House Price Declines: Buy the Numbers

[Starving Steve]

Re: House Price Declines: Buy the Numbers

I agree with you that house-prices might drop further. Especially, McMansions and houses in the exurbs (far from shopping-centres) might drop further. A drop in home prices would help our children to be able to survive, and I hope such a drop happens.

Here is what I think might happen: Landlords will push-up rents. This inflation in rents won't happen immediately, but with rising costs, landlords will have to push-up rents. And the inflation in rents puts a floor under the real-estate market.

And then immigrants will be moving to Canada and to America, to the E.U, to Australia, N.Z, even to Russia..... So in time, immigrants will push-up the demand for shelter of all types.

While higher interest-rates will act to de-flate real-estate prices, such higher interest-rates are just talk. Government can not finance its deficits with higher interest-rates. So cheap money (from the central banks) means a floor under real-estate prices. Rising-rents also would put a floor under real-estate prices, while rising taxes and rising utility-costs would put a lid on top of the real-estate market.

But meanwhile, while the real-estate market sorts itself-out, your house or condo gives you utility and rent-free living. You are the landlord. While you sleep, you still win financially.

It is just like my strategy with oil stocks: In time, given enough time, they go up because of inflation in energy prices. And meanwhile, you collect the dividends and cry--- all of the way to the bank.

[housingcrashsurvivor]

Re: House Price Declines: Buy the Numbers

I'm also quite confused.......

But if I had to bet my health/wealth on which way RE prices are going moving forward......I'd say down further.....in both nominal and real(for now) terms.

I can't help but think about that hyper inflation chart from Germany which showed what % of the average wage spent on housing, food, etc.......People HAVE to eat and currently rely on energy like oxygen....real estate is a distant, distant third isn't it?

I once lost $15 in a poker game when I was about 18, quit playing and haven't bet since. I'm an equally bad investor so don't go by me.

To unqualify myself, I have no idea how any of this works and the only thing I'm pretty sure of is that whatever move I make will be the wrong one. So mostly I just read here.

As to the importance of housing, I tend towards what I believe is Starving Steve's explanation that housing is a basic need, so though in trouble now, nothing to shrug off completely. Also, here in Florida, energy is not the issue it is elsewhere. My bills to keep a very well insulated 1,300 sq ft home air conditioned during the summer (at about 74 during the day when it can be in the 90s outside and 70 at night when it goes down to the 70s/80s) and heated during winter (73 inside when it is in the 30s-60s outside) average about $125/month. Last month cost me $80 to keep the house toasty during our coldest December in locally recorded history. As well, housing here already crashed so badly that stuff is selling at or below replacement cost (materials, labor, etc), with the land and infrastructure in many cases included free. Can it go even lower. I don't know what to believe at this point, having had no idea it could do what it did. For me, to try and understand this economy is like watching pigs fly, just as baffling but not as amusing.

Certainly there are many cases in the states of housing which seems to have so far held onto very inflated prices and I suppose you could be right that they could continue dropping, but (with exceptions of course) much of Florida seems selling at bargains. Another friend of mine inthe NY area has been trying to sell for almost two years now what he presumes is the still one of the more valuable ones, having only dropped in value 38% according to zillow, or just under $600k down from peak bubble. So I guess there's still room to fall. But something here selling for $75/square foot and still has windows & plumbing intact? Maybe not so much wiggle room.

I don't have the precise particulars you requested on the two examples I mentioned above, but here's what I found on each zip code:

The beachside townhouse

2009 mean home value $398k
Average adjusted gross income per individual tax returns 2004 was $147k
Salary/wage on 64.3% of returns $81,949
Median household income 2009 $61,217


Year 2000 (in 1999 dollars)

Median household income $55,639
Median family income $$79,524
Per capita income $56,877
Median home value $401,400


The inland condo


Median home price 2009 $152,725
Average adjusted gross income 2004 (individual income tax returns) $39,019
Salary/wage $37,131 (reported on 55.1% of returns)
Median household income 2009 $39,103

2000 (1999 dollars)

Median household income $38,319
Median family income $47,318
Per capita income $27,190
Median home value $112,800

[don]

Re: House Price Declines: Buy the Numbers

My wife would very much like us to buy back into housing. All my life I've invested enough of my savings into a home to give the mortgage a margin of safety.

Thrashing out the amount of personal funds to invest this time was a process unlike any of the past. Continuing piss-poor conservative investment opportunities played against rotting dollar purchasing power seemed to suggest a larger down, up to an all-cash buy. What principally convinced me not to go that route is getting stuck in a radically changed neighborhood, say 5 years from now, with a big loss to leave.

Now my thinking is, what could I walk away from. Quite a change from my former home buys. My wife agrees .

One safety valve of note: be certain your mortgage has no pre-penalty fees embedded in the fine print. Those can hurt.

[flintlock]

Re: House Price Declines: Buy the Numbers

What's funny is comparing the Georgia and the Beverly Hills Super mcMansions with real mansions:

http://www.charente-immobilier.com/r...ngs/l1157.html



This 15th century Feudal Mansion is available for around 1.6M euros = about $2M.

Sure, it ain't Beverly Hills, but then again it is proven to hold off angry peasants with flaming pitchforks...

And it even has 3 cottages for the 'help'

Yes but it lacks the flimsy construction, MDF trim, and fake plaster railings.

My parents live in a neighborhood of these type homes. ( They moved there 35 years ago. long before it was the "it" place to be). About 1/3 are for sale or foreclosure.

Humphrey, the mansion owner, made his money with multi-level marketing. He used to be a train conductor! My guess is his empire is collapsing around him by now and he'd love to get 50 cents on the dollar. But he won't get anywhere close to it. That home will end up being zoned "D7" as Thunder put it.

[flintlock]

Re: House Price Declines: Buy the Numbers

Here is another similar property most people in the area know about.

http://www.deangardens.com/home.htm

Finally sold after 15 years on the market. Apparently it will be demolished.

http://www.ajc.com/business/future-o...ns-585058.html

[flintlock]

Re: House Price Declines: Buy the Numbers

I live right down the road from this monstrosity.

http://projects.ajchomefinder.com/ga...s/0319mansion/

Not a foreclosure yet, but how soon before it goes that route? This is hardly Southern California. Who wants a $45 million home in bumpkinville GA?

I forgot to add, there is a really crappy trailer park adjoining this property. Kind of funny.

[goodrich4bk]

Re: House Price Declines: Buy the Numbers

My wife would very much like us to buy back into housing.

Then you're not buying a home as an investment. That's fine, but you should never confuse the two.

On the back side of bust bubbles, it is very difficult for people to avoid thinking of prior high prices as some sort of indication of real value. I've seen this play out during the past couple of years. Now buyers who used the tax credits are underwater and stuck in homes that will continue to decline for years.

Why am I so certain? Here is what caused homes to rise for the Boomers:
1. Declining interest rates.
2. Declining lending standards.
3. Demographics (house-buying population rising faster than house-selling population)
4. Tax policy (interest deduction and cap gains shelter)
5. Two incomes.

Each of these factors is not only missing, but it is now in reverse:
1. Rising interest rates.
2. Tightening lending standards.
3. House-buying population is smaller than house-selling, particularly when you see the number of Boomers who are underwater (over 25%), have 25 years left on refinanced mortgages but are within 10 years of retirement, and who will be FORCED to sell their homes because their retirement income will be insufficient to pay those mortages regardless of the interest rates.
4. Tax policy (Congress will be looking to raise taxes without raising marginal rates because eliminating a deduction has never "counted" as a tax increase in political circles)
5. Employment participation rates are declining with no sign yet of recovery.

Finally, two often overlooked points: 1) when looking at inventory figures, don't focus on houses (presently about 8 months worth) or even the foreclosure pipeline (over 12 months) ---- look at bedrooms per capita. Boomers trying to hang on will be renting their kids rooms out as such activity becomes more socially acceptable. As a result, there will be NO rent increases driving price/rent ratios. 2) real wages will continue to decline due to globalization and technology advances; therefore, price/income ratios are similar un-helpful.

I am a bankruptcy attorney who closely watches the market here in California. I use a database from Foreclosure Radar and if you want to be shocked try their free 3-day trial. You will be amazed to see the clear evidence of fraud in many of the loans in foreclosure ---particularly in the 2005 to 2007 vintages. Once the HAMP mods and foreclosure moritoria end, there will be a huge slug of homes for sale by weak hands. We are not yet in even the 5th inning and I don't see any increase in home prices until 2015 --- and then only increases that match inflation.

As for Starving Steve's notion that the Fed can and will start inflation to take home prices higher, I disagree. It is the transmission mechanism that is missing from the Fed's monetary model, not the engine. Unlike the 1970's, money supply growth is free to be invested around the world. I know of no significant direct investments being made in the U.S. that will translate into the type of wage or employment growth that drove prices higher in the 1970's and 1980's. Yes, commodities, energy and healthcare costs may rise, but that will just leave less money available for housing, not more. Housing may be a "necessity", but the size and quality of it is not. Accordingly, I see no chance that a rising money supply will cause home prices to rise.

[housingcrashsurvivor]

Re: House Price Declines: Buy the Numbers

...Boomers trying to hang on will be renting their kids rooms out as such activity becomes more socially acceptable. As a result, there will be NO rent increases driving price/rent ratios...

Interesting read, but I take it that you meant "becomes more (suburbia-acceptable and not) socially acceptable" because where I used to own near a downtown, living with nonfamily members was pretty normal, as I suspect it is in many cities, and to where I've since relocated, near a large university, it is so socially acceptable to rent out a room that the town restricts the number of unrelated persons per home.

PS. Over the past 18 months or so I have not noticed any decrease in the price of a room here. Rents, however, of an apartment or house seem to have gone up about 9-10% over the past year after decreasing for a half year before that.

[c1ue]

Re: House Price Declines: Buy the Numbers

Finally, two often overlooked points: 1) when looking at inventory figures, don't focus on houses (presently about 8 months worth) or even the foreclosure pipeline (over 12 months) ---- look at bedrooms per capita. Boomers trying to hang on will be renting their kids rooms out as such activity becomes more socially acceptable. As a result, there will be NO rent increases driving price/rent ratios.

I have no disagreement with anything you've stated in your post, but I will note that the dynamics of renting are different than just available empty bedrooms.

For an 'investment grade' rental, especially the condo/apartment market, the actual incremental benefit of renting out isn't necessarily to fill all possible vacancies.

For one thing, low rents are 'sticky' much as home owners are 'sticky' on selling prices: even counties without rent control must worry if offering rent 'too cheap' affects the overall rental fee as well as perception of the rental in question.

Equally those who bought rental property in the bubble era simply cannot afford to accept rents that are too low.

Again, complete agreement on your conclusions - just adding a little color.

[housingcrashsurvivor]

Re: House Price Declines: Buy the Numbers

Experienced in utilizing my home for income where acceptable, I'd tweak the conclusion derived from

...renting their kids rooms out...As a result, there will be NO rent increases driving price/rent ratios.

because it is a different market, generally.

First off, many people will not rent a room in their own home. Most people I know do not and would not. My brother thinks I am nuts because I do. For those who do, it is not as if very many of them will be renting to families of three or more who instead will continue paying into the apartment and house rental markets, not the roommate markets. More likely, rooms would rent out to maybe a couple, but probably singles like college kids who'd rather rent from the neighbor down the block than actually move back with their own parents, who have decided not to take in renters anyway, not even their own kid, and would rather pay their neighbors to house their kin.

In fact, just two days ago I received a request from my sil to take in her eldest for $400/month. Problem is I'll be renting for $500-550, utilities included. As yet there seems no indication here that taking in a housemate to my home will decrease the income from my nearby rental house.

So time may prove me wrong, but for now I don't buy the argument that there ever will be such a flood of roommates that will significantly reduce rents. Particularly, not flooded by this new generation which hardly knows how to socialize outside of their own palms. Yeah, that's probably the first thing on their mind when they lift their heads out of their ipodpads: man, I gotta go live with somebody.

[goodrich4bk]

Re: House Price Declines: Buy the Numbers

housingcrashsurvivor and c1ue, good observations. Buying in urban areas with low vacancy rates is definitely a lower risk proposition because there is a much lower "hidden inventory" risk for the reasons you state. And I agree that we're not yet at the point where renting rooms is common. I think we'll reach that point in the next couple of years because the nature of defaults will have changed. To date, I've been seeing mostly a fallout from bad lending practices, i.e., most of these loans were guaranteed to default once the ponzi scheme stopped because the only way they could be serviced was through a sale or refi. Once the sale and refi options disappeared, the borrower was dead in the water. Within a couple of years I believe we will start seeing defaults by Boomers whose income was initially sufficient to service their loan but who are retiring on SS with no equity. A common example I see in the Bay Area is somebody who borrowed $400k to buy in 1998, took out a $150 second for home improvements/college tuition, but the property is now worth only $500k and dropping. They're retiring in five years and the home will not be worth enough by then to pay their lenders in full and pay sales commissions. But they won't be able to hang on because the SS payments will be insufficient to pay their mortgage, particularly if interest rates go up by then. These people will panic and will most definitely take in roomers to get by.

As for generally "sticky" rents and the comment about apt owners being unable to drop their rent roll numbers, that is all true. Where rents will soften is in the purchase of suburban homes by investors. For example, Foreclosure Radar's software now provides a classic cap rate analysis in their single family home trustee sale analysis. I guarantee that a decade ago not a single foreclosure sale buyer contemplated being a landlord; it was all flippers. So the flood of inventory hitting in 2011 and 2012 is destined for the rental market.

Finally, the modest rent raise described (9-10%) may be the result of this lagging inventory issue. Most homeowners leave their home before the actual trustee's sale and almost all trustee's sales result in the home going back to the beny, not to a third party. The average lag time from beny to re-sale is over 100 days in California, which means that the former owners are renters for many months BEFORE their former home becomes inventory. So initially a foreclosure wave creates more tenants than available rentals, pushing rents temporarily higher. But eventually the inventory catches up, driving rents down.

[Starving Steve]

Re: House Price Declines: Buy the Numbers

Then you're not buying a home as an investment. That's fine, but you should never confuse the two.

On the back side of bust bubbles, it is very difficult for people to avoid thinking of prior high prices as some sort of indication of real value. I've seen this play out during the past couple of years. Now buyers who used the tax credits are underwater and stuck in homes that will continue to decline for years.

Why am I so certain? Here is what caused homes to rise for the Boomers:
1. Declining interest rates.
2. Declining lending standards.
3. Demographics (house-buying population rising faster than house-selling population)
4. Tax policy (interest deduction and cap gains shelter)
5. Two incomes.

Each of these factors is not only missing, but it is now in reverse:
1. Rising interest rates.
2. Tightening lending standards.
3. House-buying population is smaller than house-selling, particularly when you see the number of Boomers who are underwater (over 25%), have 25 years left on refinanced mortgages but are within 10 years of retirement, and who will be FORCED to sell their homes because their retirement income will be insufficient to pay those mortages regardless of the interest rates.
4. Tax policy (Congress will be looking to raise taxes without raising marginal rates because eliminating a deduction has never "counted" as a tax increase in political circles)
5. Employment participation rates are declining with no sign yet of recovery.

Finally, two often overlooked points: 1) when looking at inventory figures, don't focus on houses (presently about 8 months worth) or even the foreclosure pipeline (over 12 months) ---- look at bedrooms per capita. Boomers trying to hang on will be renting their kids rooms out as such activity becomes more socially acceptable. As a result, there will be NO rent increases driving price/rent ratios. 2) real wages will continue to decline due to globalization and technology advances; therefore, price/income ratios are similar un-helpful.

I am a bankruptcy attorney who closely watches the market here in California. I use a database from Foreclosure Radar and if you want to be shocked try their free 3-day trial. You will be amazed to see the clear evidence of fraud in many of the loans in foreclosure ---particularly in the 2005 to 2007 vintages. Once the HAMP mods and foreclosure moritoria end, there will be a huge slug of homes for sale by weak hands. We are not yet in even the 5th inning and I don't see any increase in home prices until 2015 --- and then only increases that match inflation.

As for Starving Steve's notion that the Fed can and will start inflation to take home prices higher, I disagree. It is the transmission mechanism that is missing from the Fed's monetary model, not the engine. Unlike the 1970's, money supply growth is free to be invested around the world. I know of no significant direct investments being made in the U.S. that will translate into the type of wage or employment growth that drove prices higher in the 1970's and 1980's. Yes, commodities, energy and healthcare costs may rise, but that will just leave less money available for housing, not more. Housing may be a "necessity", but the size and quality of it is not. Accordingly, I see no chance that a rising money supply will cause home prices to rise.

I agree that house prices are most unlikely to rise. They have had their bubble...... But your landlord is hungry for rent. Keep writing-out those rent-cheques and watch your bank balance shrink..... And then there are mobs outside with rocks, guns, slogans, torches, religious issues, gang-connections, etc.

Problem #1 is: Who would be better-off in times of zero-interest rates with Bernanke at the helm: the renter, or the owner with clear-title?

Problem #2 is: Who would be better-off in times of zero-interest rates: the pot-head with his/her photo-electric paint and other "green-tech" fads, or a stock-holder in BP, GE, Canadian Oil Sands Trust, Exxon, Duke Energy Co, among other politically-incorrect holdings?




No, you do not own a yuaht, and you can not sail-away to some tropical-island in the South Pacific. You have to make a decision but stay where you are: What do you decide to do? How do you play this game with Bernanke and his bunch (i.e, the central bankers)?

[housingcrashsurvivor]

Re: House Price Declines: Buy the Numbers

... most of these loans were guaranteed to default once the ponzi scheme stopped because the only way they could be serviced was through a sale or refi. ...Finally, the modest rent raise described (9-10%) may be the result of this lagging inventory issue. ... So initially a foreclosure wave creates more tenants than available rentals, pushing rents temporarily higher. But eventually the inventory catches up, driving rents down.

I had assumed those zero down ads were bait and switch, having no idea, at that time, that anyone was buying with nothing. So it is still difficult for me to wrap my little brain around some of this. I'm also stunned when I read the median net worth figures of boomers ready to retire. I tried it once myself, thinking I'd like it but found I don't so I'm back in school to start my 3rd career. Maybe I'll try retirement again in my later 60s or 70s if I feel differently by then. But many of the people in my life who were most satisfied with their lives worked until they dropped. Retirement is often overrated and possibly obsolete. For practical purposes, I wouldn't be surprised to see it become not much more than a blip on civilization's screen.

As to the rents I mentioned, they certainly went down with home values while I was looking to buy and even some after purchase. Then I noticed asking prices rising in this area but confirmed on rentbits.com which shows the percentage. The prices it quotes look about right. As I mentioned in another post, it is cheaper now to buy here than to rent, but because of the economy and the makeup of this area, it is still a strong rental market.

Housingtracker.net shows inventory in our metro area of just over 33k single family & condos for sale, right where it was in June of 2006. Since crash, inventory so far peaked in July 2007 with just under 60,000 units for sale at that time.

According to Realtytrac.com, my immediate neighborhood is about 1% distressed (% of total units under some phase of foreclosure) in a town that is about 2% distressed in a zip code that is 2.5% distressed, in a county that is 5% distressed. The zip here was 2% distressed when I checked last March. My neighborhood has maintained a 1% distressed level for at least a year and a half or two years, when I first checked.

[flintlock]

Re: House Price Declines: Buy the Numbers

Then you're not buying a home as an investment. That's fine, but you should never confuse the two.

On the back side of bust bubbles, it is very difficult for people to avoid thinking of prior high prices as some sort of indication of real value. I've seen this play out during the past couple of years. Now buyers who used the tax credits are underwater and stuck in homes that will continue to decline for years.

Why am I so certain? Here is what caused homes to rise for the Boomers:
1. Declining interest rates.
2. Declining lending standards.
3. Demographics (house-buying population rising faster than house-selling population)
4. Tax policy (interest deduction and cap gains shelter)
5. Two incomes.

Each of these factors is not only missing, but it is now in reverse:
1. Rising interest rates.
2. Tightening lending standards.
3. House-buying population is smaller than house-selling, particularly when you see the number of Boomers who are underwater (over 25%), have 25 years left on refinanced mortgages but are within 10 years of retirement, and who will be FORCED to sell their homes because their retirement income will be insufficient to pay those mortages regardless of the interest rates.
4. Tax policy (Congress will be looking to raise taxes without raising marginal rates because eliminating a deduction has never "counted" as a tax increase in political circles)
5. Employment participation rates are declining with no sign yet of recovery.

Finally, two often overlooked points: 1) when looking at inventory figures, don't focus on houses (presently about 8 months worth) or even the foreclosure pipeline (over 12 months) ---- look at bedrooms per capita. Boomers trying to hang on will be renting their kids rooms out as such activity becomes more socially acceptable. As a result, there will be NO rent increases driving price/rent ratios. 2) real wages will continue to decline due to globalization and technology advances; therefore, price/income ratios are similar un-helpful.

I am a bankruptcy attorney who closely watches the market here in California. I use a database from Foreclosure Radar and if you want to be shocked try their free 3-day trial. You will be amazed to see the clear evidence of fraud in many of the loans in foreclosure ---particularly in the 2005 to 2007 vintages. Once the HAMP mods and foreclosure moritoria end, there will be a huge slug of homes for sale by weak hands. We are not yet in even the 5th inning and I don't see any increase in home prices until 2015 --- and then only increases that match inflation.

As for Starving Steve's notion that the Fed can and will start inflation to take home prices higher, I disagree. It is the transmission mechanism that is missing from the Fed's monetary model, not the engine. Unlike the 1970's, money supply growth is free to be invested around the world. I know of no significant direct investments being made in the U.S. that will translate into the type of wage or employment growth that drove prices higher in the 1970's and 1980's. Yes, commodities, energy and healthcare costs may rise, but that will just leave less money available for housing, not more. Housing may be a "necessity", but the size and quality of it is not. Accordingly, I see no chance that a rising money supply will cause home prices to rise.

I pretty much agree with everything you said here. Homes in my neighborhood appear to have rooms being rented out. I notice a lot of different cars at some homes. This was unheard of a few years ago before the bust. A lot of the neighbors have their grown children back home as well now.

[goodrich4bk]

Re: House Price Declines: Buy the Numbers

I agree that house prices are most unlikely to rise. They have had their bubble...... But your landlord is hungry for rent. Keep writing-out those rent-cheques and watch your bank balance shrink..... And then there are mobs outside with rocks, guns, slogans, torches, religious issues, gang-connections, etc.

Problem #1 is: Who would be better-off in times of zero-interest rates with Bernanke at the helm: the renter, or the owner with clear-title?

Problem #2 is: Who would be better-off in times of zero-interest rates: the pot-head with his/her photo-electric paint and other "green-tech" fads, or a stock-holder in BP, GE, Canadian Oil Sands Trust, Exxon, Duke Energy Co, among other politically-incorrect holdings?




No, you do not own a yuaht, and you can not sail-away to some tropical-island in the South Pacific. You have to make a decision but stay where you are: What do you decide to do? How do you play this game with Bernanke and his bunch (i.e, the central bankers)?

Don't mistake me for a renter hoping to score a lowball sale. We've owned our home since 1991 and can handle our mortgage with some cushion for emergencies. So I hope I'm wrong. That said, let me try to answer your questions:

1. ZIRP means rates have nowhere to go but up. If buyers get used to payments at 5%, a mere 1% rise will increase their payment by 20%. A rise to the historical average of 8% (over the last 30 years) would almost double monthly interest payments. Although many assume that such rates could not possibly exist without accompanying inflation (which would raise the value of their home), it need not be so. There are many economies that have experienced high rates, high unemployment and falling real estate prices simultaneously, including ours in the early 1980's. So I'd still rather be a renter under a ZIRP regime, at least until values drop to a level where the spectre of future rate rises is less risky.

2. I'm not following the connection between ZIRP and either of the two energy-source alternatives. For what it's worth, I think the successful energy companies will be those that develop new drilling technologies as well as those that develop alternative energy sources that are profitable without subsidies. Although I believe cheap oil has peaked, I am fairly confident that Americans have quite a bit of room to increase their efficiency to delay the adverse effects of any sudden price spikes. Wise policy would allow us to exploit existing resources only if efficiency standards improved, e.g., open new leases for each "x" percentage improvement in CAFE standards.