Yohannon (yohannon) wrote,

US Housing Goes Boom

So one of my friends from work has made a bet with me. I'm of the opinion that the recent mess with over-leveraged financing of housing (which in turn resulted in what can only be described as the worlds largest Ponzi scheme) will result in a 50 to 60% price drop in the SF bay area over the next 12 to 24 months. He thinks I'm completely nuts, and that housing will go up (because that's what real-estate always does, right?).

So we did a look up of my current address, which is valued by zillow.com at 703,638. He says it will be worth 725,00 by next February 14th (2008). I say it will probably hit about 600K by then.

As a part of this exercise, I took a look at the price history of that property -- and, to my shock, it's listed as being worth 320K, or about 60% less.  In 2001, when the real estate bubble started to inflate in response to the dot.com money being shifted from stocks (plus the massive post 9-11 infusion of cash that was injected to keep the markets from collapsing), it was worth about 250K... which, based on the formula of multiplying what you can rent a place for by 100 to 120 is STILL 20K too high... at best.

Right now a lot of people have a vested interest in keeping the books cooked so that it appears that things are fine. Just one more house sale. One more commission. Do everything you can to keep the "comps" (comparable house prices) high. Even with a record foreclosure rate you'll see a LOT of banks refuse to sell a house for less than a certain amount, as dropping the price on one ripples throughout an entire neighborhood. You'll hear about "incentives" by sellers that, when applied to the "sale price" that looks about what it was a month ago, really means the property's value has dropped 10 to 20 percent.

So, to review:
  • No more "liar loans" -- even people with good credit are having trouble funding anything over 417K, and no more of this "piggy backing". The irritating thing about that is that's how I bought a house in '98. Thanks for ruining that for us, people!

  • People being foreclosed (or forced to short sell) will have screwed credit for at least 7 years. Banks can play the "hold it until the market gets better" for so long, before "deferred maintenance" (read: the property starts to look like shit and crumble) starts to devalue the house for them. Oh, and if you're talking multiple foreclosures in a single neighborhood, THAT depresses values as well.

    Short selling? That's when you sell the house for what you can get for it, and the bank agrees to take the loss. The bitch is the difference between what you owe and what you pay is considered "debt relief" by the IRS, which means you have to pay taxes on money you never really had. That's why some moron named Jim Cramer is telling people they should just "walk away" from their distressed property -- it may be the only way to avoid having that 1099 form sent to the IRS and thus hitting you with an insanely high tax bill.

  • People can avoid foreclosure -- by declaring bankruptcy. That's an 11 year hit. You MIGHT be able to keep the house. You more likely to wind up short-selling or being foreclosed anyway.

  • Builders HAVE to keep building houses -- or they go out of business. Unfortunately, a lot of them will anyway, which makes this another double hit -- you increase the number of houses, and wind up with countless contractors who can't afford them either. Ironically, almost all housing developments those days are HOA based -- associations that can dictate your yard, house color, even fine you for leaving your garage door open for 100 bucks a day, and take your house, even when fully paid for, if you refuse to pay. That completely removes a lot of the reasons for buying in the first place.

  • Houses that don't sell wind up being rented -- which gluts the rental market, driving rents down. Lower rents means you can't even buy a house as an investment, as you wind up subsidizing the renter to live in a much nicer house than they could ever hope to buy.
There's one fundamental that is unwavering: supply and demand. As the number of foreclosures skyrockets (a lot of adjustable rate mortgages are due to reset in the next 2 to 24 months) you simultaneously increase inventory while reducing the number of people who can afford that house (or even finance) that house.

I've spent the last few years listening to people tell me I'm crazy to rent -- waiting means that I'm priced out of the market, they kept saying. Except my damn gut kept saying "don't do it". Every single time... EVERY time... I've ignored my gut, I've been screwed.

So I signed a lease for this place, and put up with the ridicule.

The way I see it, if I'm right (and keep my credit and saving story in good shape), I'll be primed for being called a "genius" in hindsight. Otherwise, I couldn't afford the crap their selling anyway.

Why am I blogging this? Because I want to be able to either admit I was wrong, or be proven right, conclusively and without question. Think a 100K price drop in six months is unheard of? Ask Japan about their little bubble pop in the 80's.

Ultimately, the question becomes "how could this happen? Is Yohannon freaking out over nothing?" Well check out the report found here -- if you read it all the way through, you'll find it's an old story of greed and self-interest, with no small collusion by the old-school media. Remember, a lot of news papers have a real estate SECTION. Ever stop to think how much cash, on a daily basis, those pages represent?

I never thought I would say this, but can you IMAGINE how fucked the democratic party would be if they held the White House all this time? As it stands, the Shrub is going to be toast, and his enabling party will fry with him. Even funnier: He's against raising the limit on what constitutes a "jumbo" loan (that's that 417K number I mentioned earlier), which will hasten the "correction" -- which will wipe upwards of 9 to 15 TRILLION dollars US.

Thought the S&L debacle was bad? Burned by the dot.bomb? Flattened by Enron? This has the potential to dwarf them all -- combined.

So I've made a bet that the local prices WILL go down. They haven't yet, because denial is a powerful thing. The fact that my friend was a real estate player at one point may be behind his steadfast certainty that housing CAN'T go down -- but as people in places like Vegas, Phoenix, Miami will attest, that's not a law of nature after all.

Stay tuned...
Tags: bubble, rant
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