From the emailbag:
I’m still confused why you said you think the real estate market is going to take off like a rocket in 2010. Was this sarcasm, or did I miss something in the video? And why do you think we had this run up over the last few months in home prices (at least I seem to feel like RB and 4sranch homes went up about 10% from the bottom).
There is heightened anxiety these days among those who are actively pursuing a home purchase.
They are seeing the good buys receive multiple offers right away, and get bid up over list price. Yet there are more bank deals appearing, which could mean that prices will go down too.
What will happen in 2010?
The main event from where I’m standing is that we’re not just seeing crack houses and mold farms getting foreclosed – there are some good-looking bank deals at attractive pricing.
For the buyers who have been making offers all year and still haven’t bought one, the market seems to get better and better, yet more elusive at the same time.
How buyers manage their expectations/emotions vs. increasing bank inventory will determine the market for next year and beyond.
Will buyers bid up every decent bank deal in sight, or cool off if the flood begins?
Here’s more evidence for your consideration:
What is going to happen to home prices when interest rates finally go up?
What we have now are speculators jumping into the market thinking we have hit bottom.Everyone is looking for that quick buck again.
I think home prices in the sub 500k range are all dependent on…
1. Interest Rates
2. Qualification requirements (fico, down, employment history)
3. Supply/Inventory
If one of these variables changes home prices respond accordingly. Currently we’re at the lowest interest rate possible, Qualification requirements are almost as low as they were during the bubble (FHA), and the Supply/Inventory is incredibly low.
The likelihood that any of these 3 will increase is high. Which will push down home prices and get more buyers in the market.
No Idea what will happen at the 500K and above range, but the lower end I think will do much better in 2010, may even go up a little more in price not much more but maybe a little as it was bashed into the ground from 2007 to start of 2009 .
I’m an RE bear for 2010. Here’s why:
1. Interest rates are bound to go up.
2. There is going to be an avalanche of ALT-A and ARM resets in 2010 and 2011.
3. There will not be enough buyers to soak up all the new inventory.
4. Unemployment is going to get worse, not better.
5. There are only a limited number of “all cash” buyers out there.
Let me see if I understood this correctly.
$275K first mortgage, $500K second mortgage. Assuming the first mortgage is paid off and gone, he defaults on the second mortgage, buys the house at auction for, say, $275K again in cash, owns the house outright with no remaining mortgages.
He ends up with a house and $225K in cash. In the end, he paid a grand total of $50K for his house.
Did I miss anything here?
More evidence:
http://blogs.wsj.com/developments/2009/12/16/moodys-outlook-dims-for-the-housing-markets-high-end/
An article years ago, “every raise of one percent the value of the home goes down 4%”.
There are not enough family incomes in San Diego County to buy (qualify) all these foreclosed homes over $800,000 plus 20% down.
The numbers are available for how many families make over $150,000 or $200,000. They have already bought their expensive homes. How many high income people are moving into San Diego with the economy.
We shall see if the average home is one million dollars in Carmel Valley Christmas of 2010. I will guess at least a 15% cut.
Jim,
I have to disagree with your belief that RE is going to take off in 2010. If it does, it’s going to be short lived and a false start.
The fundamentals are still way off. And we are so jaded with ludicrous pricing that even at 25% discounts by the banks, we’re still overpriced. But we’re so used to bad pricing that the deal looks great. I don’t think the banks are reasonable at all. It just feels reasonable relatively speaking to 2006.
It’s like when I went to the Sony Store to look for TV’s recently. They had a deal where you buy a Bravia 40 inch TV for $1600 but get an $800 store credit to buy other stuff. The line was out the door with suckers thinking they had a good deal.
The volume of sales in RE is SO low right now that any discount looks good.
Fundamentals have been “way off” all year, yet there have been multiple offers on every ‘deal’ for months now.
For the record, when I say ‘take off like a rocket’ I’m referring to sales, not prices.
I think we’re already seeing some squish down in the higher end. When you’ve got trustee sales on Fairbanks Ranch properties (albeit a house with issues). More NODs happening in the higher end. More trustee sales happening in sought after Carmel Valley… this will put downward pressure on the prices.
Sure – there will continue to be homeowners who list at high prices… but the sales will happen in larger numbers on the lower priced, distressed homes in the high end neighborhoods.
Inventory and volume may stay challenged… but the prices in the sought after areas might, finally, be approaching affordability.
By the way, banks are doing this on purpose to give the perception that prices are dropping like crazy….and given peoples’ lack of understanding and whip-ups into a frenzy, it’s a perfect recipe for repeating what happened before…people buying more house than they can afford.
“”Fundamentals have been “way off” all year, yet there have been multiple offers on every ‘deal’ for months now.”
That’s true….we see the same here in Los Angeles…but the number homes on the market are at all time lows…so any activity seems huge right now.
“Did I miss anything here?”
(1)Assuming that the house will sell for that little at auction.
(2)Secondary mortgages can be recourse in CA.
Noz – I disagree.
It would look huge if the 2-20 offerees on each ‘deal’ were all able to find similar homes at similar prices, and buy them.
The activity now is barely detectable by those who are casually watching, because it looks like a sale here, and a sale there….
For an example, let’s compare October YOY sales so we minimize possible tax-credit sales, though very few will benefit from the tax credit in 92130:
Oct 2008
Sales: 50
$$/sf: $365/sf
SP:LP: 95%
DOM: 70
Oct 2009
Sales: 53
$$/sf: $335/sf
SP:LP: 98%
DOM: 52
The lower pricing goes, the hotter it gets. My point is that buyers will wake from their ‘holiday hibernation’, see lower pricing, and be elated. I think it’ll cause many to buy.
It looks slower and problematic to those in 92130 who remember history, but to buyers on the street the current environment looks decent – and better than before:
Oct 2006
Sales: 71
$$/sf: $355/sf
SP:LP: 94%
DOM: 65
Oct 2007
Sales: 37
$$/sf: $383/sf
SP:LP: 95%
DOM: 49
Jim you are probably correct, sales will increase next year if more distressed properties come to market – clearly with all the multiple bids happening now there is enough desire to fuel many more sales.
Noz makes a good point regarding people becoming acclimated to extremely high housing prices and now feeling like they are getting a screaming deal by paying $800K on a house that sold for $1 mil at the height of possibly the greatest American housing bubble of all time. Throw in additional concepts such as “stealing” one from the band and the consumer psychology involved in bidding wars, and you can see why homes on the mid to higher end still appear to be in great demand despite their still-shocking prices.
I think that buyers who feel strongly about not buying a home that is likely to devaluate sharply in the coming years must address certain fundamental questions, such as what is the level of distressed properties in the pipeline and soon-to-be distressed properties? How do I feel about employment? Are interest rates more likely to rise than not? What is happening not only in the zips where I am looking, but in surrounding zips?
A buyer can (and should) perform a thoughtful analysis before making the biggest financial decision of their lives. I suspect many don’t, and in the alternative they allow the Great American Consumer Psychology run their show.
As big a threat to mortgage rates as the Fed cancelling their MBS support:
Even though the warehouse lending platform of National City is among the largest in the mortgage space – and continues to be profitable – PNC Financial Services plans to close it by mid-year 2010, according to warehouse lending officials.
When there are just a few mortgage lenders left, they’ll squeeze rates higher, because they can.
Jim,
When I mean sales, I mean available properties…the banks have mountains of inventory that is only growing bigger and bigger by the day. What’s going to happen to pricing if they release all these on the market?
I think they are whipping people up into a frenzy like you said, and then will slowly open the gates up (not all the way mind you) and let people outbid each other like they do on Ebay.
It’s anyones guess I suppose as to what will happen. Given that many of the properties are being bought out cash, or with huge downpayments, that goes to show how little inventory there is to be able to be saturated by such buyers.
Also, what were the sales ## before 06?
Oct 2005
Sales: 46
$$/sf: $439/sf
SP:LP: 96%
DOM: 37
Oct 2004
Sales: 62
$$/sf: $390/sf
SP:LP: 96%
DOM: 42
Oct 2003
Sales: 74
$$/sf: $322/sf
SP:LP: 98%
DOM: 32
Oct 2002
Sales: 94
$$/sf: $278/sf
SP:LP: 97%
DOM: 43
Jim –
I enjoy your postings; keep them coming! I’m bearish on the RE market in 2010 and tend to agree with JAP (Comment #4). House prices are still over-inflated and more inventory will come on the market in 2010. See Case-Shiller history chart here:
http://www.ritholtz.com/blog/2009/07/update-case-shiller-100-year-chart/
San Diego RE is worse than average USA. Although there may be opportunities for some speculators, many buyers in 2010 are in for a shock.
Merry Christmas and a Happy New Year.
Jim,
Agreed I think the lack of inventory is keeping the number of transactions artificially low. That 98% of LP says a lot about how many bids things are getting. I’m just working from what you’ve shown us about San Diego, but I think you’re conclusion that there are enough buyers to soak up a lot more REO inventory than is out there now, is absolutely well grounded.
I have a harder time predicting what will happen in 2010 now than I did in back 2005. I was wrong in 2005.
I don’t see people any more eager to take a loss. Similar to my friends who got slaughtered on their espp holdings; they would rather hang on to it until it’s worthless than sell it at even 5% off of peak price.
Whatever liquidity the market sees will be imposed by banks ridding themselves of assets. The ratio of REO/SS to normal sales will increase significantly.
Obama talks more trash to the bankers, which is followed by more bailouts. Also, continued tug of war between market forces and gov’t intervention.
Jim struggles with debt incurred at Pizza Port this Thursday. Distributes AA pamphlets for New Year’s.
I think 2009 was the year of the under $500K house. Throughout most of 2009 the product that was moving was under $500K and it was roughly split into 3 groups at about 1/3rds. The investor (rent cash flow is better than CD or other fixed income rates), the FHA/tax credit down first time home owner (why not it’s not that much more than rent with the rates this low), and the first time or second time owner that had a pretty decent down just waiting for prices to come down significantly. The activity was in the generally middle class/working class neighborhoods like Mira Mesa, Clairemont, Santee, Chula Vista, Vista, Oceanside, etc.
I think once the tax credit expires at the end of March 2010 we’ll see the bulk of the sales move into the $500K+ range, it’s already happening and considering many of the areas Jim covers (North County Coastal) fall into this range I’m sure Jim is going to see a significant improvement in activity. You’re going to see the option ARMs and Alt A loan that dominated financing in the $500K plus range start hitting the courthouse steps. I expect to see the selection in nice $500K homes significantly improve in 2010. People wanting a nice home in the 600, 700, 800 range will probably be rewarded for waiting.
I guess the question then becomes what happens in the lower end range as we see nicer product get closer and closer in price. How does your 1600 sqft 4 bed / 2 bath built in the early 1970’s in Mira Mesa that you purchased for $425K in 2009 stack up to the 2700-3000 SqFt 4 bed / 3 bath in San Marcos that’s listed for $499K in 2010. I know there different areas, but I think you’re going to see a lot of that newer, nicer, and bigger product available in 2010. I wouldn’t be surprised if some of that product gets pushed into the high $400’s, which will slow the lower end sales and make the upper end of the mid tier product the hot market.
Predictions for 2010(for So Cal)
1- more govt intervention.
2- more and more social acceptance(the real tsunami) of statigically defaulting on your home(s).
3-banks will begin to actively foreclose again and follow thru all the way (per my bank sources)
4-inventory will increase on all levels.
5-many more high end REO’s on the way.
6-median price will become even less of a measurable figure due to inventory shift.
7- 100% chance of average price per sqft to be lower at end of year than beginning.
8-it will be a fun ride.
good luck to all in 2010!
It all depends on Zimbabwe Ben. If he actually follows through with his “exit strategy” and stops buying MBSs and Treasuries, mortgage rates go near 6% and we get another leg down in pricing.
If ZB keeps the printing presses running at full speed, we are on the path toward serious inflation, in which case you want to buy a house at just about any price.
As long as there is a lack of good jobs, I’m a real estate bear.
congrats on another WSJ blog link Jim! Just curious do you get a noticeable spike in traffic when that happens?
Did I miss anything here?
He probably blew the money ON the house payments, i.e., interest payments back to the bank. That’s why defaults were nearly non-existent during the bubble and the phrase “If they don’t let me take out a third mortgage, how do they expect me to make my house payments?” came about.
If the big banks were smart enough to limit the supply of foreclosures to keep prices up into 2010, it would mean that they are well managed.
And that the foreclosure crisis is und control and manageable.
But judging that most of the bank management is now the same as it was before, during and after the crisis, I’d say they were and are still very poorly managed. Meaning the same morons are in charge.
I don’t see California coming out of this housing debacle without a flood of foreclosures.
Bankers seem to be making oodles of money speculating elsewhere. Housing is a sideshow, now. All the major banks that are to big to fail have already had their bad bets covered. Look out below. 2010 Tarp is paid back and the flood gates open.
According to the Time Magazine interview, Big Ben just refinanced his ARM with a 30 year fixed rate loan. Hmm…
TIME: Do you have a mortgage?
Bernanke: Oh, yes, we refinanced.
TIME: Oh, perfect. When?
Bernanke: About 5%. A couple of months ago.
TIME: Good time.
Bernanke: Yes. We had to do it because we had an adjustable rate mortgage and it exploded, so we had to.
TIME: So, did you get a fixed rate at 5%? I think this might be the most valuable piece of information. (Laughter.)
Bernanke: Thirty years fixed rate at a little over 5%.
I should have noted that I found the excerpt on Calculated Risk. He hyperlinks the Time interview here:
http://www.calculatedriskblog.com/2009/12/bernankes-arm-explodes-refinances-into.html
That “Person of the Year” quote is priceless! 🙂
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Jim,
I think you nailed it both in your post and your video. If prices go lower on the higher-end homes, and IF we finally get some decent inventory, sales will rocket.
The only caveat is interest rates, so I’m guessing they will extend the MBS purchases through next year, at least. It’s pretty likely they’ll extend the credit again, too. The NAR has too much juice to let that drop.
Update on a house in Cardiff that was discussed in an old thread:
http://www.sdlookup.com/MLS-090062401-92007
This one was only open to cash buyers and it still went for 60k over list price. Cardiff still seems like a seller’s market at least for REOs.
“This one was only open to cash buyers and it still went for 60k over list price. Cardiff still seems like a seller’s market at least for REOs.”
I don’t think it’s REOs, it’s price. Want to sell your home in Cardiff list it for REO level pricing and watch the bidding war ensue. List it too high and it just sits. Buyers want what they perceive to be a deal. They’ll bid significantly over list because they want to win that deal, even if it means by the time things are all said and done, they didn’t really get a deal.
I know some say stealing one from the bank but it’s really just the starting price. I wonder how that conversation goes. Yeah, I got this steal of a deal house, it was listed at $799K. I bet they don’t elaborate too much on the $850K+ they actually paid to get that house. Of course when there’s another house that’s almost the same listed at $900K with 200 days on the market they still feel pretty good about the $850K.
@ W.C. Varones:
You Sir have in all probability probably hit the nail right on the head.
When governments start the printing presses running overtime (and I believe the U.S. government has been doing that for quite some time) the dollars eventually come home to roost and push up inflation.
I have relatives in Zimbabwe whose real estate holdings increased its value in real terms with reference to hard currencys (gold /diamonds / euros / us$) during their recent bout with inflation.
Something for you chaps in America to worry about: every year my kids Grandmother in the U.S. sends them $1000 for christmas, last year they got R11 000 for it this year R7 500 so perhaps it IS a good idea to start thinking about investing in property again at the present relatively low prices.
Have any of you seen a 11 to 7.5 change in the cost of bricks, lumber, cement, wiring or labour? If you have not then it still costs as much for the goods and labour to erect a new house as it did to erect one over the last 5 years.
If you think inflation Ah La Nixon is coming back………..BUY PROPERTY (ask your parents and grandparents what happened then)
Thanks for letting me rant from South Africa Jim, I find your situation in the U.S. sometimes gives me a 6 month lead on what is going to happen here.
While I can’t speak for all buyers, I don’t think “winning a deal” is the psychological motivator behind bidding wars – try, “the banks expect it, and won’t even accept offers below list, so play or forget owning a house.” My husband and I just started looking in the OC, after hitting our 20 percent, and what we’ve found is that we can’t even bother with houses listed for what we can afford – we need to bid on those listed under because the listing agent will inevitably tell us he already has offers at or over list. Does this mean we’ll end up overpaying? Probably. But we won’t be paying “more than we can afford” – we’ll be paying just what we can afford, but we’ll have to bid up to get there on a cheaper (smaller) house. If I thought this would change anytime in the next year, I’d wait, but I suspect this will be the market for homes under 500,000 for a long time. Everyone keeps pointing out that prices are too high based on fundamentals – that might be true, but if so, it’s exactly what’s driving most buyers to the low to mid end and creating the bidding wars we all hate. I don’t see the buyer pool drying up anytime soon, precisely because most people can’t afford the higher end. And those people won’t really notice if a formerly 900,000 home goes for 650,000 in a higher-end neighborhood because all they can afford is $450,000 – and they’ll getting anything at that price.
Rbelle, what are you finding in OC under $500K ? mostly condos?
I’m actually seeing some SFRs (between 1500 and 1800 sq ft or so) around $450K where we’re looking – that is, parts of Placentia, Yorba Linda, Fullerton, Orange, and Anaheim, areas that aren’t super nice, but that are decent and not high crime. I don’t know how those are selling, though, because we’re looking to buy under $400K – and *those* are selling like crazy. We just bid 400K for an SFR on the edge of Brea that was an equity sale, but they apparently got an offer for 450,000 that same day. We’ve now started looking at condos, even though we weren’t considering it before – same size, a little lower priced and maybe not so much competition. But we’d have to give up a yard (and tack on an association fee), which my husband really wants, so we’re also looking at smaller places with room to expand down the road. Being a buyer right now stinks, but we have other, non-financial reasons for wanting to buy now. And since there’s clearly enough people willing to spend more than what WE’RE willing to spend, I don’t expect another big drop in the price of houses where we’re looking. For all the pent-up supply, there seems to be at least as much pent-up demand.
We rented the house next door to the one on Corte Jardin with the huge 2nd. It also had a NOD this summer, but is off the list (RealtyTrac), presumably because the owner is participating in one of the mod programs. Does anyone know? The owner is a real crook (defaulted on three properties, tried to steal our deposit). Address: 10504 Corte Jardin del Mar