Thursday, March 30, 2006

Wealthiest Counties -- Marin Need Not Apply

Marin didn't even rank among the wealthiest counties according to this survey. What is Marin's hubris founded on if not its imagined sense of self-worth? That's gotta hurt. ;)

Some choice quotes:
A survey released today by TNS Financial Services ranked Los Angeles County, Calif., the wealthiest county in the United States, based on the number of millionaire households.

TNS' annual survey of wealthy U.S. households is based on a representative national sample of more than 1,800 households with a net worth of $500,000 or more, excluding primary residence.

According to the survey, Los Angeles County has 262,800 millionaire households, which constitutes 23 percent of the state's wealthiest households, the survey found. Cook County, Ill, came in second with 167,873 millionaire households, followed by Orange County, Calif. (113,299 households); Maricopa County, Ariz. (106,210 households); San Diego County, Calif. (100,030 households); Harris County, Texas (96,593 households); Nassau County, N.Y. (78,816 households); Santa Clara County, Calif. (75,371 households); Palm Beach County, Fla. (69,871 households); and Middlesex County, Mass. (67,552 households).

I Know You Are but What Am I?

Sheesh! The Chinese have a better understanding about why the prices of our houses have gone through the roof than Boobus Americanus does. The United States has positioned itself between Scylla and Charybdis: what's more important, a strong dollar or keeping people's house prices artificially inflated? Naturally, our spineless politicians and the Fed are looking for a third way out -- saying it's all China's fault and that they should change. Good luck with that. China is just doing what's in their best interest and there is no reason why they shouldn't.

Hey America, it's pretty simple: if you mess up you room, clean it up yourself; if you live in a glass house, don't throw stones.

Update: Apparently, Asians are preparing for a dollar collapse. We already have good reason to believe that the Fed won't protect house prices and instead will come to the dollar's rescue.

Anyway, there is a great discussion (as always) about this over at The Mess Greenspan Made blog.

Some choice quotes:
The solution is with the United States and not, as pointed out by Governor Ben Bernanke in March 2005, with global savers. The problem is not the global savings glut, it is the lack of savings in the United States on the part of the government no doubt, but also on the part of the individual households.

Believe it or not, the extremely low household savings in the United States can be partly attributed to the rising housing price. Think about it: Who needs to save if his house is gaining value astronomically? By the time of retirement, all he needs to do is to cash in on the house or get an annuity through reverse mortgage to pay for all the bills for the rest of his life (increase in rental cost consistently falls short of the increases in housing price).

Saving little is indeed rational if the housing price continues to rise at its current pace indefinitely, if down payment and mortgage cost remains low, and if the dollar does not collapse in the foreign exchange market. Unfortunately, these are big "ifs."

We need the Fed doves to help remove the lid on the long rates and break the wishful thinking that cheap financing is always around for property purchase, for fiscal budget deficit, and for current account deficit. The property market will cool off. With well-targeted CPI inflation rate eating into the value of the house and with dollar depreciating against all major currencies, the property market bubble will shrink over time.

The US households will finally begin to realize that they need to save for their retirement nest egg, or else, be prepared to face the reality that the equity they build into and the capital gains on their house won't be enough to keep them happy for the rest of their retirement life.

Wednesday, March 29, 2006

Today's News

I've been enjoying some of the thoughtful discussion you all have left in some of the previous posts. I hope that can continue.

I've been pretty busy at work and so I didn't have time to post much. But here is a list of the housing bubble related news. It's all rather negative; no sweeteners today, just more vinegar. The article discussing how talent is leaving the Bay Area because of the declining quality of life (to a great extent caused by the outrageous cost of decent housing) is good but not terribly surprising to those of us who have been watching and discussing this bubble for a while now.

U.S. mortgage rates rose Tuesday

Ben Stein: Housing will continue to decline

New chief keeps raising rates, hints at more to come

Foreclosure shock !!

Mortgage defaults to rise as housing market slows

US home loan demand falls to lowest level this year

Prices, sales slip for new houses

Delinquencies peak the third and fourth years of mortgages

Lennar says earnings up 34% before housing market Killed

US home foreclosures on the rise

Jim Cramer: Real estate now like Dotcoms in 2000!

Homeowners face rising insurance rates

HomeRoute Names Top 100 Relocation Destinations

Insurers Backing Off Homeowner Coverage

Fed raises rates in Bernanke's first meeting

Sales stopped at off-Strip Las Vegas condo project

Nervous home sellers tossing buyers incentives

Bay Area's economic growth stunted by housing, education issues

The Apologists Club

Big Cali Quake on the Way?

A cold February for housing


Bonuses to Loan Brokers Scrutinized

Home sales slowdown a boon to buyers: YOY price declines

EB take it to another plane

Mortgage Fraud Blog

There is a mortgage fraud blog worth checking out.

Tuesday, March 28, 2006

Price-to-Rent Ratios

A good series of posts on the housing bubble here and abroad can be found at this blog. Here is an interesting chart that I found there:

New Rules

This Wall Street Journal article describes some of the "new rules of real estate" now that the markets are trending down. I think Marin buyers and sellers could benefit by learning the rules of the new reality as of now, the inflection point of this housing bubble:
  1. Price your house in the bottom 25% of comparable properties.
  2. If you are looking to enter the market for the first time, don't overly stretch your finances because rising house prices will no longer bail you out; first-time buyers need to leave a financial cushion instead of stretching as much as possible and counting on rising house prices.
  3. New employees who are relocating to the area should steer clear of older construction where competition from newer construction could make reselling difficult.
  4. Say goodbye to the days when you could simply look at what your neighbor’s house sold for and then list yours for 10% more.
  5. Sellers need to make sure their house comes across as a good value relative to other houses on the market.
  6. Cut your asking price by 3% to 5% if your listing doesn't generate several showings or written offers within three weeks. Repeat until sold.
  7. Sellers need to help with closing costs.
  8. For employers: enforce policies that require transferees to price their houses close to the appraised value. Enforce ‘loss on sale’ programs, which compensate people who are relocating for losses when they sell below the purchase price.
I would add:

9. Only use agents who are willing to reduce their commissions down to 1% or 2%.

Monday, March 27, 2006

The Commission

Why do we have a system where both the buyer's real estate agent and the seller's agent are incentivized to encourage the highest sale price possible on a house? Shouldn't the buyer's agent be incentivized to achieve the lowest possible price whereas the seller's agent is incentivized to achieve the highest possible price? Is the only viable solution to remove all commissions from all steps of the housing valuation process (loan officers, appraisers, real estate agents, etc.)? Shouldn't the commission be replaced by a flat fee that has absolutely nothing to do with the sale/asking price of a house and everything to do with the actual amount of work the agent does? If there were a flat fee at all points in the process of buying a house, wouldn't that allow for more competition among the various players (loan officers, appraisers, real estate agents, etc.) and thereby result in fairer pricing of houses in our free market economy? What can be done to change the way agents, etc., get paid? Should something be done?

Environmental Zoning and California's Historically Low Home Affordability

California's rate of home ownership (according to this SF Gate article) is far lower than that of the rest of the country due to the combined effects of such things as tax law (e.g., Proposition 13) and environmental zoning regulations (e.g., the Marin Agricultural Land Trust (MALT)).

This article in SF Gate looks at whether environmental zoning policies should be altered to allow for more building (yes, I know, the proposal is backed by a building association but that doesn't change the fact that there is a problem that needs to be addressed). Of course, the timing of this is not surprising given our current historically low affordability rates. But if real estate bulls are right, if "it is different this time", and house prices do not correct in a major way so as to re-establish more normal housing affordability, then I do not see how we can afford to not alter the environmental zoning regulations.

Should preserving current owner's property values (at least in the short to medium term) trump housing affordability and take precedence over future generations' ability to own their own house in California? Or do we just smugly sit back, congratulate ourselves on our pricey homes and how desirable they must therefore be, and hope incomes will rise enough to make housing affordable again in California and let the current generation flounder as it will until that time? With respect to MALT, are cows and pasture land more important than people?

Update: It seems that Santa Barbara is already having to swallow this bitter pill.

Some choice quotes:
The study, titled "Homeownership in California," makes the case that the state's 57 percent homeownership rate -- the second lowest behind New York -- lags far behind the national average of nearly 70 percent because a patchwork of environmental policies and legal decisions has choked off new home building and thereby pushed home prices $300,000 above the national average.

"We may be producing some of America's best college graduates, but we're exporting them to states where owning a home is more than just a fantasy," said Alan Nevin, chief economist at the California Building Industry Association in Sacramento and the author of the study.

In the 1950s and 1960s, California's homeownership rate was equal to the United States' as a whole. But in the 1970s, that changed as the California Environmental Quality Act and other measures were passed, Nevin said.

Now, as a dwindling number of residents can afford even modest homes, the building industry contends the answer is to curtail the use of the quality act by environmental groups to halt development and to force cities to identify and plan for a 20-year supply of new housing.

The study coincides with the building association's sponsorship of several bills that would make it easier for builders to access and develop available land.

Environmental advocates, however, say the builders are using the specter of recent, huge housing price increases to attempt to curb important protections for open space and endangered species.

Sunday, March 26, 2006

A Prediction

The following prediction came from this article. I'm not saying Marin will follow this trajectory; we all know that at worst it will move horizontally from point "A" into the foreseeable future. But the rest of the country is so screwed:

Step A: You are here.

Step B: As housing prices begin to decline, sales will continue, though more slowly and less frequently. Old habits die slowly. One year into the decline, housing speculators will have left the market, but home owners will generally still believe that prices will either resume their rise or at least flatten out, not continue to decline.

Step C: After prices have declined for two years, large numbers of buyers who purchased near the top of the market will begin to feel the psychological effects of being underwater on their mortgage...As transaction volumes continue to fall, demand for housing-related employment will decline too. The first signs of labor market distress will start to show up, as more and more of that 43% of the private sector who found jobs in the housing industry are no longer needed.

Step D: Three years into the decline, marginal home buyers will learn what owning a home really costs, versus renting when housing prices are declining and jobs are more scarce. Rent is a fixed cost, whereas home ownership presents many variable costs, including increased interest payments on ARMs, and rising tax, insurance, and energy costs. Also, upkeep for the average home typically costs five to ten percent of the price of the home, annually.

Step E: Five years into the downturn, rising unemployment will begin to more seriously affect the market...As unemployment rises, homeowners will leave housing bust regions to move to areas where there are more jobs. Many houses will be sold at a loss, or even abandoned, as the market price falls below the loan value.

Step F: Ten years into the downturn, real estate will be widely regarded as a terrible, "can't win" investment. McMansions will be subdivided for rental as multi-family homes.

Step G: Ten to fifteen years after the start of the decline in housing values, prices will bottom out, setting the stage for the next boom. Time to buy.

Marin Speculators Chase the 'Buy and Flip' Scheme in Tertiary Locales

According to this SF Gate article, Marin speculators (and others of course) have stopped speculating in Marin and the Bay Area at large and are now, as many here have long suspected, spending their specudollars in tertiary locales.

Dissatisfied with having destroyed their own community's affordability as a result of the never-ending pursuit of sating their greed, Marinites must now do it to others. Let's Marinate the whole country!

Some choice quotes:
“For nearly 2 1/2 hours one night recently in Mill Valley, a capacity crowd of 300 people looking for the next hot real estate deal listened raptly as an insider revealed the best cities to buy bargain houses. None was in California. The back-to-back programs weren’t isolated efforts to woo investors and homeowners into taking money out of California’s pricey residential market.”

“‘The economic numbers don’t readily work here anymore,’ explained Michael Morrongiello, program director for a Sonoma investment club. ‘It’s tough for the average investor to acquire rental homes (or) multiple units, here in California and particularly the Bay Area.’”

“Not only will individual and institutional investors look beyond the Bay Area, according to the reports, they will even rummage through largely ignored tertiary cities. ‘I’m going to places the average investor doesn’t, such as South Carolina,’ said Mike Sarwri. ‘In California, you’re spending $600,000 or $700,000 for an average property..and you could take that money and buy four or five’ houses in Dallas or Oklahoma City.”

Saturday, March 25, 2006

"Everyone Wants to Live Here"?

People defending the recent rise in house prices here in Marin County often justify their argument by claiming that "everyone wants to live here". The same argument is often heard in many other bubble areas. So I wanted to know if it really is true that everyone wants to live in Marin County. Below you will find the results of my research. All data comes from the US Census Bureau. All graphs can be enlarged by clicking on them.

The following graph shows the percent change in total population in Marin County from the previous year's population ("total population" includes births, deaths, migrations in, migrations out). As you can see, the total population increased in 2001 (relative to 2000's total population) and then declined in 2002, 2003, and 2004 relative to the previous year's population, and then increased in 2005 (relative to 2004's total population). Since I did not include the data for 1999 or earlier, 2000's relative change is by definition 0% but I think it is safe to assume that it would have been some positive number:

The next graph shows the net migration for Marin County. This data does not include births or deaths and so represents the absolute numbers of people moving into or away from Marin County (which, of course, is what we are really interested in). As you can see in the following graph people moved into Marin in 2000 and 2001 but left the county in a major way in 2002, 2003, and 2004. There was an insignificant migration into the county in 2005:

The next graph shows the same data as the one above except expressed as percentage change:

The conclusion that I draw from this research is that it is in fact NOT true that "everyone wants to live here". If anything, it should be "everyone wants to leave here".

The question then becomes if people are leaving the county, who is buying their houses since they are probably not being razed? Speculators? Investors? You tell me.

Friday, March 24, 2006

Crazed Prophet

The Sacramento Land(ing) blog has a very nice and thorough review of the various real estate related blogs. Check it out as there are some that you might find interesting and that you might not already be aware of.

I spewed my morning coffee and laughed out loud when I read this description of that crazed fool Marinite:
The Marin blog's author, Marinite, reminds me of an Old Testament prophet crying in the wilderness, warning a willfully ignorant populace.
That's just too funny. But I think it pretty much fits for all bubble bloggers to varying degrees; I guess me more than others.

I am not oblivious to the fact that I have pissed off a lot of people by pointing out the various follies of the current real estate craze, questioning the sanctity of "God's country" (aka Marin County), asking some hard questions, and genuinely caring about the future of California.

So this post is for all you readers. Use the comment section to say whatever you want about me. Don't hold back any punches. I'm asking for it. And unlike other posts I won't delete any offensive comments. You have my word. Say what you want -- good, bad, ugly, whatever. Catharsis is healthy after all. Get it out of your system now and then we can move on.

Thursday, March 23, 2006

Affordability for Working Families Below What It Was in 1978

Sure, some people like to tout how home ownership is now at 70% "Yay for us! Isn't America just the best?" But what they don't tell you is this:
Nearly 70% of Americans own their homes, a record high, but the rate of homeownership for working families with children is lower than in 1978, according to a study being released Wednesday by the Center for Housing Policy.
It looks like you have to be white, making well in excess of median wages, and not have children to buy a house, especially in progressive California. Is this progress?

Housing Hangover

A reader sent in this link to this ABC video (thank you). The party is over for some, it's now the next day, and the hangover is killing them. Part of me feels sorry for them and part of me wonders "what did you expect?" I mean, everyone knew this was going to happen (rate resets), or should have known. People have been talking about it for a long time now. No one made you take out that "toxic" loan. And the frightening thing is that this is just the beginning; it's only going to get worse, foreclosures are up YOY, and the ripple effects of all of this will effect us all.

Wednesday, March 22, 2006

Early Mortgage Data Portends Big Slide, Mortgage Fraud

Check out the graph in this post over at the excellent BubbleTrack blog -- pending mortgage data suggests a steep slide to come.

And Athena at the Sonoma Housing Bubble blog has a very, very informative post on mortgage fraud.

A New Blog

Here's my new favorite blog. Lots of food for thought.

On who is buying our debt and propping up this housing bubble (the usual answer is China):
Who's snapping up all the hundreds of billions of U.S. Treasury bonds which get auctioned off every quarter, And why are they plunking down such vast sums of real money for such lousy returns?

Let's start by asking, who has hundreds of billions of dollars accumulating every year? China? Nope. Japan? Nope. Europe? Nope. Russia? Nope. The Mideast Oil Exporters? Bingo!

...why are the Mideast oil barons buying American bonds? If the U.S. economy goes into a tailspin, the price of oil will plummet along with it.
On housing appreciation:
Q. What was the median price of an American house in 1996,
and in 2005?
A. The median price of an American house in 1996 was $140,000. In 2005, it was $234,000.

Q. If housing had only risen with inflation (26% total since 1996), what would the median house price have been in 2005?
A. The median house price would be only $176,000.

Q. Inflation has risen a total of 26% since 1996; by what percentage has housing risen?
A. The median house price has risen by 67% since 1996.
On the likelihood of a recession following the current housing bubble:

Frankenstein Economy

Welcome to the Frankenstein Economy. Both humorous and informative. Lots of graphs and charts. Too much to quote.

Proposition 13 and the Housing Bubble

Proposition 13 was a very bad idea (in hindsight) for all the right reasons. It is a significant factor that contributes to the very high cost of housing in California. Proposition 13 lessens the willingness to sell thereby decreasing the housing supply and, when combined with California's strict environmentally-based zoning restrictions, which further limit housing supply, is it any wonder that we find ourselves in the current mess?

The aftermath of Proposition 13:

Proposition 13 has greatly benefited homeowners whose homes have appreciated in value since it was passed, particularly those (such as the elderly) whose incomes have not risen as fast as property values. In cities with many older residents, this has led to a severe shortage of affordable housing, since new developments must often be far above the state's median home price in order to provide enough tax revenue to pay for the services they require. Impact fees have offset this problem somewhat, but are limited by developers' ability to go "jurisdiction shopping" for localities with low impact fees.

Owners of commercial real estate have also benefited: if a corporation owning commercial property (such as a shopping mall) is sold or merged, but the property stays deeded to the corporation, ownership of the property can effectively change hands without triggering Proposition 13's provision that fixes the amount of tax based on the property's resale value. Since many properties are nominally owned by shell companies whose sole assets are the properties in question, this has led to situations that have struck many commentators, such as Steve Lopez and Michael Hiltzik of the Los Angeles Times, as absurd and unfair. For example, the Times has reported that the property tax bill of the historic Capitol Records building in Hollywood is approximately five cents per square foot, while a small house assessed at $300,000 may pay up to 60 times that on a per-square-foot basis. Critics of Proposition 13 have argued that this situation unfairly benefits commercial property owners and should be changed, but recent attempted ballot initiatives have not succeeded in altering assessment formulas.

Proposition 13 has hurt mainly immigrants and young upwardly mobile workers in California. Because Proposition 13 is a disincentive to sell, there is less turnover among owners near the older downtown areas, and prices have appreciated fastest in these areas. Young people who would be wealthy in other states are house-poor in California, and are forced to live tens of miles from their workplace in order to afford a home. Thus, the Proposition can be seen as a "transfer tax" from the working classes to the retired class, as retirees are subsidized and the young have less working hours in their day because of long commutes. Immigrants are another class of losers under proposition 13, since they come from other states where property taxes are higher and their real estate equity buys less in the California housing market.

Imaginative strategies have been necessary for localities to compensate for Proposition 13 and the state's loss of most property tax revenue (which formerly went to cities and counties). Most California localities have recently sought their voters' approval for "special assessments" that would levy new taxes earmarked for services that used to be paid for entirely or partially from property taxes: road and sewer maintenance, school funding, street lighting, police and firefighting units, and penitentiary facilities. Sales tax rates have skyrocketed from 5% (the typical pre-Prop 13 level) to 8% and beyond.

California localities have taken measures such as using eminent domain and "redevelopment" laws to condemn "blighted" residential and industrial properties and convert them into sales tax generators such as shopping malls, multi-dealer "auto malls," and strip malls anchored by "big-box" retailers such as Costco and Wal-Mart. Cities that have been notably successful with this strategy include Cerritos, Culver City, Emeryville, and Union City. However, the spread of big box retail is credited as another major factor behind California's severe housing shortage, as cities have routinely rezoned vacant parcels and "blighted" neighborhoods for retail in an attempt to increase their share of the sales tax pie. With developable land made scarce by open space preservation laws and by the resistance of single-family homeowners to up-zoning, the resulting market pressures have led to urban sprawl that has brought formerly rural areas like the Antelope and northern San Joaquin Valleys into the urban areas of Los Angeles and San Francisco, respectively.

Some commentators have said that cities no longer control their own property tax revenue, and even claim Proposition 13 has exacerbated city-suburb class and racial tensions in California, particularly in Los Angeles. On talk radio and in other venues, working- and middle-class white and Asian residents of the conservative San Gabriel Valley often complain that the city of Los Angeles "steals" their tax dollars and funnels them into impoverished black and Latino districts.

Should Proposition 13 be repealed? If so, what should replace it? There are other states in this Union that do not assess property tax; how do they do it and still provide for public services? Post your thoughts. Write to your representative.

Personally, I favor a flat tax on all residents that has nothing to do with the value of a resident's property combined with tax exemptions for the folks that Prop 13 was designed to protect. But that's just me.

Tuesday, March 21, 2006

Renting as a Form of Arbitrage in Today's Market

A poster over at Ben Jones' blog made this rather articulate point. I thought it deserved repeating and commenting on by the intelligent readership on this blog:

I see renting in the current market as a profitable arbitrage opportunity. Arbitrage opportunities arise when market inefficiencies exist: apples are selling downtown for $1/lb and uptown for $1.50/lb An arbitrageur can make a risk-free profit of fifty cents per pound by buying downtown and selling uptown.

The same can be said of the rental market. In an efficient market, the cost of renting closely approximates the cost of owning, with some nominal premium on ownership for tax benefits, pride of ownership, etc. However, when the price of ownership deviates from that of renting by as much as 100% or more, there’s an opportunity to profit from the price imbalance. My rental unit costs $2300 to rent and would cost approximately $4500 to own. My landlord is actually paying me roughly $2000/mo to live here (allowing for an ownership premium) by continuing to rent the unit rather than selling it out from under me (yes, he bought the unit for much less than the current going-rate, but he incurs an opportunity cost by not selling for a profit and investing the proceeds elsewhere). I take that $2000/mo and invest it in the stock market, where the long-term gains are much better than in real estate. It’s really a great opportunity. Where else can you get $2000/mo risk free just by occupying a building?

Social Darwinism and the Housing Bubble

A comment left by a reader in a previous post got me thinking and suggested itself as this rather unconventional blog post:

One reader said (and I paraphrase) 'one way people are able to afford houses these days in California is by choosing to not have babies or else having babies later in life when fertility becomes questionable'. Another reader then responded to this saying "So what is wrong with that? Darwin in action IMO!"

Now I know I got grilled pretty dang hard for once saying that if people knowing get a loan that they cannot really afford and subsequently find themselves "underwater", then they get what they deserve. That was a rather darwinistic thing for me to say.

So, is social darwinism relevant in today's housing bubble? If so, are we under no obligation to help people by trying to constrain this and future housing bubbles? Should the free-for-all market be allowed to run its course no matter what the consequences? Is appealing to social darwinism a form of denial and avoidance?

And are you more fit if:
  • you can afford these crazy loans?
  • or you cannot afford these crazy loans, you know you cannot afford them, and you therefore choose to rent?
  • or you sell and/or choose to save your money and rent (even though you can afford to buy) when everyone else and their brother is buying, and then buy when everyone else is selling?
Are you unfit if:
  • you get a loan that you cannot really afford and at some later time find yourself "underwater"?

"I'm eating ramen and PB&J every day, but at least I have a house"

That quote just says it all, doesn't it? It so well defines the term "house poor" which characterizes today's California.

Anyway, I was doing a little research regarding what percentage of people's incomes are now being spent on the mortgage and I came across this article from way back in August, 2005. It's still fresh.

Is this an accident waiting to happen? Or does it even matter; is living in the Bay Area just so wonderful that it is worth giving up living?

Some choice quotes:
The housing market is red-hot in the Bay Area. So, who's buying those pricey homes -- and how are they able to do it? The answers: Young professionals. Riskier loans. Longer commutes. Smaller houses. And, in some cases, a lot of peanut butter and jelly..

With Hayes Valley condos selling for $750,000 and Livermore tract homes fetching $1.3 million, the question is on everyone's lips: Who's paying these stratospheric prices?

The answer, increasingly, is young professionals who are devoting exorbitant portions of their incomes to housing, according to a new study.

"It's painful, more painful than I thought it was going to be," said Kris Crichton, who bought a $640,000 condo in San Francisco's SoMa neighborhood using $50,000 in equity from a home she owned with her former husband and an interest-only loan for part of the mortgage. "I'm eating ramen and PB&J every day, but at least I have a house."

Recent California homebuyers are finding novel ways to stretch into the nation's most expensive real estate market, including taking out riskier adjustable loans, leveraging existing equity, and choosing smaller homes and longer commutes, says a study released today by the Public Policy Institute of California in San Francisco.

...1 out of every 5 recent California homebuyers is spending 50 percent or more of his or her income on housing costs -- twice the national average (the study defines recent home buyers as those who purchased homes in 2002 and 2003). Though 2004 and 2005 data were not available to include in the study, Johnson said the percentage is likely even higher today.

Increasing numbers of both trade-up and first-time buyers in the state are allotting a fat chunk of their incomes to their house payments. Although the U.S. Department of Housing and Urban Development recommends that households pay no more than 30 percent of their incomes on housing costs, 40 percent of all households in California with mortgages and 52 percent of the newest home buyers exceed that threshold. In the Bay Area, 44 percent of recent home buyers dedicated 30 percent or more of their household incomes to homeowner costs, which include mortgage, real estate taxes, insurance, utilities and condo fees, the study said.

Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.

In the Bay Area, the percentage of mortgage-paying households that exceeded the recommended housing/income threshold in 2003 was more than 40 percent, an increase from the year 2000.
Be sure to look at the tables of data.

I think that in a few years we will look back at the situation described in this article and just shake our heads in wonder.

Monday, March 20, 2006

It'll Never Happen Here

People in California are so squeezed by California's crushingly unaffordable housing that they are even unable to buy earthquake insurance. Earthquake insurance! You know, there IS a reason why it's called "earthquake country". So you agree to pay a ludicrous amount of money for your PoS house, more money than you will ever be able to repay, and you don't insure it against a disaster that is sure to happen? I mean, seriously, what the heck is wrong with you people?
When Charlie Bott got an offer in the mail recently for earthquake insurance, he stared long and hard at the bottom line. Then he threw it away.

"It was way beyond anything you pay for house insurance. Not even in the same league," said Bott, a nuclear engineer with a baby on the way.

Now, like millions of others, he's hoping the Big One doesn't strike — or if it does, the government will come to the rescue.
But no worries, right? I mean you can always just walk away from the loan, right? Think again.

So you are stuck with a mortgage you could never really afford and you are now "underwater" and you can't just mail in the keys. So what do you do? Why, what any good, red-blooded American does these days...borrow more money of course:
When new bankruptcy laws took effect last October, adding time and expense for consumers seeking Chapter 7 protection from their debts, mortgage broker Equity Concepts saw an opportunity.

Bankruptcy law now requires debtors to undergo a means test to qualify for Chapter 7, which shelters them from creditors. If they fail the test – designed to gauge their ability to pay creditors – debtors must file for bankruptcy under Chapter 13 and, therefore, submit to a repayment plan.

So, Cranston-based Equity Concepts launched seven weeks ago, offering loans to debtors who would fail to pass the means test for Chapter 7.

Sunday, March 19, 2006

Price Reductions in Marin According to ZipRealty

I've been tracking the number of properties in Marin that flags as "price reduced". ZipRealty started this new service back in late January or so and that is why the data is so far rather sparse.

The first graph shows the total number of properties marked as "price reduced" and the second graph shows the corresponding percentage.

I don't think any strong conclusions can be made at this point; I just wanted to make the data available.

A Recent Ad for a Luxe Condo

A reader sent me this ad (thank you!) -- "It's offering to rent a unit that was clearly renovated to sell as a luxe condo". I love the lines about it 'being better to rent now and wait for the bubble to burst since it is impossible to buy' and asking to state what you (the renter) can actually afford:

perfect for the loving couple
give your loved one the perfect home he/she has always wanted
prices of single homes have skyrocketed to $850,000 after closing
interest only mortgage payments close to $4250 mo. ((850k*0.06)/12)
it is impossible to buy, so why not just rent for around 1/3 the cost
get the luxury now, save some money and buy when the real estate bubble bursts.

... [snip photos]...

$5,000 to move in.

Please contact us by email.

When emailing, please include your full name, address, phone number and cell phone number. Also state your current housing situation, work location, credit score, number of people moving in. If you are unable to pay the full rent or deposit, please state what you can afford. Thanks.

Thursday, March 16, 2006

More On February, 2006's Sales Results for Marin

DataQuick is reporting that the median sales price for properties in Marin County is up 10.1% year-over-year for February:

Vision RE, on the other hand, reports that the year-over-year median sales price appreciation is 2.3% for SFRs and -0.3% for condos:

For total sales (SFRs and condos, using Vision RE's "Recent Sales" listing) median sales price appreciation in Marin is down about -5%.

I like using Vision RE's data because there is so much of it and it spans a significant period of time; it is a terrific data source. So I was wondering why calculations based on it differ so much from that of DataQuick (also, because the Marin IJ seems to rely on DataQuick's data and so understanding the reason for the discrepancy might prove insightful). So I asked someone over at Vision RE what might be going on. He didn't really know where DataQuick gets its data or how they do their calculations but he did have this to say:
The recent sales by city is not the entire Marin county, but the selected cities that we track on a monthly basis.

We are confident that our numbers are coming directly from the Marin MLS sytem and of course have no idea where dataquick is getting the numbers form.

Lastly , we show 145 total sales of condos and single family homes compared to their [i.e., DataQuick's --Marinite] 207 sales. We don't include anything that's not in the MLS such as new construction not sold on the MLS ( those sold through direct sales agents for the developer) and FSBO's. Also, we exclude from the MLS: farms and houseboats
So my calculations and those of Vision RE are in good agreement. But I don't know what to make of DataQuick's calculations.

So I want to ask you readers: Should I continue to track median sales prices for Marin in this way? If not, what better alternative should I use?

Don't Count on the Fed to Bail You Out?

The Fed has now gone on record in no uncertain terms as saying that it has no intention of protecting the recent gains in housing price values should markets collapse. There you have it folks. (This shouldn't be too surprising given the warnings Greenspan has made but it is rather ironic given that Greenspan also encouraged the heavy use of ARMs.)

Or, is this just the sowing of doubt required if a "Lender of Last Resort" (LLR) is to hope to be successful? A LLR is a body that has access to massive amounts of liquidity and which will apply that liquidity during the collapse following a speculative frenzy so as to "bail out" the large number of investors who would otherwise suffer huge financial losses. To be effective, the LLR must both provide that liquidity when needed and also make investors believe that it is extremely unlikely to provide that liquidity when needed; the mere knowledge that the LLR will "come to the rescue" has the counterproductive effect of spurring on the frenzy.

Only time will tell.

Some choice quotes:
The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday.

"If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,' Kohn said in a speech prepared for delivery to a European Central Bank forum in Frankfurt, Germany.

In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise.

"The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions," Kohn said.
Here is the actual text of Kohn's remarks.

Wednesday, March 15, 2006

Appraisal Fraud - A Reader's Comment

A mortgage loan officer and a reader of this blog sent me this email regarding appraisal fraud which I found interesting; he gave me his permission to share it on this blog. So here it is in its unadulterated entirety (although I did remove his place of employment and contact information from his signature):

Thought you would be interested to read this. Among all the investigations of appraisal fraud and fraudulent activities and title companies, the FBI is striking out bad on their fraud investigations. Stated income loan fraud is so wide-spread in areas of the East and West coast, there are actually mortgage brokers who openly admit to doing it. I myself am a broker and am subscribed to an industry internet message board at I posed this question: "What causes you to use a stated income loan program?". The following are some of the answers I received:

Quote: "boarder income..."

Quote: " Another reason is the wife or husbands credit is garbage"

^^^ That would imply that they are stating the spouse's income that is not on the application as the income that the spouse who IS on the application receives from their employment. Fraud.

Quote: "I write them all the time. Often if the wife has a higher credit score and less income."

^^^ Same deal. Using income from a borrower that is not on the loan application to qualify the loan.

Quote (in response to me saying that the previously mentioned activities are fraudulent): "You are getting confused. We aren't using the co-borrower's income for the borrower. You can "state" the income for both borrowers. Stated Income does not mean we are making John Doe who works at Burger World suddenly make $125,000 a year. Nor are we making someone unemployed suddenly employed. The employment is still verified, the income is not. And yes, it is legal and there isn't anything unethical about it."

^^^ Simply amazing. Basically, this loan officer was implying that he can put whatever income he wants on the loan application, as long as he verifies the person works at the place of employment they claimed. Apparently, he believes that their actual level of income is irrelevant. Fraud.

This was my response:

"Have you read the little print on the 1003 right above where the borrower signs? You do understand that is a federal document, correct?
The FBI or DoJ investigators must just jump with glee every time they log into this website."

Now, here is my point:

These people are so naive, crooked, or comically misinformed that they are actually posting this on a PUBLIC internet forum! Considering the fact that there are actually enough mortgage companies participating in this that they have LO openly discussing it on an internet message board, how many "smart" crooks do you think there are that DON'T discuss it?

The following is an article I wrote on the state of mortgage fraud in the world of mortgage brokers. Somebody had better stop this stuff, fast:

Rough times ahead for people who bought houses at inflated prices:

This is a bit of an elaboration on the consequences that some individuals in certain sections of the nation are about to experience as the result of fraudulent loan activity and property values that are overly inflated:

Stated income mortgage fraud.

You can bank on the prediction that stated income loan programs will be the subject of massive federal investigations in the coming months and years. In a stated income loan program, the loan officer takes the loan application, and puts the income the client says he makes on the application. The bank does not verify that income. Instead, the bank simply approves the loan based on the word of the loan officer and loan applicant.

How does it get abused?

When a borrower can't afford to buy the house because their debt ratios are too high, an unscrupulous loan officer says, "well, gee, Mr. and Mrs. Borrower, if I put you in this stated program, we can say that you make any income that we want!" At that point, the loan officer puts in some arbitrary number that is supposed to be the amount of money the borrower makes every year. Instead, it's the amount of money that the application needs to show to make the debt ratio fall into the range that makes the loan approvable.

The worst part is, a BUNCH of lenders have this program and it allows you to borrow 100% of the purchase money for the home. So now, the borrower is not making a down payment, has no equity in the home, and they have been convinced by the loan officer to sign a fraudulent loan application so that their debt ratios will make the loan "work". Incredibly, loan officers will openly admit that they practice this in expensive markets on the east and west coast.

Apparently, they do not realize that a mortgage loan application is an official Federal document, and lying on it makes you subject to jail time, huge fines, and other penalties. Additionally, unscrupulous loan officers have made statements similar to this: "Hey, I didn't realize they were lying, it's not my fault!" Give me a break. Just who do you think the Federal Government is going to pursue in these fraud cases? The little borrower who claims "I was just doing what the 'professional' said I could" or the loan officer that pleads ignorance about the borrower's financial situation. The entire situation can be compared to negligence suits where an individual's irresponsible actions (in this case, the loan officer either "coaching" the borrower on what income needed to be shown on the loan application or otherwise not properly investigating a borrower's income) results in harm to others. That individual pays fines, goes to jail, or is otherwise punished. If loan officers think they are going to be immune to this, they are kidding themselves.

Here are the original purposes behind the stated income loan program:

If you are dealing with a borrower that has maybe been working a side-job for the last couple of years doing lawn care, and they get paid entirely in cash, but never document that income, this was supposedly a way to use that income to qualify the loan. Of course, it begs the question: "Why wasn't this person reporting this income on their taxes?" Additionally, if you had a borrower that was working on a job where most of the income came from tips, such as a hair-stylist or restaurant worker, this was supposed to be a way for them to document their cash income from tips. Yet again, the question arises: "Why aren't they reporting it on their taxes?”

If you are a borrower who is self-employed and has very strong credit, trying to document their income from the business they own can be difficult. If they claim large amounts of deductions on their taxes, a traditional loan must be qualified on the income AFTER deductions. The stated program was intended to allow you to use the income level BEFORE the deductions.

If you are a borrower that has income coming in from all over the place, and very strong credit history, you can simply elect to do a loan that has reduced income documentation to save you the time of verifying 5-10 different sources of income.

The purpose of stated loan programs was never to artificially inflate a borrower's income, but that is what is happening. On one popular internet discussion forum for loan officers, the discussion at that site on this issue is mind-boggling. There are loan officers on there who outright admit that they use stated income programs to exaggerate income, because they claim that without them, they could never approve anyone for a loan in expensive areas. That raises more questions.

Do these loan officers understand that the FBI regularly reads that site, and that just because an agent isn't knocking on their door with a search warrant today hardly means that they are immune to prosecution in the future. A lot of mortgage fraud cases take a long time to investigate. At this site: you can read about some of the cases of fraud that have been uncovered in recent years. They are very complex, but are also easy to uncover. It is stunning that individuals actually believed they could get away with some of this stuff.

I wonder if the loan officers understand that part of the reason that housing prices exploded to ridiculous levels in the last few years is because of the ease of obtaining credit to purchase homes. When credit is easier to obtain, more people can qualify for the purchase. When there is more demand, prices are higher.

Potential long-term implications of fraud:

Part of the reason for the rapidly appreciating property values we have seen in the last few years have been historically low interest rates and loan programs that make it possible for people to purchase homes that they have no business purchasing, when taking their income into account.

What do you all think is going to happen when easily defrauded loan programs start to disappear and interest rates continue to rise?

First, houses are going to be a tough sell, because they are going to be unaffordable until prices adjust in a downward direction to a level that makes it realistic to buy them. Loan programs that allow easy approval of loans for people that otherwise should not be able to afford a house are about to disappear.

Second, when the values shift downward, you are going to have these “home owners” who were put into incredibly bad loan programs, didn't make a down payment, and can't afford their house payment. When they try to sell the depreciating property, they aren't even going to be able to pay off their mortgage in its entirety. If they don't pay it off, then the next buyer can't finance the purchase.

As a final slap in the face, people that are in terrible loan programs such as an adjustable-rate mortgage in which they lack equity to refinance will be faced with increasing payments that they cannot afford. Since they can't sell the house to get out from under the mortgage that they can’t pay, they will just foreclose. That translates into a massive loss for the banks, which means further evaporation of bad mortgage programs and tightening of requirements on existing programs (if we're lucky).

In a strange sense of irony, all of the foreclosures will actually result in housing that may once again be affordable. It's an interesting cycle.

Hope you have time to read all of this.


Matt Norris

Matt Norris
Mortgage Loan Officer

Tuesday, March 14, 2006

Marin February, 2006 Results - Part II

Here are the charts for total sales in Marin County (includes February, 2006 data) based on the data from Vision RE (was West Bay RE...whatever). Refer to this earlier post to read what Vision RE had to say about the February, 2006 data. Click on an image to get a larger view.

January Results for Marin Care Of the Marin Assessor's Office

The Marin Assessor's Office has finally updated their housing info; it only goes to January though. So, here are the January year-over-year results (January, 2001 to January, 2006) for Marin County.

The first graph shows median prices for total sales and the second graph shows median prices for SFRs.

It's the Economy, Stupid

For those of you who like to believe that the job market is just fine, here's some food for thought. Apparently, the disparity in pay between the highly educated and the not-so-highly educated is narrowing.

Some choice quotes:
The evidence is in a new Fed study of family finances, the latest in a triennial series. It shows modest but clear signs of incomes converging rather than diverging. Between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20 percent of families increased while incomes of the richest 20 percent fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank. Incomes became just a little less unequal.

What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing...the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually declined 5.2 percent, while those of high school graduates, strangely enough, rose 1.6 percent.

The other main possibility is that something unexpected and fundamental is changing in the way the U.S. economy rewards education. We don't yet have complete data, but anyone with his eyes open can see obvious possibilities. Just maybe the jobs most threatened by outsourcing are no longer those of factory workers with a high school education, as they have been for decades, but those of college-educated desk workers.

Perhaps so many lower-skilled jobs have now left the U.S.--or have been created elsewhere to begin with--that today's high school grads are left doing jobs that cannot be easily outsourced--driving trucks, stocking shelves, building houses, and the like. So their pay is holding up.

College graduates, by contrast, look more outsourceable by the day. New studies from the Kauffman Foundation and Duke University show companies massively shifting high-skilled work--research, development, engineering, even corporate finance--from the U.S. to low-cost countries like India and China. That trend sits like an anvil on the pay of many U.S. college grads.

Because our best-educated workers are earning less, and the incentives for higher education may thus be declining, the result could be a more uniform--and lower--standard of living. Be careful what you wish for.
And here is an article showing that roughly 25% of all electrical engineering jobs have been lost since 2000. That's not too surprising (at least in the Bay Area) but the consequences may be worrisome:
Declining employment can be as worrisome as increasing unemployment. The economy can still benefit from an unemployed engineer who has taken a non-engineering job. But when an engineer leaves the profession, those high-value skills may be lost for good.

Monday, March 13, 2006

Paying for Other People's Lifestyles II

This fits in with our recent discussions on this and the Sonoma Housing Bubble blogs about living beyond our means. Check out this post over at the Housing Panic blog. We borrow money to "buy" a house, do a cash-out refi so we can buy stuff we cannot otherwise afford, someone else borrows more money and buys our house thereby rewarding us for a lifestyle we couldn't afford in the first place, and on it goes. Wages are practically stagnant. Job growth is pathetic (especially when you consider the quality of the jobs vs. the lost jobs they are replacing). Savings are negative. We're borrowing the money to buy the stuff we really cannot otherwise afford. Try this on for size if you are still skeptical (or this).

Is this really prosperity? How long can it continue or should it continue? When will the piper be paid and by whom? At some point people are going to be trapped by those million dollar mortgages that they will never be able to get out from under. It'll be like a "ball and chain" of debt and cash will be king (again).

Check out this graph:

Sunday, March 12, 2006

Appraisal Fraud - "We See it All the Time"

I found this article referenced over at Ben Jones' blog. I've been avoiding dealing with appraisal and lending fraud but now more and more people are coming out and admitting to an industry steeped in fraud. It's all about the refi and living beyond one's means. This cannot end well.

Some choice quotes:
“Not a week goes by that appraiser John Meyer does not get a request to ‘hit the number’ on a home’s value to ensure a loan goes through. ‘I had a guy from New Jersey last night call, and he wanted me to do the appraisal if I can assure him I would hit $800,000,’ Meyer said recently. ‘I told him I couldn’t do that.’”

“Walker appraiser Fred Vander Wal has similar stories. ‘I had two last week screaming at me about what they wanted me to do,’ Vander Wal said. ‘It was a 7-year-old home, and it was just trashed, holes in the walls, carpeting all ruined. They said, ‘They’re not going to loan on this if that’s the real condition. Can’t you tone it down a little bit?’”

“That would be appraisal fraud, and Meyer said it’s ‘one of the primary problems out there.’ A recent example is the $325 million settlement by lending giant Ameriquest for what 49 state prosecutors call deceptive lending. Many of those allegations included inflated appraisals.”

“Marge Eppes believes her Holland home was subject to an inflated appraisal. In 2002, she was trying to refinance the loan on her 3-year-old, three-bedroom home at a lower rate. The appraisal came in at $148,000. Eppes said the mortgage company told her it was not enough to cover the refinance.”

“‘Two months after that, they sent another person out,’ Eppes said. ‘They said it was worth $175,000.’ The closing fell through for other reasons, and Eppes has since refinanced with another organization, but she was troubled by the difference in values.”

“Appraisers across the country say they are asked to do it. A recent survey by Ohio-based October Research Corp. found 55 percent of appraisers reported being pressured to overstate home values. ‘We get the requests all the time,’ said Meyer in Kentwood. ‘They say, ‘Unless you can come up with another $20,000 more, we’re not going to pay you.’”

“‘We run into it all the time,’ said Fred Skidmore, an associate broker. ‘They’ve refinanced within the past year and a half, and the refinance appraisal came out higher than what we’re able to sell it for today.’ To settle with their lender, ‘they’d have to come to the table with money,’ he said.”

“Remember the savings and loan debacle of the late 1980s that required a $200 billion taxpayer funded bailout? ‘A lot of appraisers were complicit in that,’ Meyer said.”

“Vander Wal said much of his business is reviewing others’ appraisals, many of which are problematic. He declined to name companies requesting them or the original appraisers for fear of losing business. ‘Out of the reviews I’ve done in 10 years, easily 95 percent of them had serious problems,’ he said. ‘They would overvalue the properties by 20 or 30 percent.’”

“‘We’ve reviewed some in which we looked at the appraisal, and everything looked right,’ he said. ‘We pulled the listing cards (with the sale information) and every one of the sale prices was inflated by $20,000 over what they really sold for.’ He did not know the motive, but the extra money may have given the owners some extra spending money or allowed a buyer to have a 100 percent financing on the house without the mortgage lender realizing it.”

Cash Will Be King

Well, here is an article in SF Gate that no one who reads this and other similar blogs should be surprised to read. It's nice to be seeing more and more of these sorts of articles in the mainstream media; late, but nice.

My eye caught on the statistic that in 2005 50% of buyers used interest-only ARMs. Sheesh! (I updated this post accordingly).

Some choice quotes:
"I don't want to be a Chicken Little," he says, "but it's gonna be bad for housing. It's a real threat to everything."

A financial consultant and former visiting scholar at UCLA's prestigious Anderson School, Talbott views the housing market as a house of cards on the verge of collapse. He predicts rising interest rates and plummeting property values, followed by widespread foreclosures that will not only affect the real estate industry, but almost every aspect of the economy.

"It's already started," says Talbott. "We've had 20 years of up, up, up with real estate. This spring will be brutal."

Talbott regards the latest data on the Bay Area housing market as mounting evidence for his prediction: rising interest rates, decreasing appreciation, 10 straight months of declining sales and, in January, the lowest number of sales in five years.

The problem, he says, is that home prices are way overvalued -- just as Internet stocks were during the 1990s before that sky collapsed. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property's true value.

"It paints a very scary picture," Talbott says. "Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you'll discover that, in real terms, housing prices were relatively flat until 1997 -- then (they) shot up about 70 percent."

Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant's salary to the mortgage payment. They're doing this, he said, without adjusting for inflation.

"So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they're never gonna get out from under."

To make matters worse, Talbott says, an increasing number of borrowers are taking out variable-rate and interest-only loans. According to San Francisco's, half of all Bay Area home buyers used interest-only loans to make their purchases last year. With so much of their income already relegated to their mortgage payment, says Talbott, even a small rise in interest rates will push many to -- and beyond -- their limit. For others, a divorce or job loss will spell financial ruin.

Because of the above factors, Talbott predicts a wave of loan defaults and foreclosures. Bank presidents will be fired for making so many risky loans. The new presidents, wanting to clean up the mess, will unload the properties at a loss, perhaps for 40 to 60 cents on the dollar. This will flood the market and deflate home prices further.

And then, according to Talbott's prediction, the financial impact will, like an especially vicious virus, spread. First, the real estate industry will falter. Then, industries tied to real estate -- including banking, construction, home supply stores -- will be hurt.

People should protect themselves, Talbott says, by divesting themselves of any investments in real estate, including stock. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for awhile.

"And after this mess," he says, "cash will be king."

Saturday, March 11, 2006

Marin February, 2006 Results - Part I

Well, it looks like Marin buyers are maybe, just maybe starting to wise up. Yes folks, you buyers have the power to dictate this market if you choose. You have had this power all the time. Now it's time to flex your muscles. YOU have the money so YOU have the control. It's about time things were in your favor. Now is the time to screw all of those greedy sellers who for the last few years have been screwing you. Go re-read the previous post on this blog. Get angry, get worked up, and demand that 15% price reduction and stick it to the sellers. Do you really want to pay for the lifestyles that they (the sellers) couldn't afford in the first place? It's pay-back time.

Here is what West Bay RE has to say about February, 2006 results in Marin. But basically, in summary, the only things selling are the extremely nice houses or the houses that are so marked down in price that buyers cannot resist; pretty much everything else is not selling. The double-digit price appreciations are history. We are now in a long, long overdue buyer's market. And the best part is that it is only going to get better (for buyers, that is).

West Bay RE seems to have just changed their data format, now making it impossible to do year-over-year comparisons (unless that data is now hidden somewhere else on their site). Fortunately for us I still have their data and I will post the graphs later as they will put things into proper perspective. But for now, here is what West Bay RE has to say about February, 2006:
Do you remember your first junior high school dance? The girls stood on one side of the gym, the boys on the other. The teachers cajoled the boys into asking a girl to dance. A few boys made the move, and soon there were a few boys and girls dancing in the middle of the basketball court. That's what the real estate market is like in Marin County right now. The only difference is you have to pay for this dance.

Sellers are on one side with their houses all prettied up waiting for buyers to come make an offer. Buyers are on the other side looking, looking, looking. Buyers are now bringing magnifying glasses with them so they see every detail of the home. No longer are buyers rushing in to dance. They are sizing up the playing field and then choosing. If they don’t get the first dance they just wait for another.

This behavior is perfectly normal when the market turns from sellers to buyers: sellers can't believe the double-digit gains of yesteryear are over, while buyers can afford to stand pat. In fact, the only property selling right now falls into three categories:

1. very high-end property; Over $2,000,000

2. excellent properties that are priced right at, or even a tad below, the market; and,

3. the homes of people who have to sell now.

The market is in transition The transition is causing confusion. That's perfectly understandable. . Even most of the real estate agents who do this for a living are not sure where the market will be going. They are waiting to see what the buyers are going to do. Sellers' have been enjoying themselves for the past few years and, as we transition to a more balanced market, they will have to adjust their expectations. Buyers', on the hand, are sitting on the sidelines waiting to see if this transition is the beginning of the big "bubble", we don't think so
[of course you don't think so; it's not in your commission-based self-interest -- Marinite].

Prices have come down about 8-9% from their peaks reached last summer. During 2005 Marin County saw an average price increase in ingle family homes of 16%. But, as we've mentioned repeatedly, like every month at the end of this report, the real estate market is very hard to generalize. It is a market made up of many micro markets, both geographically and in price range. Just because the median price for homes has fallen doesn't mean that well-priced, fabulous home on the corner will go for 8-9% less than the selling price. That house will still go for close to asking price with, possibly, multiple offers [yes, as long as that asking price is reasonable -- Marinite].

The median price for single-family homes in Marin County rose 6.4% to $926,000 in February from the month before, a year-over-year gain of 2.3%. Home sales fell 19.1% from the month before, and were off 14.7% year-over-year.
This is neither a "buyer's market" nor a "seller's market". At this stage in the game it is a fool's market. Now we find out who the biggest fools are.

Paying for Other People's Lifestyles

She really is a goddess. Athena of the Sonoma Housing Bubble blog has a fresh way of looking at the current housing mess that we find ourselves in -- a reverse Ponzi scheme:
Instead of the person at the top making all the money and the people at the bottom doing all the work... the people at the top of the homedebtor pyramid scheme are spending all the money... and the last fool on the mortgage train gets the biggest pile of debt disguised as a market priced house. It is NOT market priced. It is debt priced.
She then points out that people are using their houses like ATMs, extracting equity to pay for things that they cannot afford...paying for a lifestyle they cannot afford. Then, they put their house on the market which in effect is an attempt to lure some bigger fool to buy their house and thereby pay for the lifestyle that they, the seller, have come to expect and which they could never afford in the first place:
These posers finance the lifestyle they have become accustomed to by putting it all on the house... and big fool buyer comes along and pays for it. When the fools catch on that the house price isn't actually a reflection of its value in the market, but merely a reflection of the spending habits of the previous owner... how long before THAT reality repulses the buyer? What happens to the overspending fools living under a mountain of debt they never intend to pay off then?

Oh and just think about how happy the new owners of your debt with a roof will be when they are burdened with the payments for the lifestyle you enjoyed. Do you think there will be a backlash against the whole darn industry then? You think buyers will keep lining up to take your debt hand off when the reality hits them?
Like she said, it's as if people are maxing out their credit cards and then selling them on eBay to the highest bidder. "And there really are idiots out there shopping for someone else's debt. Appalling".
this hog like sense of entitlement is the only reason real estate has gone up in such horrifying numbers... it isn't a reflection of prosperity of a community. It is not a reflection of a booming economy, or job growth, or anything fundamental to the economy... it is nothing but slapping a price on the lifestyle your neighbor mortgaged himself into... I think the big fat fools should start looking at it for what it is...
Appalling indeed.

So all you potential Marin buyers out there (or anywhere else for that matter): are you a sucker? How do you feel about financing someone else's lifestyle that they could not afford in the first place? Do such people deserve to be rewarded for living beyond their means? Wouldn't it be nice if such people were held accountable for their debt? Well you, buyer, have that power: always insist on a 15% minimum price reduction on whatever house you want to buy. Given the current across-the-board weakness in the markets this is quite doable. Not only will you get the house for less, but the seller may very well have to actually pay for their lifestyle.

Keep it up Athena!

Thursday, March 09, 2006

Curbed SF

Since they are linking to this blog, I'd like to extend the favor: There is a new Bay Area real estate web site called Curbed SF. Check it out.

Wednesday, March 08, 2006

Flipagain’s Isle

Found this over at Ben Jones' blog:
“Flipagain’s Isle”

Just sit right back and you’ll hear a tale,
a tale that’ll make you sick.
It started back when everyone,
was buying homes to flip.
It started out okay you see,
the Flippers brave and sure.
Five condos they would buy one day,
their riches were assured, their riches were assured.

The market started getting rough,
they could not sell at cost.
If not for the folly of the greedy fools,
Their cash would not be lost, their cash would not be lost.
The price hit ground near the floor and yes,
they choked on their own bile.
With Flipagain, and the Lenders too,
The Realtors, and their lies.
The Groovy Cars, the Plasma Screens and the Get Rich Dreams,
Here on Flipagain’s Isle!

Tuesday, March 07, 2006

The Bay Area's Debt Bomb

I've been wondering how prevalent are "exotic" loans in Marin. Well, I'm still wondering. But Athena of the Sonoma Housing Bubble blog did a little poking around and came up with these references that do include Marin (thank you!).

This article from June, 2005 takes a cautious look at "exotic" loans and places the market share of these loans at around 66%:
Housing markets across America have been booming for quit some time now, yet people are still rushing to get on the property investment bandwagon for fear of being left behind. In this clamor for closings, many of these Johnnie-come-late-lies are allowing themselves to be blinded by reason and they are accepting mortgage terms that could one day come back to haunt them.

Two out of every three San Francisco home purchases are now being financed by interest-only loans, and Marin, San Mateo and San Jose are right on their heels. Nationally, a third of all loans granted last year were interest-only mortgages. It's no wonder that we may soon see a crisis.
This article from August, 2005 claims that "exotic" loans were just 2% of the market in 2001 and jumped to 50% by 2004:
Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.
This article, also from August, 2005, puts a very positive spin on "exotic" loans and says that they are a good thing because of the high cost of housing in the Bay Area. Hmm, but I have to wonder: how much has the increased popularity of these loans actually caused the escalation of housing prices? Sort of a chicken-and-egg thing. Anyway, apparently by 2005 "exotic" loans occupied as much as 70% of the market:
So, this new demon, interest only loans, is what has allowed almost 70% of buyers in San Francisco, Marin and San Mateo to afford homes.
And then there is this one from May, 2005 that also puts it at 70%:
[Interest-only loans] accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004, according to data compiled for The Chronicle by San Francisco mortgage research firm LoanPerformance, a unit of title giant First American Corp.
So, to sum up:
2001: 2%
2002: 18%
2004: 50-59%
2005: 66-70% (50% were IO ARMs according to this)
2006: ?
Is it any stretch of the imagination to suppose that "exotic" loans make up about 80% of today's market in the Bay Area?
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