There are many different pieces to the puzzle, here are a few more.
Jiji has posted this thought a couple of times:
Housing is broken, Agents , insurance, remodelers , landscapers, finance, escrow, builders etc… the list goes on and on. What must never be said,
YOU WILL NEVER HAVE AN ECONOMIC RECOVERY UNTIL THE MAJORITY OF UNDERWATER HOME OWNERS ARE NO LONGER UNDER WATER.
I’m not sure we’ll recover any of the old economy; instead those who are creative and desperate enough, will find a new way to get by. It will need to be independent from housing, because once the underwaterness is resolved, those who are left probably aren’t going to be moving much either.
Here’s why:
1. UP OR DOWN-SIZING – Price-wise, to move up or down, you need to change by 50% or more to make it worth it.
It doesn’t make sense to sell for $600,000, and buy for $750,000 – you don’t get enough extra house to make it worth it, and the closing costs are prohibitive. But even if the costs got down to 1-2%, very few homeowners need a slightly-bigger house. Don’t be surprised if you see in the future a JtR-supported remodeling enterprise to assist those who just need an extra bedroom or two.
2. DOWN-DOLLARING – Sellers who want/need to bank some real money will have to leave town.
Those hoping to cash-out will need to leave town, and possibly the state, to net a few hundred thousand dollars. How many homeowners are willing to leave? Those buying now are here for the duration, so the down-dollarers who do leave are part of the cleansing. How many weak hands are left? Admittedly, it could be a large group, but they will likely hang on as long as possible.
3. MORE RENTERS – There is going to be increasing pressure on rents.
Those in both the categories above who do sell, will try to stick around, and renting is a great temporary option. For many it will be permanent, especially those who have family here because as they get older they aren’t going to leave town, just to buy a house. Others moving here from out of town will prefer to rent, mostly because of the difficulty with buying smart.
Upward pressure on rents will impact the good-looking family homes in quality school districts.
4. STAYING PUT – Baby boomers are prime candidates to be moving.
According to Wiki, baby boomers control over 80% of personal financial assets and more than 50% of discretionary spending power. Do they have one more move in them? I don’t think so – after investigating the three categories above, many, if not most, will end up NOT moving, and make due with that to which they’ve become accustomed.
There will be great reluctance to selling from now on.
Hopefully we’ve learned a big lesson in this downturn, and people will be more reluctant to load up on debt too.
Which leaves just the out-of-towners, and first-timers, for homebuyers.
Those underwater are just part of the equation, and may just help with expediting the inevitable.
As long as we’re repeating ourselves: there is no confidence in the legitimacy of the entire residential RE landscape because nobody has really paid for their profiteering and fraud.
Until more than a few token players (big and small) start showering and eating whenever the warden gives them permission, there will be no reason for rational people to sign on to a new mortgage.
Banks are the root of all evil. If we didn’t give them all our money. They would have been forced to liquidate assets at whatever price the market would bear to stay in business.
Carlsbad Renter,
Whether more go to jail or not won’t affect today’s real estate market.
The current count of on-going frauds has to be the lowest in 8-10 years, if you include those who obtained financing they couldn’t afford.
Taking away the no-qual punch bowl brought legitimacy. We’re just enduring the hangover now.
[first post]
I am a renter in the bay area, following this blog with interest for lots of insight (and humor) about the real estate scene. Thanks for letting me eavesdrop on the conversation.
The down-sizing argument which Jim outlined leading to sticky sales from the seller’s perspective has its up-sizing counterpart for 1st time buyers. I am old enough that if I do ever follow through with a purchase, it will not be just a starter house, but needs to be a quantum leap above my current rental situation. The pain and uncertainty of a move also occurs from the buyer’s side, so sales are doubly-sticky.
Welcome salsahead!!
When I was little my Dad was transferred a lot. We lived in Seaside for 2 years, Modesto for 1.5 years, Covina for 4 years, and then Phoenix in 1972. My parents purchased a home at each stop, and never had to think about losing several tens or hundreds of thousands of dollars – heck the house in Phoenix only cost them about $35,000.
Today the terror of so many people lose tens or hundreds of thousands of dollars will leave a lasting memory – and cause most buyers to buy their last house. It’s back to my grandparents’ way, living in a house for the duration!
I would agree with Carlsbad Renter. The public is not that cynical. Most do expect that a system colonic will some day occur and the market would heal quite robustly in that event.
Price, and true legitimacy, can fix everything.
Thanks Jim,
I disagree completely. IMO, there have to be visible consequences for past abuses, or the presumption will logically be that the abuse is a system feature, not a bug.
Who in their right mind would enter a high-stakes game where the deck was so obviously stacked and the players so blatantly corrupt? Those same criminals and frauds are sitting in wait for their next mark to arrive.
Even TV-addled consumerists like the American people can see that.
You can only speak for yourself.
The deck so obviously stacked, players so blatantly corrupt? Can you break that down a bit?
With underwriters running scared, there is very little mortgage fraud now, a few realtors are getting away with short-sale abuse that is the banks’ own fault, and we have a federal government throwing away billions on ineffective programs.
But those don’t add up to deck being obviously stacked, and players so blatantly corrupt.
If Mozilo went to jail today, it wouldn’t change the current market either.
Who are the criminals and frauds waiting for their next mark? Loan brokers? The underwriters would have to be corrupt too, and those are extremely rare. Realtors? They are more naive and inexperienced, than criminal, and with data out in the open the buyers and sellers have a chance to educate themselves so they aren’t boonswaggled.
There are 2,000 to 3,000 sales per month happening in SD County, so apparently not everyone around here shares your cynicism.
Jimster thanks for keeping it real Hoss, you are more patient then the average, uh, bear (no pun intended).
This is a great post Jim. Panning back and looking at the whole picture I think you raise a key point that goes to the heart of any discussion regarding the future of housing (and the economy in general) when you say “I’m not sure we’ll recover any of the old economy; instead those who are creative and desperate enough, will find a new way to get by.”
The 20th century middle class in America is more an aberration that enything else, and if history teaches us anything it is that wealth and power tend to concentrate and result in a small elite class and a very large worker class. In fact, the modern day American middle class would likely have resembled a lower worker class without the unprecedented access to credit that fueled the credit expansion that made up the vast majority of the economic growth in this country for so many decades now.
How will a middle class that is dying on the vine affect housing over the next 20 years? If there are enough elites and near-elites to support SDNCC in the coming decades than that area will remain an island of high values in a surrounding sea of much lower prices, in fact the disparity may even increase. Do we not already see significant devaluation in these zip codes re attached housing, though? So there is weakness within the zips, but maybe not yet (or ever?) in the more prime detached SFRs on great lots.
It’s always a struggle to buck the tendency to project the future with linear thinking, but again history teaches that eventually the event progression is going to go off the rails, sometimes radically, and we never end up at the place projected by linear predictions. Not only housing, but the overall economy and way of life in this country (and abroad) feel like they are experiencing such a disconnect and are headed off the rails and into the unknown.
I tried, but your site filter says the links in my post make it look spammy. Instead, I’ll just point you Yves Smith’s blog, where the “real estate” link has plenty of examples from which you can discern how rotten things are in the state of Denmark.
For giggles, I’ll get you started with a story of the wrist-slap Wells Fargo just got for their upstanding business practives. Families who lost their home in foreclosure as a consequence of Wells Fargo’s illegal mortgage steering are to receive $7,000. Seven grand.
http://www.federalreserve.gov/newsevents/press/enforcement/20110720a.htm
Yes, one link at a time, otherwise it sends you to spam.
So your point is because Wells Fargo’s subprime unit took advantage of people from 2006 to 2008, nobody should buy a house today.
It might be time for you to start your own blog.
That’s obviously not what I meant, and there’s really no need for the bum’s rush.
Best of luck to you, Jim.
CR
Some people just can’t resist goin to a steak house and ordering fish!
I hate the current market probably more than most. Even I’ve stated to realize that you can’t fight the system forever. Even if you’re playing against a stacked deck sometimes it’s better to just move on. At least buyers aren’t getting as screwed as they were 4 years ago.
Carlsbad Renter,
If that’s not what you meant, then feel free to support your claim with facts.
You come in here to my place of business and crap all over it with three inflammatory comments in a row – do you expect me to say nothing?
All I ask of anyone is to support your opinions with facts. This blog is for those buyers and sellers who are looking for the truth, and if you have something factual we’d all like to hear it.
But no more wild claims or opinions allowed – it spoils it for the readers who are sick of them not matching up with what is happening on the street.
“YOU WILL NEVER HAVE AN ECONOMIC RECOVERY UNTIL THE MAJORITY OF UNDERWATER HOME OWNERS ARE NO LONGER UNDER WATER.”
With all due respect to Jiji, putting this in all caps (shouting) doesn’t make it true. Underwater homeowners make up about 8% of the population. In many cases, they’re the types of instant-cash-out/refi folks who will plunge into their equity for frivolous things as soon as the equity exists (hence they are underwater, having chased the ponzi scheme).
Even if that weren’t the case, it’s a small fraction of the population. Their needs are inconsequential, and their problems are self-created. An increase in home prices which would put them above water would be at the expense of all future home buyers. The biggest problem is that homes are still overpriced. Helping bubble-buyers and equity-spenders become above-water should not be a priority of our govt, or of the lenders. Unemployment is a far bigger problem. Those people didn’t do anything wrong, yet somehow they take a backseat when it comes to our priorities; somehow, the 8% of the populace that’s underwater is a bigger concern for some people. Perhaps by “some people”, I mean those who are underwater themselves:)
Hey kevin, i am not sure where you are getting 8%. Underwater homeowners make up at least 25% of the market. THis number will be at 50% by the end of the year. Prices have to go back to 1997 prices (and will overshoot)before inventory can get cleared. You can hope and you can pray but this all ends in tears.
Here the latimes.com is talking about how the move-up market is gummed up, but it’s really a subset of the bigger issue – very few are willing and able to take on more debt:
http://www.latimes.com/business/la-fi-move-up-20110801,0,2684628,full.story
The move-up market only existed because of easy money – and that’s not going to come back, hence, the move-up market is more than gummed up – it’s gone.
Dirk, 25% of people with mortgages are underwater. Unless those households and folks without mortgages (own outright or rent) don’t count as real people, then 1/4 * 1/3 = roughly 8% of the country. It doesn’t end in tears for them, it ends in a postponed time of profitability. That’s is their fault.
Jim, you are right, and there is something that these news outlets are missing in their narratives: move-up buyers are hindered in large part due to mid and upper tier portions of the market still being overpriced.
kevin, where are you getting your numbers from. I understand that 1/4 x 1/3= 1/12 or 8% but what quarter and third are you talking about? Until you can quantify that you are just talking nonsense. In a non-bubble market, home prices move in tandem with real wages. The lack of high paying jobs (or lack of jobs at all) will keep a lid on higher price movements. I agree with Jim, the move up market only existed because of easy credit and that is gone too. Many more people will end up in foreclosure, many more banks will go under, and prices will go lower too and trade back to the log term trend line. For most people out there, this all ends in tears!
I am talking about a proportion of the populace. These people’s inability to profit doesnt necessarily prevent the from moving up. I know folks who are underwater that moved up and are renting out their bubble house. Move up sales might be hindered by those who are stuck, but it is hurt more by overpriced mid and upper tier homes.
Nothing can or should be done about underwater owners. If they don’t like the consequences of their decisions, they can go the deadbeat route and SD. That won’t make them move-up buyers though, only time can fix that.
If you think I am talking nonsense, then maybe it’s because you’re not articulating what you think the solution should be. Principal reduction? Subsidize losers’ next gamble? What?
Kevin, I do not have a solution nor do I believe that one exists. “The market” and time will flush everyone out but you are delusional if you think that only 8% of homeowners are underwater. Also, it is extremely hard to get financing to “move up” when you are sitting on an overvalued mortgage and I would think it would be almost impossible to cover your “nut” on the primary bubble house since renters would have the choice of renting a comparable at a non bubble price. So, the situation you are talking about may exist (there are plenty of uneducated idiots out there) but it is not the norm (since generally those same idiots are cash poor). People that are underwater or bought an overvalued asset usually have a very difficult time covering their payments which is why they get foreclosed on. Prices will go down some more. You can count on that!
“if you think that only 8% of homeowners are underwater”
Where did I say that? Work on your reading comprehension. Let me save you the time, here are my above quotes:
1) Underwater homeowners make up about 8% of the population.
2) 8% of the populace that’s underwater
3) 1/4 * 1/3 = roughly 8% of the country.
4) I am talking about a proportion of the populace.
Count them. That’s one two three four. Four comments articulating what the 8% is. My apologies if English is not your first language, but I’m going to have to use the three-strikes-and-you’re-a-troll rule here since you’re either misrepresenting what I’m saying, not understanding it, or trying to distract from the conversation.
If you aren’t a troll, then yes, I agree that prices will come down a lot more. I am counting on it.
Where do you get the 8% of the total population figure from? That is what i am interested in?
Where do you get the 8% of the total population figure from? That is what i am interested in?
Math. He’s deriving by taking the percent of homeowners that are underwater and multiplying it by the percent of Americans that have a mortgage on their home. That number will give you the percent of Americans that are underwater on their home.
http://money.cnn.com/2011/06/28/real_estate/short_sale_fraud_rising/
There are certainly more examples in the recent news, but as I said above, I can’t post multiple links. The specifics and implications of any single article may be debatable, but my overall impression is that the sustained presence of fraudsters is still a significant issue to consider in residential RE.
That may be inflammatory crap to you, and if it is, I apologize. I in no way meant to imply that you are dishonest. I can’t speak for everyone, just for myself. I moved to NCSD three years ago with every intention of buying a house. I have the financial means to buy in some pretty decent neighborhoods, but for now I lack the will, and just re-upped my lease for another year. Lots of other factors, including those listed in the OP play into that, but I personally can’t ignore the fact that so many of the bad seeds are still in the ground. I think it adds another, unknowable level of valitility to the market.
Post #10 Outstanding post/commentary. Your analysis as well as JtR’s in the original post are spot-on. If the current economic recession turns into a depression and you have austerity, civil unrest, resentment towards the wealthy, a two-tiered society with a very small middle class, tent cities, homeless etc do you think North County Coastal will be insulated from the collapse? Will wealthy buyers from out of state or foreign buyers who are used to doormen in their fancy high rises or large gates buffering their mansions feel safe in the area? Places like the Covenant in Rancho Santa Fe can afford private security but most HOA’s and people in non HOA’s can’t. I sincerely hope and pray this doesn’t occur. It would be awful for everyone. I wish we could return to the 1980’s when a large part of North County Coastal was solidly middle to upper middle class, down to earth, sleepy, not as materialistic or congested.
Kevin and Dirk seem to be shouting past each other (but Kevin seems to have a better clue of what’s going on). In fairness to Dirk, Kevin hasn’t been too clear in backing up his figures. This might help.
From the latest USA Census Report:
As of 2009:
Total US Households 113mm
Total US Housing Units 130mm
(The 17mm difference includes vacant units, vacation/second homes, etc.)
Total Renter-Occupied Households: 37mm (33% of Total Households)
Total Owner-Occupied Households: 76mm (67% of Total Households)
– Without Mortgage: 25mm (33% of Owner-Occupied)
– With Mortgage: 51mm (67% of Owner-Occupied)
Soooo…if, according to recent estimates, 25% of all owner-occupied houses with a mortgage are in negative equity ( or “underwater”), then that’s about 11 million properties/households. 11mm (number of underwater households) divided by 113mm is actually 9.7% of all US households – pretty close to Kevin’s rough estimate of 8% – and a far cry from Dirk’s assertion that (and I’m paraphrasing here) “underwater homeowner are at least 25% of the market” and “50% of homeowners will be underwater less than 6 months from now”.
This assumes the generally accepted definition of “underwater” as it pertains to real estate as being a property owner that owes more on that property than it is currently worth. Of course, there are plenty more households that have negative equity – that is, the property is worth less than they paid for it – and do not have a mortgage…but that’s a more difficult statistic to put a number on. [Far too often, people (especially the press) use underwater, negative equity, and many other terms interchangeably and in the wrong context.] Dirk may have meant to say that 25% of households are worth less than what was paid for them OR what is owed on them – and that number is certainly higher than 9.7%, who knows, maybe it’s even 25%. Or more.
FWIW, none of these numbers take in to account the number of renter-occupied housing units that are underwater (either single family, multi-family or commercial apartment) – haven’t seen a report on that segment. In other words, how many of those 37mm renter occupied units are worth less than their mortgages and/or their purchase prices.
Personally, I agree with both of them that the number will be higher in the near/mid future, and there’s much more pain to come.
Anyway, here’s a fairly recent link that gives some good stats/charts/etc.:
http://www.zerohedge.com/article/66-las-vegas-mortgages-are-underwater-277-total-us-housing-debt-has-negative-and-near-negati
Awesome site/blog Jim.
Need to correct myself – negative equity and underwater are in fact synonymous as stated earlier in my post, but I misused the term in the next paragraph when I should have just said “loss of equity”. I’m just as guilty of interchanging terms as those I was criticizing…argh!
To be clear, I was trying to distinguish between someone who bought a $500k house and has a $400k loan, but it’s worth $350k. They lost $100k of equity, and have $50k of negative equity (or $50k underwater).
As opposed to someone that has the same house, but paid cash. They don’t have negative equity, but they have a (paper) loss of equity of $150k. They are not underwater. And they also don’t lose a nickel until they actually sell.
These homeonwers are NOT included in the “underwater” figures that are constantly bandied about.
If someone payed cash, 500k , for a house that is now worth 350k they are underwater no matter what stats (especially govt. issued) that you are looking at. Ask someone who has lost 30% of a (now illiquid) investment if they think they are underwater and if they were being totally honest they would tell you YES and that they have a hard time sleeping at night too. Not too many of those types around the greater San Diego market anyway so it is all just blather. One 100% financed house (see 1st video today) that gets foreclosed on and comes back to market at 50% of borrowed price (you will see this once the banks stop extending and pretending and really have to get the shite off their books) will take a whole neighborhood down. Then price discovery will be meaningful and we will know what the real market is. Kirk, now i now know where you are getting your numbers from and they seem real although i do believe that with bank owned inventory and shadow inventory the number is much much higher. Our govt.’s decision today will only kick the can down the road a bit more and delay “mr. market” of doing his job. anyway, you and i are on the same page. prices are going down and they ALWAYS have a relationship to real wages.
JordanT and Scott are correct. My poor clarification aside, did Dirk not realize that only 1/3 households are mortgage-holders?
Well since he believes that being underwater is irrelevant of one’s down payment DESPITE the fact that its absolute irrefutable definition is to have a higher balance than the asset which secures the loan…. that pretty much negates his silly theory that an all-cash buyer could be underwater. Or maybe he is just pulling our legs.
Dirk, I don’t disagree with your Bearish sentiment about the market, but I do think you are misinformed on a few items. Look up what “underwater” means; you’re embarrassing yourself.
Please stop talking about ending up in tears. I suspect you’ve never seen somebody go through a real tragedy. A delayed profitability on a leveraged housing gamble is nothing to cry about. In fact, it’s probably the least sympathetic position somebody could be in today since 5 minutes of due diligence before making the biggest purchase in one’s life would have spared them this “misery”. Better yet, they can always just walk away.