When will this Crisis End...Seriously? Part II

When will this Crisis End...Seriously? Partii: Lost In Speculation
by Hassan Nicholás

The Doomers Perspective


Great time to buy? You're probably better off waiting. There is strong evidence that we are witnessing the beginning of what will be one of the most destructive periods in our otherwise polished economic history. In it's glory days the real estate market allowed owners, first-time homebuyers and investors alike, to purchase homes with little or no money down, stated income, and "loose" allowances. Enter the moral hazard risk that, at the moment the future values for real estate fall, owners can walk, not limp, away from their investment. Cursory lending standards provided the perfect incentive for shady deals to come to fruition. There was money to be made...on both ends.

Not only did the housing bubble give spectators and buyers the ilusion that they would turn an immediate profit, it also convinced developers to build things that shouldn't have been built, encouraged consumers to spend what they didn't have, and allow banks to loan money to those people through bundled loans sold in the secondary market. So for a while lenders, real estate professionals and buyers happily indulged in "Mickey Mouse" transactions in a fantasy world supported by inflated (perhaps, with helium) prices that now seem laughable.


Everyone played their part in artificially appreciating the real estate market beyond what it could handle. But now we know the truth; we paid too much for our houses, banks lent out too much money for what homes were really worth, we were simply too wreckless with our credit. And on top of that, we had greedy lenders, agents, and appraisors orchastrating those transactions. The point is home prices are still years ahead of incomes, even with prices falling all around us, and you still want to buy? Foreclosure rates have risen in Southern California and with more resets on the horizon, we can only assume a percentage of those resets will lead to foreclosure. Inventory is up. As buyers, we have much more selection. And this is fact. But even if you can afford it, will you be lining up anytime soon to buy a (still) overpriced cookie-cutter McMansion in a decaying neighborhood laden with vacant homes? Not to mention the late developers that will add a batch of newly constructed, quickly deppreciating homes to the inventory. Just recently I received an email from the developers of the nouveau hip Santee Lofts downtown offering $100k free money incentives to be used towards purchase price, HOA fees, or upgrades. A month before that they were giving away $60,000. Panic, perhaps?

Sure, the market for real estate is in a falling - and so is the market for first-time homebuyers. Banks and other financial institutions tied to the Market have clearly experienced substantial losses as well. The outcome is that lending standards and practices have tightened. 100% financing is hard to come by, stated income is a thing of the past, and your credit risk is scrutinized a lot more carefully. Monies reserved for low and moderate income first-time homebuyers by the Government are now being used to bail out existing homeowners. And since banks themselves must pull back on how much money they can lend, first timers will have to compete with other buyers in the same pool of financing. Let's not even mention that home prices are still historically high for many.

What makes now, NOT a buyer's market is because everyone is feeling the squeeze. Unemployment, rising costs of everyday necesities (hello inflation), and limited credit will impact the incomes of many. Until sellers realize it does not matter what they think their home is worth, but what buyers feel it is worth paying for, we continue to see this drop. If you're reading this you might be amongst the many waiting for the market to bottom out so you can snatch up your dream home at cheap. Collectively, you're pushing prices down farther too. It's a waiting game that great rewards, but serious risks involved.

The only route out of our current real-estate-bubble-inspired economic malaise is realizing a new "real estate reality". Current home owners and amateur investors must recognize that some of the prices we saw over the past couple of years were an anomaly, just like enourmous gains Internet stocks realized in the '90s. Prices are falling in SoCal, but they still got a ways to go before they stabilize. Buying today could be a $100k mistake.

If there's one thing we should learn from all of this is we can no longer be casual homebuyers. We need to be savvy and smart.

"Become wealthy, knowledge is King." - Nasir Jones

When will this crisis end...seriously?

When Will This Crisis End...Seriously: A Debate Pt. I
By Hassan Nicholás

Incomes still catching up
Those who bought at the peak of the cycle pinning their hopes on incomes rising and "catching up" instead to home prices may be better off finding ways to increase their income themselves. But they had better be patient. Average incomes simply aren't rising in tune with home prices. The sooner you understand that, the better you understand prices and easier you will recognize a true bargain. Even if house prices stayed exactly where they are, it would take about 10 years for rising incomes to bring the ratios back into any sort of alignment. Which means the so-called savings that you would realize buying property in this market is superficial.

Japan, California
California has a lot of land. But home prices in built out markets, like Los Angeles proper, will not decline as much because there really is no more land (or desire in those surrounding areas). People are starting to realize the real costs of commute and are now starting to put prices on amenities, convenience, environment and so on. The migration is inward. And it is this movement that helps sustain the prices. And if what we're seeing is indeed a trend, then we can expect prices to even rise.

Correct yourself, before you wreck yourself

As long as home prices remain far above California income levels prices will have to drop. Fact. Obviously, we cannot expect home prices to fall 37% in the short term, but we can anticipate in perhaps a year or two home prices falling considerably. What we are seeing is the market correcting itself before our eyes.

Spraaaaaawlin'
Despite popular belief, the "no more land" theory example does not work too well in L.A. county. Established built-out neighborhoods like those found in Pasadena found a way to increase density by tearing down single family homes and small businesses and replacing them with multi-use developments (such as retail, condos, underground parking, etc.) Any quick glance at recent development happening in and around Los Angeles plus those waiting in pipeline and one will see the future is "up". Constant pressure to change zoning to allow more second-units behind single family homes, skyscrapers were only low-rise was permitted, lofts originally zoned for power plants, etc. are all real clues that L.A. is sprawling-- not nearly as dense as other places.

Los Angeles Flight
California’s population growth rate has slipped as many residents left for other states. Even though new arrivals from other countries and babies born in California more than offset the departure of residents for other states, foreign immigration to California is slipping – as immigrants find that other states offer plentiful jobs and cheaper housing. These changes could leave California without the educated workforce it needs, in part because of the widening achievement gap among California students. The Public Policy Institute of California projects by 2020, the state’s supply of college-educated workers won’t meet the state’s needs. So then what?