patrick.net/housing/crash.html
Speculators now account for 25% of all purchases, and an additional 13% a re vacation houses, making market very likely to go into free-fall when they all sell. This winter's sales volume in Santa Clara County is only 44% of what it w as last summer, the worst ratio in at least 10 years. Prices are already down every month for Nov, Dec, Jan, and Feb.
When rates go from 5% to 7%, that's a 4 0% increase in the amount of interest a buyer has to pay. This means a big hit to the finances of many owners every time interest rates go up, and this will only get worse as more adjustable rate mortgages (ARMs) get adjusted upward. com on 13 Jan 2005: "There is a double whammy inherent in these ARMs," said Frank Nothaft, chief economist for Freddie Mac "At the end of fixed-rate period you face a hike in interest rates and you have to start paying principal. There is more default risk in these interest-only ARMs than in a fully amortizing product." More than 300,000 jobs are gone from Bay Area in th e last 4 years. It's worse than Detroit car problems or Houston's oil bust. People without jobs do not buy houses and owners without jobs may lose the house they are in. Even the threat of losing a job inhibits house purchases. html we hear that "demand for labor that salaries have in fact returned to 1997 and 1998 levels." Local incomes are nowhere near what they need to be to sustain current house prices. The Financial Accounting Standards Board issu ed final guidelines that will force companies to deduct billions of dollars of employee stock options from profits starting in mid-2005. This will greatly reduce the amount of money that local technology employees will get, and that in turn will depress housing prices even more. San Francisco continues to lose population at the fa stest rate of any city in the US and most of those are professional jobs. The problem is not only the dot-com crash, but also outsourcing technical jobs to India, which continues at a frantic pace as corporations realize they can pay an Indian only 20% of what they must pay a similarly qualified employee in the Bay Area. Fewer people in the Bay Area means less demand for housing. The NASDAQ at about 2000 is still only 40% of the 5000 it was at the peak of the recent stock market bubble. The crash in the NASDAQ probably hit the Bay Area harder than anywhere else because of all the stock held by employees of tech companies. That money would have gone into housing, but is now gone. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss, he's bankrupt in the real world. Even a small price decline will bankrupt buyers with small equity. Buyers foolish enough to buy with no money down are already bankrupt, but still unaware of the fact. The rest of the economy shows little inflation, but h ousing inflation has been very high. This disconnect makes houses more expensive in terms of real work. There is no increasing salary to pay off the ever higher interest, so the only way to do it is more work. Many buyers will have to postpone retirement due to overpaying for their house. We are already reaping the consequences of poo r lending. Foreclosures are at the highest rate they've been in 40 years, about 1,500 per quarter in Santa Clara county. There are only about 4,500 sales in the quarter, so on average, about one third of house sales are ending in foreclosure. According to the California Associatio n of Realtors, the percentage of Bay Area buyers who could afford a median-price home in the region plunged from 20 percent in July 2003 to 14 percent in July 2004. Lightbulbs going on in many brains in the Bay Area: "Hey, I can just go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably retire on the rest of the price difference. My neighbors just did it, so I'll have friends there too." The number of houses bought for pure speculat ion is increasing. It is now possible to buy a house with 103% financing, the extra 3% to cover closing costs, with no money down. All this is on the unwise assumption that housing will rise ever higher, covering interest payments through appreciation. Even the National Association of Home Builders admits that "Investor-driven price appreciation looms over some housing markets." Trouble at Fannie Mae and Freddie Mac They are now being forced to t ighten up sloppy lending. This means they are not going to keep buying very low-quality loans from banks, and the total money available for buying houses is falling. The best summary explanation, from Business Week: "Today's housing pr ices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. Real estate related businesses d on't make money if buyers do not buy. These businesses have a large fina ncial interest in misleading the public about house prices. They do not care about the potential bankruptcy of borrowers, so they will lend far beyond what buyers can afford. Banks sell most loans to Fannie Mae or Freddie Mac, but that is going to end as Fannie Mae shrinks. It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss. Remember that buyers don't deduct interest from income tax; Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn't even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan. Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. Owners with a mortgage seem to be renting their house from the bank, but there's an important difference. The bank takes no risk, the same as real renters take no risk. It's the owners who bear all the risk of falling house prices, and all the costs of repairs. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments. House prices do not fall to zero, but even a fall of only 10% completely wipes out everyone who has only 10% equity in their house. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged. Renters in this market end up with much more money, while living in the same quality house as an owner. At the end of 30 years under our current conditions, a renter who saved and invested would have enough principle on hand to buy the same house outright and would have an extra $277,200 of accumulated interest savings, and would have lived in an equivalent house all that time. Owners frequently end up with nothing because they lose the house to foreclosure. Supply is increasing rapidly as building continues, and demand is falling as the population of the Bay Area decreases and the salaries of those who remain decreases. Prices have been driven by low interest rates and increasingly risky loans. The dramatic drop in rents and widespread rental vacancies prove that demand for housing is actually much lower now than a few years ago. gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased: year units people 2000 58086...
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