What if it doesn't collapse?

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Submitted by rb_engineer on August 6, 2007 - 12:38pm

Just wanted to make an observation. Yes, credit market is in trouble right now. My opinion is that this will lead to higher rates for borrowers and also less borrowers that can qualify. However, currently situation is much worse for the bubblesitters right now than a week ago. If it does come to fruition that interest rate for 30fixed goes to 8%, prices need to come down "at least" 10% for the affordability to remain on par (heck, it should be down 20% since the peak in 2004-5 right now since rates were close to 5% then). On top of that the loans are harder to get. Isn't it actually armageddon for bubblesitters if the prices don't crash? Just a contrarian thought for the day...

Submitted by gn on August 6, 2007 - 12:51pm.

Given the fact that prices went up b/c of the "credit expansion", I don't see how a "credit reduction" would not cause prices to go down.

On top of that, all the houses built to satisfy the demands of the speculators are not going anywhere. So, if anything, the market has more surplus now than it did before "credit expansion".

This means that prices will over-correct.

Submitted by IONEGARM on August 6, 2007 - 12:53pm.

IF prices stay high and interest rates go up, it is bad for anyone not in a home.

IF prices go down and interest rates go up it is pretty good for anyone not in a home (lower cost basis, more likely rates will go down for a refi in later years, etc).

IF prices go down and interest rates go down it is pretty good for anyone not in a home.

The housing market simply can't sustain itself at current prices and interest rates, now with more stringent lending anyone wanting to sell or buy is going to have a much tougher time of it. But that is essentially a good thing. Those that plan ahead, keep their credit clean, and save money are going to be well rewarded.

Submitted by Bugs on August 6, 2007 - 12:59pm.

This trend will be working for years, not months. Between now and the time the trend truly reverses there probably will be at least a couple mini-rallies.

I would urge everyone to stop looking at prices as the primary measure of "progress" and keep an eye of the ratio of sales to listings. It's okay to watch price trends for the entertainment value, but that's just the egg - the chicken is the supply/demand dynamic.

There is a chance the pricing may decline less than some of us may think, but there is also the chance that the declines may be greater than we think too. The 50% correction a lot of us talk about only reaches the long term trend without passing it. So far, all corrections have had a corresponding overcorrection, which in this cycle would point to price declines well in excess of 50% off peak.

My opinion only - stop watching prices as the barometer and use supply/sales instead. When they approach a more reasonable level the price declines will slow and eventually reverse.

Submitted by kewp on August 6, 2007 - 12:59pm.

They aren't making any more buyers, so the price is going to *have* to come down if folks (really, banks) want to get rid of properties.

Last year I had a gut feeling things would over-correct; I'm almost certain now.

Submitted by HLS on August 6, 2007 - 1:05pm.

From the lending standpoint, loans of $417K or less are not difficult to get, and even larger amounts are still available.
America is not going away. Lenders of money are not going to disappear.

Rates are not going insane for those who QUALIFY.
The media will blow this out of proportion, I am sure.

We are just talking about MONEY & wealth. It's not a terminal disease. Some people will be ruined.

Many people ARE freaking out. They don't know what to do.
I have refi loans to submit this week, maybe they will fund, maybe they won't. I'm not stressed. I've been through volatile markets before.

I'm off for a couple days in Mexico this week for some R&R and lobster & beer. The world isn't coming to an end.

It will give some mortgage scumbags a reason to screw people by telling them it's the best rate they can get.

Desperate times call for desperate measures. A LO that needs money desperately will try and screw people to max out their take on a loan.

Everything to a lender is risk/reward. GSE's are still backing loans of under $417K

The more you have to put down, the higher your credit score, the easier it will be to get a loan.

There IS money available for loans. There are millions of people who will have no problem, other than reduced net worth.

There will be a period of correction. I don't see rates exploding as housing prices fall.

(Even IF what you say was to happen, I would rather have someone pay 10% on $300,000 purchase than 6% on $500,000 one.
Either way it's $30K a year interest, but $300K cost gives you better options. Rates will drop, but your cost won't change)

Always remember, tough times don't last, but tough people do.

Submitted by no_such_reality on August 6, 2007 - 1:18pm.

Rates are not going insane for those who QUALIFY.

And how did this reduce the qualifying pool by?

The more you have to put down, the higher your credit score, the easier it will be to get a loan.

What percentage of the population has $100,000 to put down?

Submitted by JWM in SD on August 6, 2007 - 1:17pm.

Yawn. Yes RB, keep hoping that home prices don't go down. Maybe if you wish upon a star it might come true...Disneyland is only in the next county.

Submitted by SD Realtor on August 6, 2007 - 2:16pm.

The main problem is that people are simply impatient. If people had longer horizons such as a few years rather then a few months then I don't think there would be as much angst where we see posts complaining that prices are not reacting like they should or the market is irrational. The problem is that many people really really really REALLY want to own a home. While it is upsetting to see the median price reports come out monthly and sometimes they are up and other times they are down, it should not really affect your outlook. The latest lurch on Wall Street combined with the secondary market putting the squeeze on mortgage originators fueled some interesting posts here. I think it is nice to hope for large double digit drops in a few months, yet IMO if that does happen it will happen in the less desireable areas. Bugs had some good points... look at sales volumes, look at certain ratios... These are more telling then our untrustworthy median. Have lots of patience.

SD Realtor

Submitted by HereWeGo on August 6, 2007 - 2:45pm.

Let us know if you see any shifts in demand in the coming weeks. This massive tightening is really only days old at this point.

Submitted by SD Realtor on August 6, 2007 - 3:22pm.

Will do HWG...

As a side note, the monitor that I post (Scripps and a few other zips) as well as the sdr Carmel Valley Monitor all have enough stats in them for some nice analysis. It is simply a matter of somebody taking the raw data and plotting it out. You can get great active pending ratio's and other stuff that when read weekly is not much to look at but when plotted over several months will yield really useful information.

As a second side note yesterday I was showing homes to a client in Clairemont. Lots of well attended open houses. I peeked at 4 different logs from homes we visited and the numbers 8, 11, 12, and 11 which is not bad for an open house. How serious those people were is another story. Also the two open houses on Reisling near my home in Scripps seemed to have more activity then usual. However I have no clue about the quality of the activity.

SD Realtor

Submitted by Chris Scoreboar... on August 6, 2007 - 5:11pm.

Good topic, and bound to be met with a wave of anger. I have no idea where prices will go next, but I can say that I look at both sides of the argument constantly. One sided thinking has never made me any money. A lack of willingness to acknowledge even a chance that one's opinion could be wrong is rarely a trait of successful people that I have met. The fact that you are itleast willing to consider that a crash may not happen bodes well for your investment future.

The news is horredous everywhere, but what matters is what price actually does as a reaction to it, not what it should do. We have had awful volume for a long time now, and prices have not gone down much. If somehow prices hold up over the next year in the face of this avalanche of negative news, that would be a very bullish sign. I do not know if they will or not, but I am willing to consider that it is a possibility.

Put your helmet on, you may get hammered suggesting this.

Submitted by Andy on August 6, 2007 - 5:34pm.

What could cause prices to not collapse? I think that would be an interesting question on which to speculate.

Right now, there are tons of negatives for housing: interest rates rising, tighter lending standards, lack of income growth, bad savings rate, huge oversupply and little demand to name a few.

I've yet to hear good arguments from anyone as to why we are at bottom and housing should take off again from here. I think "they aren't building any more land" and "everyone wants to live here" should be put to rest.

I would love to hear some good bullish cases for housing - if for nothing else, something that I might not have considered. 40-, 50-, 100-year mortgages? Houses being designed for multiple families to buy/live in together? Houses designed for European-style extended families? Super -low Fed rates, or maybe foreign banks buying MBS that all becomes guaranteed by our gov't? Huge wage inflation?

None of these scenarios seems as likely to me as prices going down though.

Submitted by Bugs on August 6, 2007 - 5:54pm.

I think the question is, how long can these lenders hang on to their REOs, literally throwing good money after bad? The numbers of buyers ARE decreasing, foreclosures WILL increase, and those properties WILL have to eventually be sold at whatever the market at that time will bear. There's no IF involved.

Those distressed sales will eventually be sufficient in number relative to the sales volume that they WILL drive it, thereby resulting in an ever-declining market level.

Those people who can hang on will do so, but they aren't the ones setting prices. It's the must-sell transactions that will do that.

Really, the only thing that's even halfway surprising so far is the pace at which the credit markets are unwinding. Everything else up until now has been moving along according to earlier projections.

- The outlying areas got it first while the more central areas have lagged.

- The investors have left the building and the inventory has racked up as a result.

- The builders have tapered off on those developments they were in a position to walk away from, and they've played games with concessions and deceptions to avoid showing the losses in their neighborhoods so they could continue selling off their units.

- Jobs in the RE sector are drying up and all the retail sectors are sucking gas.

If you're looking at the cycle as showing catastrophic losses between months 12-18 then you're bound to be disappointed. The last downturn lasted 5 years and they were correcting from a spike that was only 1/3 the size of this one.

We're not kidding - this will take years. Sign the 2-year lease and relax 'cause you might have to sign another one before this is all over.

Submitted by LA_Renter on August 6, 2007 - 6:09pm.

Here is the home prices won't actually fall that much argument by Lou Barnes at Inman.

"Housing in the Bubble Zones is still sliding, inventory accumulating,
foreclosures rising, all likely to continue for years. Those ignorant of
housing propose resolution by sellers cutting prices, but it doesn't work
that way: overextended prices stay flat until purchasing power accumulates
to support them. The farther the boom pushed prices beyond purchasing
power, the longer it takes. This time, years and years.

Financial market commentators now speak casually of home prices falling 7
percent or 10 percent or another percentage du jour. Prices will fall that
much in some micro-markets, but most of the country did not join the
Bubble party, and will experience nothing of "falling prices." The stock market
can fall single-piece in a heap (99 percent of the S&P 500 stocks fell in
Thursday's wreck); homes are a neighborhood-by-neighborhood affair."

Southern California is one of the micro-markets he is talking about. Basically he sees a 7% to 10% drop and thats it, San Diego is already 7% from the peak so I guess we won't see much depreciation from here on out according to Lou. I personally try to keep my mind open to all possibilities, it's not so much being proven right as it is wanting to know the truth of the situation. One thing I would say to Lou is that we (especially California) have never experienced home prices become this disconnected from incomes and rents....Never. I think the markets he is speaking of historically have maybe hit 5 to 6 times incomes at their peak and fall back to 3 to 4 times incomes. So yea, time heals all wounds in that case. By the way thats what happened to Southern California during the 90's downturn and nominal home prices fell over 25%. We saw home prices hit 9 to 12 times incomes during this last boom. It will take a really, really , really long time for purchasing power to catch up this.

Submitted by HereWeGo on August 6, 2007 - 6:18pm.

With the weak dollar, foreigners could try the landlord game.

Submitted by rb_engineer on August 6, 2007 - 6:22pm.

I think the issue is economy. Its surprisingly resilient. Yes, people are losing jobs but unemployment is low. There are mortgage lenders going under everyday but then there are companies that are soaring (amylin, invitrogen, intuit?). I don't know why but people are still buying homes. There are many examples of people losing their shirt on the houses but there are just as many who are selling at premiums even now (think north county coastal). I think if the general population think owning a house is too expensive, that's not a bearish signal. When people are worrying more about their basic needs (food, rent, etc) that would signal a recession for me.

Submitted by kewp on August 6, 2007 - 7:04pm.

With the weak dollar, foreigners could try the landlord game.

Ahh, you beat me to it!

My first response is usually that it would take all SD wage earners salaries to triple overnight to prevent a collapse at this point.

However, imagine the doomsday scenario of a collapsed economy, housing market and dollar. Something like whats happening in Detroit going on nationwide. The market turning illiquid in parts of SD county.

The gummint could create a bailout of sorts by granting immediate US citizenship to anyone (and their immediate family) when buying a property. If the dollar sinks low enough, I can easily imagine a large influx of middle-to-upper class Asian familes immigrating in droves (both Indian and Chinese). America will seem like a bargain, particularly to the Taiwanese and Japanese. If they can find work of course, that is.

I can also forsee Mexican families (especially ones with multiple wage earners) pooling resources and snapping up properties in the IE at bargain prices.

This will, of course, give the xenophobes stress-attacks. Kind of an added bonus, I would think!

Submitted by hipmatt on August 6, 2007 - 7:13pm.

Really, housing only averages the same rate of return as inflation. Of coarse there are bubbles, and busts, but over the long haul, housing will usually "cost" a relatively fixed percentage of what the average household/individual makes. This percentage will fluctuate from time to time, but it is just one of many things that most people (people who live in housing that has monetary value) have to spend money on. This is how it has been for years, and how it will be for years.

There are other things in life that are just as mandatory for survival as owning or renting a home. For those of us that eat or drive, food and gas/energy will take up a certain percentage of our incomes. Health care, consumer staple products, clothing, education, cars/transportation, furniture, and more or less are all costs that most people in life will eventually have to spend money on, just as they do housing or food. Together they all add up to the cost of living. The change or increase in the cost of living is known as inflation. The cost of living will usually go up over time, usually in tandem with incomes.

It would be rare for the cost of housing to remain at such a relatively high ratio to incomes, with the exception of a bubble. This is the current situation that we face. There are so many reasons why we are in this huge deflating housing bubble, and I won't rehash these, but they are in many other threads here. Bubbles deflate, and usually they over correct. There is virtually no chance that housing prices will stay "this high". There are only a few ways this could feasibly happen.

A. The lower and middle class of America (think retail, education, service sector, police, fire, blue collar, some sales) gets huge increases in their wages to allow them to afford the current high prices. - this is not happening, most of the rise in incomes is seen in the upper class.

B. The cost of everything else drops and allows us to spend more money on housing. - this is not happening either, food, gas, energy, health care, even consumer staples are on the rise. Virtually nothing is getting cheaper except some tech items. Non-housing costs are rising fast, especially after the massive credit/housing boom, and they will rise further if rates are cut.

C. All of a sudden the supply of homes, land or supplies to build them was running out. We all know the current situation with resale and new home inventory.. it is at record levels and not dropping. There is still plenty of land to build on from Las Vegas to Phoenix to Seattle to Dallas. Inventory, construction supplies, and land are and will be readily available for years and years in this country.

Bottom line is that housing is and will come down in price significantly.

Submitted by bsrsharma on August 6, 2007 - 8:43pm.


Going by the Piggington thesis that all analysis be data driven, the basic data to support the collapse theory is the ARM reset schedule that has been much discussed at this site. If I remember, it is bimodal with the first wave resetting in 24 months (Jan 2007 reference) and the second one in 60 months. Accordingly, the first fallout should be around Jan 2009. By then about a million mortgages (conservatively) would have defaulted and foreclosure process would have started. Depending on the speed of foreclosure process, when the homes will become REO may vary. But once you have million plus homes in REO, the pressure on the financial institutions will be very great to liquidate and "clean up" their balance sheets. This is how I remember the Savings & Loan crisis unfolded. A temporary government agency called Resolution Trust Corporation (RTC) was formed to liquidate assets at whatever price. I have seen real estate liquidated by RTC at 20 cents on $. Strange thing is there were NO takers many times at 20 cents! You have to wait till 2009 for the eye of the (First) storm to pass through. What we are seeing are just the early showers.

Submitted by sdrealtor on August 6, 2007 - 9:25pm.

Saying housing only averages the same rate of return as inflation completely ignores the impact of leverage. The returns on housing have historically been so great because of the leverage and tax benefits associated with that leverage.


Submitted by patientrenter on August 6, 2007 - 10:13pm.

sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices. This 'free money' may be less free in the future, unless government guarantees, explicit or implicit, are further extended to insure the lenders against loss. Lenders have been supplying most of the money, and taking most of the risks. They may eventually get smarter.

Patient renter in OC

Submitted by NotCranky on August 7, 2007 - 12:11am.

The returns on housing have historically been so great because of the levera"ge and tax benefits associated with that leverage."

sdr, Thanks for reminding me. I am recalling the last ten years and what those little down payments did since 1997.

From Patient,
"sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices."

Patient Renter, If I understand you the paragraph below applies, if I don't perhaps you could explain?

Interest rates don't affect the appreciation outcome in an isolated fashion like that. As long as your fixed mortgage and costs are near ,at or less than what you would be paying for rent all appreciation and the tax benefits are gains regardless of the rate on the mortgage. As time goes by the mortgage(fixed) generally becomes progressively cheaper than rent ,principal gets paid down, appreciation at some rate is applied and viola the miracle of home ownership is in full gear.All these benefits can be aquired with no or little capital. Of course if the real market value is depreciating you are losing money and suffering opportunity costs as the wealth goes up in smoke, but any savings against rent and taxes,again regardless of the rate, off sets the depreciation.

Disclaimer: I am not saying anyone is throwing away money by renting right now.

Submitted by patientrenter on August 7, 2007 - 1:05am.

Rustico, that's the right stuff (in your paragraph).

But the point I was really making is that investors supplying money for new home loans may demand a higher return over the next 10-20 years, in comparison to the rate of HPA, than they got over the last 10-20 years. This debacle will show them that they're the ones providing most of the money and taking most of the risk, something they haven't really appreciated until now. The only way around that is a lot of 'sorta dumb' money not seeing the risk in front of their noses, or at least choosing to ignore it for bigger reasons.

Patient renter in OC

Submitted by sdduuuude on August 7, 2007 - 7:40am.

A decent question rb_engineer.

Rich addressed this a long time ago - maybe someone else has the link bookmarked.

Basically, if you believe that the ratio of home prices to wages is too high and has to come down to historical levels, then one of two things (or some of both) must happen: home prices drop or wages increase.

So, if home prices don't collapse, they will have to remain flat until about 2020 to give wages time to catch up to a reasonable level.

For those who do feel the home price/wages ratio is a little high, but don't look behind the median graph chart and examine rates, sales/inventory ratio, credit markets, the reliance of employment on the housing market, and other factors that hint at what is to come, this is one of many possible scenarios.

For those who do loook at such forward-looking factors, flat pricing until 2020 isn't all that likely. Pricing will likely give.

Submitted by cr on August 7, 2007 - 10:44am.

What's so bad about prices declining? Most people here are either for it or expect it even if they lose some equity. Those avidly against it we tend to drive away, so I am just posing the question: so what if prices fall 50%? They went up 2-300% or more in some places. Even if realistic circumstances could sustain that why wouldn't we want prices to fall?

Equity isn't wealth until the house is sold, and that requires someone with MORE money who can afford your house.

In theory buyers, banks, and investors should be fine no matter how low prices go, but skyrocketing defaults leave buyers and lenders facing the consequences of poor business, deception, and outright lying. That's rough, but if I placed my life savings on red 7 and lost, should the government have to give me my money back?

People are against prices falling because of the sense of entitlement derived from abnormal appreciation. I think people felt like they deserved to be millionaires when their 3br 2ba 1500sq ft house went from $400,000 to $1,000,000 in value, as if they earned it. They didn't do anything!!

I think "the everyone wants to live here" claim is a cop out. Even the best cities have bad parts where people with money won't live. SoCal, from SD to Santa Barabara is a great place to live, but there are plenty of equally nice places across the US, and other countries. International money will do a little, but as soon at the values drop they'll bow out too.

Outside the dollar eqauling the peso, or incomes doubling next year, I can't think of anything that will sustain these prices.

The past bubbles have overcorrected, and I hope this one does too. After a few years of correction, as suggested we think, it will be a positive. Those who foreclose, may actually be able to afford a house again, and those who are priced out or weren't foolish enough to get into an overpriced market may too.

In the end, all this will be is a more painful way to have gotten to the historical average increase in prices. The result is people will be able to afford houses with a fixed loan. Now that's just crazy!

Submitted by JWM in SD on August 7, 2007 - 11:00am.

Nice post coop. You laid out the reasons why I have difficulty taking certain posts seriously from certain posters. They always seem to hide behind "in my opinion" or "devil's advocate". But if you look at the history of their posts there is always the same theme: House Prices Can't go down in SD". It isn't an opinion, it's an agenda.

Submitted by surveyor on August 7, 2007 - 11:00am.


I think people felt like they deserved to be millionaires when their 3br 2ba 1500sq ft house went from $400,000 to $1,000,000 in value, as if they earned it. They didn't do anything!!

Not quite true. They saved up money for a downpayment, they cleared their finances, they maintained good credit, and were fiscally responsible. They were also able to maintain the payments, property taxes, and utilities. They had the foresight to buy a property when they did, when others were telling them otherwise.

Their timing may have been good, but you shouldn't minimize the hard work they did.

Disclaimer: the above is not a justification for higher prices.

Submitted by JWM in SD on August 7, 2007 - 11:04am.

Try cashing in foresight when I can rent for half the price and bank the difference ad infinitum. It might have been foresight if they didn't:

Cash out Refi the Hummer or Escalade and now they are stuck

Bought in 2005 with a 2/28 and planned to sell in 2007

Expected 15% per year appreciation when historically that isn't sustainable.

It aint foresight and don't try to pretend that it is.

Submitted by surveyor on August 7, 2007 - 11:40am.

foresight 2

It aint foresight and don't try to pretend that it is.

Response: DUH.

Agreed, those items you listed are not components of foresight and nor did I claim them to be. However, there are many who did not go that route. They've been able to make better use of their available resources and created more wealth for themselves. That is what I use for my basis of foresight. I think there are a lot more of these type of people than we think.

Submitted by sdrealtor on August 7, 2007 - 11:56am.

Dont know if that was directed at me but if it was. IMO House prices not only CAN go down, they HAVE gone down and WILL continue to go down for the next few years. The only thing I am uncertain of is how far and hopw fast.


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