Editore"s Note
Tilting at Windmills

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November 27, 2007
By: Kevin Drum

HOUSING BUBBLE UPDATE....Last year I speculated that when the housing bubble burst, prices would decline by 10-20%, with the high end of that range being more likely than the low end. Aside from fellow bubble pessimists, most people at the time thought that seemed pretty ridiculous. But here's what the LA Times says today:

No one knows how severe the slump will be, but economists and real estate experts interviewed by The Times, and who were willing to make predictions, said prices could fall 15% to 25% before turning back up.

Most said values would continue falling through at least next year, and some thought the market wouldn't reverse course until 2010.

....Leamer and Thornberg are among the most bearish of analysts, saying the recently ended housing boom pushed prices out of sync with incomes...."Southern California prices will fall 25% from their peak and won't find their bottom until the end of 2009," Thornberg said. Leamer also sees a drop-off at the high end of the range — 20% to 25% — and sees the downturn lasting into 2010.

Yuck, yuck, yuck. This is really not going to be pretty.

Kevin Drum 2:22 AM Permalink | Trackbacks | Comments (60)

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Comments

While I'm cognizant of the pain this will cause many hardworking Americans (and support some sort of legislative intervention), as a thirtysomething LA renter who will enter the housing market in the next few years, let me state for the record:

This looks extremely pretty.

Posted by: ethan salto on November 27, 2007 at 2:31 AM | PERMALINK

One only wishes that the Dems had a Presidential candidate who could effectively point to the utter failure of Republican policies of the last seven years even on the domestic front and rally the citizens against the party of greed, lawlessness, and unconcern for the lives of our soldiers.


Alas, Obama and Clinton are too busy running for the class President.

Posted by: gregor on November 27, 2007 at 2:36 AM | PERMALINK

At this point, the bearishness on the housing market is reaching a kind of critical tipping point -- a bit like the people who in 2005 were predicting a never-ending golden age of 20% annual increases in real estate values. You knew then that it was time to get out. Now everybody's absolutely sure that everything's going to hell in a handbasket and that we won't see the end of the carnage for another five years, etc., etc. Probably a good sign that, yeah, things are looking bad for the next year or so, but will probably begin stabilizing sooner rather than later. Will I put serious money on that bet? Er, no.- but just saying...

Posted by: jonas on November 27, 2007 at 2:39 AM | PERMALINK

Around central Iowa it seems that the worst kind of house to try to sell is in one of the newer subdivisions, built during the last 10-15 years. No one wants to buy a six-year-old house if they can pay about the same price for a brand-new one and make all the decisions about fixtures, layout, etc.

I have friends who have had their home, about five years old, on the market for months. They have lowered the price to about 10 percent less than what they paid for it, and have had few showings and no offers. Similar homes in their neighborhood have sold for 20 percent less than what they paid for their house. They want to downsize to a smaller home in a different part of town, but they can't get anyone interested in the house they have.

Posted by: desmoinesdem on November 27, 2007 at 2:47 AM | PERMALINK

For the economy as a whole, the withering of the bubble (its a wither not a burst), is a good thing.

Housing was overvalued, to the point that in most locales it was IMPOSSIBLE for a young family to buy a home on the income that responsible working people could manage.

Its still difficult, if not impossible for unsubsidized working people to buy a home.


It would be much better if homes were not considered for their investment prospect of gains, but as functional shelter.

We really have structured a society-wide Ponzi scheme.

Posted by: Richard Witty on November 27, 2007 at 3:00 AM | PERMALINK

Last time house prices came down by over 20% (1989 - 1993) unemployment also went up from about 4.7% to almost 8%. Whether there was a causal relationship, and in what direction, is an interesting question.

Posted by: JS on November 27, 2007 at 3:33 AM | PERMALINK

Kevin, I think you're probably right about housing. With the prospect of a Hillary Presidency in the next year or so, consumers are wise not to spend too much money due to the strong likelihood of Hillary raising taxes to finance her big government liberal welfare programs. If liberals were to promise not to raise taxes but instead to cut taxes, housing sales would go back up again because consumers would know their hard earned money wouldn't be stolen from them through taxes, but that's not going to happen.

I think the best way to counteract this trend would be for the feds to pump more money into the system or to lower interest rates. This would easily counteract any housing sales problems we're having now and lead to a quick and effective recovery.

Posted by: Al on November 27, 2007 at 4:14 AM | PERMALINK

Yuck, yuck, yuck. This is really not going to be pretty.

Oh, I don't know. I, for one, plan to be roasting marshmallows and eating popcorn while observing the festivities.

Posted by: Mike on November 27, 2007 at 4:17 AM | PERMALINK

Our East Oahu townhouse has probably lost 20% of its 2005 peak value -- but even then, the current assessment still places it at a 65% higher value than what we originally paid for it in 2000.

Further, because we have every intention of staying put, we're really not terribly concerned personally about such things, save for the marked increase in our property taxes over the last seven years.

But that's all right, too, because Honolulu property tax rates are probably the lowest of any major municipality in the country.

Now, I'm all for providing some form of relief for truly beleaguered homeowners, since the collapse of the market could reverberate throughout the U.S. economy.

But I'm also terribly afraid that under this current administration, such relief could easily go the way of the financial aid that was supposed to help Gulf Coast homeowners who suffered catastrophic losses from Hurricane Katrina, but was instead diverted to facilitate the rebuilding of luxury resorts and vacation homes for the well-heeled.

(And why Mississippi voters were still collectively dimwitted enough a couple weeks ago to re-elect Haley Barbour, that fuckin' scoundrel of a governor, I can't begin to fathom -- but alas, that's another discussion for another time.)

To be perfectly honest, I'm of the mindset that there were an awful lot of greedy people out there trying to avail themselves of this so-called "boom", for whom common sense apparently flew right out the window like an untied balloon. Those persons who speculated so blatantly in the real estate market have only themselves to blame for their s current misfortunes.

Posted by: Donald from Hawaii on November 27, 2007 at 4:32 AM | PERMALINK

House "values" in some of the most overpriced areas of California are still at ten times annual household income.

They will have to fall considerably more than 25% in order to return to prices supported by the fundamentals.

I live in one of the poorest towns in CA, Richmond. Decaying houses in the ghetto here are still "valued" at almost a half a million.

I think that 25% nationwide is itself conservative, but in any case the situation in the bubble areas will almost surely be much, much worse.

Or better, really; the best thing will be for borrowers to walk away from their loans, let the financial industry--which created the situation--take the losses, and spend the next seven years of bad credit saving up a down-payment on their next house, so they can get a sane loan.

Posted by: Nancy Irving on November 27, 2007 at 4:53 AM | PERMALINK

Al: "If liberals were to promise not to raise taxes but instead to cut taxes, housing sales would go back up again because consumers would know their hard earned money wouldn't be stolen from them through taxes, but that's not going to happen."

Sure, Al. Let's just ignore the rapidly mounting public debt and the declining U.S. dollar on the world market.

Let's continue pretending that the Bush administration's $300 billion annual federal budget deficits (which don't include the $200 billion requested for the Iraq War) not only don't matter, but are instead paragon examples of GOP fiscal responsibility.

Let's just borrow our way into economic oblivion and continue the profligate spending, just like drunken and horny soldiers and sailors used to whilst carousing through the bars, gambling halls and whorehouses along pre-WWII Honolulu's Hotel and River Streets.

At least liberals advocate pay-as-you-go fiscal policies -- unlike the GOP, which long ago abandoned any pretense of fiscal responsibility, having opted to quintuple our national debt in the 27 years since your precious Ronald Reagan first entered the White House.

Posted by: Donald from Hawaii on November 27, 2007 at 5:00 AM | PERMALINK

Gore Vidal once said that the four most beautiful words in the English language are - "I told you so".

You told us so, Kevin. After seven years of gross fiscal mismanagement by The Decider, I'm thinking a depression isn't out of the question...

Posted by: The Conservative Deflator on November 27, 2007 at 5:40 AM | PERMALINK

The Democrats better start hanging this mess around Bush and the GOP's necks now because they are sure to blame it on every Democrat back to Harry Truman.

Posted by: jimbo on November 27, 2007 at 6:24 AM | PERMALINK

i have a friend who says:

i hope a million people get dispossessed-----
i hope ten million people get dispossessed-----
and things get so bad there are riots on the white house lawn-----and then some of the rioters
go into the oval office and drag out george bush
and lynch him on the tallest lamppost on the white house lawn-----AND THEN THINGS ARE GOING
TO START GETTING BETTER(*)

(*)stupidity must be punished

Posted by: wschneid25 on November 27, 2007 at 7:17 AM | PERMALINK

If it wasn't for Republican lawlessness, I really wish one of them would get the White House in 2008. That way the blame will fall exactly where it should when the worst comes. And then maybe the GOP voting dimrods will understand that Republicans don't have their best interest at heart.

Posted by: astrid on November 27, 2007 at 7:55 AM | PERMALINK

This 25% drop over four years must not be in inflation-adjusted dollars. Considering the peak was in 2005, and the resumption of growth may not be until 2010, and that the dollar is getting weaker and weaker, a 25% drop is going to sound pretty good in a few years.

If inflation continues to grow, we may be looking at a 50% loss of value adjusted to 2005 dollars. Ouch.

Posted by: Xenos on November 27, 2007 at 8:02 AM | PERMALINK

This business will get out of control. It will get out of control and we'll be lucky to live through it.

Posted by: Fred Dalton Thompson on November 27, 2007 at 8:08 AM | PERMALINK

If they don't drop by 50% in CA, we're going to have some tough times getting loans to pay for them... Or it's back to sprawl-land.

I refuse to commute through a mountain pass.

Posted by: Crissa on November 27, 2007 at 8:24 AM | PERMALINK

It's political issue being handed to the Dems. Immigrants help housing prices. Getting some of the 11 million illegal immigrants naturalized would be a great stabilizer. Leadership? Anyone, anyone?

Posted by: Bob M on November 27, 2007 at 8:45 AM | PERMALINK

The Conservative Deflator: "After seven years of gross fiscal mismanagement by The Decider, I'm thinking a depression isn't out of the question..."

heh, as an individual, I've been pretty depressed about Bushco's mismanagement for some time.

But Drum is good. If it weren't for his much regretted pro-Iraq opinion, he'd be almost at 100% for his personal prediction success rate. Though, maybe, with Bushco, it's easy. Whatever they do or say, just predict the opposite.

Posted by: PTate in MN on November 27, 2007 at 9:13 AM | PERMALINK

"Yuck, yuck, yuck"??? Exactly what is it that this sick egotistical f_ _ _ finds so funny about a situation that, if he is correct, may devestate the economy and cost thousands of people their life savings?? Oh yeah, I get it.... His opinion of himself and credibility will rise. You just gotta love someone who has such deepseated feelings of inadequacy that he gleans joy from others' misfortune. Drum is to the political situation as Jesse Jackson is to work. Oh well, yet more entertainment in the guise of news.

Posted by: stutt on November 27, 2007 at 9:55 AM | PERMALINK

I follow a lot of the real estate talk and while I'm not certain the bust in California will go as low as some are predicting, looking down my street tells me there is a long way to go down still. Of 31 homes on my Long Beach block, (2) are foreclosed and abandoned (boarded up windows and weed filled yards) another (4) are currently for sale and have been for months. The house next to me was on the market for over a year before the owner gave up recently and found renters.

Posted by: arteclectic on November 27, 2007 at 10:05 AM | PERMALINK

I do not think u guys understand the gravity of the economic situation in the US. This is not just a housing bubble, this is not a subprime issue, and it is certainly NOT contained.

This is not a partisan issue, your economic is in crisis - your entire financial/banking system is having a seizure (google ABX, CMBX, LIBOR, Fed 23A exemption letters and which banks have got them, SIV, ABCP, CDOs, MLEC to understand some background. Read noriel roubini's blog at rgemonitor for a spot on analysis of the crisis) and how your Fed is powerless (google the expression "pushing on a string" in regards to monetary policy). Also read up on Citibank's imminent potential collaspe (forget the Arab 8 bill infusion, that is a desperation loan at 11% when CFC got 7% from BoA) as MLEC has failed and the act of it moving its SIV stuff back onto its balance sheet may wipe out their capital.

If after reading all of the above (and it is a HUGE amount to absorb) you still think the economy is "ok", well thats your perogative. Just do not be uninformed about the upcoming storm.

Many people here will probably not do any of the above and just go on dreaming or call me chicken litle saying the sky is falling. Fair enough, but in around 1 years time, I hope you would not curse yourself for spending just a BIT of your time on informing yourself so you can take the relevant steps to secure yourself financially so you can weather the coming shitstorm.

And good luck to all, because if you HAD read the stuff above, then you would realize by now this is not a USA problem, the toxic CDO shit has flown all over the globe, and this will be a global recession... if we are lucky.

Posted by: pibu on November 27, 2007 at 10:13 AM | PERMALINK

I've read one column saying the national drop could be 25-30 percent, not just in California:

http://www.nytimes.com/2007/11/25/business/25view.html?_r=1&em&ex=1196139600&en=37a46f7a26f437aa&ei=5087%0A&oref=slogin

Posted by: SocraticGadfly on November 27, 2007 at 10:16 AM | PERMALINK

Well, we both can certainly feel their pain. We can reflect on this because of that lovely breeze wafting through the cords of our Golden parachutes.

Posted by: Stan O'Neal and Charles Prince on November 27, 2007 at 10:20 AM | PERMALINK

I disagree. We need a drop of 30 % in housing values. If we don't, it would be a horrible injustice.

Who actually pays that money which is inflated? The new house buyers. That is, our children. Inflated house prices are a wealth transfer from the yet-to-buy to the current owners. As such, it is generational theft from the Gen X and Gen Y to the Baby Boomers.

I would welcome a gradual cut of 35-40 % in house values. Yes, millions will get burned. Well, many many many of those have been speculating. Speculative selling and buying has been a huge problem, and I have no sympathy for flippers.

Posted by: POed Lib on November 27, 2007 at 10:21 AM | PERMALINK

Equitable arguments depend a lot on the position of the person who is about to get burned. When you look at the people profiled by Bob Herbert, of course, you want to help: many loans were misrepresented to people who already owned their homes and were seeking to consolidate credit card debt. They themselves weren't seeking to profit from their house by selling it an inflated price.

And then there are flippers, probably a minority of people. And then there is everybody in between. I read an article in my local newspaper about a couple who happen to live right down the street from me and who bit at one of those "1.5%" phone callers and who are now facing outrageous prepayment penalties in order to refinance an ARM for a condo that they can't sell into a declining market. I don't know how I feel about these people. It probably depends on whether they are going to sell their condo or stay in it.

In other words, I am not in favor of assistance if it's mostly geared to propping up housing prices rather than letting people stay in their existing homes. Hardship does not include, for me, not being able to make as much as you planned from selling a house. I am in favor of getting as far away as possible from "housing as investment" vehicle: Housing is as much consumption as investment.

Posted by: Barbara on November 27, 2007 at 10:31 AM | PERMALINK

Kevin wrote: Aside from fellow bubble pessimists, most people at the time thought [a 10% to 20% drop] seemed pretty ridiculous.

But, now he says, economists and real estate experts interviewed by The Times, and who were willing to make predictions, said prices could fall 15% to 25% before turning back up.

That is, Kevin's prediction is still only supported by fellow bubble pessimists, although they're now more numerous and more pessimistic. Nevertheless, predictions are not facts. A year from now we will find out just how accurate the pessimists turn out to be.

BTW in the suburban areas near San Francisco housing prices are still going up. Eat your heart out, Southern California!

Posted by: ex-liberal on November 27, 2007 at 10:44 AM | PERMALINK
I live in one of the poorest towns in CA, Richmond.

Richmond, CA, isn't one of the poorest towns in CA; its a fairly middle of the road city, economically (though it has some notably bad neighborhoods).

Compare the median income, percent of the population in poverty, and any other measure of economic well-being you want of Richmond to lots of other places in the state, and you'll find that Richmond isn't all that bad.

OTOH, Richomd is at or near the bottom of the barrel for Contra Costa County, the 5th richest county of California's 58 counties. A little bit of perspective is in order. (Note Richmond at 507 of 1076, and note also that more than half of California counties have lower per capita incomes than the city of Richmond.)


Posted by: cmdicely on November 27, 2007 at 11:06 AM | PERMALINK

stutt: " 'Yuck, yuck, yuck'??? Exactly what is it that this sick egotistical f_ _ _ finds so funny about a situation that ...?"

You know, I really can't answer that -- except perhaps to ask the question, exactly what kind of stupid f_ _ _ thinks the term "Yuck" isn't commonly used to express a strong personal dislike or distaste?

Any ideas?

Posted by: Donald from Hawaii on November 27, 2007 at 11:08 AM | PERMALINK

Bushonomics at work.

When are Americans going to wake up and figure out that supply-side economics is a bogus confidence scheme by conservatives designed to funnel more and more wealth to the already wealthy and keep poor and middle class Americans, as well as small business, from competing and resulting in a stagnant economy where monetary assets can't flow.

Posted by: anonymous on November 27, 2007 at 11:09 AM | PERMALINK

Somebody is confusing "yuk, yuk, yuk" with "yuck, yuck, yuck."

ex-liberal is dumb and stutt is dumber.

Who've thought we'd get a movie sequel within Kevin's comment threads!

Posted by: anonymous on November 27, 2007 at 11:12 AM | PERMALINK

It would be much better if homes were not considered for their investment prospect of gains, but as functional shelter.
Posted by: Richard Witty on November 27, 2007 at 3:00 AM
--------
Yes. The mortgage interest deduction for second residences needs to go away entirely. We've also got a huge problem with frequently changing jobs that are far away from where we live. If you could live close to where you work and you worked at the same place half your life there wouldn't be so much of a problem. How can you make relocating more flexible and still keep stable and growing equity in each new residence? What about when gas prices go to $10/gallon and it costs as much to heat/cool your house every year as it does to pay the mortgage? I think there are a lot of socio-economic factors here that are headed for a humongous collision. Popcorn time indeed.

Posted by: Doc at the Radar Station on November 27, 2007 at 11:25 AM | PERMALINK

Without the correction, most people in southern california would never have the option of purchasing a home.

Now, if I save my money the next two years, I can actually buy something. that is good news.

Posted by: exhuming mccarthy on November 27, 2007 at 11:36 AM | PERMALINK

I refuse to commute through a mountain pass.

We returned from vacation in the mountains to LA via the pass from Victorville to San Bernadino. We were stunned by the number of bedroom communities being built. (We're not from California.) The prices on the first were around $200,000. Wow! An hour from LA and you've got to pony up $200,000! Not much further down the road -- 5 minutes maybe -- the price on the signboard for a 2nd bedroom community had swollen to $300,000. 5 minutes further down the road and the 3rd bedroom community coaxed buyers in with $400,000 houses.

Insanity. You're almost an hour from sniffing at a job in the LA basin and your house costs $400,000?

Mmmmm. Sprawl.

Posted by: Jeffrey Davis on November 27, 2007 at 11:45 AM | PERMALINK

"That is, Kevin's prediction is still only supported by fellow bubble pessimists"

LOL.... Dear heart, we know you're a fool but do you really want to display it so blatantly? Has it, perchance, escaped your notice that those "fellow bubble pessimists" actually have real data, including such things as falling housing prices, fewer housing starts, increased foreclosures, increased time to sell, a glut of houses on the market, and all those other measures that indicate where the future lies?

Posted by: PaulB on November 27, 2007 at 12:05 PM | PERMALINK

stutt @ 9:55 -
"'Yuck, yuck, yuck'??? Exactly what is it that this sick egotistical f_ _ _ finds so funny about a situation that, if he is correct, may devestate the economy and cost thousands of people their life savings?? Oh yeah, I get it.... His opinion of himself and credibility will rise. You just gotta love someone who has such deepseated feelings of inadequacy that he gleans joy from others' misfortune."

IOW: "You seem happy that everything is going badly." This is as close as wingnuts ever come to admitting defeat- it has to be wrapped within an accusation of treason.

Posted by: MillionthMonkey on November 27, 2007 at 12:06 PM | PERMALINK

Not to mention that the "yuck yuck yuck" was followed immediately by "This isn't going to be pretty," a statement not ordinarily associated with laughter or any other positive emotion.

Posted by: Barbara on November 27, 2007 at 12:11 PM | PERMALINK

AL blew it, Where does the Fed get the money to (pump into the system).I know he won't answer but are these R's dumb.

Posted by: john john on November 27, 2007 at 12:26 PM | PERMALINK

"That is, Kevin's prediction is still only supported by fellow bubble pessimists"


Where to begin...
1) Housing prices in the big bubble regions are unsustainable. The reason so many people will be losing their homes is because the only way they could afford them to begin with was through no-money-down exotic ARM's that began resetting this year and will continue to reset over the next 3.

2) These people who purchased with those loans did so because they mostly couldn't qualify for traditional 20% down, 30-year-fixed loan product on the price of the house they were buying.

3) As the mortgage meltdown has proceeded, credit has dried up. Exotic loans have completely gone away and only the cream of the borrower crop qualifies for a traditional loan at the moment.

4) The result of this is that all the people who expected to be able to refinance when their ARM reset when they would have *LOTS* of equity built up because housing only goes up, up, up are now screwed. They are in houses that they couldn't afford in the first place, with loans resetting into monthly payments that they can't afford now. They can't refinance because home prices are dropping and they are actually underwater in loan-to-value. They can't sell their homes because home prices are still too high for the average borrower to afford with a traditional loan and there are no more no-doc/no-down payment loans out there for potential buyers to tap into.

Until either the credit markets loosen (highly unlikely) or prices drop to the point where buyers can afford to purchase with traditional loan products (more likely) this mess will continue.

Yes, a lot of people are going to lose their homes, but they won't be losing life savings because they didn't go in with a traditional down payment. They walk away with a mortgage default on their record and that's it. Speculators who gambled heavily will lose big, but that's why the call it gambling. People who used their homes like ATM's will lose big, but I doubt you'll see much sympathy there, either.

Posted by: arteclectic on November 27, 2007 at 12:38 PM | PERMALINK

Economically we are headed for a world of pain no matter which party takes over the WH lease on Jan. 20, 2009. Since I accept that what lies in store will not be pretty, the only concern I have is, what will be best for the progressive forces. A major crash starting before November 2008 and the downturn starting to reverse itself in 2010, two years before the next election? Jeez, sounds wonderful to me. The Democrats could elect their own version of Reagan and be assured of his reelection in a walk.

Since I don't see any possibility of a soft landing on this one I would just as soon get it all over with as close to this current election cycle as possible and see recovery come in the next election cycle. Am I too cynical? Tough.

Posted by: majun on November 27, 2007 at 12:43 PM | PERMALINK

arteclectic, the pattern that you identify is more typical for first time mortgages living in go-go markets (LV, Sacramento, FL, etc.), but there's another category of owner, the one that refinanced. Let's say that there is the "Coastal" version of this mess and the "Inland" version, where long-time owners withdrew equity via ARM terms that are now resetting so that they cannot afford the payments. These people are definitely going to lose equity, and it is these people who are highlighted by consumer activists.

Posted by: Barbara on November 27, 2007 at 12:44 PM | PERMALINK

A major crash starting before November 2008 and the downturn starting to reverse itself in 2010, two years before the next election? Jeez, sounds wonderful to me. The Democrats could elect their own version of Reagan and be assured of his reelection in a walk.

That's why the administration will be goosing the Federal Reserve to throw everything including the kitchen sink into keeping the economy floating along through the next election. Doesn't matter if the dollar falls and inflation goes up.. that's later baby.

Posted by: Doc at the Radar Station on November 27, 2007 at 12:52 PM | PERMALINK

Actually, a fair number of people could lose their life savings or at least get a big chunk taken out of them by the IRS depending on exactly how they get out of the mortgage (debt forgiveness can be considered income). Take a look here at an IRS presser on this

Posted by: Butch on November 27, 2007 at 12:53 PM | PERMALINK

. . . debt forgiveness can be considered income . . .

Another gift to Middle America from the GOP?

Posted by: anonymous on November 27, 2007 at 1:55 PM | PERMALINK

Well, in New England after the last real estate bust started in 1989, values dropped by 20-25% when it reached the trough in about 1993 and took over ten years to recover to their original levels. Real estate values in much of the region didn't rise above the old values until the last two years of the "boom".

The real pain is going to be seen when municipalities start to revalue their grand lists (as required by law) and find that they're going to need to increase the real estate tax rates by 25-50%. That's going to cause lots of tsuris and more than a bit of sturm und drang in town and city council meetings. What politician can survive tax increase proposals like that?

Posted by: PrahaPartizan on November 27, 2007 at 2:01 PM | PERMALINK

I think that part of the plan to reduce the pain is to deflate our currency, such that, it will mask the decline in house values. There will be upward wage-pressure, to be sure. There will be hand-wringing on FoxNews - they will blame the Minimum Wage increase, and be done with it.

. . . . No one wants to buy a six-year-old house if they can pay about the same price for a brand-new one and make all the decisions about fixtures, layout, etc.. . . .
Posted by: desmoinesdem on November 27, 2007 at 2:47 AM | PERMALINK

Well - with materials costs being what they are, no one can be blamed for not wanting to drop the cash to remodel. The contractors and materials get paid for on credit - they get their money, the borrower is holding the bag, so that's how that false-economy gets its support.

I bought an older house, and yes, I was dumb, and borrowed against my equity to partially remodel. I have a fucking beautiful hickory floor. I love it. I really do. But I'm in debt up to my eyeballs now. Luckily, I bought in 2000, so prices will have to drop another 50% if I'm going to LOSE money on this house (not as much money as I've "lost" by being so tightly budgeted) - but the real problem is - the house still has a 1985 kitchen and 1985 carpeting upstairs that needs to be redone, and I'm tapped. Oh well - live and learn.

I'm a lot better off than some friends I know. I BEGGED them not to buy, two years ago. I was called a wack-job, a fruitcake, I was accused of being Clinically Depressed, a "negative person" a "downer". And now - they're the ones struggling to make $5000/month house payments, on an upside-down mortgage.

It does not make me feel better to have been proven right. I'm validated. And maybe, my "paranoia" steered me away from some unconservative financial decisions I could have made in the past 2-3 years - I could be much worse off myself. But my friends are still fucked. No matter how much I warned them - bottom line was, they still needed a place to live, and they got fucked because of it.

No. I don't feel good about that at all.

Posted by: osama_been_forgotten on November 27, 2007 at 2:17 PM | PERMALINK

debt forgiveness can be considered income . . .

Well, IANAL, but I think debt forgiveness as the result of bankruptcy is not considered income, but like I say I am not a lawyer or accountant, so don't quote me on your 1040.

Posted by: Tripp on November 27, 2007 at 2:33 PM | PERMALINK

debt forgiveness can be considered income . . .

I could be wrong, but I believe that this refers to phantom income. More here.

Posted by: Blue Girl, Red State (aka G.C.) on November 27, 2007 at 2:51 PM | PERMALINK

Actually Tripp debt forgiveness (aka debt cancellation) IS considered income by the IRS under certain circumstances, some of which WILL bite mortagees if the don't get out in the exact right way.

My link above appears to be bust, but here's the cut and paste to the IRS Q&A on the subject - http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Posted by: Butchd on November 27, 2007 at 3:01 PM | PERMALINK

Piku is right, IMO; this has the risk of getting a lot bigger. Maybe not quite depressionish, but at least as big as the circa 1982 recession.

Posted by: SocraticGadfly on November 27, 2007 at 3:24 PM | PERMALINK

Forgiveness of debt has always been considered income, and for good reason, otherwise you are enabling any number of tax shelters.

There is probably a difference, for instance, between renegotiating an ARM so that the interest rates go up more slowly in exchange for some concession by the debtor, like a faster payment schedule, and simply having the lender buy your house for its existing appraised value even if your loan is higher than that amount. The latter transaction would be a form of pure debt forgiveness and it would be difficult for the IRS to call that anything but income to you (it's money you no longer owe).

Try to think of it this way: that lender really did pay the original amount on your behalf either to you directly in a refi, or to the person you bought the house from. You've had the use of the money, ergo, it was yours. The only reason why you didn't pay taxes on it was because you had to pay it back. Now you don't have to pay it back, so you have to pay taxes.

Posted by: Barbara on November 27, 2007 at 4:40 PM | PERMALINK

Osama,

Count your blessings. There are worse things than old carpeting or kitchen appliances.

House payments of $5K/month?! Ouch. It will take a LOOONG time for that to appear like a bargain.

Posted by: Tripp on November 27, 2007 at 4:41 PM | PERMALINK

I wonder when the trend will hit here in Portland where, if I'm not mistaken, prices in 2007 are up about 6% from last year.

Article in the NYT claims top-end houses in Grosse Pointe MI communities have been dropping $100,000 a month since June.

http://www.nytimes.com/2007/11/25/realestate/25nati.html

Posted by: jrw on November 27, 2007 at 5:16 PM | PERMALINK

Al is apparently channeling Herbert Hoover; every history about the 1932 campaign includes a write-up about how Hoover spent several months trying to get FDR to agree to not inflate the economy, not to increase taxes, nor to increase public spending; because it was the "fear" of what FDR might do if elected that was causing financial "panic" and preventing Hoover's plans from working.
If the Republicans are re-using Hoover's old tactics (and where did those tactics get him?), they must be getting desperate!

Posted by: Doug on November 27, 2007 at 5:36 PM | PERMALINK

Article in the NYT claims top-end houses in Grosse Pointe MI communities have been dropping $100,000 a month since June.

I would like to see some kind of before and after price distribution for all homes in a given MSA. It seems that the median priced homes are not as affected as the upper end-would be nice to see a breakdown for a given area.

Posted by: Doc at the Radar Station on November 27, 2007 at 5:51 PM | PERMALINK

If people have been into ARMs where they're paying interest-only then they could walk away when it balloons to principal. If, in their area, they could then rent or buy something for nearly the same rate they were paying before (but certainly much lower than the principal payments) they could end up saving a heck of a lot of money over the whole time period. Paying interest-only and then avoiding the balloon...sounds good. The question is, can then find something else to move to that will remain within their budget?

Macro-economically, if there isn't a tremendous shift of wealth from ARM holders to mortgage lenders, then there won't be a lot of lost wealth for individuals, but there might be for mortgage lenders who needed the larger payments to come through in order for them to claim the large profits they had envisioned. So, anybody who bought ARMs in bundles might have been seriously over-charged and will now pay the whole bill for society.

Who profited/profits? Real estate brokers who sell pricier houses make bigger cuts. Mortgage lenders who bundle & sell off the over-priced crap made out like bandits. Individuals who could flip their overpriced houses before the bubble burst did great.

I have a relative who sold a house in Iowa just before big news stories started coming out. It was a fairly special situation and selling the house wasn't a big problem -- but just barely.

Timing is always crucial in these matters. One day too late and you're the sucker holding an empty bag.

Posted by: MarkH on November 27, 2007 at 8:03 PM | PERMALINK

cmdicely, I'm sure your statistics are correct. I should have confined my comment to the Richmond ghetto areas, some of which are much worse than anything I have seen in West Oakland (or indeed in New York or Chicago). Rotting houses covered with graffiti, yards full of trash, no one on the streets but gangs, prostitutes and dopers hanging out, virtually no economic activity at all in some places, not even a corner liquor store. The statistics for the whole city are skewed by the presence of a small but very wealthy section geographically cut off from the rest of the town, Point Richmond. As for the Richmond ghettos, the only halfway comparably distressed areas I have seen in the Bay area are West Oakland and East Palo Alto. Places like Hayward, which places statistically lower, don't begin to compare IMO, if you are looking at obvious signs of distress and depression. I was driving past a corner grocery in Richmond yesterday; they had a "community bulletin board" outside. It had obviously been up for a long while. There were no postings on the board. Not one. This town is severely depressed, in all senses of the word. Oh, and by the way, I can't afford to live here.

Most of the "poorer" towns you cite are in rural areas, where it has to be much easier to live with a degree of comfort on much less money. (Of course that is mostly because shelter is much cheaper.) I admit that I haven't traveled much outside the Bay area, however. Maybe I'm living in a fool's paradise, or a fool's hell maybe. :)

My point was that prices are still quite ludicrously out of whack. For instance, a set of "townhomes" were finished recently in a rundown working-class part of Richmond; not the ghetto, but on a street where virtually all the businesses are mangy auto-repair shops and the like. They're asking $400,000 apiece for them--not even detached houses. Even with a prime loan--and what working-class borrower would qualify for a prime loan on a $400k house?--the interest portion of a loan on these crappy places would wipe out the greater part of what any family who would be willing to live there, makes in a year.

You're right though, I should have been more accurate; but I invite you to take a look at the "iron triangle" of Richmond, next time you're up this way, and tell me what other areas in CA compare to it, qualitatively if not quantitatively.

Posted by: Nancy Irving on November 28, 2007 at 4:52 AM | PERMALINK
For instance, a set of "townhomes" were finished recently in a rundown working-class part of Richmond; not the ghetto, but on a street where virtually all the businesses are mangy auto-repair shops and the like. They're asking $400,000 apiece for them--not even detached houses. Even with a prime loan--and what working-class borrower would qualify for a prime loan on a $400k house?--the interest portion of a loan on these crappy places would wipe out the greater part of what any family who would be willing to live there, makes in a year.

If so, they'll drop in price fairly quickly -- a number of new developments in West Sacramento (which is far poorer than Richmond overall, even though its stats are similarly distorted by a geographically isolated higer-income communit) that were targetted at more well-off buyers at prices from the mid-$400,000 have recently gone to auction and sold at prices from the $200,000s.

Projects that were finished recently had their planning, including their initial sales prices, set before the bloom came off the bubble. And developers are getting shocks.

OTOH, there are lots of higher-end workers willing to live in more depressed areas if they can get a newer and better home that's accessible to their work. Which force is more at work in the case of the homes you point to, I can't say.

Posted by: cmdicely on November 28, 2007 at 11:13 AM | PERMALINK

Ah, location; yes. The only reason I live here is that I have to travel all over the Bay area for my work, and Richmond is just about ideal for that, as it offers easy(-er) access in every direction. (Otherwise I'd be living up in Lake County, where it's cheap and beautiful, too.) Most people only need easy access to one or two places, though, their and/or spouse's work.

It's difficult to believe that the townhouses I mentioned were built with even middle-income residents in mind. (As my mechanic, whose oil-soaked shop--complete with roll-down door and complement of rusting fixers in the forecourt--is on the next block, remarked: "They're not charging extra for the neighborhood!" :) ) But nothing about this bubble would really surprise me. About five years ago, when rentals were still tight, I heard about people camping out overnight for the chance to submit applications to rent a converted chicken-coop in Sonoma County; at the time, I recall hearing, families could make up to ~$55,000 a year in that county, and still qualify for Section 8, because even rental housing was so expensive. (Of course rentals now are cheap--compared to buying, that is.)

In fact, I wonder whether these townhouses, and perhaps the ones in W. Sacramento you mention, were built purely for the flipper market. After all, since housing was always going to go nowhere but up, no one would ever actually have to *live* there. :)

Do you read the Calculated Risk blog? They're focusing mostly on housing at the moment; some wonderful posts there, and the commenting community is very knowledgeable. (I mostly just lurk.)

Posted by: Nancy Irving on November 30, 2007 at 2:56 AM | PERMALINK




 

 

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