House price double dip accelerating: bottom follows capitulation

The decline in house prices is pickup up speed. The market will find a bottom when sellers holding out for higher prices capitulate and sell in despair.

Irvine Home Address … 33 LAKEPINES Irvine, CA 92620

Resale Home Price …… $225,000

Break me off, tie me down, tear me down

Make me feel like a little dog

We're a waste, we're a waste, we're a waste

And we're going down the drain, down the drain, down the drain

‪Lilly Wood & The Prick – Down The Drain‬

Far from getting better, the housing market in the United States is accelerating its swirling decent into the crapper.

Housing Crash 2.0 Is Accelerating

Published: Tuesday, 26 Apr 2011 — By: John Carney, Senior Editor,

House prices are falling again—and the decline is accelerating.

Today’s big housing numbers comes from the Case-Shiller home price indexes. The indexes, which measure how prices have changed over the previous three months, show prices falling in every major metropolitan area (except, weirdly, Detroit). The 20-city average declined 3.3 percent from a year ago, and 1.1 percent from the previous three-month average.

This is the seventh successive month of widespread price declines.

Last week we took a look at how the NAr spins data with bullshit. How do you think they would spin that uncomfortable series of data points?

The housing recovery began to stall last spring, after the government’s home-buyer tax credit expired. The three-month moving average of the Case-Shiller 20-city index showed that gains in home pricing slowing to a crawl in early summer and actually reversing in July and August. By September, it was clear that home prices were going into a serious decline.

The November numbers (which are actually the three-month average of September, October and November) showed a 1 percent decline over the previous month. Prices kept dropping by 1 percent in December and January.

February’s data shows that the decline is actually accelerating a bit.

This is the opposite of a recovery—it’s a crash building steam.

We’ve become almost passé about home price declines. A 3.3 percent year-over-year decline doesn’t seem all that shocking anymore. But prior to the recent housing crash, such a steep decline was unheard of.

The housing market is performing much worse than expected. In 2009, the Mortgage Bankers Association predict home prices would rise by 3 percent in 2011. Last year, the consensus among economists interviewed for the MacroMarkets LLC September survey was that home prices would fall by just 0.8 percent in 2011. A month ago, the economists were gloomier, estimating that housing prices would fall 1.38 percent by the end of the year. That estimate now looks overly optimistic.

I predicted that prices would fall between 2% and 5% this year. The consensus estimates are finally catching up to me. My detractors have inaccurately labled me as bearish. I do believe prices are going to fall, particularly locally, but I am only bearish when and where conditions suggest real estate is overpriced and likely to fall in value.

I am very bullish on Las Vegas real estate, despite the fact prices will continue to fall there. When cashflow becomes very positive, as it has in Las Vegas, the benefits of ownership outweigh the short-term loss in value. With low interest rates, even if prices fall further, it is entirely possible that the cost of ownership may actually go up when interest rates rise.

In Las Vegas, real estate is hated by everyone who owns. Prices are at 15-year lows and still falling. Most owners are underwater on their mortgages, and being a recourse state, they can't just walk away from their obligations.

Everyone in Las Vegas who owns wishes they didn't. The market is experiencing widespread despair. These are the best possible conditions to acquire good cashflow properties with a potential for future rebound.

Housing Bottom Comes When People Swear Off Houses

Neither housing nor employment show any sign of recovery. Nearly four years after the collapse of Countrywide, the nation’s biggest subprime lender, housing is still going down.

How far will it go? A. Gary Shilling says it will take another 20% drop in housing prices to bring them in line with their historical trend. Housing usually rises with the economy. Not more. Not less. To get back on track with the economy now, house prices have to go down.

What about over-shoot? Yes, that’s a risk too. Bubble markets don’t tend to go back to “normal” levels right away. Instead, they tend to go below normal.

Whether or not Mr. Shilling is correct with regards to Orange County, the harsh decline in prices with downside overshoot has certainly occurred in Las Vegas and a number of other subprime markets.

At first, homeowners think it is just a temporary break in an upward trend. They hold on, hoping to catch another move to the upside. Then, they gradually resign themselves to a long slump, but still believe that “you can’t go wrong on real estate, not over the long term.” Then, housing prices continue to sink. More homeowners give up. Some sell. Some default. More foreclosures depress prices even further.

The double dip is causing many real estate bulls to finally see their error in judgment. Bulls waited for three long years of serious declines to reach the illusory bottom of 2009. Now that prices are falling and gaining downside momentum, loan owners who less than a year ago thought they might be back above water soon are now faced with the reality of several more years waiting for a recovery that may never come.

The peak in foreclosures is not expected until March of 2012. When it comes – five years after the crisis began – most homeowners will be ready to throw in the towel. “Housing may go up in the long run,” they’ll say to each other, “but this downturn could last longer than I do.”

Prices are likely to drop below their historical trend. Homeowners will tell their children: “Don’t bother to buy a house. Rent. Housing is a losing proposition. It never goes up.” Then, with housing prices perhaps 25% to 40% lower than they are today, the market will have found its bottom.

When? Housing markets move slowly. It could happen by 2015, maybe 2020.

2003 rollback

Many people who bought in 2002 and 2003 believed they were buying in a normal market. In reality, they were buying into a housing bubble. Jon Lansner at the OC Register began talking about the housing bubble in 2002. Despite his early call, he was correct in his analysis. House prices were too high in 2002 and 2003 relative to incomes and historic norms. He can't be faulted for failing to anticipate just how stupid borrowers and lenders would become.

Few in real estate were seriously concerned about prices being too high in 2003. Few believed it was possible for prices to go down. Obviously, the bulls were wrong — not just a little wrong, but completely and totally wrong on all counts.

The owners of today's featured property bought on 12/23/2003, and they are paying the price for buying into the housing bubble frenzy. After nearly seven and one half years of ownership, they are going to sell for a loss.

They were conservative in their mortgage management, not that they are being rewarded for their prudence. They borrowed most of the money using a $188,000 first mortgage, a $35,250 second mortgage, and a $11,750 down payment. Despite the insanity which followed, they did not add to their mortgage, and if they get their current asking price, this will not be a short sale.

These owners did not find the pot of gold in California real estate, but through prudent management of their mortgage, they will escape with a small loss and their credit still intact.

Irvine House Address … 33 LAKEPINES Irvine, CA 92620

Resale House Price …… $225,000

House Purchase Price … $235,000

House Purchase Date …. 12/23/2003

Net Gain (Loss) ………. ($23,500)

Percent Change ………. -10.0%

Annual Appreciation … -0.6%

Cost of House Ownership


$225,000 ………. Asking Price

$7,875 ………. 3.5% Down FHA Financing

4.72% …………… Mortgage Interest Rate

$217,125 ………. 30-Year Mortgage

$48,373 ………. Income Requirement

$1,129 ………. Monthly Mortgage Payment

$195 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$47 ………. Homeowners Insurance (@ 0.25%)

$250 ………. Private Mortgage Insurance

$295 ………. Homeowners Association Fees


$1,915 ………. Monthly Cash Outlays

-$105 ………. Tax Savings (% of Interest and Property Tax)

-$275 ………. Equity Hidden in Payment (Amortization)

$14 ………. Lost Income to Down Payment (net of taxes)

$48 ………. Maintenance and Replacement Reserves


$1,598 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$2,250 ………. Furnishing and Move In @1%

$2,250 ………. Closing Costs @1%

$2,171 ………… Interest Points @1% of Loan

$7,875 ………. Down Payment


$14,546 ………. Total Cash Costs

$24,400 ………… Emergency Cash Reserves


$38,946 ………. Total Savings Needed

Property Details for 33 LAKEPINES Irvine, CA 92620


Beds: 1

Baths: 1

Sq. Ft.: 934


Property Type: Residential, Condominium

Style: Two Level, Other

Year Built: 1977

Community: 0

County: Orange

MLS#: P779013

Source: SoCalMLS

Status: Active

On Redfin: 6 days


EQUITY SELLER. This beautiful 1 bedroom, 1 bath condo is located in picturesque Lakepines. This home features high smooth ceilings, warm paint and carpet colors, walk in closet, private washer/dryer hookups and a spacious fenced patio. Association amenities include 2 pools, a spa and tennis court. Great square footage and floor plan. No one above or below. No Mello Roos.

18 thoughts on “House price double dip accelerating: bottom follows capitulation

  1. Laura Louzader

    These owners sound like cash-strapped people who bought only for fear of “losing out” and being priced out of the rental market as housing prices continued to rise rapidly. It’s sad to take on a 2nd mortgage just for a tiny one-bed apt.

    I hope they escape without too much damage. I’m seeing incredible drops in condo prices in my own neck of the woods, which is the most overbuilt condo market in the nation (Chicago), worse even than Las Vegas or Miami. They may not be making land anymore, but the only limitation on how many condos you could stuff onto a parcel of land was limited only by the local (corrupt as hell) zoning board.

    1. IrvineRenter

      Has the Illinois corruption contributed to overbuilding? Corruption in Louisiana allowed housing to be built where Katrina could wipe it out. In Miami, it was part corruption and part an attitude that all development is good development. In Las Vegas, they were just plain stupid. It wouldn’t surprise me that local officials in Chicago with it’s history of corruption would approve bad projects for the wrong reasons.

      1. Laura Louzader

        Our corruption had a minor part in it, mostly by zoning everything multifamily that important political donors wanted zoned that way.

        But I don’t believe it was the major factor. It looks to me like all the major cities- Chicago, Miami, Los Angeles, Las Vegas, as well as smaller ones, saw gross overbuilding simply because of the way the financial machine worked, in that there was ALWAYS the money to build, and always the FHA loans for buyers in new and recently converted developments. That’s why so many developers gut-rehabbed beautiful old buildings instead of merely restoring them and renovating the mechanical elements and replacing old windows and such. If they could call them “new construction”, they could offer special financing packages available only for new construction.

    2. winstongator

      I would need some sort of quantitative assessment to believe the Chicago condo market is more overbuilt than Miami. Although Miami has its own FCBs (mostly from South America, Europe and Canada), it’s got a ton of condos.

      I think people in SoFla believed the story. They had great incentive to. What is HELOC money if home prices fall? Developers are and have always been very powerful down there.

      1. Laura Louzader

        They pretty much own Chicago, too, as well as most other cities, else the abominable Trump Tower, would never have been built on a totally unsuitable site alongside the Chicago River, where it is massively out-of-scale to the surrounding historic high rises with their delicate ornamentation and relatively small scale. This horrid building destroys the sight lines along Michigan Ave and seems much, much too big in every way.

        The corruption in building code enforcement was truly scary. One smallish building of $1M condos on the west side had to be evacuated because the building was literally about to collapse. These buyers may never get restitution and their cases will be in the courts for years. Many of the high rises in the south loop have serious construction problems, notably water seepage (which is almost incurable even with millions of $$ in remediation), as well as numerous other issues.

        Many people have become afraid to buy anything built in the past 10 years because of shoddy construction thrown up to meet the swelling demand of the boom years, and because newly constructed or converted condos do not have stable associations and are excessively burdened with liens, foreclosures, and HOA arrears, for which remaining owners are liable. You’re buying into a situation where your liability is unlimited, and, just as in Miami, one bank at least has blacklisted several buildings, making it impossible to get financed to buy in them. This doesn’t do a lot for the saleability of vacant units.

        We’re also laughably overbuilt in mansions priced $3M to $6M in neighborhoods like Lincoln Park and newly developed areas on the West Side that twenty years ago were post-industrial slums. I wonder if the developers who built these places on spec ever bothered to get a work-up of the demographics in these supposedly wealthy areas. One look at, which shows that even wealthy LP has a median income of less than $100K, might have given them a clue that there weren’t as many qualified buyers for these places as they thought. Many of these homes have sat vacant for years, now.

        But the developers figured they were using Other People’s Money, so what did they care?

  2. Chris

    “I predicted that prices would fall between 2% and 5% this year. The consensus estimates are finally catching up to me. My detractors have inaccurately labled [sic] me as bearish.”

    I’m sorry IR but 2-5% is not what I consider to be ‘bearish’. Try at least 20%.

    As for your detractors calling you ‘bearish’, they might need to stop cultivating what they’re smoking cuz 2-5% drop ain’t that hard to reach after QE2 (well, there might be a QE3…4…5…and beyond).

    1. DarthFerret

      Chris: “I’m sorry IR but 2-5% is not what I consider to be ‘bearish’. Try at least 20%.

      IR predicted a 2-5% decline in 2011 ALONE. He’s not saying the decline will stop there. He hasn’t said prices won’t drop up to 20% from here (hasn’t specifically said they will either).

      Are you predicting a 20% price decline in 2011 alone? That would be an extraordinary prediction.


  3. Kevdiego

    Anyone have a notion of what rents are going to do in this downturn? I keep hearing that rents are going to go up here in San Diego, but I get the feeling it’s the same kind of bullshit rumor as “home prices always go up.”. The rents here are already too high, with a large share of renters paying 50% of their income to rent. Same unsustainable formula as housing costs?

    1. Chuck Ponzi

      Rents are tied to incomes because they are paid out of cash. If you want to know what’s going on with rents, look at incomes.

      They’ve been pretty flat for the better part of a decade. I doubt they’re going anywhere anytime soon. (small increases each year at best)

  4. HenryE

    I think it depends on where in San Diego you’re talking about. I live in SD and as I’m sure you know, the market is really differentiated by area. In the worst hit areas, it’s now cheaper to buy than to rent.

    But I would say that the San Diego economy seems to be doing OK. Not great, but it doesn’t feel like a recession any more, so I don’t imagine rents will be dropping. Actually, it feels like rents have been pretty stable throughout the whole decade, even while home prices bubbled up and then crashed.


  5. tlc8386

    Ben Bernanke has done everything to keep rates low and he continues to do so until we clean up the banks and debt load. Keeping rates so low and prices stable forces many back into the markets.
    While the banks continue to repair their books.

    We are held captive to the debt because without our financal markets we are not the leaders in the world so it was do whatever it takes. And Bernanke did just that. We won’t see the last shoe to drop until oil and commodites get so high and the dollar drops so low that Bernanke has no choice but to raise short term interest rates. Which he just indicated is still in his control.

    Housing will continue to meet the market in some areas where DTI and rents intersect. IN the high end where there is short supply and high demand will still hold a higher price tag. Those homes are usually cash buyers and with the stock market up so much there are plenty of those folks.

    We will always have a prime area where folks want to live.

    The largest problem is how long can we all hold out and wait, demand can out stip supply here in CA. jmo

  6. Matthew

    I live in Chicago as well and have been looking for a condo. I like my realtor, but I am sick to death of the propaganda of “now is a good time to buy” and “prices will rise”. I am a buyer this season, but I want straight talk not BS. There are real personal reasons to buy now til December because I will inhieret cash and there are tax benefits and the trustee is actually advising me to and will work out the tax benefit accordingly as we restructure the trust. I see the threshold. When a condo monthly cost is about half of rental comp it is a logical investment, many properties reach that threshold but most have a ways to go. I will likely negotiate a 35% rent comp deal and live there for over five years. Because when the real deals hit the market it goes in less than a week.

  7. SanJoseRenter

    “When a condo monthly cost is about half of rental comp it is a logical investment …”

    Matthew: You might want to provide an example or re-check your math.

    I don’t often see condo pricing at less than rent – the whole point of condos is to fleece the “owner.”

  8. BlowMeAmerica

    Massive student debt, lack of Rule of Law, rampant financial fraud, undealt-with war crimes, legislative corruption, legalized torture, dwindling Constitutional & Civil Rights, a pay-to-play judiciary system, an ineffectual & captured Executive Branch, institutionalized transfer of wealth from savers to speculators; the United States of America is a CLUSTERF@CK of IRRESOLVABLE problems that mutually impede & interfere with each other.

    WHY the F@CK should I spend my hard-earned money to buy a property in this SINKING SHIP when I’ll most probably need it to EMIGRATE instead?

    1. brianguy

      torture is living in a house that’s 50% underwater.

      war crimes, we’ve got much bigger problems than war crimes. but you can be sure OHolder will make sure it’s front page news, rather than the economy, jobs, and gas prices.

      dear Prez, “I’m not your stepping stone”

  9. Kevvn

    :coolgrin: If you do not own a house, BUY one NOW. I enjoy watching people become slaves to their debt, id10ts….

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