Sunday, August 26, 2007

'There's nothing to compare it to'

From the New York Times (hat tip Calculated Risk):

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950...The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.
From the Sacramento Bee:
In a sense, New Century and other fallen lenders -- as well as homeowners who are losing their properties -- are victims of history. Until now, most experts say, the housing market had never undergone a serious swoon as long as the economy was still growing. Lenders took comfort in the argument that only a recession could do major harm to the housing sector and ignored signs that the market was going cold.
Mortgage specialist Heather Fern-Luzzi, with two decades of experience in the business, thought she'd seen it all. But this downturn, which just claimed her job, has her baffled. "There's nothing to compare it to," said Fern-Luzzi, the Roseville branch manager of recently collapsed mortgage lender First Magnus Financial Corp. "I've seen it since the 1980s -- I've been in downward markets and there's always been the light at the end of the tunnel," she said as she packed files for shipment to First Magnus' headquarters in Arizona. "This one seems to be different."
Loose loans have made the collapse unusually swift. Defaults and foreclosures have increased at a much faster pace than in previous slumps. In the 1990s, even with unemployment soaring, it took five years for defaults in Sacramento County to double, according to DataQuick Information Systems. This time, the default volume has more than tripled in a little over a year.
"It's more severe now; it's much faster," said Michael Carney, a professor of finance and real estate at California State Polytechnic University, Pomona, and director of the nonprofit Real Estate Research Council.
Mortgage defaults 90s v. now chart (4-county)
  • 90's peak: 3,055 (6-7 years into bust)
  • 2007 Q2: 5,201 (2 years into bust)
From Realty Times:
Banks, loan companies and small real estate companies are going out of business. Record numbers of home owners are going into foreclosure or attempting to sell their home "short sale" (less than what they owe). Many loan companies have stopped doing 100% loans and eliminated several other loan products, raised rates and requirements for the loans they will do.

Many have said that this market is worst than 1991 for sellers and most anyone involved in the real estate industry. I've been in real estate full time now since 1991 and I agree. We have more internet technology than we did in 1991 so more information is available to people than before and consumer confidence is at an all time low.
From the Sacramento Bee's editorial page:
As is now well known, the subprime blimp has crashed to Earth, and the wreckage on the ground includes tens of thousands of homeowners and real estate businesses that, for a variety of reasons, failed to see this crash coming.
This page has warned since 2003 that the real estate market was being overinflated by risky and predatory lending practices, such as interest-only loans and deceptive marketing. But we failed to anticipate that when the bubble finally burst, it would not only send shock waves into subdivisions in Stockton and Elk Grove but to markets around the globe.
Looking back, it is easy to see how this bubble burst so dramatically. Behind each subprime lender was a phalanx of financial institutions, which bundled risky loans with regular mortgages and sold them to investors. Just as many prospective home buyers imprudently failed to examine the conditions of their loans, many investors didn't realize the risks involved with what they were buying. When they did, they panicked.
From the Modesto Bee:
If all the homes for sale in Modesto were crammed on a menu, it probably would be several inches thick and weigh a couple of pounds. A recent search of showed 2,273 single-family homes; 197 condos and town homes; and 131 mobile homes for sale in Modesto.
"When there's so much to choose from, you kind of get gun-shy," [Modesto newcomer Kevin] Schinmann said, "because you know there's always going to be something else to look at." And look he did. During his three-month search, Schinmann studied a couple of hundred Internet listings and toured about 40 homes. "We ended up buying the very first house we had looked at online when we were back in Chicago," Schinmann said. But between the time he initially spotted that Bayview Drive house and the day he bought it, he said, "the price dropped $130,000."

It's been that kind of market. Prices for new and used homes have been dropping as inventory has soared. Median sales prices are down more than 13 percent since last summer and sales volume has plunged about 45 percent.
From the Stockton Record:
Victoria Rodriguez was not only a thriving real-estate agent in recent years, she was honored as one the area's top-selling real-estate agents four years in a row. That was in the boom time, and that spigot shut down to a trickle nearly two years ago. Today Rodriguez is still in the real-estate field, but she's not working as an agent. As a single mother with four children, she said she simply couldn't pay her bills. This in a residential real-estate market slammed so hard that sales plummeted over the months from nearly 900 in May 2005 to a low of 268 last month - a 70 percent decline in business.
The Central Valley Association of Realtors, which covers much of San Joaquin County and Stanislaus County, reported that membership is down about 14 percent since January. Marian Norris, president of the group, said the market shift was partly the reason why she closed her Real Estate Gateway agency in the spring.
Also from The Record:
At first glance it looks likes a dream business plucked straight from a late-night infomercial: buy foreclosed homes and turn them around in a short time for a big profit. It's the American dream.

But in the case of Stockton's Iftikhar Ahmad, federal agents suspect it was too good to be true. Ahmad is accused of spearheading a ring using his company I&R Investment Properties to illegally "flip" more than 100 homes, allowing him to reap millions of dollars along the way...The one common thread in all the deals was Ahmad who bought up Stockton homes in foreclosure - often paying cash - and sold them at inflated prices to "straw buyers," or fake buyers, created with the help of stolen identities or fake documents, the affidavit said.

Ahmad supposedly sold the homes to some of those named in the affidavit who obtained subprime loans using the false identities. That allowed them to put little or nothing down to start. Most of the homes went into foreclosure within months when nobody made the loan payments, the affidavit says. Ahmad amassed $8.6 million in the past decade....

"This is happening everywhere in the country, and it's easy to do," said Ralph Roberts, a Detroit-based realtor who has published widely on property scams...In mortgage scams, lenders lose the most money, but neighbors of the foreclosed homes who are left looking at empty, unkempt homes suffer most, Roberts said. Their property values drop, he said, describing the scams as a "cancer of the American dream."


paranoid renter said...

This is expected. In any bust a lot of people who did not necessarily participate in the greed will lose their jobs. The exact same thing happened with the telecom bust. Engineers with 20+ years of work experience at big companies found themselves out of a job and unable to find work elsewhere.

I know at least a couple of people that quit being systems administrators and moved into real-estate midway through the dot com bust. Fortunately real-estate was booming so it was easy for folks to find alternative employment. Now with this bust, where will they go?

Folks are already saying that commercial real estate is going to be in bad shape as well.

I'm finding it hard to visualize how this is all going to end. For now there's gloom and doom and no light at the end of the tunnel.

rocklin renter said...

"Victoria Rodriguez was not only a thriving real-estate agent in recent years, she was honored as one the area's top-selling real-estate agents four years in a row."

If that is true, what happened to all her money? Surely she saved some money for the future, right?


smf said...

Let me see if I 'get' this:

1. Home prices doubled
2. Incomes did not
3. A lot of people got into homes that they could not afford in the long term

And some are still surprised about the end result?

RMB said...

Take a look at the graphic on the NYT article for expected home price. If that isn't the biggest piece of wishful thinking I don't know what is. It shows the home price relatively flat (inflation adjusted) with a few run ups that retreat to the trend line. Then in the late 90's is the mother of all run up which will be followed by a short correction and then more run up in 2008. Does anyone else have a different idea of what is going to happen? Bueller, anyone??? WOW is all I can say

Gwynster said...

The bust saw me moving away from project management, software development, and business analysis and into government admin. So much for the PMI cert and PL/SQL background. I read the writing on the wall but I never thought the RE boom would last half as long as it did because I compared it to previous cycles.

We already filled all of our staff positions. It was interesting to see the # of people from RE-related industries applying to get in on the ground floor. I had RE agents applying for receptionist positions.

The days of big turnover are done for a awhile unless you are willing to take an entry level job at 12.00/hr. All those jobs coming open from boomers retiring already have people being groomed to move up into those spots.

As to growing government employee bases? I think not. Locals will shrink and the big dogs like State and UC are only replacing people leaving. In lots of cases, if you have 2 or 3 slots open in a dept, the work will be combined into 1 position. There has been lots of development into automated systems which are eliminating about 15% of the boomer held old timer jobs. I know of at least 1 case where an upgraded system made a person's job completely unnessessary and the powers that be are just waiting for her to retire next year. Until then, she's now a file clerk.

Gwynster said...

The most illuminating thing I've seen lately is that comparision graph between the 90's bust and now. In terms of simply communicating differences between the 2 busts, it's a pretty powerful image.

paranoid renter said...

$12.00 an hour?? Wow, that less than what I was getting as a research assistant in grad school. I managed to live on that but my life was very different back then.

With this bust, the folks that will be much harder hit are the construction workers. With the easy money gone (and probably lost because of the house they bought), they will probably be forced to take loans and go back to school to study to be something else.

Diggin Deeper said...

Finally, the reports I'm reading are starting to agree that incomes have not kept up with inflation nor have they paced high enough to warrant the home prices that sellers still think they can get.

The peak resets are still 5 months away. From January to June '08 its projected that over $620 Billion will reset marking the highwater mark for this problem. A little over $500B will reset in all of '07 making '08 wave twice as bad.

It would seem to me the ability of the ARM/Alt-A/etc note holder to withstand higher mortgage payments along with higher oncoming inflation will raise the rate of foreclosures to NOD's to it's highest point over that six month period of time.

If '07 is ugly, then the first half of '08 will be much much worse. Imho, there's little hope for the inventory levels to drop much further than they are right now. Let's hope the hedge funds, big financials, and investment banks will clear their books before we reach the peak of the problem.

Diggin Deeper said...

Home re-sales fall as inventories soar.

According to this article, the real estate problem isn't going to improve for quite some time. The national 9.6 month inventory for resales is skewed by the hot markets that have inventories over a year in length, and that would include Sacto and the San Joaquin Valley. The interesting part is that buyer sentiment is so low that inventories are likely to escalate even further in coming months. Sellers will panic before this market settles down just like sellers panicked on Wall Street over the last two weeks. That will mean much lower prices imho.

smf said...

"With this bust, the folks that will be much harder hit are the construction workers."

It all depends. I have been in the industry for a long time, and I can tell you the changes that occurred.

(This is one of many problems)

Not that long ago, any mistakes made during the planning stage were easily corrected by the builders. Lately, it was not the case, and we were spending gobs of time providing direction to the builders.

Ended up that the boom made worse a problem that had existed for a long time, that is, the lack of people entering the construction industry.

So A LOT of new and inexperienced people got into the game. Up to 2000 you would rarely see an Eastern European and migrants working in the industry. Now there are gobs of them.

These people will disappear soon, letting the industry go back to a more normal footing.

On a side note, it was a real joke between my wife and I that I would tell her that this year is really busy, then the next I would tell her 'now, THIS year is really busy'.

Now we know why.

And there are much less jobs out there than before. I get the feeling that the smart migrants will take their winnings and establish a business back at their place of origin.

Cmyst said...

What puzzles me is how screwed up the economy has become in such a short time. If we say that the housing/credit bubble is really just the dotcom.bubble's fault, then how far back do we have to go for a period of economic stability?
The early 90's were bad, the early 80's were bad, God knows the 70's were bad.... Have we just been delaying some kind of economic disaster since going off the gold standard?
We all know that lucrative jobs in manufacturing have largely disappeared. I remember reading "Future Shock" when I was a kid, and the prediction that a service economy would replace the manufacturing one, but I think the idea was that it would be information and higher-level professional services being supplied to the rest of the world, not the middle-class disappearing and everyone working at Wal-Mart. It seems to me that India is filling the role that the US workers were supposed to fill.
This is a lot bigger than just home prices, but the problem is that home "values" fed the beast for so long. We were all doing relatively ok before the bubble, even though the tech sector has never recovered. Now, it's everywhere and it's even worse. I just don't get it. We can't go back to normal without the entire world going bankrupt, it seems. What a mess.

Jacob said...

The problem is much worse cause people cashed out trillions of dollars from their home's equity that really wasn't there.

And that money propped up other industries like travel and automotive. Now all companies are hurting.

You have a small percentage of home owners that could actually afford to buy the home they own if they didnt already own in.

The people that didn't cash out are fine but the people that did and spent it all on "things" that they didnt need are screwed.

They can panic all they want now, but they cant sell. Not for what they owe, so it will have to go into foreclosure.

But the banks and builders can only hold so many homes for so long. And once one decides to really liquidate then the rest of the dominoes fall.

And once they really fall then people will start buying again, cause we will be able to afford to.

mopar777 said...

Let the bleeding begin! These sellers and their jacked up realtors have got to realize the party is over.
Last week I inquired about a duplex on Mellowdawn Way in Orangevale. Three bedrooms each side and one car garages. I found out the rents were only $995 & $1050 (they should be at least $1150 if it's in good condition.) The jerk wanted $450k but had just gone down to 420. $320-330 would be a fair price based on rents. The realtor abruptly hung up on me when I told her this.

Diggin Deeper said...

Cmyst...indeed the problems of excess have just been transferred from one generation to the next with no one taking responsiblity or providing solution along the way. We're a "crisis management" country and until the shoe drops we'll just keep passing the buck to anyone who'll accept it.

Developing countries are like stepchildren with huge dollar trust funds. Between BRIC counrties, Japan, the EU, etc. there's $3-4 Trillion in T-Bills held in their coffers. As long as these countries need us and we consume our way to their success, they'll accept what we force on them. At some point, though, when we quit buying and their middle classes become high powered consumers, why would they want keep lending money to country that has little or no collateral?

This credit madness will come to an end someday as the cracks are beginning to show around the edges... The US consumer does not have the juice to continue the binge...when we quit, the world just might not want our dollars any longer.

Real Estate is now serving a huge part of the population that can't afford to buy at present day prices. It one would pay off the Hummer, keep the college fund intact, and pay down the remod on the home, maybe there'd be some money left over to move up...

Hate to say it but, imho, the buck stops with this generation.

rant off...

norcaljeff said...

Interesting. It never ceases to amaze me the people in the RE industry don't admit the problem with the market until they lose their job, then all of a sudden reality sets in. I bet that mortgage firm manager was telling clients days before she was cut that it was "an excellent time to buy." Now all of a sudden "things are different this time." Get a real job!

SacramentoCrash said...

Overpriced housing puts a damper on economic activity and business formation.

Every dollar put into an oversized mortgage is a dollar that can't be spent on building a business or building your retirement nest egg.

Real estate is a non productive asset in terms of regional growth.

Too much went into the real estate finance and construction industries.

That is why SacTown has so few innovative technology companies and manufacturers.

All the smart money has gone out of state where housing is cheaper and you don't have to feed the aligator as much.

SacramentoCrash said...

India, Vietnam, China, Philippines.

What do they have in common?

That is where alot of outsourcing jobs are going.

Software developers consulting firms in those countries charge $7 to $20 per hour.

The cost of a software person in Sac is about $40 to $80 per hour after benefits. An independent consultant charges $75 to $150 per hour.

Data transcription services in those countries charge about $3 to $8 per hour. Sooner or later like it or not, unions or not, the state will start outsourcing some of their work if they haven't already.

This area needs innovation such as the green industry start ups in the Davis area.