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Real Estate Bubble – The "Tidal Wave" of Foreclosures Strikes the Bay Area

I have to admit, I’ve been enjoying watching the housing bubble burst. There are lots of great stories, from crazy Realtors on crack to strawberry pickers earning $15,000/year who bought $720,000 homes. These make for quite the entertaining read. But what’s next?

The housing bust is progressing quite nicely, and identical to what I predicted in 2006. It’s now 2008…what does my prediction say for this year?

1991 (2008): A “dead cat bounce”? Some folks wondering if the bust has bottomed out or not. Sales are abysmal (e.g., -42%). Other parts of the country showing some signs of recovery.

2008 is when you might tell me that I was wrong about all of this and that we’re starting to recover. WRONG. 2008 will NOT be the bottom. Remember, we still have our “0” year ahead of us.

An interesting thing happened as I perused the MLS last week. (I log on about once a week to track real estate prices in a few different areas of the country.) For the first time since I started tracking real estate in 2003, I found two houses that were affordable from a historical perspective.

I combed through about 200 houses for sale in San Jose, CA, and Pacifica/Half Moon Bay, CA. San Jose is where I live now and I’m most likely to actually want to buy a house in Pacifica, so I am tracking both areas. San Jose is progressing ahead of Pacifica…the first REO’s (“real estate owned”, or properties foreclosed and taken over by lenders) showed up in San Jose in mid-2007, and did not show up in Pacifica or Half Moon Bay until November.

We’re now at about 7 months after the first REOs appeared in San Jose, and the desperation is clear. I’ve watched mortgage companies post REOs for what the property last sold for (at the peak of the market in 2004 or 2005.) Of course, none of those properties sell for that price, so they get aggressive on the price drops until the property sells.

Through my research, I have found the first two affordable single-family home properties in San Jose since I began tracking in 2003. I’m actually shocked that these exist this early in the bust cycle. This confirms that it’s a bloodbath out there.

Property #1 is 124 Birch Ln, San Jose, CA 95127. In fact, both of these properties are in 95127, which is an outlying area of San Jose (confirming my theory that the “tidal wave” of foreclosures would start from the exurbs and work its way inward.) 3BR, 1 bath, 1564 sq.ft. on a nice-sized lot of 7840 sq.ft. Last sale 7/1/2005 for $601,000. Now asking $399,000. Doing the math, we find that is a 34% discount off peak. The MLS lists 3 pictures of the inside and it seems to be in fairly good condition.

This house would rent, in decent condition, for about $1800/mo. Doing the math for 200x rent comes out to $360,000, which I’m guessing the bank would take as an offer.

Property #2 is 3356 Joanne Ave., San Jose, CA 95127. 3BR, 1 bath, 1075 square feet, on a 4,792 sq.ft. lot. A pretty fair specimen of a house for San Jose, though the MLS listing doesn’t include inside pictures, so it probably needs work. Now asking $400,000. This isn’t as good a deal as the first property — rent probably would be $1500/month, which makes the house a bad value at anything over $300,000 (rent x200).

The thing I find most interesting about this property is that it wasn’t last sold during the 2004-2005 peak. The house last sold on 5/1/2001 for $365,000. Doing the math, we find that there was less than 2% appreciation per year since 2001. Not exactly what the Realtors had in mind when they recommended you buy! πŸ˜‰

These are only a small slice of what is to come. I predicted a total loss of 35% off peak prices by 2011. I’m amazed to see houses already listing for 34% off peak prices. So do I think this is the bottom? Do I recommend you buy? Not a chance!

The “tidal wave” is spreading inward, with San Mateo County and San Francisco just starting to get hammered. Bargains still require you to hunt them down and do some legwork — I only found these two properties after looking at hundreds of single-family homes for sale. The best values are in the lower end of the single-family home market — the high end still has flippers on the market trying to sell big houses for twice what they paid for them a few years ago. It will take another 12-24 months for this to shake out.

Based on the information above and my own prediction timelines, I am going to say that 2009 will probably be the first year you will want to consider buying a house. Even then, you’ll still have declines to deal with for a few years, and flat prices for a few years after that. However, by the end of 2009, if you can find a house that is selling for 45-50% off its peak price (and those deals will be out there, if not more discounted), that you actually see yourself living in for at least 5-6 years, I’d recommend a buy at that point.

This is just the beginning. We are in for a long ride. I am enjoying seeing prices finally become more reasonable, but I’m still a happy renter. I’m holding out for ocean-view property discounted from $1M peak price to $575,000 or so, where I will happily snap it up. I expect I will be renting for at least another year or two!

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