patrick.net

upon the assumption that the property was fairly priced to begin with, and how do you know that?

Well, sure a lot about real estate may assumed, and what is a "fair" price anyways? That seems to be one big question this blog is asking. Obviously, there's many assumptions about which way the market is headed, everything from those "educated guesses" to emotional responses. Should we listen to Lereah or Shiller? Unless we want to reduce the market to some undecipherable, relativistic mush, what can be said about price levels? I tend to think that sales history, inventory, DOM, and other data can show trends, and something can be learned.

So, if future conditions no longer support (or support higher prices) than today, careful study of data should indicate that--a testable hypothesis. Studying data is the only way I can get reality ahead of my expectations.

Some more reductions in 95120 neighborhood (Almaden Valley, the "prime" part of San Jose)

Almaden Road, from 1,000,000 to 899,000
Redmond Avenue, from 868,888 to 838,888
Vegas Drive, from 939,000 to 919,000
Almaden Road, 1,050,000 to 950,000, then to 899,500
Cross Spring Court, 1,295,990 to 1,195,990
Hillcrest Drive, 1,939,000 to 1,785,000

This is definitely a non-exhaustive list, I just didn't track this area so closely, so my database didn't show most of the reductions.

More reductions on prime neighborhoods, Los Altos

Del Monte, 1,050,000 reduced to 990,000 and pending

Pine Lane, 1,279,000 reduced to 1,195,000

Selig Lane, 1,545,000 reduced to 1,450,000

University Avenue, 1,575,000 reduced to 1,499,000 and pending

Edge Lane, 1,749,000 reduced to 1,688,880

Manresa Lane, 2,195,000 reduced to 1,950,000

Alicia Way, 2,795,000 reduced to 2,595,000

The point is securitizers keep most of the credit risk on their own books. GSEs in particular keep almost all of the credit risk. - H.Z.

I cannot get anymore down to earth than this:
http://money.howstuffworks.com/mortgage21.htm

Here is a snip:

They purchase mortgages from lenders and then sell them as securities in the bond market. This provides lenders with the money to make more mortgages. These mortgage-backed securities (MBS) offer investors a good return.

Just like I said.

Can someone explain to me the effects on rental rates in the event that the housing bubble pops? It would seem to me, that they would go up. More people in the rental pool due to increased defaults — I have zero data…just curiosity.

This was already discussed....there is a thread on this particular subject.

In order for houses to drop in price people are banking on foreclosures. In order for that to happen interest rates are going to have to go up (more), right? And if that’s the case home prices are going to have to go down substantially before someone holding out will bite. Is there any data from previous crashes that show where these two (interest rate and market decline) meet?

House prices don't have to drop much for the avalanche to accelerate. There are so many people who bought with no money down unlike any other time in history. These people only need a drop of 5% to be underwater. If you want to compare previous crashes, you have to go back to the Great Depression to find something that looks close to what we have.

Actually you are wrong about the good areas going up at a higher percentage than the bad areas.

Well you know your territory better than I.

LOL This is what I feel like saying to you after reading EVERY post you have ever left on this blog!

Thanks for the insult Jack, .......maybe you need to read them over slowly so that you understand what I was really saying.

I do think our readers, and I am one, do not want doublespeak. They come here seeking info or sources for info. Even ScottC gives plain advice.

Sometimes you have to repeat yourself because some people didn't understand the first time or weren't there to begin with (new members)...........You know what I can't stand? Bogus chit-chat....read the first 100 or so posts of the "Tangent thread".....I rest my case!

And thank YOU likewise for YOUR insult!

That was no insult.....it was bogus chit-chat, it didn't have anything topic-worthy as was self evident....................but thanks again for an even bigger insult it only shows what kind of a person you are!

More reductions on prime neighborhoods, Los Altos

Owneroccupier--
Good to see those figures, which illustrate how there have been price reductions in "prime" areas as well. I've tracked price reductions on par or greater in Marin. Of course, we could say all these homes were priced "unrealistically" to start, but I suspect the truth is more complex than that. Perhaps someone who knows can chime in here, but I've read that homes are typically priced to comporable home sales. So, if the market cools/inventory increases, those prices will no longer be supported by the market, and will need to be reduced to generate interest. Hence, all the "price reduced" I've seen on MLS. I'll maintain that market reductions can be seen in the data.

Regarding "price compression": what I've seen is not so much the "prime" areas stabilizing, but homes in specific price points have inflated just a bit more than others. Since the majority of the market are buying homes under $1.5M, I've tracked slightly higher increases in this range. Then again, the homes I've seen at $2-$5M have a pretty small market (perhaps since 11% in Marin can only "afford" median--$950K). These homes are pretty much dead in the water (8 months sitting), so I wonder if they're priced "realistically" as well?

I do think our readers, and I am one, do not want doublespeak.

Go to the Tangent thread..............do a search for "speculator".....keep on searching.....you can do the same in the previous thread "Anecdotal Reports....".

Dan wrote:
Can someone explain to me the effects on rental rates in the event that the housing bubble pops? It would seem to me, that they would go up. More people in the rental pool due to increased defaults — I have zero data…just curiosity.

There's also the additional supply coming from people who have to move away for whatever reason, but don't want to take the loss (or simply don't have the cash to write the check at closing), and thus rent their place out. At least that's what I do in my own personal real estate sob story, and that's what my former landlord did while he was underwater for almost 10 years after having bought in Cupertino in 1988.
On the other hand, there will be the growing number of people who could very well buy, but choose not to do so because everybody will have been losing money in real estate for the last x years, thus adding to the demand for rentals. That's the situation in the post-bubble area that I know.

I really have no idea what will end up being larger - additional supply or additional demand.
However, no one will spend money on rent that they'd otherwise buy food from, so there's a natural limit to how high rents will go before people start leaving the area. When renting, your cash flow HAS to be positive, unless someone invents "Option Rents".

In order for houses to drop in price people are banking on foreclosures. In order for that to happen interest rates are going to have to go up (more), right? And if that’s the case home prices are going to have to go down substantially before someone holding out will bite. Is there any data from previous crashes that show where these two (interest rate and market decline) meet?

In the post-bubble environment I know, prices fell pretty rapidly until they bounced off the level where investing in real estate for income (not for appreciation) makes sense again. Right now, my tenant would pay less per month than when he bought the place from me.
If that'll be the case in the S.F. Bay Area, we have a long way to go.
And that's not such a outrageous thought. At the last bottom around here, in 1996, buying and renting was pretty comparable in terms of cash flow.

f it’s a GOOD area, lots of people will want to buy there…since there are only so many houses in that area and everyone loves it there, the prices will be bid up higher

Allah--
I've observed this effect as well. Whether it's Los Gatos, Los Altos, Palo Alto, or Mill Valley. In these towns, anything (even shitboxes) have appreciated tremendously since the late '90s. I'm talking about 50% over long-term trends. If people want to see specific data; I can post that (I've posted some already)

was thinking mostly in the 700 to 900 K range in Marin,

Agreed...because few people could qualify for homes above that range...

Right now, my tenant would pay less per month than when he bought the place from me.

Make that: Right now, my tenant would pay less per month if he bought the place from me.

In the absence of hard information, prices are made through buyers' emotions. Today, emotions are positive and housing is overvalued, tomorrow, emotions will be negative and housing will end up being undervalued.

In 2000 and 2001, we heard a lot of "once everybody hates stocks, it'll be time to buy again".

So, again, shopping for what does not exist is only a sign of a complete detachment from reality.

This is a perfect example of why I have to repeat again.............Buying at these prices is a complete detachment from reality.

South Texas is certainly not experiencing a bubble of any kind. Housing prices in this area are up 3.5% over last year, which is steady, sustainable appreciation in line with economic growth and inflation.

Could be over there....but not in my neck of the woods.

As I explained most of the MBS do not pass the default risk to MBS investors.

How is that? Once the MBS is sold to investors, they have assumed all risk for it......haven't they? ....if not, who does? I could dig up many articles that describe exactly this if you want me to.

Because the sellers incurred substantial costs in purchasing and maintaining or developing and improving it, and they’re not about to sell it for less than it’s worth, any more than they’re about to sell it to lose money.

This brings up an interesting point--how much cost of improvement can be passed along in the sales price? Sure, in a steeply appreciating market, dropping $100K into a new kitchen may be absorbed if you sell, but what about a flat, or normal market. Say you bought a house in 2000 for $500K, then you spent $100K on a gourmet "remodel" kitchen. Since then, prices have appreciated annually at 3.5%*, and theoretically your house should now "value" at around $600K if you sell. But wait--you also spent $100K on that kitchen...so would the price now be $700K? Wouldn't the pool of buyers willing to spend that premium for your kitchen be smaller?

I do think our readers, and I am one, do not want doublespeak. -Newsfreak

the true speculators have left the market

You have mentioned this 5 times..........3 times in "Tangent thread", once in “Anecdotal Reports….” and once in this thread. I am not putting you down for this, I'm just saying that others do this for whatever reason.

Because the sellers incurred substantial costs in purchasing and maintaining or developing and improving it, and they’re not about to sell it for less than it’s worth, any more than they’re about to sell it to lose money.

If this is the case, the stock market will never fall. Why would anyone who bought Qualcomm at $400 a share even sell at $399 a share?

It is a market of greed and fear.

Fear is my favorite emotion.

the true speculators have left the market

Whew. I am glad that my friends are not true speculators so they will be fine. They are still deep in the market.

As I explained most of the MBS do not pass the default risk to MBS investors.

Very true. The default risks of the MBS have been replaced with the default risks of the sellers, i.e. the GSEs, which have implicit "guarantee" of the US government. Following this logic, MBS has only as much default risk as the treasury.

Sure, the magnitude, duration and direction of Elliott wave events are eminently predictable. The only thing that’s not predictable is exactly when.

Very true.

BTW, pbass, do you also do fibonacci retracement analysis on your investment? I am looking into it and find it quite interesting.

Where will housing prices in the Bay area find support?

For condos in San Jose, I think we may see a 61.8% retracement. ;)

(For those who do not know what we are talking about, x% retracement means x% down from the peak here)

Very true. The default risks of the MBS have been replaced with the default risks of the sellers, i.e. the GSEs, which have implicit “guarantee” of the US government. Following this logic, MBS has only as much default risk as the treasury.

Yes, I'll agree with the "implicit guarantee"...... in other words, the investors assume they are safe.

http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm

[snip]
The GSEs' special advantage arises because, despite the explicit statement on the prospectus to GSE debentures that they are not backed by the full faith and credit of the U.S. government, most investors have apparently concluded that during a crisis the federal government will prevent the GSEs from defaulting on their debt. An implicit guarantee is thus created not by the Congress but by the willingness of investors to accept a lower rate of interest on GSE debt than they would otherwise require in the absence of federal sponsorship.

Yes, I’ll agree with the “implicit guarantee”…… in other words, the investors assume they are safe.

The government does seem to be sending out messages to reinforce this assumption though. (e.g. regulation)

Just one thought... many believe that if housing prices fall 60% regionally we will plunge into a depression and most will end up in soup lines. I doubt this logic.

I do not recall miso soup lines in Japan a while ago.

The government does seem to be sending out messages to reinforce this assumption though. (e.g. regulation)

I do remember AG saying in one of his speeches that the FED will not be responsible for the GSE's irresponsibility in his own convoluted language.

I never saw any shantytowns when I lived there in the early years of the housing decline, but obviously things have gone downhill since then.

I am planning to go to Kyoto/Osaka in two weeks. Perhaps I will look at open houses. ;) (I have not been there for over 20 years, so I cannot possibly compare)

I’m not saying that we’ll all end up in soup lines, but I saw an interview with Donald Trump, and even he acknowleged that the effects of a RE crash could be catastrophic.

I am sure that the crash will be catastrophic, but I do not envision martial law yet. ;)

In a declining market, you might be able to pick up that reno for free.

Very true. In a strong buyer's market, such reno is nothing more than an attraction. Pergraniteel for free!

"...but this is why rehabbers look like such geniuses in this market"

Yes, this concept may be beaten to death, but thanks for the confirmation.
Many people have overspent on their homes, believing they'll see this money someday.
Maybe, or maybe not.

Pergraniteel for free!

And bowls of soup at open house!

In reality, securitizers/lenders live and die on pricing the default risk correctly.

Very true.

However, individuals within the securitizers/lenders may not align their best interests with those of their firms. Throwing in the Greenspan Put, the game is interesting again.

Risk pricing can be very interesting in the presence of intense competition of moral hazards.

Risk pricing can be very interesting in the presence of intense competition and moral hazards.

Anyone considering shorting Home Depot stock? (Not my game, just curious)

Possibly. The stock does not seem to have responded to the possible implications of the housing bubble bust yet.

(Not investment advice)

That is why it makes no sense to say that “the lenders know a lot of them will default, but they don’t have to worry”. In reality, securitizers/lenders live and die on pricing the default risk correctly.

From the same link:
http://www.federalreserve.gov/boarddocs/testimony/2004/20040224/default.htm

[snip]
Securitization by Fannie and Freddie allows mortgage originators to separate themselves from almost all aspects of risk associated with mortgage lending: Once the originator sells the loan into the secondary market, he or she may play no further role in the contract. This development was particularly important before the emergence of truly nationwide banking institutions because it provided a dramatically improved method for diversifying mortgage credit risk. Fannie and Freddie demonstrated that, by facilitating the diversification of mortgage portfolios and insisting on the application of sound loan underwriting standards, the credit risk associated with holding conforming mortgages could be reduced to very low levels and could be distributed across a wide variety and large number of investors.

notice above:

the credit risk associated with holding conforming mortgages could be reduced to very low levels and could be distributed across a wide variety and large number of investors.

The stock does not seem to have responded to the possible implications of the housing bubble bust yet.

Perhaps not, but I found a few home improvement stocks did well around the same time as the builder stocks were at an all-time high:

http://tinyurl.com/ex5ka

Wasn't July/August a peak for housing sales?

This brings up an interesting point–how much cost of improvement can be passed along in the sales price?

In a declining market, you might be able to pick up that reno for free.

This is a very interesting question, so I did a little research. The NAR/Realtor Magazine does an annual nationwide survey on this (Cost vs. Value Report), although their archive only covers the period of skyrocketing home values (2000-2004), so this may not be a good benchmark for the future:

realtor.org/rmomag.nsf/pages/costvaluedec04

Here's another good link that also covers what rennovations DON'T add much value in addition to what does:

loan.yahoo.com/m/living5.html

I don’t know what you intend to say through your quotation of the Fed statement.

H.Z.

Securitization by Fannie and Freddie allows mortgage originators to separate themselves from almost all aspects of risk associated with mortgage lending: Once the originator sells the loan into the secondary market, he or she may play no further role in the contract.

I'm not a rocket scientist, but does this statement not mean that the lender (aka mortgage originator) is not responsible for the loan once they sell it? Because if this is what it means that is why I say the lender does not have to worry.....and because of this, they have loosened their standards so it is much easier to get a loan. If this is wrong, then please explain to me what they mean.