It’s time for an update on the real estate bubble, which I have been watching since 2003. About a year ago, I laid out a timeline for the real estate boom. Knowing real estate happens in 16-year cycles, I juxtaposed the last boom/bust cycle in the early 90’s onto this cycle. Here’s what I came up with:
1990 (2007): Prices take a serious plunge. One article claims that housing booms are a bad thing and we should hope prices stay low. Increasing mortgage rates are blamed for the bust. The word “recession†is mentioned. Gloom and doom.
That’s next year. How many times do you think you will hear the words “looming recession†next year? More than you want to, that’s for sure…
Ah, yes. Recession, recession, recession… Yep, all over the news. Notice I called it a “looming” recession in my post last year. That’s because “A recession is traditionally defined in macroeconomics as a decline in a country’s real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative real economic growth).” (thank you, Wikipedia.) We won’t hit two consecutive quarters this year (or, if we do, it’ll be 2008 before we know we did.) I think the actual “recession” will start next spring.
2008 will be a disaster year for housing. Let me share with you a choice quote: “‘Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets,’ said Lawrence Yun, senior economist for the Realtors.” That’s from this article, published today and titled “Existing Home Sales Fall in 41 States.” Have a good, hearty laugh over that one. Prices are nowhere near “stabilizing.” Homes here have lost about 15% of their value since the 2006 peak. They still have a good 25% more to go down from here…and that’s probably a conservative number.
The proverbial **** has hit the fan here in California. You are no longer able to get an interest rate under 8% for a loan over $417,000. Take note of that number, because I don’t doubt that will become the subject of a heated political debate. $417,000 is highest rate at which Fannie Mae and Freedie Mac will buy a loan. Loans at or below $417,000 are called “conforming.” Loans above $417,000 are “non-conforming”. Since non-conforming mortgages are defaulting at shockingly high rates, and there is more risk associated with them in a market where prices are going down, interest rates have skyrocketed for those loans.
61.9% of the loans in the Bay Area in January-June 2007 were non-conforming loans.
That’s why this post is entitled “The Game is Over.” The jig is up — there’s simply no way more than half of the buyers who qualified for home loans in 2005-2007 in the Bay Area will now be able to afford loans. Add that to the people who can afford home loans, but don’t want to buy in a declining market, and you have a perfect recipe for huge price drops.
I don’t think we’ll begin to see huge price drops until this time next year. A year from now is probably the first point at which I’d recommend actually buying a house…no matter where you are in the country. Prices are dropping now, but they’ll drop more once all of the bad loans are squeezed out of the system. This is going to take a while. Sellers haven’t realized what happened…the bomb that just dropped. They’re still pricing their houses 10-15% below peak. It will be several months before housing prices adjust to this new reality. Don’t kid yourself…this is the new reality. Bernanke may drop the Fed funds rate later this year by 0.25% or 0.5%, but that doesn’t automatically mean that you’re going to be able to get a non-confirming mortgage at less than 8%. Those two things simply aren’t correlated. Mortgage interest rates are dictated by the market for mortgage-backed securities and what buyers of those mortgages are willing to pay, not by what the Fed dictates. Remember, in my chart I mentioned that it wouldn’t be until 2010 that houses truly became a bargain. Notice the quote from the early 90’s bust: “1993 (2010): It’s definitely a buyer’s market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980’s.” We have quite a way to go until we reach that point. We will get there, but it’s not going to happen more quickly this time.
I’m happy to wait things out. How are you doing? I hope you sold your house last year… we’ve passed the point of no return at this point, and it’s downhill from here for the next 6 years or so. I’m optimistic about all of this, though. Downturns are when the most amazing things happen… inventions get made, and people band together to help each other. Yes, it won’t be easy. We will be hit harder than we were in the dot-com boom. But opportunity always awaits.
By the way, if I could make a recommendation… invest in a growing country, and get out of dollars. Which country? That’s for you to determine. 
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15. August 2007 at 2:06 pm
I’m seriously feeling the hit of the real estate bubble at home. I got into a townhouse in the DC area 4 years ago. My fiancee did the same (albeit with a much larger down-payment). We’re getting married in April, and we’ll be selling two townhouses and buying a single family. Unfortunately, we’re looking at a non-conforming “jumbo” loan, just because of the cost of living in this area. And we’re only looking at houses that one of our salaries could afford! Because of the interest rate hike, we’ll probably have to use both salaries and then re-finance when we want to have kids – hopefully with more equity in our home.
15. August 2007 at 3:00 pm
Smart girl! Yes, it’s game over for the speculative mania in RE. Due diligence in lending is the new black, and no more “going stated” just because the borrower’s W-2 income isn’t high enough.
It’s gonna get real ugly this fall.
16. August 2007 at 11:23 am
I’m assuming I jarred your memory?
17. August 2007 at 12:08 am
The fallout from this mess is going to be huge. It goes far beyond real-estate to pretty much the entire financial sector along with things like heavy equipment makers and pretty much anyone who has been depending on easy consumer credit for their bottom line.
17. August 2007 at 5:24 am
I sold my home last quartr 2005. Put the cash in earning income.,it has paid my “rent” & saving for the last 2 yrs. Ive been living in a sweet camper…traveling & looking at re. its over priced thruout the us. bankers, brokers realtors (greedy thieves): its payback time..
17. August 2007 at 5:35 am
Could not of predicted it better. I am in the real estate auction game and that game is just beginning. With this mess people will have to turn to an alternate source in HOPES of getting rid of their houses, even that will be a tough hill to climb. Would be interested in your opinion sometime about how you see the auction industry and real estate coming together in the next 36 months.
17. August 2007 at 5:49 am
on the back burner: tax laws. with so many losing homes,(and maybe jobs?) tax base will dwindle, services cut down to the bone. crime rises. will (they?) resort to eliminating the $250m cap.gains tax break? taxes are going to have to go up at a time when we cant pay. and just when our infrastructures need repair. Il and IN. have already leased or sold their tollroads to foreignors with a freeze on tolls til 20??. who is responsbile for repairs during the lease period? and what then? they are selling leasing roads that WE PAID FOR. The audacity of the situation makes my stomach sick. we need to be more informed. they are still running refi ads @ 5.6% WE NEED TO GET THE FAT OUT OF OUR GOVERNMENT and we need to have a say in what they do with the assets we paid for! sorry to seem off track from the housing issue, but its really the same in other sectors. Were being lied to and getting screwed. Thank god lou dobbs exposed the sale of our ports. and oh yea? wheres the fence?
17. August 2007 at 7:05 am
I have a contract on my house right now. For 2.5 times what I paid for it in 1997. Of course we’ve completely remodeled it since then.
17. August 2007 at 7:37 am
I’m doing very well with my fixed rate at a little over 5.1%. When rates were so low, I don’t know why people even bothered with variable rates. It was an unnecessary gamble. My neighbor just sold their much smaller house for $40,000 more than I paid for mine. I’m glad I got my house when I did!
17. August 2007 at 8:14 am
Not that I’m hoping for another Great Depression, but bluntly, prices have to fall a lot in order to be in line with the fundamentals of cost of living expenses. If wages continue to stagnate and slide instead of increase, that means housing prices must do the same. Homes are not investments, they are places to live. Speculation needs to be excised like the disease it is.
17. August 2007 at 8:32 am
Here in the Bay Area all those smug, smug people crowing about double-digit appreciation and about how *smart* they were to buy and how I was a sucker to keep renting and saving for a down payment (how old-fashioned)… that attitude got real old… so I am going sit back and enjoy the show now. Bring on the crash! Will scoop something up WITH a downpayment WHEN sellers are desperate. I can wait.
17. August 2007 at 9:25 am
Plus the fraud!
I think it will be even worse than you predict. We need to factor in the very widespread fraud involved in mortgage applications. Home buyers often overstated their income in order to afford a mortgage. Brokers turned a blind eye because they knew those mortgages would packaged as securities and sold on to third parties.
I have read estimates that since 2000 over 60% of applicants in the Bay Area overstated income.
If lenders begin to screen mortgage applications for fraud demand will crash even further.
17. August 2007 at 9:56 am
House price is not the prime momentum to buy houses, confident over the entire economy is.
By the time when price drop 50% from 2005 Peak, the whole US economy already in a really bad situation, stock market already have trillion of $ vanished, companies started laying off people, or we are in the stage of Recession or Depression.
By that time, “Who have confidence to buy.”
If the Stock market crash, people
17. August 2007 at 11:52 am
Per Harry S. Dent’s analysis, we won’t see a major price correction after year 2010. The price is going to go down from now, but the worst will come after 2010. Home prices have gone over its fundamental that people still living on La Veda Loca.. Prices will drop up to 50% just like Japan did back in early 1990s.
17. August 2007 at 4:18 pm
I made it out like many of you (2.5 X original 1998 price). Living in Stockton, CA area (#1 for forclosures). Waiting for the blood.
17. August 2007 at 6:40 pm
Who cares?
18. August 2007 at 5:34 pm
Jump Suits! Yep jump suits. Stock price of jump suits has shot up 500%! Sales on Wall St. have sky rocketed and NY retailers can’t keep them in the stores! Germany 1923 is the historical reference for whats happening now. Except it will take a Dawes Plan imposed from another planet to save this planet from a new dark age. LaRouche was right!
19. August 2007 at 7:27 am
http://newyork.craigslist.org/lgi/rfs/400615248.html
buyer beware ,anybody that is thinking of buying real estate now needs to get there head checked ,,, real estate agents are liars , they tell everybody its a great time to buy ,, dont be stupid and buy now you will be making a grand mistake ,dont listen to real estate agents they are liars , last year at the same time i wrote to all the folks on craigslist and warned them not to buy ,How right was i ,,, i told everyone that was renting to stay put and wait for the storm , well the storm is here and prices will continue to decline , i must say the have to be down at least 20% since last year or maybe even more ,, dont buy ,,,i repeat dont buy ,,if a house is selling for an asking price of 350,000 offer 290,000 ,, nobody is making offers ,, sit on the side lines , prices could decline as much as 50% yes i said 50% ,, i do feel bad for the people that brought from 2004 to 2006 because they have some big issues with there investment ,, good luck to those buyer your stuck for a min of 10 years , the market is flooded with property and there are no buyer ,, if you people out there thought hurricane Katrina was bad wait for this storm to pass ,, big problems ,, very big ,, dont buy
http://patrick.net/housing/crash.html
19. August 2007 at 10:32 am
I seriously doubt that prices will drop much, if at all, inside the SF Bay area for single family homes. My argumental points follow. Please refute them if you can with facts.
1. The SF Bay Area has had a HUGE, HUGE inflow of Asian & Hispanic immigrants, & a small amount of eastern Europeans as well, over the last 10-15 yrs. This has put demand pressure on the housing market here. Just look at the Sunset District & the Richmond District in SF. These were previously non-Asian; now they are prredominant Asian. Of course the Mission District is very impacted & is a portal of Hispanic growth to the Bay Area as well. Look at: Hillsbourough= Asian influx
San Mateo County=Asian/Hispanic influx
Alameda County=Asian/Hispanic influx
Co Co County=Asian/Hispanic influx
The schools of Danville, San Ramone, Dublin, Pleasanton, Palo Alto, Hillsbourough, all have HUGE, HUGE Asian influx.
Mendocino County=Hispanic influx
Fruitvale District of Oakland now rivals Mission Dist. of SF for Hispanic influx.
These are all families that compete for homes & schools with everyone else. Prices will not fall as this influx is not slowing down, but INCREASING.
2. I have not seen any appreciable drop in prices in any of these areas.
3. Average price of a 30 to 40 yr. old tract home/4bd/2ba in these areas:
Pleasanton=800K to 1,200K
San Ramone=800K to 900K
Danville= 950K to 1,300K
Alamo= 1000K to 1,500K
Dublin= 800K to 950K
San Mateo County: sky is the limit as bdrm in Burlingame start at approx. 950K
Palo Alto=sky is the limit
4. The SF Bay Area has not decreased & immigration has not decreased. This equals price increasing.
5. The only areas dropping are those with poor infrastructure, high crime, bad schools, etc.
6. Stocton=crime, lots of gangs, drugs, shootings, parolees, bad schools, lower socio-economic populace.
7. Oakland=crime, gangs, drugs, parolees, fires, shootings. Only Montclair, Piedmont(HUGE-HUGE-HUGE Asian influx), Upper Rockridge maintain prices in this town.
8. I rest my case. OF COURSE, places like Stockton, inner city Oakland, Richmond, Flint-Michigan, Detroit, Pomona-Ca, Merced, Fresno, Vallejho etc., will have decreases in a credit crunch because the lower socio-economic classes always will get impacted. You can get killed in these areas just walking down the street.
19. August 2007 at 2:17 pm
I LOVE YOU, SlashChick. Lets go hiking at Rancho. I’m heading over there right now.
19. August 2007 at 2:23 pm
I’ll take a shot at refuting the last post by RedHydrogen.
A) Immigration. Unless the influx of Asian and Hispanic immigrants are coming in with considerable amount of saved capital, please explain how they’re going to afford to take out a jumbo loan over $417,000 at 8% interest. A loan of that amount alone (without taxes or HOA) will require a montly payment of $3,060. How many immigrants do you know can afford a monthly payment of that amount? Also, assuming 20% down, that only covers a home of $521,250. So influx is irrelevant unless the “influx” can pay these amounts, which wasn’t addressed at all.
B) You never stated how long have you been looking at the market (5, 10, 40??). We haven’t had a real painful recession in what?? 15 years. There’s an entire generation of folks out there that haven’t experienced it and we don’t know how they will react. But again, basic number crunching would indicate that if the median house price is (as you say) over 800k, how many folks/businesses can seriously stay at these price points?
20. August 2007 at 12:11 am
I would like to reply to SciLaw on the issues he (she?)raised. Thank you for your reply, as I enjoy being the devil’s advocate; but I still fail to see any evidence of a significant dropping of market prices and/or impact of a credit crunch.
A. My “self survey” of the locals I mentioned prove to me that a very large portion of these immigrants are indeed paying these monthly payments. In fact I believe that a significant number of them are putting much more than the traditional 20% down on a loan. All I have to do is look at the kids walking out the door of the local high school to see that at least one third of them are Asian, East Indian, etc. This was not the case 10 yrs. ago; & t is a trend that is increasing rapidly. I rented a home out in Pleasanton for the last 20 yrs. The first 15 yrs. all the tenants were USA born. The last five yrs. they were all Asian, East Indian(non USA born). All I have to do is look at my new neighbors from the last 5-10 yrs. Approx. 75% Asian & non USA born. I don’t care if they are from Mars, except that my point is that the Asians epecially are comming with the cash & buying at these high prices! I know because I go to the open houses & two weeks later another Asian family is moving in. They are purchasing close to or at full price. I see the property sales reports in the local paper; so I know that they aren’t getting any bargains. They are also buying the newer homes as well, & the new ones are approx. 850K to 2000K. I do see a lot of Asian Grandparents now, & I believe that they ae combining their life savings from Taiwan, Hong Kong, Bombay, etc. with the current income of the kids to accomplish this economic feat. The Hispanics in the areas surveyed seem to be doing the combining income thing as well; but they “usually” purchase in the lower income areas(Fruitvale-Oakland, etc.), where the prices have started to fall a little bit, but even here the prices are still crazy; like 400K to 500K for an 70 yr. old 2bdrm in East Oakland, Ukiah, etc. So, even those immigrants are still putting upward pressure on the overall market.
B. I’ve been looking at the Bay Area market since 1978. I don’t see any of my newer neighbors/businesses moving out at all, & professional type businesses are still comming in, & retail property is still being built.
C. If you haven’t done so, may I respectfully suggest that you drive north on Tassahara Rd. from 580 in Dublin to the Windemere project in San Ramone & then reply back with your interpretation of current market forces. Unless I am wrong, you will be amazed at the quantity of residential growth and the prices people are paying. The construction has not abated.
20. August 2007 at 7:47 pm
This might be just a coincidence, but on my way to work today, I counted 6 for sale signs on Middlefield road between Calderon and Moffett. For the past 2 years it was rare to see ONE! Trouble brewing? More to come? We shall see.
22. August 2007 at 12:14 am
Red, I don’t think anyone is claiming that the market is dropping in the Bay Area yet. As the subprime resets next year and mortgage requirements tighten up, I don’t think you can count on an immigrant population with cash to bail out this area. Granted if my stock options kick in, maybe I’ll buy in this market, but the Palo Alto, MV and Sunnyvale market are seemingly driven by the “Asian influx” and the options at Cisco and Google. Is that sustainable, I don’t know…
What I do know is that our neighbor is an Asian law student, and his parents bought his townhome for $610,000 with a $500 HOA. The going rate for a renovated rental 2/2 in the complex is $2100. Personally I think that’s a crazy, but to each is own, we’ll see how the next 2 years play out.
ps I’m Asian as well and I won’t go into the cultural aspects of homeownership but suffice to say, it plays along with “showing off” and proving that you “made it” (even if you haven’t).
22. August 2007 at 8:39 pm
This is just the 1st stage of housing crash.
24. August 2007 at 11:51 am
When investing in a country just remember, the USA is the greatest entrepreneurial country in the world. I believe it is in our entrepreneurial spirit that we have kept it floating while so much of what we see around us is sinking. We as entrepreneurs cna hold our heads high. Think positively, set your goals, determine a plan of action, and go after it. The wealth of the world is ours.
25. August 2007 at 7:16 pm
Ummmmm… “Comment by Rob — 8/24/2007″; is Rob short for Tony Robbins??
2. September 2007 at 11:42 am
Oh the sheep, the sheep…lol!!
17. September 2007 at 5:15 pm
The signs of a world wide bubble in Real Estate 2004
- Waiting in Line at an Open House
- Australian Home Prices Accelerate Upward
- Greenspan Gets Knighted by the Queen
- Banks offereing me money on a weekly basis
- Home Depot Lines are outrageous
But let me say that I am truely afraid of the consequences of a world wide real-estate correction. The run on Northern Bank on England is the type of news headlines that have not reached print in over 70 years!!!!
This type of news is bad for everyone who has to work.