Higher-Priced Homes Feeling the Pressure

Submitted by Rich Toscano on December 30, 2008 - 5:37pm

The Case-Shiller index data for October was released today. Kelly Bennett has written it up here and here, for those who want the full rundown.

The thing that jumped out at me was that for the first time during this bust, the highest-priced of the three Case Shiller price tiers experienced a greater monthly decline than either of the other two.

The high-priced tier fell 2.9 percent between September and October, easily beating the 1.8 percent drop in the middle tier and just edging out the 2.8 percent drop in the low-priced tier. Until this month, the low tier had almost always declined the most of the three with the middle tier falling the second hardest. The accompanying graph shows that the high tier has been the most resilient of the three.

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Submitted by peterb on December 30, 2008 - 8:38pm.

Thanks Rich. Looks like the sharp market decline is now reaching the higher end homes. Stands to reason as unemployment rises and the Alt A and Prime/jumbo prime loans weaken, we may see a similar fall as the low-end has experienced.

Submitted by investig8r on December 30, 2008 - 9:25pm.

It looks like the high tier homes are poised for even more dramatic price declines in the new year. Unless there is a change on the federal level, the conforming limit on loans in San Diego drops from $689,000 to $546,250 on January 1. From what I understand, nonconforming loans are expensive and hard to find, which shrinks the buying pool to those people with enough cash to make a downpayment equal to the price of the home minus $546k. For instance, to buy an $800,000 home, a purchaser would need to make a $254,000 downpayment, which is almost 30% and a lot of cash for most San Diegans. Unless jumbo loans become cheap and plentiful, it looks like there is going to be a credit squeeze that disproportionately hurts homes priced over $680,000. That is the most expensive home on which a buyer can put 20% down and still get a conforming loan.
It is possible that the government will once again raise the conforming cap or erase it altogether. Has anyone heard anything to suggest this may happen? Los Angeles, San Francisco and Orange County all have a $625,000 cap, so I'm not sure how much political will there is to change it for San Diego. It will be interesting to see how this plays out.

Submitted by 4plexowner on December 31, 2008 - 6:26am.

Another factor that might hurt the high end more than the low end is the need to now prove income in order to obtain a mortgage

Does anyone know what percentage of high end homes were purchased with stated income loans?

I suspect the percentage is non-trivial and now those buyers are unable to purchase any home, much less a high end one.

Submitted by LV Renter on December 31, 2008 - 11:03am.

Rich

Did you read the quotes in the U-T from Norm Miller. Looks like there is never a shortage of Karevolls, Yuns, and Lereah's/

His last quote was with unemployment potantially reaching 10% 2009 is a great time to buy an home. Can you help me understand that quote?

Submitted by ChrisinDiego on December 31, 2008 - 11:12am.

Rich... On your data tables: Can you help me understand why Coronado and Carlsbad increased home values over this time? Coronado especially seems more resilient in its high end position with lower sales overall... inventory low? If lower inventory and lower sales volume are driving prices higher in Coronado.. why not elsewhere?

Submitted by 34f3f3f on December 31, 2008 - 12:21pm.

It looks like people may be beginning to realize how much they can actually afford. So the tail is no longer wagging the dog. That's good news, and I hope it continues until these still very over-priced homes correct to more realistic levels.

I expect this may have been covered in other posts, but Businessweek revealed that FHA backed loans have attracted the same unscrupulous subprime brokers back into the market. I suspect this is just a small boil forming on the puss-ridden carbuncle, and won't dent price declines.

Submitted by LV Renter on December 31, 2008 - 12:27pm.

I think real estate will be at a bottom when the reason to buy real estate is to live in a home for a long time. The reason is not to buy to flip, rent, invest, etc.

We will also be close to a bottom when many of the mortgage brokers and realtors have found new careers (house cleaners?) and bo longer keep calling false bottoms.

Submitted by sdrealtor on December 31, 2008 - 12:47pm.

investig8tr
The key to higher priced tier will be the availability of 2nd trust deeds. If buyers can get 2nd's for $100 to 200K at reasonable rates there is a market between 800K and $1M. If they cant, the market between 800K and $1M is much more difficult.

Submitted by investig8r on December 31, 2008 - 1:30pm.

sdrealtor,
I agree completely. My mortgage broker who has always been reliable and delivered literally unbeatable rates has told me that seconds are pretty much gone from the market or too unaffordable to be much help. That, combined with a return to legitimate underwriting standards seems to leave the top tier buyer pool quite limited. Balancing that limited number of buyers against a potentially large number of motivated sellers, including banks, it looks like there will be serious top tier price reductions ahead.

Of course, government intervention such as raising the conforming limit, forgiving principal owed by struggling borrowers or support for second trust deeds can change that. All those potential government actions seem quite possible, but I haven't heard much detail to suggest they will happen soon.

Submitted by cr on December 31, 2008 - 1:46pm.

investig8r wrote:
I agree completely. My mortgage broker who has always been reliable and delivered literally unbeatable rates has told me that seconds are pretty much gone from the market or too unaffordable to be much help.

I was just going to say, aren't seconds gone?

And don't we want them to stay gone? That will bring prices down for everyone in all income levels, save the super elite top 0.01%, which is a good thing.

Over-lending got us into this mess. Low prices mean people can borrow less, spend more elsewhere, and eventually the income to price ratio will return to a normal level.

Submitted by sdrealtor on December 31, 2008 - 1:53pm.

Seconds are not readily available right now. The question is whether that will continue. I dont think we want them to stay gone as they serve a legitimate purpose when used properly. There is nothing wrong with a homeowner who has plenty of income and equity along with a good 1st loan but wants to do some improvements to their property taking out a second. My brother recently bought a home (not in SD and against my advice but he had good reasons) and did not have 20% to put down without liquidating his retirement accounts (previous wife took care of that). He needed to borrow $150K on a 2nd that he will have no problem paying off in 3 to 5 years with his income.

If used properly there is a legitimate use for them. Unfortunately, they were abused for many years and now the pendulum has swung to far in the other direction.

Submitted by cr on December 31, 2008 - 4:11pm.

Call me old school, I just think there's no difference between zero down and borrowing for that 20% down.

I think people should and need to learn how to save money again. A society built on perpetual debt (like ours) will eventually come to an end if it doesn't change it's ways.

A bit extreme to some I'm sure, but if the result is a stable economy and affordable housing while preserving a desirable quality of life, a little discipline today will make for a much better tomorrow.

Unfortunately discipline went out of style 30 years ago.

Submitted by Rich Toscano on December 31, 2008 - 4:21pm.

ChrisinDiego wrote:
Rich... On your data tables: Can you help me understand why Coronado and Carlsbad increased home values over this time? Coronado especially seems more resilient in its high end position with lower sales overall... inventory low? If lower inventory and lower sales volume are driving prices higher in Coronado.. why not elsewhere?

That table lists median prices so there is a lot of noise, especially in areas with fewer sales. It provides rough trends only and I wouldn't make anything of the median price change in a specific zip code.

LV Renter wrote:
Rich

Did you read the quotes in the U-T from Norm Miller. Looks like there is never a shortage of Karevolls, Yuns, and Lereah's/

His last quote was with unemployment potantially reaching 10% 2009 is a great time to buy an home. Can you help me understand that quote?

Got me...

Rich

Submitted by sdrealtor on December 31, 2008 - 5:38pm.

Coop there is no difference between 0 down and borrowing the 20% except if you plan on paying off the 20% ata different rate as the 1st (and I mean actually paying it off).

Regarding the upper tier decline it looks like there was a similar decline last year but I dont have the exact data points to be sure. Looking at the shapes of the graphs over the last 18 months, It looks like the low and mid tiers feel off a cliff and are starting to level off while the upper tier is continuing its steady decline.

Submitted by patientrenter on December 31, 2008 - 8:02pm.

sdr, you're a smart guy, but buying a $1,000,000 dollar home, while putting none of your own money at risk, is the net result regardless of whether it happens by:

A. Borrowing $1,000,000 from lender L, or

B. Borrowing $800,000 from lender L and $200,000 from lender M.

Yeah, sure, we know that the rates and PMI and repayment terms might all be a smidgeon different between A and B, but the risk sharing is the same - almost all of the biggest risk - of a large drop in home prices, followed by a walk - is taken on by the lenders, not the "buyer".

Submitted by sdrealtor on January 1, 2009 - 12:10am.

pr,
Yeah? Isnt that what said? As for who takes on the risk, it depends upon the state as laws vary as do borrowers indivudual situations.

Submitted by eagleeye on January 2, 2009 - 2:11am.

ChrisinDiego wrote:
Rich... On your data tables: Can you help me understand why Coronado and Carlsbad increased home values over this time? Coronado especially seems more resilient in its high end position with lower sales overall... inventory low? If lower inventory and lower sales volume are driving prices higher in Coronado.. why not elsewhere?

Where are you finding this table? I can't seem to locate it.

Submitted by fredo4 on January 11, 2009 - 2:24pm.

Rich-
Why is the high price tier on this chart so low? 469K hasn't been considered a high price for a home in S.D. county for a really long time. Just wondering.
- Fredo

Submitted by Rich Toscano on January 11, 2009 - 7:31pm.

fredo4 wrote:
Rich-
Why is the high price tier on this chart so low? 469K hasn't been considered a high price for a home in S.D. county for a really long time. Just wondering.
- Fredo

That's the cutoff for the most expensive 1/3 of homes sold during the measurement period.

rich

Submitted by guy1 on January 23, 2009 - 7:44pm.

I keep seeing these quotes of 40 to 50% price drops from the high. But I don't see it reflected in the listings. These statistics are bogus. All they reflect is that the top end of the market has stoped selling, and the only thing selling is the bottom of the market. Result= median goes down dramatically, yet the actual purchase prices haven''t declined nearly as much. Sure, you can find some crappy area or repo that sold for 50% on the dollar, but go to Newport, Laguna, or Corona del mar. What the hell. These prices haven't dropped at all. Hey, I'll be nice and spot you 10%. When is the top of the market gonna take the hit. These homes are still up 100% over there 2002-3 prices, while we are being told the market has returned to 2002-3 prices based on the median. Give me a break.

Submitted by Rich Toscano on January 23, 2009 - 8:01pm.

guy1 wrote:
I keep seeing these quotes of 40 to 50% price drops from the high. But I don't see it reflected in the listings. These statistics are bogus. All they reflect is that the top end of the market has stoped selling, and the only thing selling is the bottom of the market. Result= median goes down dramatically, yet the actual purchase prices haven''t declined nearly as much. Sure, you can find some crappy area or repo that sold for 50% on the dollar, but go to Newport, Laguna, or Corona del mar. What the hell. These prices haven't dropped at all. Hey, I'll be nice and spot you 10%. When is the top of the market gonna take the hit. These homes are still up 100% over there 2002-3 prices, while we are being told the market has returned to 2002-3 prices based on the median. Give me a break.

These aren't median prices. These indexes are calculated by comparing same-home sales. Nice try though.

rich

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