Journal tomhudson's Journal: Largest house price drop in 40 years, more declines expected 22
But first - foreclosures are now at 1.2 million this year
Foreclosure Market Report, which shows that 120,334 properties nationwide entered some stage of foreclosure during the month, an increase of 4 percent from the previous month and an increase of 68 percent from November 2005. The report also shows a national foreclosure rate of one new foreclosure filing for every 961 U.S. households, the highest monthly foreclosure rate reported so far this year.
"Defaults, auctions and bank repossessions all trended higher in November, bringing the year-to-date foreclosure total to almost 1.2 million -- up 43 percent from the same 11-month period of 2005," said James J. Saccacio.
http://biz.yahoo.com/weekend/firsttimehome_1.html Yahoo finance - The Wall Street Journal Online
No wonder prices are down
But recent data have been encouraging for first-time buyers. The National Association of Realtors reported that the median price of an existing home fell 3.5% in October from a year earlier, the largest decline since the group began collecting these data in the late 1960s.
Consider the 45% of first-time buyers that financed 100% last year (stat in next blockquote) - most of them now have negative equity in their homes
In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent National Association of Realtors survey, up from 43% a year earlier.
People expect prices to fall more, so they wait longer, so "motivated vendors" end up lowering their selling prices. Its the reverse of the circle we saw during the bubble's ramp-up.
When home prices were soaring, many first-time buyers jumped to buy houses they could barely afford, believing they would be shut out of the market if they didn't act quickly. Now, with prices falling in many areas, "there's no immediate need to buy, and so they kick the tires more," says Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va.
Expect annual declines for the next year or two, as increasing numbers of first-time buyers who financed 100% default, depressing prices of similar units, kicking the bottom out of the lower end of the market. As the article points out, entry-level homes affect the sales of higher-priced units, so this will ripple upwards:
First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market.
So, to those who said "what housing bubble - prices will never fall" - this is the new reality. Buy a house because you want to - not as an "investment" - unless its "distressed housing" / "motivated vendor" or some other similar scenario. Don't count on "home price inflation" to create equity, because, at least for the short term, those days are fast disappearing as the collapse spreads.
Now before you go on about "It's just one article - even if it IS the Wall Street Journal" - consider the view of other governments, such as the Governmnet of Canada's Export Development Corporation:
http://www.news.gc.ca/cfmx/view/en/index.jsp?articleid=262529
The trouble with bubbles is that you can't let the air out of them gradually - they burst. Perhaps the biggest and most widely recognized bubble that has emerged during this expansion is the U.S. housing market bubble. We are presently witnessing its collapse, fully cognizant that if it has knock-on effects on the U.S. economy, then all other countries will share in the pain.
... For the longest time, we argued that there was no clear evidence of a bubble in U.S. housing. A shift in consumer preferences in the wake of the terrorist attacks in 2001, together with low interest rates, ignited a new-millennium US homebuying spree. That was fundamental - people purposefully chose to live for today and to buy homes earlier in their life cycle in response to the insertion of terrorism into their awareness. But significant price gains boosted residential investment and eventually led to speculative activity, probably in mid-2005. This in turn encouraged a pace of new home construction that could not be sustained. Higher interest rates and slower economic growth helped to burst the bubble, and housing statistics have descended rapidly since early-2006, and are still in free-fall.
If contained within the sector, the descent of the housing market might well be among the milder burst bubbles of recent times. Would that it were that simple. US consumers are highly leveraged at present, and over the years have become heavily dependent on rising home equity to supplement their income. Dipping into this home equity has added roughly $250 billion to income annually in recent years, a hefty 2.5 per cent of US consumer spending - weighty, considering that US consumer spending accounts for over 70 per cent of US GDP, or about 15 per cent of global GDP. Given the leading role of the US economy in the recent global boom, and the contribution of US consumer spending, outright loss of this income supplement alone could tip the world into recession.
While the article goes on to state that a global recession as an unlikely worst-case scenario, the simple fact is that the boom is over, the bubble is broken, and its going to ripple through the US economy, same as any other broken bubble.
Then there's Moody's, as quoted here http://www.billingsgazette.net/articles/2006/12/17/news/business/50-stagnation.txt
That's slightly ahead of the nationwide forecast by Moody's Economy.com. The private research firm projected that the national median sales price for an existing home would decline in 2007 by 3.6 percent - the first yearly decline in U.S. home prices since the Great Depression of the 1930s.
2007 will actually make it the second year in a row, for a 7% decline in housing prices in 2 years
Barron's has an interesting side note on the mortgage problems lenders run into when clients end up with less than zero equity: http://www.marketwatch.com/news/story/subprime-lender-ownit-mortgage-shuts/story.aspx?guid=%7BF201AE5C-F0D5-4DE6-8471-197B09864C5C%7D:
Merrill Lynch & Co. (MER) and private equity firm CIVC Partners hold stakes in Ownit, which built its book of new loans to $8.3 billion in 2005 from $1.1 billion in 2003, in part by introducing products like 45-year mortgages, according to its Web site. Ownit's demise comes as subprime mortgage lenders are being squeezed by higher funding costs, weakening loan demand and rising delinquencies.
"Effective Dec. 5, Ownit closed its doors, and we are no longer able to fund or process your loans," the company said on a recorded telephone message. "We apologize for any inconvenience." Ownit ran out of cash needed to meet its obligations to repurchase loans from investment banks and others who bought them in the secondary market, people in the industry said. The banks, which convert the loan payments into mortgage-backed securities for sale to investors, can force the original lenders to repurchase loans if the mortgage borrowers default.
People with negative equity are far more likely to default. With the drying up of the "zero-money-down" and "pay option" http://news.goldseek.com/DailyReckoning/1166047573.php mortgages, expect to see "only" a 10% to 15% decline in real estate from its peak.
As recently as three years ago, only eight out of every 1,000 Californians who took out a mortgage chose a 'pay option' model. By 2005, one of every five new mortgages was of the 'pay option' variety. More recently, the number has risen to one of every three.
The genius of the 'pay option' mortgage is that it allows a homebuyer the option of not really buying his house. Instead, the 'pay option' gives the buyer the option of not paying, which means that the interest he should have paid is added to the principal. Or, another way to look at it, is that the money he should have paid is subtracted from his equity. So every day that the buyer fails to bring his interest payments up to par...he owns less of his own house.
Here's the reality behind adjustable-rate mortgages - when this guy's mortgage hits 115% of value, he's going to be out on the street: http://www.theday.com/re.aspx?re=be5757ba-6e46-423b-9bf9-fdcec7dc03d7
ast fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.
But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115 percent of its original size he'll run out of credit with the company.
That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150 percent, to $2,848 a month.
"If I could afford that," he said, "I wouldn't have needed this loan in the first place."
And someone who's already been bitten, and paid the price, in today's Toronto Star:http://www.thestar.com/NASApp/cs/ContentServer?pagename=thestar/Layout/Article_Type1&c=Article&cid=1166310610178&call_pageid=970599119419
See Bob. See Jane. And see their moppet children, Jimmy and Johnny.
This, fair warning, is an unmerry tale.
Four years ago Bob and Jane achieved what for many remains the quintessence of economic accomplishment: they purchased their own home. The purchase price: $148,000. After a modest down payment the couple was left with an initial mortgage of $140,000.
Bob and Jane's timing was great. Their townhouse caught the real estate updraft of the outer Vancouver neighbourhood in which it is located. This past spring it was valued at a nudge below $250,000, at which point the home-owning couple should have found themselves in a happy place, secure in the knowledge that their single greatest asset had become a nicely appreciating nest egg.
Instead, Bob and Jane faced a far more woeful situation. On the basis of the plumped-up equity in their home the couple, with an annual gross income of about $70,000, refinanced the family home, consolidating some prior consumer debt, purchasing furniture, pursuing a lifestyle. Soon enough, Bob and Jane found themselves financially squeezed, tapping credit lines and credit cards in order to just get by. By the time they walked into the offices of the Credit Counselling Society of British Columbia in April, Bob and Jane were weighed down with a $192,000 mortgage -- $52,000 higher than it had been at time of purchase -- and a further $49,000 in bank and credit card debt.
Unable to refinance again, Bob and Jane were forced to sell their home. Post sale, the couple found themselves with $43,000, clear, to deal with the $49,000 in debt.
"They walked away with absolutely nothing," says Scott Hannah, the credit counselling society's president, who recounted the tale on the phone the other day. "After four years they were left with a net worth of negative $6,000."
The couple did not, however, declare bankruptcy, and so this story otherwise would never have been told. "It's not an uncommon story," says Hannah. "It doesn't hit the papers. It doesn't hit the bankruptcy statistics."
On second thought, 15% will probably be the low end of the decline
In my area (Score:3, Informative)
Of course gravity will kick in.
No wonder the Fed hasn't been raising rates at all--that would start to push things off the cliff.
One left-handed benefit of all this is that Congress is going to be less enthusiastic about funding wars and social spending programs, as tax increases are also a negative input signal.
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There are, of course, side benefits. For example, the people who have been pushed out of the market by irrationally high prices will be able to buy when the price drops. Also, since people won't be able to roll new debt into old debt so easily, they'll be more rational with their spending - which will keep the lid on inflation.
And with fewer people over-mortgaging, there will be less demand for money, which means lower interest rates. except for homeowners who bought at or near the peak - they'll be high
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Comment by an old market hand: (Score:1)
http://slashdot.org/~banky/journal/155414 [slashdot.org]
"In this business cycle, it will be some damned silly thing in housing that does the economy in. "
http://www.bloomberg.com/apps/news?pid=20601039&si d=aYwCAToaB484&refer=columnist_baum [bloomberg.com]
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One left-handed benefit of all this is that Congress is going to be less enthusiastic about funding wars and social spending programs, as tax increases are also a negative input signal.
Doubtful. Historically, the US government has always gone into debt to boost its economy during recessions or depressions. This is based on the theory that it's better for the government to go into some debt and boost tax revenues a lot to be able to pay it back. Of course, the reality is that they never pay it back. And they don't really have enough equity in anything they could sell to pay off their loans. And wars? Come on. Everybody knows wars and military buildup are often used to kickstart an
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It's the government's non-command of the difference between acute and chronic that shoots down my previous sentence.
Someday I'll buy a house (Score:2)
On my bikeride around the area I saw new houses starting at 1.5million, then new pieces of crap close to a moderately large street (it's actually marked a highway) "starting at low 1 million" as the sign said. All not that big of a house on tiny lots and not that great of a location. In the San Fernando Valley in Los Angeles, it's now to where the
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I bet it all on black, and it came up red (Score:2)
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I agree 100%. If they had had any brains, they would still be sitting pretty, but like a lot of people, they got used to subsidizing their earned income with equity from their home.
If they had been smart, they could have leveraged that equity, then sold out the secondary property to pay off the first, and basically not given a sh*t.
Yipee, lower taxes! (Score:2)
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The problem with lower values is that, as the average price goes lower, the mill rate goes up to compensate. Local governments get used to a cash cow from higher evaluations in good times, but you don't see them handing it back in bad times. Don't you wish you had the same kind of gig?
Its like real estate agents - prices go through the roof, but you don't see them going to a lower commission to compensate for the increased sale price (no wonder there are a half-million real estate agents in Cali - sell a
moron (Score:2)
No wonder they got out of the situation almost (but not quite) even. Because they have horrible spending habbits!
jason
Bah... (Score:2)
I live in SoCal. I just spent a HUGE amount of money (well over $500k 2 years ago) to live in a modest, older/needs some work house in a decent neighborhood NEAR our work. I didn't go ONE PENNY over what we (my wife and I) could afford if either one of us lost our job. We could get a cut of 50% of our income and still manage to "get by".
I fully expected interest rates to rise. I fully
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You have one advantage over us poor Canucks - your interest payments are tax-deductible. Of course, since our interest payments aren't, there's also no capital gains on the sale of a primary residence, and not being tax-deductible means that there is less urge to speculate, so it all balances out.
I hope they drop! (Score:1)
Now by next year, those price graphs form some nice parabolas.