There were a couple of panel discussion this week, one at USD, and the other sponsored by USC.
USD’s Mid-Year Economic Update provided some rather revealing scientific quotes:
“When the history is written, historians and economists will decide Wiley Coyote was really the mascot of the last eight years or so,” he said. “Both in terms of strapping ourselves to the housing rocket to get out of the last recession and unfortunately, Wiley Coyote always ends up in the same place: able to sustain hanging over the cliff as long as he doesn’t look down.”
“I think, out of 10,000 economists, maybe a dozen foresaw this,” he said. “On behalf of all of us, sorry, we were wrong.”
http://www.sddt.com/News/article.cfm?SourceCode=20090611czg
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The USC Marshall School of Business sponsored their Southern California Real Estate Mid-Year Report on Wednesday night. There were several speakers, including J. Bradley Forrester of The ConAm Group, Gregory R. Hillgren, President, CALVEST Realty Advisors, Inc., Gary H. London, President, The London Group Realty Advisors, and John P. Wickenhiser, Senior VP, Wells Fargo Real Estate Group.
Hat tip to T who was in attendance, and filed this report:
1. San Diego has the 2nd lowest vacancy rate in the nation, behind Washington DC. In addition, San Diego was the first to crash and seems to be the first to correct. Keep an eye on San Diego to find out how the rest of the coastal communities (SoCal?) will follow.
2. The 3 panelists who are/were investors, liquidated 75%-80% of their real estate holdings from 2005-2007. They are hesitant to buy, but are definitely looking.
3. The investors are primarily looking at multifamily complexes (apartments). The reason being is that in the 1994 crash, there was a lot of extra space built out and it took a long time to fix the cycle. In preparation for this real estate boom, many builder relied heavily on options that gave them the ability to quickly halt construction. In 2006, that’s exactly what happened and construction has not picked up. In 12 month, construction is expected to pick up slowly with new home/apt phases slowly being introduced in 2011. They all expect the new 18-34 yr olds to have a shortage of rentals and expecting a “landlords” market from 2010-2013 (one guy said it could be 2010-2015 or even 2020 depending on how agressively construction happens).
4. When builders start building residences again (12 months), then lenders will start lending again. Finance should be more available by 2013.
5. One dude (Hillgren) was pretty nervous about how Sacramento is going to take the recession. He is generally worried about what taxation laws will go into effect on real estate investments and would like to figure out Sacramento’s direction before investing again.
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Here’s JtR’s Mid-Year Report:
Demand for housing has been strong all year, and especially since the beginning of March when interest rates dropped under 5%. Mortgage money is readily available to those who qualify under the traditional underwriting guidelines, and prices of homes that are selling are lower than they used to be.
There are major concerns:
1. Buyers are somewhat paralyzed by the anticipation of new bank-owned inventory coming to market in the near future. Yet banks have been very tight, dribbling out new listings little by little. The standoff has kept sales activity lower than it could be, and once listed, any quality REOs should sell just because their price is likely to be attractive.
2. Sellers (and listing agents) who list high and wait for the lucky sale, are faced with diminishing returns. Not only are there very few lucky sales, the longer a house loiters on the market, the chance of it selling plummets. Yet sellers (and their agents) are slow to read the market signals, and many end up not selling, or renting it instead. The likelihood of them being undermined in the near future by more-motivated sellers nearby is extremely high. The seller’s ego wants to chalk it up to, “it wasn’t meant to be”, and most agents do nothing to dissuade them. There will be tough lessons ahead for both. Have the ability to hold out long-term? Great, plan on it.
3. Rising interest rates have the ability to squash any momentum. They have the same effect as rising prices, because buyers will have to pay more to buy the same thing. In this environment, buyers will be reluctant to endure that, and will instead have one more reason to not buy.
4. Divorce is rampant – it is everywhere, creating more supply.
5. The number of long-time owners who are selling is surprising too, far higher than I would have anticipated. it was mentioned here last year that I thought by now that REOs and short sales would be the only homes offered for sale. But there are many long-term equity sellers trying to sell.
6. Will there be enough buyers to soak up the supply? Nobody knows, but I’m looking forward to the second half of the year. If the banks would smarten up and unleash some, or most, of their inventory during the peak selling seasons, I think they be surprised at how many buyers are waiting.
Though the second half of the year should enjoy more sales, the 4Q08 inventory was lacking in quality homes. If all that comes on the market is more junk, the standoff will extend – buyers are focused on both price and quality, and are resistant to compromise on either.
What’s your report?
Another good post, Jim!
My report:
I’m ready to buy the right house, at the right price as soon as it becomes available – 20-30% down, 30 year fixed, full doc, etc.
What I’m seeing is the same thing I’ve been seeing – most sellers in this price range are delusional and/or have no choice but to try and sell for 10-20% more then a 2004+ purchase price. No thanks, good luck with that.
The bank surely has a stockpile of inventory, or has it coming in the pipeline but it’s not available today. The few REO’s that do trickle out are apparently gobbled up on the spot.
End result: Still on the fence, waiting.
I wonder where this flood of REO property rumor is coming from? I keep hearing it up hear in sacramento too.
That is funny the divorce rate is so high.I guess when the money drys up the gold diggers go looking for money elsewhere, classic.
I would think the divorce rate is high because of the stress that many of these lost homes is causing. Imagine a lost job, lost house, etc etc all because someone had to get that house which was way above their means. Im sure thats the driver for those high numbers..
With 3.7 trillion dollars sitting on the sidelines in cds and money market accounts people are seeking anything that returns better than the paltry 1.5% return they are getting. They obviously don’t trust wall street so they are going to put it into something that they can actually see and touch with one choice being real estate. People are pouring cash into the low end letting the high end languish till it makes sense on paper.
Hilgren is right, and probably the most prescient comment mentioned.
California is very favorable towards landlords and investors. Add in that “the rich” (which often includes landlords) are becoming the target of many new taxes and you’ve got a recipe for catching the falling knife. Better to know that you’re going to get 6% than hope that you’re going to get 9%. Waiting with cash has never been a bad idea in a recession. Ever.
Chuck Ponzi
Unfortunately I agree with everything Jim stated
JIm,
Most real economists, those with Ph.D’s obtained at reputable universities, didn’t miss this epic housing Ponzi scam. Most who were employed by financial services companies were pressured to simply look the other way. And most did! Job preservation comes before the truth! The most obvious example is the belated mea culpa issued by former NAR economist David Lereah.
What about our university economists? Aren’t they suppose to be independent? Yes. But most of them don’t follow housing, or, believe it or not, the financial services sector (stocks, bonds and so forth). But the subset of academic economists who do follow financial services and the housing sector nailed this sucker early on and were loud and vocal in trying to warn anyone who would listen about the dangers ahead.
No one, I repeat, no one with power listened.
Again, we have a collapse of leadership that is stunningly wide and deep. Just another indication of how wrong most of our fundamentals are and why, this time, our economy is not going to “turn around”.
The great unwind is happening now and the only thing we can be sure of is that all of us are going to “forced” to live differently, whether we like it or not. More accurately, we’re all going to be doing less with less until a new normal emerges.
My report from the Central Coast:
March,’09: 44 New/14 Pending/8 Final.
April,’09: 35 New/18 Pending/11 Final.
May,’09: 41 New/38 Pending/6 Final.
Pendings in May exploded. Many listings that had been on MLS for months had steadily decreased their list price. REO’s are trinkling in and short sales abound.
A couple cases in point: One 2,300 sf home sold for $785K in 2/2005. Now a REO, I saw in on Zillow, but it never even made it onto MLS, and went pending within the first week in June for $469K. Another home (3,000sf) sold in August, 2008 for $1,058,000 and then put on the market in October at $1,145,000. It was listed as a short sale in 12/08 at $999K. Listing price steadily decreased until it went pending in May at $825K. I wonder if the reason was a job loss or a divorce…
I have a slightly different take, Consultant. I don’t think it was a failure of leadership and no one in power listening so much as the fact that there was LOTS of money made in the bubble. I mean huge amounts, staggering amounts, buy-yourself-a-Caribbean-island kinds of amounts. Just think of a few of our local fraudsters who pulled in millions each. Imagine how much more that gets multiplied when you go up the food chain, and how much influence that can apply in Washington. As someone once observed, it’s hard to understand something when you’re being paid a lot *not* to.
CA real estate has become a game of insiders and outsiders (maybe it always was)
On the inside are cash buyers / specuvestors and corrupt agents. They tend already to have money and be ‘rich’ and trade sweetheart deals among themselves. I think most of the ‘awesome’ REO deals fall into this category.
On the outside are people who want RE for a home, have small amounts of money to play with (i.e. no ability to really buy off the courthouse steps) and ‘aren’t connected.’ They see the insider deals / comp killers and can’t stomach buying 10-20% more than others (insiders) for comparable properties. Eventually (especially in the face of higher mortgage rates) the panic sets in and the frantic bidding for realistically-priced property occurs.
Add in the fact that banks don’t need to dump houses to due the suspension of mark-to-market accounting.
So…the market is a mixture of frantic buying, wait and see and the occasional bailout.
Here’s my downtown San Diego condo market report:
I’ve been renting downtown for 4 years. I spent the first 3 years in the Acqua Vista building in Little Italy paying $1500 per month for a 650 sf 1 BR unit the owner bought from the developer for $350K, with $500 per month HOAs. After I moved out, the owner gave the unit back to the bank and they currently have it listed for $210K. That price might start to make sense, but there’s ongoing litigation between the HOA and the developer that will make mortgage financing difficult and given that it is a very troubled building, who knows what kind of financial shape the HOA is in.
About a year ago, I moved into the much nicer Electra building in the Marina District paying $2550 per month for a 1350 sf 2 BR unit that the owner bought from the developer for $850K with $800 per month HOAs. The developer still has about 20 units on its books and just cut the prices 20% trying to move them, but from what I understand, that only got them a few sales.
Bottom line: It’s been great as a renter downtown for the past few years, and while prices are coming down, it’s still good to be a renter. Downtown has a limited universe of owner occupied buyers–young professionals and retirees. I’m not even sure about the young professionals because, like me, I think they’re only downtown until they start a family and are reluctant to buy with a short time horizon. There aren’t enough owner occupied buyers for the supply downtown, and with ridiculous HOAs, these lower prices still don’t make sense for investor landlords.
who really wants to be a renter, cmon guys?
“who really wants to be a renter, cmon guys?”
(Sarcasm?)
Well, how many people are underwater on their house? I think that many people would prefer it right now.
Jim,
I find this a bothersome statement:
“…and prices of homes that are selling are lower than they used to be.”
They’re also higher than they used to be! It depends upon what point in the past you’re comparing them to. This sounds like a quote from the NAR.
CA & LV Renter made some comments recently about how the banks and the bondholders are looking at this situation. As soon as the banks flood the market with REOs in above-subprime markets, they will have to admit defeat on ALL of the other loans they hold!
It’s not a matter of if. It’s a matter of when will all of the REOs come around. If they don’t come until the end of the year and the interest rates are higher and the credits and incentives are gone, how low will the prices fall then?
I’m thinking that things could get very ugly 4Q’09 1Q’10, and then what will we be talking about?
I completely agree with Dwip on “experts” ignoring the signs.
Absolutlely anyone with a decent education and/or some experience could see this was a bubble market–even an old-timer like me could see it in 2004 in LA. The trick was calling the burst time. The area I was in at that time has just starting retreating in price in the last few months. Yet many people there still think they can weather through this.
There was just so much money to be made, that it was considered poor management to “do the prudent thing” and ignore it. And there was probably a lot of arrogance that they could get out quick enough when the party was over. Bad bet on that one for most.
Good summary, BTW, Jim.
Interesting that these experts are betting on rentals. Everything I’m seeing is that the rental market may get overheated because of all the low-end investors who can pencil in profits at current rental rates, but there will be too many rentals to keep prices up.
If these investors can sustain a few years of negative cash flow and hold long-term, it might well be a very good bet. But if they need to constantly cover their costs, could be trouble.
Hey KO, those HOA fees seem high to me. What do downtown condos give you for $500-800/month? Or is it just that much more expensive to maintain a high rise?
I’m thinking that things could get very ugly 4Q’09 1Q’10, and then what will we be talking about?
That’s an easy one.
There always seems to be a minority segment of this audience that insists on sitting on every sentence, of every paragraph I write.
They will dissect it, magnify it, twist it, and then attack it – all in an attempt to humiliate this blogger in public, on his own site.
LV Renter excluded.
All I can hope for is that I can outlast them.
“What do downtown condos give you for $500-800/month?”
Excellent question. I wondered the same thing when I rented in Renaissance a couple years ago, but people pay it. It was $750 there (owner paid, of course.) Staff was constantly vacuuming, and the elevators had a fresh coat of paint every month. But the pool and common areas were miserable.
I know a guy who used to own a condo in Horizons and he said the HOA is “ridiculous. A bunch of old ladies with nothing to do, who want someone at the door 24 hours a day and their windows washed 5 times a year.”
It’s always a great time to buy a house according to lawrence yun.Where is david lereah these days.Is he scrubbing toilets?Look at all the people who listened to their realtor over the years.they have been ruined.Also the so called financial advisors are real helpful.I wonder how people are doing who bought washington mutual and AIG.Be very careful of your advice!!!!!!!!!!!!!!!!!!!!!!
What are the banks going to do with all the excess inventory when all the option ARMS come due in the next couple of years?
Who wants to be a renter?
Basically anyone with an interest only mortgage…
RE: #5 comment, Jim,
It makes perfect sense that aging baby boomers (even those who thought they could sit on their nest eggs for a few more years) are going to try to cash out now to either rent or trade down.
But an interesting link on the Calculated Risk site, made me think there could be other reasons for old-time owners getting out instead of just sitting–they may have to:
http://www.calculatedriskblog.com/2009/06/study-home-equity-borrowers-in-danger.html
Basically it’s showing how long-term owners– if they used their home as cash machines or have multiple mortgages –they are just as likely to end up in foreclosure as a little-to-no-money-down subprime loan.
I know a realtor, married to a builder, who lost (at least) two properties this way, including their 1993-purchased and upgraded to the max, owner-occupied home.
“JTR Said…There always seems to be a minority segment of this audience that insists on sitting on every sentence, of every paragraph I write.
They will dissect it, magnify it, twist it, and then attack it – all in an attempt to humiliate this blogger in public, on his own site.”
Its called biting the hand that feeds you. You are a realtor. Realtors by their nature “exaggerate” things in their favor. You dont – you tell the truth.
You arent afraid to say when things truthfully suck. And when you do say “things suck” we here in the peanut gallery celebrate “hooray, things suck”.
At the same time, you arent afraid to say “this little thing might be good” or “that little area is looking up”. And when you do, we here in the peanut gallery get angry…oh so ANGRY… NO!!!! You are WRONG!!! Things are going to IMPLODE!!! We lash out at you because we cannot handle the truth you give us. We only want to hear things that fit our definition of reality.
I dont envy what you do, but as someone who wants the truth, even if I dont like it. Thank you for providing the insight you do.
The purpose of this blog is not altruistic. It is self-serving. Although Jim is a far cry from the typical realtor, he is still a realtor with a business to run.
I appreciate the forum and the information provided, but I try to take it all with a grain of salt.
I didn’t intend to ruffle your feathers JtR. I was simply pointing out a statement that I had a problem with. Obviously you don’t.
We are actively looking with large downpayment, and I can tell you that JtR is correct about buyer’s mentality:
Good quality houses get tour’ed, and 10 discount offers. Houses with any defects (close to high traffic road, power wires, or just bad curb appeal) will NOT get our visit (or they will get 20+% discount offers)
Buyers want smoking deals or they won’t sign the contract.
‘Who wants to be a renter?’
people who want to enjoy the beach life in CA…not the dirt life in AZ.
Dwip,
Downtown condo HOA fees are that high for generally two reasons:
1. As you suggest, high rises are somewhat more expensive to maintain with multiple elevators, etc.
2. As The Blur points out, the other big factor is staff salaries. Acqua Vista had a full time GM plus a 24 hour a day attendant, plus valet staff for the valet parking (the building was originally designed as apartments, so when they converted the plan to condos during construction, they were short parking spaces and had no choice but to implement valet–they sold it as a luxury amenity, but really it was a big pain). Electra has a full time GM, a full time assistant GM, a full time engineer, at least 2 attendants 24 hours a day, plus a huge housekeeping and gardening staff.