        Just use 4% and test if the vacation property is economically worth keeping for a few years. If not, do the emotional aspects tip the balance? Such as the house was my grandfather’s, father’s, now mine. I want to pass it to my children. That can be worth more than the money portion.

  12. theyenguy

    Irvine Renter … this one bedroom you feature sure looks like “home sweet home” to me … being a single person who keeps to my self, it would be ideal … and in Turtle Ridge … like WOW … unfortunately all I could afford would be the association fees and utilities.

    I’ve provided a link to the Keith Jurrow, RealEstateChannel article Shadow Inventory, an Avalanche That’s Coming Soon? He relates:

    Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.

    Will three years be enough to bring prices back up as the title of your article suggests?

    Well if there are now 6.7 million homes in shadow inventory to hit the market, and more next year, then home prices are never going to come back up.

    It will be like in Detroit where as Sarah Cwiek reports on September 17, 2010 in Detroit Michigan Radio article Tax Foreclosures Surge In Wayne County:

    “Wayne County County puts a record 13,000 tax-foreclosed properties on the auction block starting today (Friday). Ted Phillips is Executive Director of the United Community Housing Coalition in Detroit. He says the number of occupied properties facing tax foreclosure jumped tenfold this year.

    Phillips says the economy is driving the problem, but tacking water bills and high interest rates onto back taxes contributed to the sudden surge.

    He adds the huge amount of property available raises fears that speculators could buy much of it on the cheap, further degrading already hard-hit neighborhoods.

    “In past years there’s been a half a dozen out of town investors that have purchased the property,” Phillips says. “We’ve been at this now long enough to see properties that were purchased at the auction that are now coming back onto the auction because the investors don’t pay the taxes, don’t keep the property up.”

    The Wayne County Treasurer’s office says the sheer number of properties is forcing them to conduct the auction online.”

    Finally here is something to ponder, I am writing at 4:00 AM Pacific Time on September 21; and at 2:15 PM Eastern Time the FOMC will announce the minutes of its meeting.

    A bear market in stocks started September 17, 2010 as currency traders sold the Euro, FXE, in response to the Bank of Japan intervening in the currency markets on September 15, 2010 and selling Yen, FXY, to stop the rise of its currency; this caused the Yen to fall to its 20 day moving average, which in turn terminated “long carry trade investing”. The Euro, FXE, fell 0.32% to close at 129.88.

    Yesterday, September 20, 2010, September 20, 2010, the currency traders went long the the Australian Dollar, FXA, and the Swedish Krona, FXS, in front on the US Federal Reserve Meeting, causing stocks to rise.

    Whether there be disappointment or satisfaction with the Fed Meeting, I believe the Euro will fall from the region of 129.88 and that this will cause continuing disinvestment from stocks as well as all currencies, including the US Dollar over time, to fall lower in value.

    Yes debt deflation has come to stocks and bonds. And with falling currencies, real estate as well.

    Irvine Renter please understand the only bottom is zero, like in Detroit.

    Just ask anyone in Hungary, as their currency the Forint has fallen, and no one, repeat nobody repays the Austrian and Switzerland banks back on their Euro and Franc home loans.

    I said it before, and I’ll repeat it again …. While many write that Ms Warren has been appointed as a lapdog, I believe that Ms. Warren, is more likely to turn out to be the top dog, that is the Seignior, meaning top dog who takes a cut, and be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as her many articles would apparently qualify her for such a role.

  13. RG


    I was wondering where you got the income requirements for the FHA loan numbers—is this income listed your gross income or after taxes? It seems downright dangerous to take out a loan because it takes up an overwhelming amount of one’s income.

    Taking the listed income of $58,768 this amounts to $4897 per month, but that’s GROSS. If you have taxes taken out, and being very generous here, maybe you get $4000 each month–this means that your monthly out of pocket expenses are over 50% of your monthly check. Even if no taxes are taken out, it’s still 44% of pay!!

    I don’t know, but unless you want to eat top ramen and bike to work, this is not a plan that can realistically work.

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