Where will Real Estate Bottom?

[william the wie]

I have been looking over data for Jax Beach FL and I find the Case-Shiller data even more optimistic than ever. Looking at houses here are the trendlines

By 1990 virtually all land within the city limits had been developed.

In 1972 the house I live in was bought by wife for 10K.

In 1985 we were advised to list at 40K.

In 2000-2 some of my wife's friends bought the same model house at 100-120K for a value based on distance from the ocean of 100K for our home.

At peak based on Zillow numbers value was about 350K.

Current value for comparables about 210K.

I would expect at least another 57% drop to 90K before a bottom is reached.

What are your estimates for future decline and why?

 

[Revere]

The problem is, most people who don't qualify for loans on properties on current values won't qualify even if the value drops 57%. Credit scoring and underwriting requirements aren't killing deals on debt-income ratios, credit scores are. So unless you are talking about investors who already qualify for almost as much as they have cash to buy, drops in value will still put homeownership out of reach for many.

 

[william the wie]

The problem is, most people who don't qualify for loans on properties on current values won't qualify even if the value drops 57%. Credit scoring and underwriting requirements aren't killing deals on debt-income ratios, credit scores are. So unless you are talking about investors who already qualify for almost as much as they have cash to buy, drops in value will still put homeownership out of reach for many.

A tiny bit more complicated than that but not much great post.

 

[Revere]

Then why the fuck do you ask?

 

[Revere]

Do you know people being turned down for loans with 50% LTV or better because of their credit scores alone? I do. Won't matter if values drop 57% then, chum.

 

[loosecannon]

Then why the fuck do you ask?

because he is interested in at least a discussion of where the bottom is, not because he was hoping somebody would post a non sequitur and derail the topic off course.

BTW despite being diversionary, he still praised your post.

Willie, ocean side property is a horrible standard to gauge the rest of the nation by. McMansionville is gonna get slaughtered and Suburbia may a model that is doomed. But lots of RE has probably already hit bottom, in fact maybe the majority of lots/homes nationwide.

But if the real goods services and employment economy is ripe for an extended contraction, or a relative wage decline, or a period of prolonged stagnation it may be a while before you can be sure what the bottom is.

Typically robust recovery is what really illustrates peaks and valleys. Or hindsight in the case of stagflation and deflationary periods. Think about Japan, where was the bottom to the late 80's RE crash in Japan?

I still believe that inflation, foreign investors or even domestic investors will rescue the RE market before prices fall anywhere near the historic trend lines from decades past. 57% more decline nationwide? Only if the whole world falls into an intractible depression.

 

[Revere]

Those aren't oceanfront homes with the price he's talking.

The mortage markets are fucked up in the opposite direction as what they were 3-4 years ago. Interest free money from the Fed is best invested in stocks than lending in the Dodd-Franks era.

The only suburbs and mansions that are on their backs are the ones developed from 2004-2007 with buyers getting nothing down loans.

 

[william the wie]

Then why the fuck do you ask?

because he is interested in at least a discussion of where the bottom is, not because he was hoping somebody would post a non sequitur and derail the topic off course.

BTW despite being diversionary, he still praised your post.

Willie, ocean side property is a horrible standard to gauge the rest of the nation by. McMansionville is gonna get slaughtered and Suburbia may a model that is doomed. But lots of RE has probably already hit bottom, in fact maybe the majority of lots/homes nationwide.

But if the real goods services and employment economy is ripe for an extended contraction, or a relative wage decline, or a period of prolonged stagnation it may be a while before you can be sure what the bottom is.

Typically robust recovery is what really illustrates peaks and valleys. Or hindsight in the case of stagflation and deflationary periods. Think about Japan, where was the bottom to the late 80's RE crash in Japan?

It may not have been reached and in honor of the new year I also have an S&P poll going too if you want to take a stab at it.

 

[Revere]

It's not linear, kiddies. The mortgage market is the third dimension you aren't considering.

 

[loosecannon]

Those aren't oceanfront homes with the price he's talking.

He specifically said that they were.

The mortage markets are fucked up in the opposite direction as what they were 3-4 years ago. Interest free money from the Fed is best invested in stocks than lending in the Dodd-Franks era.

and yet you were just saying that it was the credit worthiness gap that prevented banks from lending, make up your mind.

The only suburbs and mansions that are on their backs are the ones developed from 2004-2007 with buyers getting nothing down loans.

The entire model of Suburbia may be one "oil shock" from complete obsolescence.

And McMansionville will DEFINITELY be the hardest hit RE sector once all the ashes clear. "Downsizing" will be the RE buzzword of the next decade. Couples do not need 4000 sq ft of space to air condition and maintain.

 

[loosecannon]

It's not linear, kiddies. The mortgage market is the third dimension you aren't considering.

The securitization of mortgages should be criminalized. If I BUY a mortgage from party A I have a legal right and a compelling legal interest to retain that contract with the same party.

 

[Revere]

Those aren't oceanfront homes with the price he's talking.

He specifically said that they were.

The mortage markets are fucked up in the opposite direction as what they were 3-4 years ago. Interest free money from the Fed is best invested in stocks than lending in the Dodd-Franks era.

and yet you were just saying that it was the credit worthiness gap that prevented banks from lending, make up your mind.

The only suburbs and mansions that are on their backs are the ones developed from 2004-2007 with buyers getting nothing down loans.

The entire model of Suburbia may be one "oil shock" from complete obsolescence.

And McMansionville will DEFINITELY be the hardest hit RE sector once all the ashes clear. "Downsizing" will be the RE buzzword of the next decade. Couples do not need 4000 sq ft of space to air condition and maintain.

Oh, the "oil" thing again. The 1200 sf ranch homes in Santa Ana, California which don't use heat or air conditioning are in "ashes."

If you can't get a home loan with less thann an 800 fico score, it doesn't matter if property values drop 57%.

 

[Revere]

It's not linear, kiddies. The mortgage market is the third dimension you aren't considering.

The securitization of mortgages should be criminalized. If I BUY a mortgage from party A I have a legal right and a compelling legal interest to retain that contract with the same party.

Not if you sign a contract that says you don't.

Find a lender who will give you a loan under such arrangements.

 

[loosecannon]

exactly. Find a lender who isn't institutionally geared toward promoting a continual escalation of loan origination regardless of the credit worthiness of the borrower.

The liar loan/subprime mortgage surge was driven by commercial banks not government pressure to increase home ownership. It was and is a systemic function of the commercial banking industry, not a politically ramrodded event.

 

[Revere]

The liar loan industry was caused by government demanding banks make loans to people who could not pay.

The securitization of those was an accessory after the fact.

And those securitized mortgages had the full faith and credit of the US government.

 

[Paulie]

exactly. Find a lender who isn't institutionally geared toward promoting a continual escalation of loan origination regardless of the credit worthiness of the borrower.

The liar loan/subprime mortgage surge was driven by commercial banks not government pressure to increase home ownership. It was and is a systemic function of the commercial banking industry, not a politically ramrodded event.

What did banks, at the time of the boom, feel they had to gain from liar loans?

 

[Revere]

exactly. Find a lender who isn't institutionally geared toward promoting a continual escalation of loan origination regardless of the credit worthiness of the borrower.

The liar loan/subprime mortgage surge was driven by commercial banks not government pressure to increase home ownership. It was and is a systemic function of the commercial banking industry, not a politically ramrodded event.

What did banks, at the time of the boom, feel they had to gain from liar loans?

They government green lighted them to make those loans. They did what they were told.

 

[william the wie]

Sorry LC ocean view (If I add two stories to my house or climb the pine tree in my backyard) is not ocean front. Ocean front costs close to 100K/ft. Beach property within 1.5 miles of the beach or the Intercoastal Waterway and not on a busy street will run 150+K/acre for land costs. Buying trailer parks and turning them into condos or big box stores during the boom was so bad McDonald's and other fast food stores that McDonald's in Ponte Vedra had a starting salary of 24K for third shift workers until it became too expensive to go 24/7.

 

[Silver Fox]

I think the liar loan industry was also caused by extreme greed on behalf of buyers and speculators, those convinced that real estate values would continue to climb, many of which were simply gambling when they leveraged. The "liar loan industry" hoodwinked investors tweaking the numbers for the Robert Kiosakis and the John Doe's of America in order to close loans that were fraudulent. Not only were the lenders at fault but so were the appraisers. Values were inflated, helocs were closed and checks were fed exed one day and then letters closing lines of credit were mailed from those same lenders (Chase, etc.) freezing locs and devaluing the same properties they lent the money on just weeks prior. Investors were the gamblers and the banks were the casinos.

 

[loosecannon]

The liar loan industry was caused by government demanding banks make loans to people who could not pay.

The securitization of those was an accessory after the fact.

And those securitized mortgages had the full faith and credit of the US government.

It wasn't an accessory after the fact. Banks simply make 10 times as much profit by issuing mortgages and refis and rolling them over asap as they do via traditional banking.

The entire mortgage securitization industry serves the banks first and foremost.