Real Estate bubble bust may be worse than Dot Com bubble bust

it's such a pain in the ass. size vs. schools vs. price vs. comfiness vs commute vs. suburban/urban/look/age. you really have to pick two or three and damn it if you don't get fucked on all other fronts in the process.

we've paired it down to two options, it's either:

a) live in suburban lame-o land with an association and a horrible commute and liveable schools, but a lot of house and fairly new house for a reasonable price that won't eat us alive. the chance our house will retain value and be any kind of unique is nil. my wife refers to these as the middle class projects. (so you can tell that i'm probably going to end up in b, which irks me just as much for other reasons...)

b) live in gentrification central with amazing public schools with bilingual immersion programs, but tiny cute homes for a fuckload that guarantees i'll never have fun money again, yet meanwhile, i can ride my bike to the grocery and mexican popsicle store and walk my kids to a great park. while i'm not going absolutely insane because my office is in my bedroom (i telecommute) and our kitchen is so small we'll never have a dishwasher and and and...

it's so frustrating. where's the magic middle? oh that's right, none of those houses are for sale.
m.

I think people are forgetting that there is a limited supply of echo boomers willing to leverage 2/3rds of their income over the next 30 years just because a couple of real estate ground-pounders are yammering on about how things never stop appreciating ever and if you can BARELY afford to buy NOW you'll NEVER be able to afford it LATER!!!

Which is mostly what I get from that SF article.

In DC, for example, you have 3 main tiers of income, in my limited experience:

1. People who sell things to the government/tell the government what to do. Contract specialists who close the deals, GSA salespeople, owners and partners in outsourcing companies, lobbyists and law firms who work with the representational branch. Profit creators skimming off taxes allocated for work the government can't be bothered to do itself.

2. People who do cost control on these outsourcing deals, like me and everybody else I work with, hired to fill a requirement and keep things on budget/on schedule etc, and some private industry worker bees who fulfill the ancillary needs of companies like mine or the other businesses mentioned in #1.

3. People who work directly for the government and non-profits in the area, holding down the fort, slugging it out year after year being polite to the people in categories in #1 and #2.

Categories 1 and 2 are totally subject to the winds of change. It's happened before and will certainly happen again, no matter how many stupid motherfuckers keep calling this area "recession proof." We aren't doing anything value-added here, we leech off the sweat of the IRS. People who lived here fifteen years ago remember. When housing gets to the point where everybody in category 3 has to go find a roommate to share an english basement 20 minutes' walk from a subway stop (or worse, leverage 3/4ths of their entire household income for the next 40 years to get a starter rowhome 70 minutes away from work), it's a fucking bubble.

I'm surprised the Bay Area, having seen a MASSIVE overbuilding situation in the dotcom boom, can seriously consider the current appreciation rate anything close to sustainable or rational.

Anyway. Back to cost control.

fuck, we need to move somewhere cheaper.
m.

http://money.cnn.com/best/bplive/winners.html

this also assumes the value of the property is stagnant. if it goes up, you've got that as equity.

as to it's popularity, the economist recently reported that 60% of new mortgages in california are interest only.

Yup, sounds about right. Many, many people are going to be very, very fucked down the line.

We're at the point where the line bet/w predatory lending and "easy mortgages" is blurred out of existence...

Money Magazine's 100 Best Suburban Hellholes to Live 2005

I think half my office lives out in that shit.

yeah, that's what my wife talks about when she mentions the middle class projects... or .... more and more common, the upper-middle and upper class projects. i'm seeing these developments spring here in nashville and parts near that "HOUSES starting at $600K!!!"... big brick palaces... ugh.

of course, that same house in the gentrificombobulated hood would be $1M easy.
m.

They should just call these places "golf course towns." It would get far more hits on CNN.com if worded that way, anyway.

since it is still hilly farmland surrounding the lake, cows will sometimes come down to the water to go bathing, so you can tootle up in your boat next to them.

see here

i know the house we almost bid on last weekend would've put us back around maybe $1600 a month and that same house on the rental market in that hood would've been more like $1800 at least. (i'm looking at craiglist.) of course, paying extra on the princple of the interest only 20% loan would throw us well over $1800.

so perhaps there is wisdom in your strategy. i think we may just need to consider living in a cheaper hood for 5 years. the schools might not be AS good, but... parents make more difference at the younger ages. there are magnet schools... but the enrollment's lottery oriented. something'll work out.

the worst part is patience.
m.

They're not. I've seen the finishes and fixtures in these places, and they're appalling. They most certainly are NOT built to last - I think a lot of the value is in the land, not the shitty house they bought. Also, the buyers are not taking into account aesthetic value, which adds to the long-term value of the house. Poetic justice, though, for those who live for "conspicuous consumption" and little else.

Seriously, you are better off buying a little fifties ranch house - those things can be lovely if fixed up properly. People have got to learn to do without so much space.

Not taking into account, or failing to grasp?

A lot of McMansions are, at least, fairly inoffensive. Avoid the extremes of contemporary fashion, when you go to sell it down the line the new owner won't have to immediately rip everything out. Find a couple of rising yuppies just as bland as you are and it won't hurt at all.

I can't believe people are willing to blow $250-350k+ on a new house and get linoleum and carpet all over the place. Engineered wood floors (or if nothing else, cork and bamboo floors) aren't that expensive and add a ton to value and sellability (saleability, sale-a-something, whatever).

Nope. My fault for being very unclear. But the opposite. It's easy to rent a roomy one bedroom place in a "hipper" neighborhood in town for around $700 a month... but purchasing similar can produce a mortgage that's around $1400/month instead. It's a factor of 3 from rent to mortgage if we're talking about renting vs. buying a house, respectively.

And after all that, Seattle still isn't in the top 10 real estate bubble states. I don't want to even think about how much a shitty L.A. suburb house mortgage is.

That makes no sense. (I'm not saying you're wrong - just that I don't get it.) How can an investor afford to buy a property to rent it out for less than the mortgage payment? Renting should always be more expensive than buying (on a macro level.)

My wife and I are in the process of selling our condo now, its been on the market for a month. No biters. Kind of sucks because there are a some nice houses in our price range in town, but they sell quickly. And we are looking for a fixer-upper, we like the old charm compared to the new McMansion shit.

We really are pleased that we bought the condo when we did 4 years ago as its gone up in value $75000 since, which gives us a great chunk to put down on a house when we step up. And our mortgage is around $600 a month, which sure as hell beats rent around here. Averages around $1000 a month for 1 bedroom.

We both have pretty bad credit as well and have been told our max purchase price is around $232000, which doesn't get you much around here. Lucky to get 1/2 acre of land...most of the houses need new roofs, updated electricity and lots more work. But all in all, i would prefer to have a mortgage rather than rent these days purely for the tax breaks.

m.

And this is certainly what most parents look for in a school.

but they get less funding. and when nearly 100% of the kids are economically disadvantaged, their parents don't always have time making ends meet to help them with their homework or to discipline them. or they've got parents who are basically fucking up hard. etc etc. so meanwhile, your kid might be one of the few in class that can read. the teacher is spending all her time with every other student or with discipline issues cause so many kids just doesn't care, or are bored, etc. there's just a deficiency.

what do you do? it's your kid's future hanging on your actions.

i personally would rather go for some middle ground. not snootyville academy. but public school in a middle class neighborhood where they will still get some diversity yet still get attention. then, on top of that, make sure my kids hang with lot's of other types of kids.

me and my wife went to ghetto schools and survived, but frankly, i KNOW i got held back. i can live with my own fate, but i want better for my kids.

i don't know if that makes me some kind of sell out to certain ideals i've always put forth. have i?
m.

It's that Elvis song. The real estate people got so mad at him after that, they had been flipping ghetto housing like crazy until he came along.

I don't think this is true. What is true is that the value of the investment property should equal the present value of future rent cashflows. Once the mortgage is paid off, the landlord will still be able to collect rent, so that means that in the short-term, mortgage payments could exceed rent payments.

school district is a fairly common problem we are having as well as we are trying to start a family as well. most of the places we have seen have shitty schools...although their is always private school for mucho $$. But we figured by the time our children are old enough to start kindergarten (in 5 years time if we have one within the year), we may be able to pack up and afford a bigger home in a better district. we'll see.

Most real estate investors (ie people who buy houses and small apartment buildings to rent) think in terms of cash flow and short terms, like five years. You always assume that there will be a mortgage payment, and that the mortgage will never be paid off. Most investors don't hold property that long. So while you may find some cases to the contrary, look at it this way: If you are an investor and you want to buy a property to rent out, the immediate question is, "can I rent it for enough to cover the cost of ownership and also make some profit?" If the answer is no, then it's a bad investment.

risky. he's banking on the fact that boom or no boom, rich kids go to vanderbilt university here... and daddy will pay for the nice "condo" that's near bars, class, and all the other rich kids.
m.

But that's only in the short-term. In the long-term the rents will even out with the mortgage costs. And if there are any long-term investors in the market, they will affect the prices you can get.

i can hardly wait for similar "deals" to start popping up here in NYC, too.

That's really just incredible. So, what's the word, though: imagine, for the sake of imagining, that you have 20 mil lying around. Isn't getting two of these babies for one a sound investment - is the market not expected to turn around within 20-30 years? Or what?

Not necessarily. You still have to look at what you're getting for what you're paying. I could sell you a Toyota Corolla for $28,000 and throw in a free scooter, after all.

here's the problem. If the developer has managed to already offload any of his units in prior years, than I can probably get two idiotic/misinformed/out-and-out-scammed families to let me take their properties off their hands for less than 1.6M combined. So as an investment, yes, that's a bad deal.
And if I'm going to go long on something with an eye for 20-30 years, socal real estate is not fucking it, to be kind of blunt.

lol my payment just went down $30 a month.

(mortgage unchanged; surplus in taxes/insurance escrow acct)

http://www.elliottwave.com/images/marketwatch/figure5.JPG

For those that still think this is a US problem

Wow, if I understood that graph I bet I would be really shocked about something.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?

this thing fucking rules!!!
apparently there is no way on god's green earth I should buy this year unless I find an absolute steal that I'm in love with. Wow, I feel kind of dumb for needing that confirmed, but goes to show how sentimental people are abt property

-- El Tomboto, Wednesday, May 28, 2008 12:44 AM (3 weeks ago) Bookmark Link

one thing thats not being appreciated in this equation is the forced fiscal discipline associated w/home ownership - people will do a lot of things to hang on to their homes that they wouldnt do in other investment situations

but basically im psyched to see tools like this that contradict the omg real estate is always a good investment conventional wisdom

also lol UK ^^

I admit to also being confused by that chart. Does it refer to securities backed by mortgages in the respective countries? Like does the Portugal graph equal securities linked to Portuguese mortgages?

I think the graph is just the average amplitude level of the parties that happen in each country celebrating the debt.

Meaning the UK is just off the fucking script right now. Party central!

"OI DEBT. KEEP THE FEEL FLOW. OI DEBT! DEBT! KINGSTON HOLLA! THIS IS THE SHIT!"

do you guys fuck with bloodhoundblog? It's a collective of seller's agents mostly.some good writers on there.

http://www.bloodhoundrealty.com/BloodhoundBlog/?p=2181

this guy reminds me of tombot in a good way. he fucking hates redfin and then the redfin founder joined the collective, should be interesting.

http://farm4.static.flickr.com/3031/3026233313_08c9bf0fdd_b.jpg

this is from the british pavillion at the Venice Architecture Biennale. It shows average room sizes for new construction. The UK is the smallest and the biggest three are Denmark, Austria and The Netherlands.

http://www.theage.com.au/national/housing-prices-its-all-relative-20090125-7pgu.html

Australia has among the least affordable houses in the world, according to an international study that suggests (its) price "bubble" is due to burst.

A comparison of median house prices with median household incomes in Australia, Canada, Ireland, New Zealand, Britain and the United States found that Australia had the most cities in the "severely unaffordable" bracket — in which prices are more than five times incomes.

The Sunshine Coast in Queensland was the least affordable area, ahead of the Gold Coast, ranked third, Sydney, in fifth place, and Melbourne in 12th place.

These were all deemed less affordable than New York, London, Dublin and Miami.

The report, by international public policy group Demographia, said affordability in Australia was worsening relative to Britain, Ireland and New Zealand — where prices had collapsed recently. Australia would be next.

HURRY THE FUCK UP THEN

Well one area of the real estate market is booming again:

http://www.buzzfeed.com/mjs538/zombie-proof-condos-sell-out-in-kansas

Bottom floor, our in-house scientists from the Umbrella corporation will be working around the clock to find a cure!

last-resort-style amenities

Damn. Looking back at my contributions to this thread, I was wrong enough to feel pretty ridiculous. (puts on his dunce cap)

This thread is kind of fascinating to read with hindsight. And I was mostly OTM in 2005.

BTW, I will make another call right now: there is a mini-bubble in Brooklyn condos, fueled by low rates and tax abatements. Prices will momentarily appear to be heating up, but then will slow down again (although I don't expect a huge drop either).

I am guessing same is true in some other markets as well -- low rates are enticing buyers but overall credit is not flowing like it used to and any bump will be shortlived.

IT IS HAPPENING...AGAIN

http://online.wsj.com/article/SB10001424052702303296604577450810342727388.html

By NICK TIMIRAOS
Federal officials are broadening their investigations of mortgage lenders that use a popular federally backed mortgage program, a move that could force more banks to pick up some of the rising tab for losses at the Federal Housing Administration.

U.S. attorneys already have reached settlements with four banks, Bank of America Corp., BAC -1.48%Deutsche Bank AG, Citigroup Inc. C +0.37%and Flagstar Bancorp Inc., FBC +0.13%recouping $1 billion for the FHA.

Last month, the inspector general for the Department of Housing and Urban Development, which oversees the FHA, issued subpoenas seeking information from additional lenders, including MetLife Inc., MET -0.17%SunTrust Banks Inc. STI -0.09%and U.S. Bancorp, USB +0.24%among others, according to people in the banking industry.

The FHA doesn't make loans but instead insures lenders against losses on mortgages that meet its standards. In the past, the FHA has looked into whether lenders ignored cases of potential fraud and failed to properly verify borrowers ability to pay. The subpoenas could be used to uncover potential violations of FHA program rules. If they discover violations, the findings could be used to strike a financial settlement with the lenders.

The moves are the latest sign that officials are trying to protect the FHA from needing a taxpayer bailout by recouping losses from lenders. Representatives for HUD and the inspector general's office declined to comment.

Representatives for the banks declined to comment. MetLife, which disclosed the receipt of two subpoenas in a federal filing last month, earlier this year said that it would exit the mortgage business.

The scrutiny also raises the possibility that lenders will become more cautious when underwriting government-backed loans. "Lenders are practicing the mortgage equivalent of defensive medicine," said Brian Chappelle, a former FHA official who runs Potomac Partners, a mortgage consultant. "Instead of requiring more tests, lenders are excluding more borrowers to protect themselves from liability that they feel they could not otherwise protect themselves from."

Last month, Wells Fargo WFC -1.12%& Co. told lenders that it would no longer purchase FHA-backed loans with credit scores below 640 beginning June 11, though it continues to make those loans available through its retail division. A bank spokesman said the change was the result of regular adjustments of credit policies.

U.S. Bancorp originated $3.3 billion in government-insured mortgages during the fourth quarter, making it the fourth-largest lender of government-insured loans during that period, according to Inside Mortgage Finance, an industry newsletter. MetLife and SunTrust ranked 12th and 15th, respectively.

The FHA wasn't heavily involved in the mortgage bubble because private lenders provided credit on easier terms. But the agency saw a surge in business beginning as the private market seized up in 2007 and later as Fannie Mae and Freddie Mac tightened standards. The FHA allows buyers to make down payments of just 3.5%, which has made it the last major outlet of low-down-payment mortgages.

Fannie and Freddie can more easily force banks to buy back delinquent loans that are found to run afoul of their lending standards, and banks have imposed tougher lending standards than what the mortgage companies require in order to deter against those costly buybacks, which have cost lenders billions of dollars.

The FHA insured more than 700,000 mortgages that were 90 days or more past due or in foreclosure at the end of March, representing about 9.4% of all mortgages it guarantees.

While the agency had $32.3 billion in reserve at the end of March, its independent audit last fall estimated that after expected losses on its current business, it would have just $2.7 billion to cover unexpected losses on more than $1 trillion in loan guarantees.

A more conservative forecast by the White House's budget office in February found that without the recent settlements, the FHA would have been short nearly $700 million, requiring a taxpayer infusion for the first time in its 78-year history.

great

From 2009:

http://www.nuwireinvestor.com/articles/the-next-subprime-mortgage-bubble-courtesy-of-the-fha-53733.aspx

This seems really, really fucking bad. FHA is propping up the housing market. FHA takes huge losses on its insured loans = double whammy. (1) Taxpayers on the hook for bad loans.(2) No more FHA propping up housing market = further price declines, further defaults, same shit all over again.

FFS