It’s been two months since I’ve done an update on local real estate in the Bay Area. One of the reasons I track the real estate market so closely is that most people simply aren’t aware of the magnitude of the price drops that are occurring right now. I’m still hearing quotes like “It’s a good time to buy”. I write these posts to create a larger awareness of the real state of the real estate market here in the Bay Area.

The main thing I want to point out is that the magnitude of the price drops is increasing, not decreasing. Prices are dropping faster than they were 6 months ago. While this means you’re likely to get a better “deal” if you shop for real estate now, it’s also likely that you’ll save a lot more money by waiting…even if you choose to only wait 6 months. (more…)

“grandma’s decreipt house”
by tatterh00d
Licensed under Creative Commons

I did the math, and I think our society has been sold a pile of crap that we’ve bitten on hook, line, and sinker. I’m not going to mince words or try to make this sound nice, because we’ve been duped, and we have every right to be upset about it. (more…)

I have to admit, I’ve been enjoying watching the housing bubble burst. There are lots of great stories, from crazy Realtors on crack to strawberry pickers earning $15,000/year who bought $720,000 homes. These make for quite the entertaining read. But what’s next?

The housing bust is progressing quite nicely, and identical to what I predicted in 2006. It’s now 2008…what does my prediction say for this year? (more…)

It’s time for an update on the real estate bubble, which I have been watching since 2003. About a year ago, I laid out a timeline for the real estate boom. Knowing real estate happens in 16-year cycles, I juxtaposed the last boom/bust cycle in the early 90’s onto this cycle. Here’s what I came up with:

1990 (2007): Prices take a serious plunge. One article claims that housing booms are a bad thing and we should hope prices stay low. Increasing mortgage rates are blamed for the bust. The word “recession” is mentioned. Gloom and doom.

That’s next year. How many times do you think you will hear the words “looming recession” next year? More than you want to, that’s for sure…

Ah, yes. Recession, recession, recession… Yep, all over the news. Notice I called it a “looming” recession in my post last year. That’s because “A recession is traditionally defined in macroeconomics as a decline in a country’s real Gross Domestic Product (GDP) for two or more successive quarters of a year (equivalently, two consecutive quarters of negative real economic growth).” (thank you, Wikipedia.) We won’t hit two consecutive quarters this year (or, if we do, it’ll be 2008 before we know we did.) I think the actual “recession” will start next spring.

2008 will be a disaster year for housing. Let me share with you a choice quote: “‘Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets,’ said Lawrence Yun, senior economist for the Realtors.” That’s from this article, published today and titled “Existing Home Sales Fall in 41 States.” Have a good, hearty laugh over that one. Prices are nowhere near “stabilizing.” Homes here have lost about 15% of their value since the 2006 peak. They still have a good 25% more to go down from here…and that’s probably a conservative number.

The proverbial **** has hit the fan here in California. You are no longer able to get an interest rate under 8% for a loan over $417,000. Take note of that number, because I don’t doubt that will become the subject of a heated political debate. $417,000 is highest rate at which Fannie Mae and Freedie Mac will buy a loan. Loans at or below $417,000 are called “conforming.” Loans above $417,000 are “non-conforming”. Since non-conforming mortgages are defaulting at shockingly high rates, and there is more risk associated with them in a market where prices are going down, interest rates have skyrocketed for those loans.

61.9% of the loans in the Bay Area in January-June 2007 were non-conforming loans.

That’s why this post is entitled “The Game is Over.” The jig is up — there’s simply no way more than half of the buyers who qualified for home loans in 2005-2007 in the Bay Area will now be able to afford loans. Add that to the people who can afford home loans, but don’t want to buy in a declining market, and you have a perfect recipe for huge price drops.

I don’t think we’ll begin to see huge price drops until this time next year. A year from now is probably the first point at which I’d recommend actually buying a house…no matter where you are in the country. Prices are dropping now, but they’ll drop more once all of the bad loans are squeezed out of the system. This is going to take a while. Sellers haven’t realized what happened…the bomb that just dropped. They’re still pricing their houses 10-15% below peak. It will be several months before housing prices adjust to this new reality. Don’t kid yourself…this is the new reality. Bernanke may drop the Fed funds rate later this year by 0.25% or 0.5%, but that doesn’t automatically mean that you’re going to be able to get a non-confirming mortgage at less than 8%. Those two things simply aren’t correlated. Mortgage interest rates are dictated by the market for mortgage-backed securities and what buyers of those mortgages are willing to pay, not by what the Fed dictates. Remember, in my chart I mentioned that it wouldn’t be until 2010 that houses truly became a bargain. Notice the quote from the early 90’s bust: “1993 (2010): It’s definitely a buyer’s market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980’s.” We have quite a way to go until we reach that point. We will get there, but it’s not going to happen more quickly this time.

I’m happy to wait things out. How are you doing? I hope you sold your house last year… we’ve passed the point of no return at this point, and it’s downhill from here for the next 6 years or so. I’m optimistic about all of this, though. Downturns are when the most amazing things happen… inventions get made, and people band together to help each other. Yes, it won’t be easy. We will be hit harder than we were in the dot-com boom. But opportunity always awaits.

By the way, if I could make a recommendation… invest in a growing country, and get out of dollars. Which country? That’s for you to determine. 🙂

It’s almost time for the new year, and although I have several blog entries I’d like to write, I think it’s time to take a look back at the real estate industry, which I have been tracking as a hobby for 2 1/2 years now.

First of all, most of my predicted bubble headlines for 2007 are still making news. I don’t wish to change any of them, and I’m sticking with those predictions for now. A few more recent stories that jibe well with my predictions (and we’ll see more in 2007!)

• Looks like Fannie Mae may take down KPMG with it, as this Titanic grasps at (sues) everything in its path before finally sinking. KPMG out of business? Maybe, maybe not…too close to call at this point. If I had to guess, I’d say the lawsuit will be thrown out and/or KPMG will emerge “victorious” — but battered.
• Florida’s still shaping up to be a disaster. Despite a quiet 2006 hurricane season, Florida’s houses are dropping in value at an astonishing rate, and wind insurance is playing a huge factor in that decline. From the linked article: “Insurance companies dramatically raised premiums after Hurricane Katrina. Depending on where they live and their policies, Florida homeowners may pay as much as 10 times more for flood and wind insurance than last year; premiums can exceed $30,000 per year on mansions.” Woof.
• Naples, FL seems to be “ground zero” for home price declines, taking the one of the largest YOY (year-over-year) price declines for a major market. From the article: “Median sales prices for homes dropped by 13 percent from $479,800 in November 2006 to $415,200 last month.” I’d hate to be someone who bought in 2005. Foreclosure, anyone?
• Ah, yes, and speaking of foreclosures, that’s going to be a popular news item in 2007. Watch what’s happening in Denver now for a preview of what California will be like in 2007 and 2008. Bloomberg says “About 20 percent of sub-prime mortgages granted in the last two years will end in foreclosure as owners struggle to make payments and home prices stagnate.” A reminder that more than 60% of the loans granted in California in the last few years were “payment option” or “adjustable rate” mortgages — exactly the kind of loans that were offered most often to sub-prime borrowers. By 2010, 1 out of every 15 borrowers in California could lose their home to foreclosure. That means, if you live in California, you’ll likely know someone who was foreclosed. The really unfortunate part is that most of these borrowers have no equity in their homes, so there’s no good reason for them to try to hold onto their house. They’ll just give up the keys and walk away…and the “investors” who bought piles of subprime loans on Wall Street will take the hit.
• Speaking of mortgage lenders…how are they doing these days? Well, if the last month is any indication, most of the subprime mortgage lenders will eventually either be sold at cut-rate prices or simply close their doors. OwnIt Mortgage Solutions became one of the first lenders to go out of business last month. That company provided thousands of loans to subprime borrowers in California. There will be more…many more.

I’m now going to go out on a limb and make a few bolder predictions not just encompassing 2007, but the rest of this decade. The oft-mentioned retirement of the Baby Boomers is almost upon us. By 2010, most of them will retire. Or will they?

You see, a lot of those Baby Boomers put all their wealth into dubious investments like overpriced real estate. I’ll use my landlord as an example, but there are millions more like him. In 2004, my landlord had a brilliant idea to buy a bunch of overpriced properties in the Bay Area and rent them out as his retirement strategy. Unfortunately for him, the fundamentals didn’t really make sense, and he’s been losing money on most of them. The rental prices he gets are break-even with his mortgage payments, but by the time he factors in repairs and property taxes ($6250/year on the place I’m living in!) he’s underwater by a significant margin. I assume he expects to sell for a profit (“real estate only goes up!”) to fund his retirement. He’d have to do that in the next 12 months, though, to make much of a profit (if any) and it looks to me like he’s planning to sit on them for a while longer.

Baby Boomers who bought into real estate (or, increasingly, even the stock market, which is fairly overvalued right now as well, though I don’t expect it to crash in 2007) to fund their retirement will be mostly out of luck when they decide to cash out in 2007-2011. That means that the much-vaunted “worker shortage” due to baby boomers retiring will most likely be nonexistent. Remember all those scary charts that projected a massive worker shortage by 2010? I don’t think you’ll see that as the case, with baby boomers going back to work (or not retiring in the first place) because they need so much money in order to survive. Unfortunately for them, most of the Boomers are very consumerist, meaning a “simple” lifestyle is not an option, and thus they will work well into their 70’s in order to continue to feed their lifestyles.

Speaking of “simple” lifestyles, as the economy tanks over the next few years (first real estate, then industries directly related to it like mortgage brokers and construction, then industries feeding the home industry like Home Depot and Lowe’s, then furniture stores, then service industries like plumbling, then businesses who sell to those businesses…creating a dramatic ripple effect through the economy), the “simple”/”frugal” lifestyle will start to come back into vogue. This is the time to take advantage of that trend and start a website, blog, or whatever else you want devoted to some niche of that lifestyle.

If you’re not the entrepreneurial type, I recommend holding off on major purchases and focusing on paying down debt as quickly as possible. Be long in cash and commodities and short in bonds/CDs (no reason to go long in bonds with the inverted yield curve.) Cash will be king once the stock market grinds to a halt (probably in late 2008-early 2009 or perhaps later…hard to forecast at this point.) Even now, there is not much to be made in mutual funds/stocks unless you trade (and trade well/do your research) instead of hold.

I’m also predicting that something major will happen to Lowe’s or one of the smaller home improvement chains. I believe a buyout/merger is imminent in that industry.

That’s a rap for 2006, and some guidelines on how to make money in the coming years. I’ll post more ideas as I have them (and I do have them!) Expect more blog posts from me in the New Year as I integrate blogging into my daily routine. Enjoy the rest of 2006!