Great to look back >6 months later and see how “on the money” you were!

Saw your link elsewhere … I hope you try out our new product we discussed … I emailed you

-B

I am happy to have found your web site. I live in Coronado CA and we rent, I have said for about a year now that prices here have to go way down before we buy. People that own here have told us no, prices will always stay high here. That we should buy before the prices go higher. Based on what you say the prices will go down and we will not go wrong to wait. I am staying a renter and holding out for price drops. Thanks for making it so clear.

We’re just starting to see foreclosures on the high end. Especially in NYC, the traditional boom that comes at the end of the year with Wall St. bonuses will not happen this year. I think next year is the year that will get really “interesting” for NYC real estate.

-Erica

An explanation I can give is because people use their money from China and transfer it into here. Just the other day, I indirectly know someone who just transferred 1 million US dollars from China to this area and bought a house here… this year 2008.

Another explanation is that most asian here earn cash.. they cannot put into sleezy money market account or anything so the only way is to buy asset of Real Estate. Somehow they are able to turn the Cash into checks and buy houses. So you go figure.

But yes, there is a slowdown now, but that is because of the news (psychology..but this is a minor issue) and also because the stricter lending requirement since the cash buyer does not have income documentation. If they can somehow bypass that in a way, this Queens area where the asians are abundant will not see a drop in prices.

For current owners it should be stated, however, if you own a home now, but have no plans on selling it in the next 5+ years, don\’t worry about its value. Home values only matter to buyers and sellers, not owners. You\’ve lost nothing except maybe some equity you didn\’t pay for in the first place. Calm down. A lot of owners are letting their homes go because of their values, and no other reason.

Yes, it is true some people fell for the \”boom\” a couple years ago and their values have dropped tremendously, but if you\’re going to stay in that home for many years to come, you have nothing to worry about. Don\’t let the fears of buyers and sellers get in your way as an owner. I own a home in Colorado (bought in 2004), and it\’s down about $10k in value since I purchased it, but I don\’t care. I have no immediate plans to sell, and my tenants are paying my mortgage. So, who cares what the value is?

Always look at the bigger picture.

What’s amazing is not that the buyer’s thought they could force turnover in those apartment complexes (RE borrowers conform to Barnum’s first law, there really are an infinite supply of sucker borrower/developers out there), but that they found lenders will to loan them hundreds of millions of dollars on that story (i.e. that the new owners would put 25 – 40% tenant turnover on the table). Well soon those lenders will own those buildings (there is no way in h*** that kind of turnover will occur). The chance of the foreclosers turning those buildings over at 50% of what they lent on them is slim.

With respect to 97/3 deals in the CRE world, they certainly existed, but mostly in the very small dollar market (i.e. $500K to $1.5MM). Once you got above that you were either looking at conduit financing that had the parameters I discussed before or local bank financing (typically floating rate/full recourse financing).

Thank you for your comments!

I wanted to respond first to several of you who have emailed and commented. The most common message I have received is: “I live in an expensive area of California. Your 150x rent calculation means house prices would have to drop by 50% for them to be in line with this calculation! Do you really think this is possible?”

My answer: YES. Not only is this possible, it’s probable.

For the reasoning why, refer to my earlier real estate post: “When Should You Buy Real Estate?”

http://www.erica.biz/2008/when-should-you-buy-real-estate-and-when-is-it-better-to-rent/

There is a section there titled “When will higher-priced houses fall?” Basically, foreclosure sales are driving the market. Subprime loans reset to higher rates first, so there are more foreclosures in subprime areas right now. Later on (starting mid-2009), as prime loans reset, foreclosures will start to hit the higher-priced homes, and they will fall, too.

Here’s the chart: http://bp3.blogger.com/_pMscxxELHEg/RxzD0s_7EYI/AAAAAAAABB4/ljDSXZhMG3o/s1600-h/IMFresets.jpg

As you can see, the biggest first lump of prime resets hits in March-July 2009. You can expect a foreclosure wave about 6-8 months behind that, and prices to have their biggest crash 8-12 months behind the resets — as prime properties get put back on the market at low prices.

In other words, be patient. It WILL happen, and it could end up being worse than subprime, since prime loans are a higher percentage of loans made — but it hasn’t happened yet. Look for some very nice bargains starting late 2009 from the early resets, and some super-sweet deals in late 2010 as the second wave of foreclosures goes on the market.

I plan to buy a million-dollar home at a 40-50% discount off its peak price. Don’t think it can happen? Just be patient. You have nothing to lose by waiting a year or two before you buy.

@Chris: Regarding rental property… I, too, may end up buying some at the bottom. You can use the same 100x rent metric for it. If it’s a multi-family property, just tally up the total gross rent and multiply by 100. I’ve done MFH total rent x100 calculations in the Bay Area, Orange County, San Diego, Houston, Tampa, and Miami — and that metric works in all of those locations.

Use rent x 80 for a subprime market, as those are likely to have higher costs due to flaky renters and they may need repairs. Use rent x 120 for a really prime property. Don’t go above 120 — at that point, the cashflow isn’t worth it.

I think the subprime market should have some good opportunities at the end of next year or even August of next year at the earliest. Prime will be another couple of years after that — 2010-2012 seem good thus far. I will continue to update on that front.

@Tal: The government program requires lenders to mark their property values down to below market value. Lenders have been reticent to acknowledge the bust, since many of them hold mortgages for amounts over 100% of the value of the property.

See, there’s a nice loophole in the bank regulations — and others can explain it better than I can, but I’ll explain by example. Let’s say a bank holds a $500,000 mortgage on a property. The market busts and the property is now worth $300,000. The loophole is that as long as the bank doesn’t intend to sell the mortgage to another company, it can continue to hold that mortgage at its “book value” of $500,000. Banks depend on this sort of “equity” because it’s money they can lend against, as well as shareholder value.

To take advantage of the government program, the bank has to mark the mortgage down to less than $300,000. This erases a huge amount of shareholder equity and significantly reduces the capital the bank has to lend with. Now you start to see where the problem is. The credit crisis is happening because banks are not acknowledging reality. They figure if they don’t have to sell their mortgages, they can still pretend they’re worth the full amount.

So no bank in their right mind is going to agree to mark these mortgages down, because it will cause (at the least) their stock value to plummet. Many of these lending institutions had only the bare minimum of about 2% of total capital on hand to cover loan losses. That means that even if all their loans were only marked down by 3%, they’d be out of money and thus out of business. When you’re that leveraged, “marking to market” (marking the mortgages down to market value) might as well be a bankruptcy notice.

So the government order will probably do nothing, except that some banks may knock a couple token mortgages down for publicity.

@DaveZ: I’m puzzled as to why the companies that bought these apartment buildings didn’t figure out that a law would prevent them from raising prices. Maybe they just assumed they’d “hire” a couple politicians and get the law changed? It’s bizarre to me.

I get the feeling from reading these articles that these companies were made up of a bunch of people who didn’t give a rat’s *** about whether their project actually made money, as long as they got paid their salary and bonus. Nice work, if you can get it.

By the way, I was offered several 97/3 (3% down — and they’d get an SBA loan for you for the 3% through a different program) mortgages for office real estate in the 2004-2005 timeframe. So there was plenty of crap floating around in the commercial real estate industry, too. Guess I should have saved some of that junk mail.

@pacificapatriot: Read the link about rent control in my post.

I came out publicly on my blog in 2003 saying condos were too expensive in Pacifica:

http://www.erica.biz/2003/why-i-rent-alternate-title-why-the-bay-area-sucks/

I still have that saved search set up on ZipRealty, and the same condo model that sold for $342,500 in 2003 just sold last month for $330,000.

I won that round, and I’m pretty confident we still have more price drops to go. Send the Realtor over here — we can have some fun.

-Erica

I’m dead set in favor of rent control, since it moderates the insane runup in rents we’ve seen in this bubble.

Here in Pacifica, where I remember you said you thought about living, reality is setting in, but only slowly.

We have a local realtor trying to shore up the decline by commenting how much it costs to rent versus buying. What say you?