Kiplinger.com Community - California is headed for a massive real estate crash in the next 12 months

anonymous Banke

RE: California is headed for a massive real estate crash in the next 12 months and it's inevitable.

California is at the end of its 10-12 year recurring cycle of running up real estate values, and is now due for a correction. However this time, there are factors in play that will act like an accelerant on the decline in California real estate values like nobody's ever seen before.

In a nutshell, here's Why:

Real estate values have been artificially "pumped" up by the presence of interest rates that are at 50+ year lows.

Despite these very low interest rates, records are being set for the number of bankruptcies filed for almost every year of the last three years. See related article at http://www.abiworld.org/Template.cfm?Section=Press_Releases1&CONTENTID=5175&TEMPLATE=/ContentManagement/ContentDisplay.cfm

Increasing foreclosures and REO's are appearing in the same states (Texas, Arizona, Colorado, etc.) that immediately preceded our crash the last time. Foreclosures are up 400% (over 2000) in Dallas Texas per the article here... http://www.zwire.com/site/news.cfm?newsid=10717727&BRD=1426&PAG=461&dept_id=528197&rfi=6

California has a disproportionately high number of 1031 tax deferred exchanges. Consequently, and in order to avoid paying taxes, tens of thousands of real estate investors have allowed themselves to be suckered into buying (i.e., increasingly leveraging into) larger properties that are significantly overvalued.

California still has an ENORMOUS and UNRESOLVED budget crisis

California still has an ENORMOUS and UNRESOLVED energy crisis

If you think records were set for fixed rate mortgage refinancing, you're right. But what you may not know is that the number of homeowners who've taken out Home Equity Lines of Credit (HELOC's) on their homes (ever notice how many people "more" people are driving expensive cars these days despite the cost of gasoline) is far more than the number of people who have locked in low fixed rate mortgages. Keep in mind, ALL HELOC's (and credit card debt) are adjustable! When interest rates rise, these homeowners will get blown out of their homes, and when that happens, their low fixed rate mortgage will disappear (remember, fixed rate loans are not assumable!) and lenders will be happy to lend it out again at a much higher rate. Maybe now you can see why lenders are so happy to give you a HELOC that far easier to qualify for than a regular home loan. And I'll bet you didn't know that in 2001 alone the Prime rate dropped ELEVEN times that year. Imagine what will happen if the Prime Rate increases ELEVEN times in any one year!

The disparity between what it costs to own versus rent the same property has become nonsensical economically. I've heard from too many Californians about the so-called "sunshine tax", the excess amount people are willing to pay to live in California, and how it will always be that way. Well guess what, they're wrong. The only people coming into California are those coming from the south looking for a hand out. Anybody with enough money to rent a truck and leave California is doing exactly it and here's the PROOF!

If you go to Uhaul.com (as of mid-April 2004) and get a one-way quote from Las Vegas, Nevada to San Diego, California for their largest truck, it costs $200, but if you get a quote "leaving" San Diego for Las Vegas, the amount is well over $1,500!, a more than 700% increase! That's because so many of their trucks are leaving the state compared to coming in, that they have to price them for what they have to pay people to retrieve them and bring them back. I checked other cities that I've heard Californians are moving to and the rates all reflect the obvious, that the net migration pattern for San Diego (and likely other parts of California) is that tons of people are leaving! With more people (with assets) leaving the state, and more illegals arriving, in an increasing interest rate environment, economically, it's going to get very ugly for California!

Want to verify what I'm saying, get a quote from Uhaul.com at the link below:
http://reservations.uhaul.com/(5roksl45lnxsxdu31gpfqa55)/moveinfo.aspx?move=oneway

Other interesting articles related to this topic are at:

It's about the World real estate bubble, but it applies here.
http://www.economist.com/displayStory.cfm?Story_id=1794899

Britain's housing boom threatened by record bankruptcies
http://uk.news.yahoo.com/040408/325/eqm4b.html

How healthy is the US banking system?
http://www.brookesnews.com/040504usams.html

Housing Bubble
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

Housing Bubble
http://www.baconsrebellion.com/Issues03/11-17/Housing_bubble.htm

Problems with Fannie Mae and Freddie Mac
http://www.larouchepub.com/other/2002/2924fannie_mae.html

Housing Bubble
http://www.msnbc.msn.com/id/4724213/

Housing Bubble
http://www.greekshares.com/real_estate.asp

Watch for news reports of slowing real estate sales that should begin in the 3rd quarter 2004 through the 1st quarter of 2005 immediately following any increase in rates by the Federal Reserve. Two increases by consecutive meetings of the Federal Reserve will officially launch the begining of a real estate crash in California and more so in San Diego, if not for the actual impact of the increase then for the psychology of back to back increases.

Remember to ask yourself this question about those who say there's no real estate bubble: What's their bias? The only people who are denying the obvious are those who stand to profit from it, real estate agents, lenders, title companies, and anybody who's so leveraged that any small decline in property value will destroy them.

chachi

Sorry to bump this thread, as I found it from searching for real estate bubble on Google. Interesting prediction and after posting in an earlier thread, I wanted to add this article to the mix http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37631.asp

I don't necessarily agree with anonymous' conclusion about Uhaul rates, I am sure there are other "forces" at work there. I for instance just rented a 26' Uhaul and drove it to Healdsburg, CA (Sonoma County) and it cost me $400. Anyway, the article is very interesting, especially for those who have tried to value home prices over time and attempted to predict when "the bubble will burst".

escape-artist

yeh, I was looking around this site on housing, I would agree with the article over at http://www.dinl.net on housing what is value.
Altho it may sound strange, why take a massive mortgage if everybody thinks a bubble is out there??? Renting and keeping some $$$ in the bank sounds reasonable to me...go check it out. ea

marlin

Real estate gains and losses are not unlike those of other asset classes. You have paper gains unless you actually SELL. Well, sort of...

See, the low LOW LOW interst rates and the "creative" financing programs have driven "homeowners" to take A LOT of $$$$$ out of their homes by re-financing, essentially buying their houses again at a higher price from the lender. If you ask many of these people if they would buy their houses for what they owe they would probably laugh -- AND THAT'S EXACTLY WHAT THEY DID!!!! When the price tanks, and it will, A LOT of homeowners will be walking away and handing the keys to their 50 year old tract homes that originally sold for $12K and have $700K notes back to their lenders.

Watch inventories and prices closely before the end of this year to get an indication. Already seeing 300% increases in inventories in the SF Valley. If the interest rates continue to rise - at least 2% Discount by the end on 04 and all those HIGH RISK adjustables coupled with the speculation and flipping and California will experience a price collapse disaster that will make they early 90s look like appreciation -- 50-60% likely IMO.

Just watch...

Irentin CA

The demand backlog (people like me who've been waiting and waiting for better prices) will soften the blow, but yes, housing prices in CA will drop and sales will slow. It's already begun. And the 100% financed people with ARMs will owe more than their houses are worth, which will only be a problem if they are required to move in the next 5-8 years or so. My 2 cents. As far as U-Haul goes, Califonia U-Haul is offering a free tank of gas to anyone driving a truck to CA. So there's something to what Anonymous says.

madmax

No doubt that houses are over-valued in San Diego, but I think the you are misinterpreting the Uhaul phenomenon. There are not more people moving out of San Diego than moving in. However, the people moving into San Diego come from the ?I don?t care how much it costs? group. And people from that group do not rent Uhauls ? they hire moving companies.

Pooterite

gsemike

I get what Nervous Nigel is saying. Everyone that bought a few years ago is walking around patting themselves on the back like they're Gordon Gekko. I'm tired of everyone bragging about how they've made hundreds of thousands of dollars when all they really wanted was a place to live and just happened to be fortunate. If you buy just for a place to live, it doesn't matter if the market goes up or down, you've still got a place to live.

Pooterite

Sid

I hope the bubble will indeed burst, as I am looking to possibly buy in the next year or so. However, one thing about California (and other markets) that makes me skeptical about the bubble bursting is the old adage of supply and demand. The housing costs are booming because there is so much demand. And why is there so much demand, and why will there continue to be demand? The basic fact that people are breeding and multiplying like bunnies and the population is booming.

gsemike

I'm not sure that the bubble will burst, but just like in the late 90s when Greenspan coined the phrase "irrational exuberance" in regards to the overheated stock market, the housing market has been bid up beyond the fundamentals or short supply vs long demand. People now have the mindset, "you can't lose with real estate" and have driven up the prices.

I'm in the same boat as you on the opposite coast. I'm hoping to buy on Long Island in the next 2 years. When it takes two 6 figure incomes to get into a modest house in a working class town, there is a fundamental problem.

I keep an eye on the listings and have seen a slight softening. Houses are still high, but at least crappy overpriced houses are now sitting for months without a buyer. I looked at a few houses that we're pretty much overpriced dumps 4 months ago and I still see the same houses for sale with price reductions. It's a sign, I hope.

trip

Since this was posted six months ago, there are only six months left in the prediction.

I think we will see a softening rather than a burst bubble. Everyone (including institutional investors) is not going to sell their house at once like they did with stocks in 2001. We have to live somewhere.

trip

ghn

True, home prices increase because demand is higher than supply.
Now, there are 2 types of demand: "real" & "artificial".

"Artificial demand" occurs when people buy homes and hold them
for a few short years, hoping to sell for a profit. In the
real estate circles, these people are called "speculators".

In markets where home prices have gone up dramatically, much
of the increase has been due to "speculators".

Since the "speculators" are only interested in making money,
they will "cash out" when the think the market has peaked.
This is what's going on in southern California.

Home prices increase also results from the "creative financing"
being employed by the lenders:

- 0% down payment.
- adjustable mortgages
- interest only payments
- higher housing expense to income ratio
(used to be 28% - 33%, lenders allow more than 40%)

Basically, the "barrier of entry" into the real estate market
has been lowered significantly. The previously high barrier of entry
was put into place for a reason: to ensure that only people
who are financially capable/stable can buy homes.

In my humble opinion, there is a price to be paid for lowering
the barrier of entry. And that price will be paid by the
home owners and their lenders.

Of course, it's entirely possible that home prices will further increase
from current levels. But, the days of reckoning will be inevitable.
After all, the correction can be delayed, but not avoided. The more
delayed it is, the more devastating it will be when it arrives.

-GHN

trip

That is very well though out GHN. I agree with your comments around lowering the "barrier of entry." It is a risk by the lenders and when they get burned a little the will raise the bar back up (I hope anyway). But I do not agree with your assesment that there will be a big crash.

Let's agree that there are more buyers who want to live in a home as their primary residence than there are speculators. When the speculators bail prices will soften and buyers(real demand), going to live in the home as primary residence, will step in and firm prices up. This board alone (while not an perfect sample) has people with hoards of cash waiting for prices to drop a little so they can jump in and buy.

There is no "inevitable reckoning." That is like saying this is the only way it could happen. I am sure there are a number of sennerios which could come to pass. I am just not knowledgable enough to list them all. :)

trip

ghn

One of the consequences of a "low barrier of entry" is
"future sale".

Let's suppose that I want to buy a house to live in.
And I want to buy a particular property, but currently,
I don't have enough savings for a 20% down payment or
my income doesn't qualify for a 30-year fixed rate morgage.

I would probaly have enough savings/income 2 years from
now. But with the "low barrier of entry", I can buy the
property today. This sale is a "future sale".

The problem is: you can temporarily borrow from the future,
but you can't do it forever. In the future, there will
be a reduction of demand.

According to the San Jose Mercury News, in the past year,
more than 70% of the mortgages application in California are
adjustable mortgages. In my opinion, the people who take out these
adjustable mortgages are one of the following:

- Speculator
- Primary resident owners who bought more than they can really afford.
- "Future sale"

When the mortgage rate goes up :

- The speculators will sell
- The primary resident owners have ARM mortgages will be
slammed with higher mortgages payments.
- The "real demand" will be depleted because much of
the sale from the "future" has been taken by the "present".

A friend of mine recently made the following comments:
"Home prices keep going up, but in the end there's one
question: 'where's the meat ?' "

On the surface, the real estate market in California
looks great. But, the fundamentals of a high-priced real
estate market:

- Robust job market
- High rent (relative to mortgage payments).

are not there. This is especially true in the SF bay area.

I bought a house in San Jose in 1999, so I have benefited
greatly from the real estate market boom. But it would
be "wishful thinking" of me to think that there won't be
a crash. I've learned that you have to look at things
the way they are not what you want it to be.

-GHN

panduka

I am not sure whether there is going to be a crash or not, but I recently found out Pardee homes has reduced the price for new homes in their Mulberry Community in Camarillo (Ventura County). They actually moved their release date 3-times due to lack of interest, had a few previous orders canceled before they went ahead with the price reduction.

Ex. There are 11 on the release right now, here's the comparison for two of them (all of them have been reduced by similar amounts :o ).

4620 Marrisa Way (2134 sqft) was 725,900 on August 30th, now its 699,990
4637 Marrisa Way (2254 sqft) was 743,650 on August 24th, now its 726,950

Well hopefully this is good news for all of us....

droopycom

Since 2002, I've heard this theory: the housing bubble is gonna crash, the housing bubble is gonna crash.

I'm not saying its not gonna happen, but face it, there is no science to back up those claims.
When I heard the doomsayers one years ago, I was reluctant to get out of rent and buy. Well I should not have. But how could I know.

Today, my rent is going up, I'm buying in one the most expensive place of the country (SF bay area), and sure there is a risk, but not more than stock market or other investment.

People are irresponsibles with there HELOC, thats another problem, the state of California is going bankrupt, still another issue.
If you rent you loose 100% of your "investment", even if the housing market goes down a bit, i'm pretty sure I would still be better off in the end.

Plus there is the "This Is My House!" factor, I'm also willing to pay for that, and stop worrying about abusive landlord. (Yeah I know, the bank own my house as much as I do, but the feeling is different...)

Anyway after the next big earthquake, I'm sure the market will change again, the real gamble is, Is your house still gonna be up after ?

--Dr. Fox
(as much a Dr. as Dr. Phil)

ghn

Those of us who believe that the real estate market will crash
are NOT doomsayer. In Calif., the marked has crashed before (during the early 90s).
In the early 90s, most people were doing OK :

- Those who bought their homes before the prices went up &
have small mortgages.
- Those who had stable jobs/income

The people who were in trouble bought when price were high,
had large adjustable-rate mortgages.
To be clear, they formed the minority of all home-owners, but
they bore the brunt of the crash.

Interest rate is currently at 30-year low level. The fact that 70%
of the mortgages applications are for adjustable mortgages is baffling.
There are those who plan to sell their primary residence in a few
short years, but these people form the minority of home buyers.

So, the only explanation is that most people want to lock in
the low interest rate for 30 years, but unable to do so because
their incomes do not qualify (i.e. they are "fragile home owners").

In my opinion, to evaluate the real estate market based on
what happened since 2002 is short-sighted. In order to have
a perspective, one needs to view the market with a much longer
time frame, at least 15 years. I've lived in Calif. for 21 years,
so I've seen the ups & downs.

The person who heads Santa Clara County Assessor's office, Larry Stone,
once said: "If you own real estate for as long as I have, you'd know
that they come in cycles". Larry is 60+ years old, he had owned real
estate for more than 30 years.

-GHN

droopycom

Those of us who believe that the real estate market will crash
are NOT doomsayer. In Calif., the marked has crashed before (during the early 90s).
[...]
In my opinion, to evaluate the real estate market based on
what happened since 2002 is short-sighted.

I agree, but thats well enough to evaluate scare tactics.
I'm not saying you are personnally trying to scare out people, but some are definetely doing so and have been doing it.
Yes the market is cyclical, we can assume that, any market is in some way. I also safely assume that nobody can predict those cycles with much accuracy.

And yes some other people (lenders) are trying to pump up the other side, with catch phrase like "Low interest rates wont last long!"

The bottom line if unless you can predict the future, _playing_ the market (any market) is dangerous.

Of course if playing the market is your business, then all I can say is good luck.

With so many people making so many random predictions, when something bad happen you are bound to have somebody say "I told you so", it doesnt make their prediction valid, I call that statistical luck.

-- Fox

droopycom

Just to make my point, a few quotes from past history:

* "The prices of houses seem to have reached a plateau, and
there is reasonable expectancy that prices will decline"
(Time, December 1, 1947).

* "Houses cost too much for the mass market. Today's average
price is around $8,000-out of reach for two-thirds of
all buyers" (Science Digest, April 1948).

* "If you have bought your house since the War ... you have
made your deal at the top of the market.... The days when
you couldn't lose on a house purchase are no longer with
us" (House Beautiful, November 1958).

* "The goal of owning a home seems to be getting beyond
the reach of more and more Americans. The typical new
house today costs about $28,000" (Business Week, September
4, 1969).

* "Be suspicious of the 'common wisdom' that tells you to
'Buy now ... because continuing inflation will force home
prices and rents higher and higher'"(NEA Journal, December
1970).

* "The median price of a home today is approaching
$50,000.... Housing experts predict that in the future
price rises won't be that great" (Nations Business, June
1977).

* "The era of easy profits in real estate may be drawing to a
close" (Money, January 1981).

* "In California ... for example, it is not unusual to find families
of average means buying $100,000 houses.... I'm confident
prices have passed their peak" (John Wesley English
and Gray Emerson Cardiff, The Coming Real Estate Crash,
1980).

* "The golden-age of risk-free run-ups in home prices is
gone" (Money, March 1985).

* "If you're looking to buy, be careful. Rising home values are
not a sure thing anymore" (Miami Herald, October 25,
1985).

* "Most economists agree ... [a home] will become little
more than a roof and a tax deduction, certainly not the lucrative
investment it was through much of the 1980s"
(Money, April 1986).

-- excerpt from Make Money with Condominiums and Townhouses
by Gary W. Eldred --

I agree he may be biased, but come on, some are pretty funny in retrospect...
(I am not endorsing this book, I havent read it, just found the quotes on the web, theres probably as much BS in this book as any other, "how to make money" formula).

trip

Well I predicted a softening, and it has happened (see panduka's post above). Told you so. Just a softening! I am always right.

Seriously, I am enjoying the comments here. I think the market will take care of itself over time (that will be an easy one to get right), but I think the points about risky lending (GHN, Fox) are far more important than making predictions.

Personally, we are 1.5 years into a 5/1 ARM (3.375%). It was a strategic decision. We have moved all around with my bride's work: Detroit, Chicago, Memphis, Phoenix, Portland, and now Denver. The increase in the number of ARMs could be due in part to a more mobile, ladder climbing work force. Thoughts?

trip

panduka

As a continuation to the previous post showing how prices have settled for Pardee homes in Ventura:

Well my friend who's interested in buying a home from Pardee went for the release this past Saturday. He said there were only two people there, and even the developer's agents showed up late. It seems they were hoping to just not show up, if no one showed up (lack of interest).

Anyway as the story goes, they had made an interesting offer to the two people there. After saying that there are still houses from the previous release, they had offered those houses to them at the price from the original release (some time in June I believe), and as an incentive they had also offered to not charge for any upgrades the original buyers had asked for. Also, they had said that if they were interested in houses that had limited upgrades, Pardee would pay $7,500 of the closing cost.

In addition to the slowing demand at Pardee I just also found out that "Shea" homes town home development in Simivalley has also hit a soft patch. When we went to see the models, the agents were insisting there were a long waiting list, and the prices would go up for October 16th release, it seems there were only 2 people in the priority list and the town homes were offered at the previous release price.

The next community I am interested in is Newbury Park (Standard Pacific). Unfortunately it is hard to gage the demand for that community (they claim its very high).

Ohh if anyone is interested I have been monitoring the Camarillo (Ventura county) housing market very closely. Right now more than 50% of the houses have been discounted from the asking price. That does not mean house prices have come down, just means that people are not as willing to pay as high price over the last sale. Also, it seems a friend's realtor had insisted houses in the 500-600 ranges are not moving at all. I do see a small reduction in the number of houses on the market (3%), but most seem to be because sellers are pulling out (hopefully temporarily). There are few neighborhoods where people are reducing their asking price below the last sale price.

:o

ghn

The situation that Panduka described is a classic situation.

In a real estate market downturn, the first thing developers
do is offering "free upgrades". That's because the "profit margin"
for "upgrades" are pretty high. So, a $10,000 in free upgrade only
costs the developer $2K or $3K.

In general, developers are much more experienced & more knowlegeable
than buyers. They've been in the business for a long time & have
seen the ups & the downs. They are adept at getting rid of inventories
before things get worse.

I suspect that Panduka has been waiting for prices to come down
before buying. I think the market in southern California is in the
early stage of a "price correction". The "correction" will not end until
all of the "excess" have been removed. Since there is currently much excess
in the market, it will take some time for the correction to play itself out.

In my opinion, you have to wait at least 2 years.

-GHN

airline

California Housing markets can certainly crash with the simple influx of developers willing to meet the demand (creating if not a surplus ..at least affordable housing) OR the exodus of a population that cannot afford a California home .

And it's clear California is seeing an exodous of people ..I believe Cal population only grew by 1% last year .

Certainly you'll see developers willing to come in serve such a mass Market even at slightly reduced profits

trash259

Bump

Any more predictions?

nonames

I think the shortage of land theory is a lot of bs. Two years of boom should attract some greedy builders to the area, shouldn't it? I came across this link - http://www.hbg.com/siteSpecific/communities/cities.aspx?countyID=5
They are building in simi, camarillo, moorpark, oxnard, and even thousand oaks.

I think I now understand why the pardee home sales lady wouldn't answer my question about what is the huge piece of land on the other side of 101 right will be used. Will anyone rush to buy Pardees if they only know a huge development is going on right there and right now?

Anyone still wonders if the bubble is about to burst? Supply is finally catching up with demand!

nonames

another large development in simi valley, I wonder if anyone would really want to live there if the news link here is true: http://www.lacitybeat.com/article.php?id=1771&IssueNum=92

How would anyone find out pollution, flood, and earthquake hazard about any neighborhood? Any good source on the web?

trash259

From GREENSPAN himself: (02.18.05)

"I think we're running into certain problems in certain localized areas. We do have characteristics of bubbles in certain areas but not, as best I can judge, nationwide," Greenspan told the House Financial Services Committee. He added: "I don't expect that we will run into anything resembling a collapsing bubble," though it's "conceivable that we will get some reduction in overall prices as we've had in the past, but that is not a particular problem."

Here the chairman was cryptic. "Remember that there's a very significant buffer in home equities at this stage," he said. Most home buyers have put down deposits of 20%; they can weather a potential drop in home values, Greenspan implied. Even for home buyers who put nothing down, the recent price surges will offer a cushion against decline, he suggested. He added, though, that some home buyers, perhaps 20% of the total, face some real risk.

I suggest you guys read these two telling articles:
Forbes- (02.18.05)http://www.forbes.com/business/services/2005/02/18/cx_da_0218topnews.html
Piggington- http://piggington.com/

Here in so cal. I highly doubt most people put 20% down payment. I personally know 7 people who recently (2004) purchase homes here in so cal at a ridiculously over inflated price using a 5 yr ARM rate @ 0 down. Once interest rate rises, these people will get blown out of the water.

Greenspan who basically dictates the direction of the interest rates is stressing caution. The chairman himself state there will be a correction. How much of a cushion could there be if someone recently purchase a house (2004) before the correction starts? Not much!

The original thread started was correct in assuming there will be some kind of crash or major correction. However, putting a time on when it will happen is virtually imposable.

stressedsnyder

My father-in-law, a 97 year old lawyer with long term (held railroad stocks through the "great depression") stock market experience, told me in 1998 that stock valuations made no sense and that unless I had the stomach for a large correction to get out now. I took his advice and praise the lord. Al's dead now and I wonder what he would think about today's real estate valuations? Knowing Al, he'd say get the hell out and patiently wait for the easy prey. I'm waiting.

solster

This thread has been very good for the wife and I. I encourage more updates if you all don't mind. We own in the Santa Clarita Valley (north Los Angeles). We own, and are very close to selling. We want to put away the money for a relocation in a year to another state.

I'm less concerned about the possible large correction (I believe it will eventualy happen), but wonder MORE if the market can hold any steam after this real estate season (going into 2006). It's hot again this spring, 20% again, yet we had a 10% downturn in the fall. Things look more precarious, and yet, some factors are still suggesting growth (employment, interest rates, etc...)

Advice is appreciated. thanks! Solster

OcLeo

Hello guys,

I have been a long time renter and would like to know from some of you experiences market watcher if this is a good time to buy a house in southern california/ San Franando Valley / Chatsworth area.

The prices have gone sky rocket and according to what I'am reading, I think I should wait because the market may crash sooner or later?

If one should wait, how long? Obiviously no one knows, but just a rough idea?

Thank you kindly,
Leo

Leo

I wish this forum was a bit more active.

solster

Is Leo ad OcLeo one in the same?

I aso hoped for more response, too bad.

OCLeo, I have no answers for you. It's my feeling the mrket is peaking. There are 2 main beliefs, the market will fall, or the market will slow to 5-8% appreciation. I go with my gut.

Do a google search on "california real estate bubble", lots of good reading, with both points of views presented. Remember though, time scale its the issue when you read those articles! Some say it won't crash, but notice they often say it in reference the very near future, or, over the next fifteen years it will still make money. Others predict a major correction, but they can't forecast when. Timing is the key to anything you read.

My feeling, it will follow the last 3 trends of boom and bust from the early 80s, late 80s, and the current cycle. Things will cool soon, fall hard and recover remarkably in the next cycle 10-12 years from now.

I plan to sell this month, put the money in the bank, and buy in 3-5 years, one home to retire in, and one as a permanent rental invetment. That's if the market works as I predict. BEst of luck, and I'll still check in every few days for while!!!

stressedsnyder

Leo, even here in the swamps property values have run-up 100% plus over the past 5 years. It took 20 years for the previous 100% increase in values. From an investment standpoint I see the conservative money sitting on the sidelines while out-of-state condo development money literally pours in with no local market to support the units. Maybe my thinking is old school but sometimes the the best decision is to do nothing until the picture is clearer. I lived in northern CA in the 80's (pre-market correction) and chose to rent. If you are buying as an investment I would stay put.

OcLeo

appreciate your replies. I like what you said "to do nothing until the picture is clearer" I think that's the safest way to go for people who don't have millions of dollars in their banks.

Thank you

bjewell

What effect will any sort of correction have on those in the mortgage broker's business? I ask, as I have been invited to work for a friend's (very profitable) company.

antibalas

I would love to hear anyone's thoughts on the housing situation in the San Fernando Valley. I hope the market will turn soon so I can buy something slightly larger than shoe box without going into miliion dollar debt! Would appreciate any and all opinions/predictions/visions. :)

TDunne

Great post and reply's but the market never crashed. My opinion is it will cool down but not crash. Everyone wants to live in California (even if they have to get an interest only loan). First time home buyers ... good luck. I just witnessed a 600 square foot condo (1 bedroom and 1 bathroom) go for $310,000 here in Davis (just outside of Sacramento). Disgusting.

Personally I am selling. My house is going on the market next week. I feel the market is going to cool but I am not by any means a real estate expert. Just a homeowner that wants to get his equity and hit the road.

Good luck everyone.

solster

Just a homeowner that wants to get his equity and hit the road.

I thought you said everyone wants to live here, but you are iting the road?

This is a problem I see coming for Calif, equity rich owners wanting to cash in and leave the state. I am in that boat also, and I think more will join the ranks. Will it crash the market, maybe. The market will slow - at least that's the common thought. Will it crash, I say yes for several years, and rebound again in 10-15 years to prices higher than today. That's been the trend in the last couple of housing booms in so cal. But who knows is really the main issue, it's speculative. My 2 cents.

Dingobiscuit

solster

Is there any speculation on what happens nationwide if the real estate bubble bursts in CA, FL, NY, etc.? What about areas where properties have had slow gains over the years, or have yet to reach their potential?

I am in Texas, N. of Dallas, in one of the fastest growing counties in the US (Collin County, TX). In my neighborhood, s/o is selling a nice, 2-story, 2,000 sqft home on a 1/3 acre corner lot, built in 2000 for under $150,000! I can't see prices falling below such excellent rates, especially when new property growth has maxed out (which is soon to happen in my town).

You could "maybe" buy a garage here in so cal for a $150K, hehehe!

Dingo, how much yearly appreciation by percentage has your area seen over the last 5 years. so cal has been 20% give or take for 4+ years. It is considered overheated. Many regions are also experiencing this nationally, such as, Boulder CO, Phoenix AZ., and much of the north west and northeast. However, some areas are not overheated, Missouri, Kentucky, etc. they have seen traditional run ups of 5-7% a year, very steady. So, how has your region done lately. I would believe areas with the very high appreciation rates are vulnerable to large falls in price, but areas that have gone up at more reasonable rates will be fine - they may see minor roll backs as the national market corrects - but it should be less painful or non-existant in those areas. My 2 cents, don't mind me if I'm wrong.......

Dingobiscuit

solster,

In my town, NE of Dallas, it had been steady growth for the past few years. New homes are still being pumped out at a tremendous rate, so people who are trying to sell their homes are in trouble (serious buyers' market here). Why buy a 2-5-year-old home, when you can have a brand new one, built to spec, with a 1-yr-warranty? I assume we will see land value appreciation when there is no more space for new homes (probably within 4 years). Nothing like SoCal, of course!

stressedsnyder

I just read an interesting report on real estate in The Economist. Unfortunately , I didn't get the issue date but it had to have been very recent and was not too upbeat. Also, deflation has begun in the Chicago condo market. Current inventory has exceeded the number of buyers requiring developers to advertise and offer incentives. Burn baby burn! I look forward to the good old days (2000) when property capitalization rates were 12-16%.

Rigg315

Thanks for all the great insight and comments everyone!

I have been on the fence about buying a house in Orange County, CA since I first got my full time job after graduating from university in 2003. And I'm kicking myself for not buying a $380K attached home in anaheim hills in fall of '03 that my realtor showed me, probably now worth ~$525K. That hurts!

I constantly analyze the OC market and read every article available. I have come to the conclusion that the peak in OC would have been Spring of 2004, if it wasn't for the 30 yr fixed dropping to 17 month lows this past spring of 2005, who would have predicted a 6.25% rate in summer of 04 drop to 5.5% spring of '05? We truly do live in a 'monthly payment driven economy!' Orange County Register realeased the real estate median price in OC from dataquick.com for june to be an astounding $603K!!!!! That hurts! But I knew that was coming, as those figures are usually 2-3 months delayed from the spring frenzy.

Now, obviously I have already missed the 125% appreciation boat the last 4-5 years, and still believe the day of reckoning will be coming for OC, so my thought is to hold off. My job is good paying and very stable and my fioncee is an RN, not a bad combined salary for when we do buy a house someday.

There are many reasons why RE has been fueled beyond belief:1. Stock market crash of teh late 90's, everybody says, Im' investing in real estate, not that stock market that I lost a lot in.
2. Corporate scandals, people don't trust buying stock with these shady CEO's of now a days, they go invest in real estate instead.
3. Anybody can get a loan now a days, illegals....no problem. Poor credit score.....no problem. 0 down.....no problem. Bankruptcy on credit......no problem. Bum off the street, i'm sure there is a lender out there that will give him a loan too. While in past history, any person with any of the issues above were left renting, and kept 'approved' buyers limited and kept prices down.
4. Historically low interest rates.
5. Interst only loans, nobody seems to care anymore about paying there home off??? I know of a guy that bought a house in OC last month for $790k, and has $700k ARM?????
6. This mentality of whatever you buy turns into 40% profit within 2 years.

Here are my reasons that the 'perfect storm' is just around the corner to deflate prices in OC more than what most people think:
1. People are going to get squeezed when there honeymoon Interest only or teaser rate ARM period is over with, which will result in a for sale sign in the front yard or re-fi to another interest only loan.
2. Unemployment will increase in the coming years due to a slow down in real estate due to higher interest rates. Mortgage brokers, RE agents, construction, appraisers, inspectors will definitely slow.
3. Equity bouncing around the economy will slow, and it's been a lot to keep the economy going.
4. Even UCLA anderson forecast(june '05) says economic growth in CA is in a fragile state.
5. Cantor Fitzgerald is predicting an inverted yield slope by the end of 2005, which always preceeded a recession in past history. Time will tell?
6. The market will get flooded with homes for sale in OC because of higher unemployment, peoples honeymoon ARM ending, and builders building a lot........which will lower prices. 3 buyers for every home for sale raises prices, less than 1 buyer for every home for sale makes homes sit for a while and wait for a buyer to offer 5% less after being on the market for 45 days.

I don't believe in the saying there isn't enough land in OC, Lennar bought the old el tora marine base. Anaheim Hills has all the land east of the 241 toll road to develop in the coming years, and many other areas.......there is plenty of land out there, the builders have just been smart to keep building within reason.

All I need is for the OC market to get flooded with homes for sale, and prices will take a hit.

I do believe that we have seen the peak of the market here in OC this past spring, as long as the 30 yr fixed gets back above 6.0% and approaches 6.5%. And hopefully a lender won't introduce a 50 yr loan term.

My conclusion, I'll take my chances on the future, and renting cost only 40% of what it takes to own here.

ibcnet

Predicting housing bubbles is a lot like predicting when and where a twister will appear not to mention the size and force. I think a lot has to do with demand. Here on the eat coast people are flooding the area building like mad. Houses that sat for decades are being bought and sold for quick returns.

Rental properties are the new investment of the day. It cannot be ignored that there is a rental boom and this is sustaining the economy as mush as any other housing phenomena. The fact is as long as there is sustained demand for housing be it in the form of rental property investments or homeowner inhabited property the economy will sustain itself fairly well for sometime.

So what to do...what to do. I say if you can find a way to reduce your housing costs do so. It may mean refinancing or selling and opting to rent for a time while investing some of the pocketed funds into a second income business venture.

-----------------------------
more info http://www.refinanceloanrates.fimark.net

solster

Here's a significant article!

http://www.latimes.com/business/la-me-homes7aug07,0,7037595.story?coll=la-home-headlines

SeminoleB

I read pretty much all of the posts, but I didn't catch anyone recognizing what Trip said. I agree, for the most part, with him in that many people might be selecting ARMs due to the fact that we have become a much more mobile society. However, this is just a small part of it.

The fact that many career and life changes are the norm these days certainly has an affect on the type of mortgages that people elect when they are purchasing a house. When is the last time you've met a younger someone that is in a job, life, and home that they plan on staying in for the next 30 years? Securing mortgages that last for such long periods of time and "cost" more per month in interest fees are no longer worth it to the owner who realizes that they are only going to be in a career for a few years. When you add to the equation the fact that too many people are reading Rich Dad, Poor Dad and thinking that it is the written word on real estate investment, it certainly doesn't help. This is only a small part and I can go on forever, but it's just too late in the evening.

I think another part of this is the fact that, no matter what, people are migrating to warmer areas. This migration runs in patterns. I ran into the same issue when I moved from Ohio to Florida and from Florida to Texas. When I moved from OH to FL in 2001, we paid about $900 to for a 14' truck. When I moved from FL to TX 3 years later, we rented a 20' truck for $330. When I asked MULTIPLE companies why the difference in price, they said that there were so many people moving to FL, they needed people to get the trucks out. When I came here to TX (not a big place for people who already live in Sunny Florida to move to), I realized how many people have moved here from cooler climates and even the warmer ones.

Austin is turning into the next California-esque boom area. About 30 years ago, there were 70k people in Austin. Now there are over 1 million in the metro area. The average home price in 1990 was about $85k, now it is up around $220k. The popularity of this place, much to the chagrin of the locals, is going through the roof.

So much so that the prices are becoming outrageous. Apartments downtown and in the near westside of town (where it becomes hilly) are reaching large city prices. A studio is over $1k per month in a downtown area that is not as full of life, stores, food, etc. as needed to survive without a car.

This drive up in price doesn't have much of a sign of settling...yet. The popularity of Austin is growing immensely. It is popping up everywhere, on TV shows, in commercials, etc. More and more people are coming to this area, especially from California and the cold northern states.

However, there are some signs that, much like California, Austin will hurt from such serious growth. Highway development is WAY behind. Infrastructure is way behind. This city is growing N and S immensely because there is no major E-W highway. Even the highways that traverse N-S are poorly planned and outdated before they are completed. This is partially due to the fact that Austin's core is fighting tooth and nail against the inevitible growth.

There are already rumblings that staple company, Dell, might be packing up operations and taking them to North Carolina. If they go, others will follow. This town doesn't have much of a job market outside of the tech industry anyway. Having a tech giant pull out could spell doom, especially if others follow.

Anyway, I've rambled on enough. The bottom line is, you can't predict the real estate market. Sure, everyone can take a guess and make predictions. With so many predictions out there, eventually, someone is going to be "right" and seem like a genious. The market does run in it's cycles, but knowing when one is going to burst is impossible because if everyone knew the cycles, then there wouldn't be booms and busts.

The best bet is just to be smart, educated, and make the decision based on sound financial planning. Don't buy outside of financial means. Don't try to make "the quick buck". Doing this with any type of precision is next to impossible. Most people who are successful with this are LUCKY. They might claim to be educated and a "whiz," but that's mostly BS. You know why? Because someone else who had made correct assumptions in the past and everyone else thought was a "whiz" probably missed out on a boat somewhere.

IMHO, it is all about being in the right place at the right time. Sure, you can do some research and do your best to make sure that is the place you need to be and the time but, in the end, it's all a gamble.

In the words of a funnyman "That's just my opinion, I could be wrong."

solster

The problem I have with the mobile society issue is:

The idea is based on moble society owners will often sell in say 5 years, so why not take advantage of a ARM lower rate vs a fixed.

the potential problems:

1) the ability of the "mobile" seller to be able to sell
2) rates may rise significantly enough in the short period of time that makes an ARM more costly than a fixed rate loan.

Example: I bought a condo in calif in 1989 (heigth of the last boom cycle). In 1991 the property was worth $20K less than I paid for it, and to sell it I would have lost the $20K plus closing costs. By 1994 the $20K deficit had grown to $30K + closing costs. I couldn't get out. I tried to sell 5 times in the 90s, not a single offer. I had an ARM. I had to move in 1991, I rented the unit, I was loosing $250 a month as rent did not cover the mortgage. That loss continued for 7 years before rents began to rise. That's a lotta $, but I knew it couldn't last forever.

Thus, people who are in need of mobility need ever more assurance that they can sell their home, so buying in a market that is speculated to being at the end of a boom cycle would be dangerous. If they get caught in that circumstance, they may have to maintain it as a rental from a long distance (which is what I was forced to do).

Now, what saved my butt in that situation? The fact ARMs in 1989 were a fairly smart move, there were good odds rates wouldn't go up, granted that wasn't quaranteed. Had they gone up, the $250 a month I was upside down on the property would have become much more problematic. Fortunatley, the rates went down since 1989. My ARM worked out to be effectively a fixed rate, small variations is all I ever saw from 1989 through 2005 when I sold.

What are the odds rates will hold or go down from 8/2005? Not likely. If a person can't sell a home, and has an ARM, they could be in pretty big trouble. The recent rise of rates (including todays 10 consecutive one) suggests ARMs could be very risky business.

My lesson - If real estate collapses, it can trap buyers, they can't sell, their only choice, stay put, rent it, or give it back to the bank. Worst, if the have ARMs when that happens, in an economy where rates are almost guaranteed to rise, they will suffer horribly. ARMs are gambles, and there is not a lot of support that rates will stay low.

As for predicting a bubble, you are correct, nobody knows. But, look at the San Diego story I posted previously, that's why I sold last month. My call, game over in calif this season. Small growth next year at best. I'm more comfortable with my money in short term CDs that are going up as the Feds raise rates. Of course, I had to sell one way or another, cause I'm moving soon - funny - I'm a mobile society member!

SeminoleB

I do agree with you solster in most aspects. However, I honestly don't believe that most people:
1. Know that that are going to be mobile
2. Realize that if the market is booming now, that it might slide terribly in the next few months (ie. they get in to keep riding the wave up, or so they believe)
3. That they sit and really think about the damage an ARM can do, especially if they can't sell when they need to.

I don't think everyone knows if/when they are going to quit their jobs. Most people don't go in saying they are going to work for X company for 4 years and then move. They have to investigate whether they like the job enough, what their co-workers and bosses are like, what their promotional opportunities are, and most importantly, what their other, higher paying options might be. Only after this trial period can they really make the decision and no one really knows how long this period may be.

I don't think that the average home buyer really thinks of the whole picture. For example, in an area like Austin or SoCal, the demand shows no signs of waning and the cities are expanding. The surrounding suburbs (much further out in SoCal I know, but still...) are pumping new houses out like crazy and building further and further away from downtown. So, you can buy a brand new house right now for $120K and in three years someone is going to be able to buy and equivalent brand new house two blocks up for the same price. I have talked with numerous people who are in this slump. They bought a house cause it was extremely cheap to buy a brand new house, they stayed there long enough to realize that they didn't like their jobs, the city, etc. and decided they wanted to move out. However, they're screwed. They can't sell and get their money back, they can't rent because it will be for a loss. Rents are lower than payments and no one is going to rent a house when they can buy one for the same price (and with insane builder discounts).

Many of these people are also in ARMs. First off, they bought houses that were at the extreme top of their payment abilities because they could "just afford it". They also figured that they would be able to re-finance or sell easily and for a profit if they started having trouble with the payments.

They also believed, along with many others, that the demand for homes in Austin would keep growing. They were right about the demand, but they didn't consider the fact that there is TONS of open country-side around Austin and builders are going to continue putting up houses for the same prices as the ones they'd already purchased. What would you rather have: A brand new house in a brand new neighborhood or a 3 year old house?

Now they are stuck with rising mortgage payments, an inability to rent their house and cover their expenses, and the realization that they cannot sell their houses for a profit.

Sure, this all might level out, but I don't forsee it happening anytime soon. Austin has grown N-S and it has room to grow E-W. Once they put in an E-W expressway further north (which will take forever and be fought for tooth and nail by the hard-core Austinites) it will expand out into outlying areas that are undeveloped on the sides. There is more than enough land close by for builders to be able to meet demand for at least the next 5 years (different from SoCal, I know). However, the job market here is lagging way behind the amount of new residents and, eventually, something's going to give.

Either way, the only "good" real estate market around here is the area close into town. There are many cool older homes that are skyrocketing in price and have a very competetive market for. I see this market continuing to inflate fairly steadily, however, even it will falter eventually.

The bottom line is that the average homebuyer is not making sure they are fully educated on their options. They are purchasing houses at the top of their bracket because, hey, who wouldn't want a bigger, nicer house. They aren't considering outside influences and they are getting in over their heads. Divorce, kids, new cars/toys, job loss or change, lack of growth in value with the addition of all the new homes, and rising interest rates and house payments can all come in and make their current situation unaffordable. It is a constant battle of "Keeping up with the Jones'" in suburbia and many don't think of the consequences.

"That's just my opinion, I could be wrong"

Brian

N

solster

Good posst Seminole! I think we are on the same wavelength. I wasn't trying to say people know they are mobile, just responding to the Trip comment - which I've seen elsewhere. That reasoning may have some logic, but it includes inherent dangers, and I believe we agree on that.

This thread tends to grow slowly, I hope you'll stick around to keep it going. I keep coming back as I google "california real estate bubble" daily, and this thread always is a top hit, so I got used to checking it often.

Some interesting headlines.

Feds rase rates for 10th consecutive time, and intend to continue with more rate hikes in the future:
http://money.cnn.com/2005/08/09/news/economy/fed_rates/index.htm

Impact of these rate hikes on loans/mortgages:

http://money.cnn.com/2005/08/09/real_estate/fed_hikes_impact_on_homeowners/index.htm

Sand Diego real estate slows to 6% growth (down from a high of 30%), slowdown OR beggining of a bubble burst:
http://www.latimes.com/news/printedition/la-me-homes7aug07,1,3210376.story?track=mostemailedlink

RE Stocks:
http://www.latimes.com/business/la-fi-reit9aug09,1,1063494.story?coll=la-headlines-business

The significant points:
Feds will continue to raise rates.
fixed 30 year mortgage rate projected go from 5.4% to 6.4% by December
people with ARM mortgages will immediately feel a hit in the wallet
San Diego's RE market is seen as an indicator for Calif, and the belief is it has peaked, perhaps crash?

Combine the San Diego story with the direction of mortgage rates, and share your thoughts. I really believe we're seeing the beginning of the end for this cycle. NOTE that in this thread, many here in So Cal saw prices decline in Fall 2004, but then the prices recovered and appreciated remarkably in Spring/Summer 2005. Next spring, prices may not be able to do this, especially with so much media coverage on the expected real estate bubble burst.

One last thought: I find it funny that the guy who posted the first post in this thread, the one who made the prediction, has never posted again on kiplinger...........INTERESTING :confused: