Not the sort of thing I need to hear six months after buying my first house. But this Washington Monthly article (long) argues that we’re in for a downturn that could bring the entire economy down with it. Worse, there’s an ethics component:
In most markets, buyers and sellers rely on independent experts to bring sanity to prices. In the stock markets during the 1990s, that role had traditionally been played by stock analysts, whose opinions were famously bought off by the investment banks they worked for. Something similar has happened to appraisers, the independent contractors banks hire to determine the worth of a home for the purposes of a mortgage loan. In a recent survey conducted by the October Research Group, more than half of all appraisers said that they personally felt pressured to overstate loans, and “nearly all” said they knew a colleague who had actually done so. The pressure to inflate, October’s publisher Joe Casa said, “is much worse now than it’s ever been.” Industry analysts have estimated that between 15 and 30 percent of houses nationally are over-valued.
RE: California is headed for a massive real estate crash in the next 12 months and it’s inevitable.
California is at the end of its 10-12 year recurring cycle of running up real estate values, and is now due for a correction. However this time, there are factors in play that will act like an accelerant on the decline in California real estate values like nobody’s ever seen before.
In a nutshell, here’s Why:
Real estate values have been artificially “pumped” up by the presence of interest rates that are at 50+ year lows.
Despite these very low interest rates, records are being set for the number of bankruptcies filed for almost every year of the last three years. See related article at http://www.abiworld.org/Template.cfm?Section=Press_Releases1&CONTENTID=5175&TEMPLATE=/ContentManagement/ContentDisplay.cfm
Increasing foreclosures and REO’s are appearing in the same states (Texas, Arizona, Colorado, etc.) that immediately preceded our crash the last time. Foreclosures are up 400% (over 2000) in Dallas Texas per the article here… http://www.zwire.com/site/news.cfm?newsid=10717727&BRD=1426&PAG=461&dept_id=528197&rfi=6
California has a disproportionately high number of 1031 tax deferred exchanges. Consequently, and in order to avoid paying taxes, tens of thousands of real estate investors have allowed themselves to be suckered into buying (i.e., increasingly leveraging into) larger properties that are significantly overvalued.
California still has an ENORMOUS and UNRESOLVED budget crisis
California still has an ENORMOUS and UNRESOLVED energy crisis
If you think records were set for fixed rate mortgage refinancing, you’re right. But what you may not know is that the number of homeowners who’ve taken out Home Equity Lines of Credit (HELOC’s) on their homes (ever notice how many “more” people are driving expensive cars these days despite the cost of gasoline) is far more than the number of people who have locked in low fixed rate mortgages. Keep in mind, ALL HELOC’s (and credit card debt) are adjustable! When interest rates rise, these homeowners will get blown out of their homes, and when that happens, their low fixed rate mortgage will disappear (remember, fixed rate loans are not assumable!) and lenders will be happy to lend it out again at a much higher rate. Maybe now you can see why lenders are so happy to give you a HELOC that’s far easier to qualify for than a regular home loan. And I’ll bet you didn’t know that in 2001 alone the Prime rate dropped ELEVEN times that year. Imagine what will happen if the Prime Rate increases ELEVEN times in any one year!
The disparity between what it costs to own versus rent the same property has become nonsensical economically. I’ve heard from too many Californians about the so-called “sunshine tax”, the excess amount people are willing to pay to live in California, and how it will always be that way. Well guess what, they’re wrong. The only people coming into California are those coming from the south looking for a hand out. Anybody with enough money to rent a truck and leave California is doing exactly it and here’s the PROOF!
If you go to Uhaul.com (as of mid-April 2004) and get a one-way quote from Las Vegas, Nevada to San Diego, California for their largest truck, it costs $200, but if you get a quote “leaving” San Diego for Las Vegas, the amount is well over $1,500!, a more than 700% increase! That’s because so many of their trucks are leaving the state compared to coming in, that they have to price them for what they have to pay people to retrieve them and bring them back. I checked other cities that I’ve heard Californians are moving to and the rates all reflect the obvious, that the net migration pattern for San Diego (and likely other parts of California) is that tons of people are leaving! With more people (with assets) leaving the state, and more illegals arriving, in an increasing interest rate environment, economically, it’s going to get very ugly for California!
Want to verify what I’m saying, get a quote from Uhaul.com at the link below:
http://reservations.uhaul.com/(5roksl45lnxsxdu31gpfqa55)/moveinfo.aspx?move=oneway
Other interesting articles related to this topic are at:
It’s about the World real estate bubble, but it applies here.
http://www.economist.com/displayStory.cfm?Story_id=1794899
Britain’s housing boom threatened by record bankruptcies
http://uk.news.yahoo.com/040408/325/eqm4b.html
How healthy is the US banking system?
http://www.brookesnews.com/040504usams.html
Housing Bubble
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html
Housing Bubble
http://www.virginiabusiness.com/magazine/yr2004/feb04/ideas.shtml
Housing Bubble
http://www.baconsrebellion.com/Issues03/11-17/Housing_bubble.htm
Problems with Fannie Mae and Freddie Mac
http://www.larouchepub.com/other/2002/2924fannie_mae.html
Housing Bubble
http://www.msnbc.msn.com/id/4724213/
Housing Bubble
http://www.greekshares.com/real_estate.asp
Watch for news reports of slowing real estate sales that should begin in the 3rd quarter 2004 through the 1st quarter of 2005 immediately following any increase in rates by the Federal Reserve. Two increases by consecutive meetings of the Federal Reserve will officially launch the begining of a real estate crash in California and more so in San Diego, if not for the actual impact of the increase then for the psychology of back to back increases.
Remember to ask yourself this question about those who say there’s no real estate bubble: What’s their bias? The only people who are denying the obvious are those who stand to profit from it, real estate agents, lenders, title companies, and anybody who’s so leveraged that any small decline in property value will destroy them.
As a future first time buyer, I can only hope you are right. However, since industry is booming here in SD, there will remain not enough housing to go around, the laws of supply and demand will keep housing costs artifically high despite being overvalued. My guess is that housing costs will slow or stand still but not dip. I hope and pray for the bust so I can make my move but I am not very hopeful about it.
:neutral::twisted::arrow::oops::razz::roll:
I think the inevitable bubble burst will ultimately be a result of higher interest rates. These rates have to start increasing after the election or else we face inflation catching up to us. San Diego does have an unstable biotech sector as a couple of companies have layed off half their workforce and one huge company is in a huge slump. The telecoms are also just surviving. Something will happen sometime next year to bring down those homebuyers who bought on emotion and hype. The ones with variable loans and no money down will find themselves in a bind and have to run to their rich baby boomer parents for a loan to keep their house. All you first time buyers sitting on the side lines…your time will come! Don’t listen to all the “supply and demand” hype (the demand is fuelled by low interest rates) and there are plenty of homes sitting on the market right now that aren’t selling because they are over priced. The flippers will eventually go away and things will return to normal. In the meantime, save save save!
The bubble is now at it’s very peak. Those who have bought in the last year are the ones who will suffer the most. The housing market is just starting to go south. All the ingredients for an all out real estate crash are evident.
1) Noone can say that house prices are reasonable. Obviously they are overvalued.
2) Interest rates are about to start rising from historic lows and 1/3 of all mortgages are ARM’s….You know what that means!! Inflation is having its way and the fed will have to get more aggressive.
3) Our best paying middle class jobs are going overseas and our president is going to make sure it continues. All those middle class workers who have taken out these collosal mortages based on your present income will soon learn that their next job will be stocking shelves in home depot. I hear they don’t pay too good!
4) Foreclosures are already at an all time high and this is just the beginning.
Combination of two factors will speed it burst of housing buuble:
1. rising interest rates, caused by inflation (energy) and budget and trade deficits (Fed has to make Govt bonds more attractive to foreign investors, mostly Japan and China – we have large trade deficits with both)
2. continuing offshoring of US jobs (manufacturing, service, high tech) by American companies to 3rd world countries
Both factors are structural, and not cyclical (part of economic cycle), and they never existed in US economy at the same time (large trade deficits and massive offshoring)
I’m definitely staying away from any real estate investments in hot areas until the housing buuble bursts – this WILL NOT be pretty, not even close to dot com stocks bubble.
Despite all the negative predictions, you should at least own your home. If interest rates go up with inflation, the underlying value of your house will go up. If interest rates go down or stay the same, the values will continue high.
CNN Money reports 12/23/04 — New home sales tumble. The crash is now well under way.
http://money.cnn.com/2004/12/23/news/economy/home_sales/index.htm
Sales of new homes took the sharpest plunge in more than a decade in November, the second report in a week that raised questions about the strength of the nation’s real estate market.
Half of the employment in San Diego in the last few years has been due to construction… It is not as stable as some people think it is.