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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Drygulch Dan who wrote (155942)	10/9/2008 10:11:44 PM
From: ChanceIs	Respond to of 306849

>>>3 or 4 years when those houses will sell for about 3X the annual base salary <<< Hmmm. Haven't checked with Chris Thornburg in a while. From a Sept SF Times interview: "Anyone who thinks this is an interest rate issue is fooling themselves," said Christopher Thornberg, principal with Los Angeles consulting firm Beacon Economics. "This is a prices being too high and people buying homes they couldn't afford issue." California price declines will only stop once home values are properly aligned with income levels, or about 50 percent below the peak, he said. As of July, the median value of homes across the state was down 33.5 percent from a year earlier, according to San Diego County research firm MDA DataQuick. beaconecon.com also: How far down will San Diego prices go? DataQuick analyst John Karevoll predicted several months ago that $350,000 would be San Diego's bottom, a number last seen in early 2003. But other analysts now think the median could drop as much as $100,000 below that as new foreclosures outnumber foreclosure sales. Christopher Thornberg at Beacon Economics in Los Angeles, who was in San Diego yesterday, said he could imagine the median dropping to $240,000 or $250,000 before it starts to rise again. He cited the jittery economy. “Unemployment: That statistic is now tipping us into a very nasty downturn,” Thornberg said. California's latest unemployment rate was 7.3 percent; San Diego's, 6.4 percent. “One thing about economic turmoil is that it puts a lot of pressure on home prices, as well.” beaconecon.com And yet another: "Home values are falling, and that's having a large impact on consumer spending," Thornberg said. "That is a process that is not going to go on for three months or six months; it's going to go on for two years." beaconecon.com And finally - in toto: It's unfair prices, not unfair loans By Christopher Thornberg March 24, 2008 The mortgage loan modification plans put forward by the governor and, at various times and in various forms, by the U.S. Treasury Department all failed to fix the problems in the housing markets. Why? They pretended that the problem is the structures of the mortgages used to buy houses -- in other words, fix the interest rate and you fix the problem. Make the loan "fair" and everything will be fine. Nothing could be further from the truth. The real issue in today's housing markets is that prices currently sit at levels that are unaffordable given income levels in our state. Take Los Angeles County, where the median price of a house peaked higher than $530,000. With a 6% interest rate and assuming a 10% down payment, the total annual cost of owning such a house would be $35,000 for the mortgage alone and $43,000 if taxes and insurance are thrown in. This would eat up roughly 75% of gross annual income of your median homeowner in the county -- much more than twice the maximum affordability rate used by Fannie Mae and Freddie Mac when making loan decisions. Prices are going to fall one way or another; it's only a function of time. They simply aren't sustainable at their current levels. So what caused prices to go so high? Home bubbles are nothing new. We had one in the late 1980s, another in the late '70s and certainly many others before then. The bubbles are characterized by people buying an asset, in this case a home, and thinking they can sell it at a higher price regardless of the fact that the price being paid is completely out of whack relative to fundamentals such as income. At their root, all bubbles are driven by individual greed -- the desire to make money. Think of it this way: Every buyer over the last few years had a choice: Buy a home or rent an apartment until income was more in line with prices. Many leaped into the housing market even as prices climbed to such high levels because they thought they could sell at a higher price. To a degree, they were all speculators. This bubble is larger than any we have seen since at least World War II because the sub-prime markets gave buyers the means to speculate like never before. As a result, prices went up like never before. This isn't a sub-prime problem; it's the same old greed problem on sub-prime steroids. No one likes to think of a family thrown out of a house. But many people made a very unwise decision in recent years: They bought a house they couldn't possibly afford. Needless to say, they had help from the real estate agent who told them that prices couldn't fall, the mortgage broker who promised them they could refinance easily in a year or two to cover the higher payments, and, of course, from a financial community that bought sub-prime-backed securities despite all the evidence of everything that was going wrong. Now that the house of cards is falling, all parties are taking a hit. But it all started with buyers who bought something they couldn't afford and listened to the words they wanted to hear to help themselves justify that bad decision. You can't have a lender without a borrower. To single out that one party as the hapless victim is to distort the true situation. Everyone had a choice -- and still has one. If you can't afford to buy, you rent. People make mistakes. We give them a second chance by allowing them to bankrupt themselves out of debt they couldn't afford even if they arrived in this situation because they made an error. We pay for this right through high interest-rate premiums on consumer loans. Years ago, in an effort to make buying homes cheaper, the home asset was opted out of the bankruptcy system. Because the home is a secured asset that could be repossessed in the event of a lack of payment, we all have enjoyed lower interest rates. But the game is simple -- if you can't make the payment, you lose the house. To change the game now is to violate this simple rule; that violation will lead to high costs of capital in the long run for anyone playing in the housing market. In other words, changing bankruptcy laws as they relate to mortgages would punish those who made the prudent decision to stay on the sidelines and not buy something they couldn't afford. Christopher Thornberg is a founding partner with Beacon Economics.

To: Drygulch Dan who wrote (155942)	10/9/2008 10:46:14 PM
From: J. P.	Read Replies (2) \| Respond to of 306849

Amen, that is my thought exactly. When houses are what people can reasonably afford. One weeks pay for a monthly mortgage payment. And save up for the 20% down. I think the house price shoe has not even dropped yet. That is the next big wave. When unemployment hits the defaults will really get rolling, and let's not forget everybody's 20% mortgage for their down payment is pegged to LIBOR which has about doubled this week. The whole house price party is just getting started.