Recently I got a note from former Orange County resident Peter Schiff, the always outspoken investment watcher at Euro Pacific Capital, now of Darien, Conn. He wanted to remind me of a op-ed piece he penned for The Register in June 2004 that said, in part:
“In a rising interest rate environment, home equity extractions through refinancing will stop and an increasing share of household incomes will be diverted to meeting higher (adjustable-mortgage) payments. This will result in a collapse of discretionary homeowner spending, devastating the local economy and causing unemployment to soar, particularly for those whose livelihoods are directly related to the expanding real estate market. Unemployment will lead directly to higher mortgage defaults. So while today’s real estate market is characterized by an abundance of buyers and an absence of sellers, tomorrow’s market will reflect the reverse. ” (To read it all, CLICK HERE.)
While we haven’t hit that level of despair yet, I figure a guy who’d make such a gutsy statement deserves a shot at our our weekly Insider Q&A …
Us: What did you see when you made your prediction?
Peter: As I did with the stock bubble that preceded it, I merely recognized the real estate bubble for what it was. I am a professional investor, and understand the difference between investing and speculating. In addition to having an appreciation for manias, and the dynamics that define them, I also have a good understanding of economics, and the many problems facing our nation that will lead to much higher interest rates and recession in the future. These developments are very negative for long-term real estate values. Also, the way speculative real estate purchases were being financed was very troubling.
Us: How bearish are you on housing?
Peter: We are only just getting started. The current problem is just the tip of a very large iceberg. Orange County will plunge into a severe recession, with real estate prices falling by 50 percent or more, and lots of unemployment. Higher interest rates and consumer prices will only make the situation worse, for both housing in particular and the economy in general.
Us: You don’t just follow real estate. … How will this housing slump play out for other investments?
Peter: Whatís happening, and what is about to happen, will have severe negative implications for the U.S. economy, U.S. stocks and bonds, consumer and producer prices, and the value of the dollar.
Us: What events might change your mind about real estate?
Peter: Once real estate prices are cheap, and I am one of the few who sees the light at the end of what will be a very dark economic tunnel, then I will buy.
Us: What would you tell somebody thinking about investing in residential real estate now? Why is it such a wrong time? And how will they know when true bargains are available?
Peter: Donít! When everyone in real estate is broke, when real estate agents and mortgage lenders are waiting tables (or in jail) and your neighbors think you are crazy for even considering real estate, then it will be time to buy.
Who is this knucklehead?
What I want to know from “experts” is how quickly they think the downturn will happen. We sold at the end of last summer (our realtor actually told us last April that the market was about to turn, and really pushed us to sell…) and we are now renting. We would love to buy near the end of the year, but I’m not sure how much of a decline we will have seen in the market by then. I’m guessing 5-7%. Predictions anyone??
Peter ignores the financial resources OC homeowners have built up. They own second homes and investment properties in CA and all over the US. If this prediction should start to take place, those properties, in places like Las Vegas, Phoenix, Austin, etc will be the first to go.
This scenario will push the entire US into depression, which will be fought vigerously by the Fed and US government. Hence a 50% drop is out of the quesstion. It would bankrupt America.
OC has become a premium area to own homes. It is not nearly as expensive as NYC, London, Paris, San Fran, etc. Why will OC be the one to fail?
This is a bit extreme if you ask me. But if he’s right, I will buy a few investment properties, once the light at the end of this very dark tunnel shines again. They would all be cash flow positive too if today’s 800K house is tomorrow’s 400K house.
I was interested in his assessment until I came to the understanding that he actually believes there will be a 50% drop in value of OC homes (in general). I thought he stated that he was a real estate “professional investor”. Sounds like he is bitter that he missed out on so much opportunity over the past few years (like many on this blog) and has lost his sense of reality. Common sense says that homes will decrease but never reach to that level. No Credibility what so ever.
Schiff predicts a recession in June of 2004 and is still waiting. Now when he says that real estate values will fall 50 percent, is he talking about a drop from 2004 prices or 2007 or does he even really care about those details?
My guess is that he’s a Democrat with an agenda and if a Democrat were president, he would be touting the record high levels of home ownership and equity and record low levels of unemployment.
Jon:
If Gary Watts gets time in the paper so should Peter Schiff. Good job.
I am bearish but don’t agree with the fully house of doom and gloom, but Peter raises a good point.
There are 3 possible outcomes of our recent infatuation with globalization.
Option One, living standards and wages in India and China rapidly rise to 1st world standards.
This isn’t very likely, most prominently due to the capacity constraints of 1 planet with 1 atmosphere.
Option Two, living standarsds and wages in the US and Eurpoe rapidly decline to 3rd world standards. Peter Schiff’s seeming wordlview.
Option Three, some combination of the first two. This is my position, and is the most likely result of globalization.
Real declines in OC real estate of 30-50% have precedent and all public measurable fundamental support points that direction.
Here is a classic case of why we need instant blogging.
This man has given a scenerio and some evidence to back the scenerio. Now bloggers have made comments such as “who is this kucklehead” and no credibility without any justification. Also some have asked for timeframes. All comments worth answering to get a better model.
As we have a contraction of the “real estate related” jobs there will be a contraction of all jobs because the real estate people won’t be buying. There is essentially no possiblity of oc generating replacement jobs in the short term. So these people will be forced to move out or move down or move in with others. The rental market in such a situation will go very sour. Also the price of interest could go up and thus one will not have houses that are positive cash flow to rent. Positive cash flow must be calculated on the equivalent of 100% financing. So one will have a situation with housing prices going down, rents going down, interest rates going up and no end in site. Not to mention that rise of globalization will continue to squeeze the middle class for good paying jobs. This will result in what may be called despair. So with the value of a home as an investment going down whether you rent it or own it there is little incentive to buy for either reason. Therefore the 800k home for 400k will not look all that good. The 800k home for 400k did not look that good in 2002 or 2001 say.
This is just a further explanation. I am sure some have and can say it better. But just to state a model of no credibility does not really do it for me.
Further Orange County can have a much deeper recession that other parts of the country just as it had a much bigger boom. So the fed need not target its policy to fit orange county.
Further Orange County is not NYC, LONDON, PARIS, MOSCOW, DC, SF or other financial or government centers. It is a huge more middle class working center with nice weather. Those others have financial markets we got weather. I like weather but weather grows on trees or causes trees to grow it does not make wealth available to the middle class.
Now again I am not going to spend the time to fully develope the arguments, but we need instant blogging for these arguements to be developed, but without instant blogging this will all break down into name calling.
Maybe DonS should read the Fed’s weekly reports from now on. It’s not the tax payers job to bail people out who bought homes they can’t afford.
2006 was this boom’s 1990 and that took 11 years for your house to be worth what you bought it for in 1990 and that was without all the exotic loan programs. I say 30% to 50% drop in 3 to 5 years…
Fed official: It’s not our job to halt decline in property values
Scott, your comments reflect your inexperience with Real Estate cycles. In the last 90s bust home prices went down upto 30%. I know, I LIVED IT and it was bad. So don’t tell me homes cannot go down 50%, especially this time around it’s so much worse, because they most definitely can.
During the last downturn we also had a ton of people in denial chanting the same old mantra “OC is special”, “This time it is different”, “People are rich here” blah blah.
Scott,
I love your comment “Sounds like he is bitter that he missed out on so much opportunity over the past few years (like many on this blog) and has lost his sense of reality”
This guy is probably pulling down 500-1 Million a year, do you think he is sorry he did not make 500K on appreciation of his home. How do you know he is living in some tenement anyway?
Sounds like Scott experiencing a little denial.
Another Bear who thinks he is smarter than everybody else. Funny how his assets are safe but everybody elses are not. He must be eyeing Detroit properties.
My neighbors already think I’m crazy to be considering real estate, so I guess it’s time to buy.
“Peter ignores the financial resources OC homeowners have built up. They own second homes and investment properties in CA and all over the US.”
DonS, what a retarded thing to say. OC homeowners are highly leveraged and don’t actually “own” all this real estate you speak of. They owe a great deal of money against all these properties they allegedly “own”.
“This scenario will push the entire US into depression, which will be fought vigerously by the Fed and US government. Hence a 50% drop is out of the quesstion. It would bankrupt America.”
Wow, another retarded statement. It won’t drop because the Fed and government won’t let it happen. Just like they didn’t let it happen in the early 90’s when RE dropped 35% (50% in real dollars).
So just how would they “not let it happen”?
1) An act of Congress is passed to fix prices at current values. People who sell for any other price are threatened with prison. This is the Mugabe/Chavez approach.
2) They lower rates or crank up the federal deficit to pump more money into the economy. Ah, yes, the old inflationary death spiral. If they do that, you can stack up your dollars next to the toilet and use them to wipe you behind.
3) They crank up the printing presses and hover overhead in helicopters and throw out trashbags full of cash. See consequences of #2.
I’m posting this so people won’t fall for that crock about what you’re trying to say.
Prices are what they are because they’ve been settled by buyers and sellers. The buyers have been heavily influenced by the constant loosening of credit requirements.
But just because buyers have agreed to a certain price, it doesn’t mean it’s going to stay at that price, and it doesn’t mean the government will have anything to say about the price. What if the buyers in this negotiation are absolutely crazy? You imply that the government is going to come to the rescue of people based on their absolute craziness.
Yeah. I don’t think so.
Uh oh….(good news?)
The U.S. Labor Department reports that the unemployment rate now ties a 5-year low, with 180,000 unexpected new jobs added to payrolls. Outside of housing, the economy appears strong.
The unemployment rate dropped to a surprising 4.4 percent.
The strong job market, though, may dampen hopes that the Fed will lower interest rates any time soon.
This is not the employment trending of the early 1990’s.
Jon, Thanks for sharing Schiff’s views. I have read his articles and listened to him on the radio and TV for a couple of years (he is a frequent commentator on CNBC). He is often dismissed as a “knucklehead” (or something worse) by those with a lesser understanding of economics, but his long term predictions have been remarkably accurate.
I keep wondering why no one has really stepped back and looked at the situation completely. I do beleive that if prices were to drop back down to the affordability range (even 50%would do)that the housing market will self correct. I don’t think the Fed will lower the interest rates in the near future, they’re more likely going the protect the ‘Dollar’. Afterall, the housing market will only have a short term affect on the economy. The fear factor that seems to be on everyone’s minds seems to be to the fact that the lending standards are tightening up. Well, if you’re credit worthy and have the down payment,you will be able to buy a home. The affordability range will increase back to the norms before this housing mess kicked in. Homes will begin to sell, people in the repair/renovations trade will be re-employed due to the fact that alot of the foreclosures will unfortunately become fixer-uppers. Human nature as in the past people will destroy their home before losing it to foreclosure and before someone else will gain from them. Look back at the late 90’s, HUD was bogged down with alot of fixer uppers that could be gotten at bargain prices. So in my opinion, once we get the housing prices back on tract, people waiting to buy will, and most likely the fixer uppers will create the jobs to keep the economy going - it will self correct.
Randell Young at April 7, 2007 09:30 AM:
“Schiff predicts a recession in June of 2004 and is still waiting. Now when he says that real estate values will fall 50 percent, is he talking about a drop from 2004 prices or 2007 or does he even really care about those details?”
A recession in the near future is not in question - history has taught us that. It’s just a matter of when.
“My guess is that he’s a Democrat with an agenda and if a Democrat were president, he would be touting the record high levels of home ownership and equity and record low levels of unemployment.”
Absolutely. Democrats also put a gun to every home buyers’ head and told them to buy properties they could never afford. Democrats also are telling the oil companies to raise prices to cause a crisis of confidence in Bush’s leadership. And Democrats also caused cancer.
Speaking of caring about details, could you try to refute his claims instead of speculating on his character?
Roberta:
Is it good news that employment remains strong and the housing sector is having as many troubles as it is?
Low unemployment will drive wages & inflation up and increase interest rates?
How will that help housing that is obviously struggling?
Oops guess you didn’t think about that.
Hmmm. Peter seems to assume that just about everybody in OC just bought or refinanced. All with toxicly bad adjustable mortgates. At 100% or more of value. At the market’s peak. And that interst rates will continue their steep climb.
That’s assuming an awful lot. In my neighborhood less than 5% of the homeowners fit this category.
Peter reminds me of my father-in-law. When I bought my first home in 1976 for $48,000, he told me I should wait until the prices drop. Guess I’d still be waiting.
I have to say I still don’t understand the thesis that should property values drop by 50%, this would precipitate a depression. Surely those who purchased in the last 3 years would be hit very hard, but relative to the owners who bought before this, it would still be a relatively small fraction of the total market. Since we know much of the appreciation was due to “funny money,” the gains seen were mostly just on paper, unless you sold during this time.
During the dot com bust, I recall similar predictions. I started getting rather bearish on NASDAQ in late ‘99, citing the lack of fundamentals for my concerns. I have been bearish on RE for a little over a year for the same reason. The dot com crash hurt many people, but it did not precipitate a recession. I don’t see how a market correction to the historical mean for RE pricing would do this either.
I have enjoyed reading Peter Schiff’s commentaries and watching his CNBC debates for a year now. He is very intelligent, and can be quite convincing. Whether he is at all correct is another story.
One thing that seems contradictory in his “crash” scenario is that inflation rages while nominal prices fall drastically. One reason to own real property is to hedge against inflation. If we did experience prolonged high inflation (usually theorized as a reuslt of vast government overspending, low savings, weak manufacturing power, and the end of US economic “exceptionalism”) then how does that square with drastically falling nominal prices? The price of everything else soars due to inflation, but house prices get cut in half?
I agree that OC home prices are out of balance with historical trends, owner’s equivalent rent, and all that stuff; I accept that OC realty has carried and will carry some price premium for the “desirability” factor (absent a major employment hit, like the early 90’s). Today we are experiencing slowly declining nominal prices (coming off the top line) along with our typical inflation (coming off the bottom line). Those forces, if staying on trend for a few years, would somewhat ease the very real “affordability” problem. Supply constraints are real; this isn’t Phoenix, where flat dirt runs to the horizon.
Isn’t it more likely in the big picture of things that we see relatively flat prices for a number of years? That’s not bullish, it’s bearish without the cataclysm. Rust, not bust.
Can we stop getting predictions by so called “experts” and just get factual data on this blog? It’s such a better use of time.
Roberta Murphy at April 7, 2007 11:07 AM:
“The U.S. Labor Department reports that the unemployment rate now ties a 5-year low, with 180,000 unexpected new jobs added to payrolls. Outside of housing, the economy appears strong.
The unemployment rate dropped to a surprising 4.4 percent.
The strong job market, though, may dampen hopes that the Fed will lower interest rates any time soon.
This is not the employment trending of the early 1990’s.”
Notice that 180K new jobs for March is the first month in several where the minimum amount needed to keep up with population has been reached. The unemployment rate doesn’t even reflect the employment picture. Regardless, the Fed can not afford to ease interest rates and risk runaway inflation.
I’v been saying this for 3 years. I used to get laughed at. Now all my friends that quit secure jobs to become RE agents are lookng at me like a genius. 50% may be excessive but 30-40% is almost guaranteed.
Exagerrated senarios are always interesting to read like watching movies but they rarely happen in real life.There were those who thought the prices are going to go up 20% to 30% a year with no end to it and now there are people like this guy who predicts a 50% price drop or basically the crash of real estate market.As Rodney King said!!! Could we all get along? and agree that the bubble is going to deflate for a while untill the averages go back to the historical norm which for S.California is about 7% a year.That means a drop of 15% to 20% total during the next two to three years and then prices going side way for another two or three years and basically we are going to be there.The world as we know it is not coming to an end!!! Those who were trying to day trade with real estate and did not get out on time are going to loose their shirts and those who have been planing to stay in their homes for a few years are going to be okay.Like everything else some will loose money and others are going to have the opportunity to make good money.Our economy is resiliant enough to ride this one too.
Dear Roberta Murphy,
The question is not what is the unemployment rate nationwide and question is what is the unemployment in oc and where is it going. Will the workers laid off in the real estate industry, specifically the subprime lenders and the local real estate agents be able to get jobs that pay anywhere near what they are getting today?
And the question is not just what is the employment today, but what will it be as we have a further slow down in housing sales due to a loss of loose lending standards, which have so fueled the oc boom.
These questions are far more important than a national low unemployment rate.
Further one needs to look at a national level at the finances of the people making say under 200k a year. These people buy most of the houses. Are their salaries going up, and what do their balance sheets look like. For this will determine what they are willing to pay for housing.
Give me instant blogging or give me name calling!
One thing that concerns me is the foreclosures we will see from the subprime lenders who gave away money using ARMs, etc. That is going to be a problem all over the place.
Dear friends, it is a depression, Mr. $ is coming down so fast that soon you don’t need to go to Home Depot to by wallpaper. The employment you are talking about is $8. an hour jobs by which you could not even rent a studio in your OC. U.S. ought several trillions to China, Russia …. .Several millions will lose their homes… . Keep your houses tight, you might need to sell them to buy food in coming years.
Yep - those employment numbers look great. I’m sure all of the former New Century employees agree.
Apologies to Gary Watts, but a 50% decline is “in the bag”!
Price must be in line with rents, and anything priced more than 120X the monthly rent just won’t flow. If you do the math on many of these homes, the potential figure could be a 70% decline.
And the Fed could lower rates to 0% (like Japan) and it wouldn’t do a thing - there is precedent for these scenarios.
Keep drinking the Kool Aid Roberta! Keep drinking it! Drink it up! Don’t stop!
Never mind that the last low in unemployment was in 2000, at 4%, just *before* a recession.
The previous low? 1989 at 5%, just before another two recesssions, and before the ugly housing downturn of California.
The low before that? 1980 at 6%, just before a double-whammy recession.
Roberta,
A majority of those new jobs are probably GOVERNMENT jobs added to make unemployment numbers look better than they actually are…
It would be nice to hear in which sectors those jobs were added. If they were added by the GOV’T (read: taxpayer supported) they don’t really do us much good or necessarily reflect the true health of the economy.
- MMAB
Peter Schiff is tax protester Irwin Schiff’s son. Interesting. Apple,tree?
I’m a pretty big bear, but 50% or more seems like a stretch (even though it’d be great).
I definitely see the market giving back 30% over the next 2-5 years.
SCHB
The thing that prices could go up 300% for 5 years is a sign of depression is coming. That is the reason for dollar loosing its value so fast that we will use it a as wallpaper soon. The Inspector General of Federal Government is going around the country talking about debt that we all are inn. Millions of people are loosing their houses because of the fraud, through which houses in OC “appreciated” 300%. In regard to unemployment rate, you know that those jobs are $8 jobs, that recent loan officers are fighting for in order to pay for their houses in OC, that they bought in recent years… .
I am quite bearish on southern California real estate. However, when somebody makes these macroeconomic forecasts, I ignore them. The economic future is always unpredictable, when people claim they can predict the unpredictable, I look elsewhere.
Having said that, I would not be at all surprised to see price declines of 50%. That is about what it will take for housing prices to correspond to average incomes using sensible traditional loans. While some may see this as a terrible economic collapse, I think it will be healthy for the long term OC economy. High housing prices don’t help anyone except for the few who sell and move away.
Even as a bear, I think 50% sounds like too much of a drop to be considered much besides an edge-case scenario. Something extraordinary, spectular would have to happen for this kind of doomsday scenario to occur. I don’t think ANYONE wants that.
The last downturn was, as others pointed out, about 30% (over six years), which also agrees with the Case/Schiller data for the period. I don’t know if this time around is going to be better or worse, but this 30% number gets a lot of play in the buyer community. It seems to enjoy some level of cult status at the target price decline for this downturn.
With that in mind, unless we are in the most dire of national/local economic straights, I think demand ought to pick up around -30%, causing prices to rise. I just can’t see my way to -50%.
People can argue if the total declines will be less or more. No one really knows. But with sales level at 11-year lows and inventories up 11.8% month on month (and already at May 2006 levels), clearly buyers think prices still have a long way to drop.
Wait, the TV is on and I hear another infomercal on how to get rich in realestate. I think they are talking about O.C. While the subprime industry has been hit hard. Besides the question on why these type of loans were allowed in the first place. The industry is still making loans at 5 to 10% down and willing to take the risk at this price point. Therefore the economy is strong and the housing market is going through a correction. There sure a lot of hand ringers out there. My thoughs are if someone was near to purchase a home. One could wait for 2 to 3 years and save and invest in something safe like a CD paying 5%. Rents will continue to rise… Best of luck.
I bought several Corona Del Mar properties in the mid 90’s for 500K using option ARMS. I guess that was real stupid taking option ARMS … that is what everyone says. Now, my Corona Del Mar houses now worth 2M each. Dumb me.
Now, all those did not buy beach properties are wising or blogging for a price crash so they have a chance to fix their mitake. I have bad news for you. Prices are not dropping in Corona Del Mar.
You need to face the fact that you made a huge mistake not buying when prices were low and you needed no money down. You set your family back generations. Please, no more tears.
LOVE people who think 50% correction is insane/impossible while they had no problem watching the OC bubble up 300% in the last few years….ever heard of New Century?
Being a .com survivor, i’m not worried about the “coming depression”… prices of homes SHOULD fall by 50% for the most part.
Housing affordability is at an all-time low, current “wishing prices” have been run up by a large percentage of “specuvestors” who were enabled by loose lending standards.
There aren’t many TRUE victims here. All my friends either bought before 2002 or are renters. From 2002-present none of us could afford a home (using historic precendents of 3-4x annual income).
The current crop of “foreclosees” couldn’t afford their homes either. They might have made a few interest payments, but won’t lose their shirts since they didn’t put anything down.
Prices will come down 30-50% quicker than most people think and not move up again for years.
Jon,
Can you dig up when he sold his Newport home and became a renter back east. I remember at the time a story in a newspaper about it. This would be the best way to peg exactly when he truly felt values would drop. I think it was before 2004, but maybe I am wrong. If it was earlier, his views do not have much credibility on this subject. It it was late in 2004, then he was not that far off.
His views are in general pretty extreme, how do his funds or managed accounts perform?
Jake is right!
What a meathead! Good luck with your predictions, see you in the after life, after the WWIII happens!
Unemployment is indeed in good shape… but I think we’re forgetting that median household incomes have actually fallen recently and those .3% gains in average hourly wages aren’t going to cover the waves of ARM resets that are about a month away from starting and will last for the next few years.
The value of real estate throughout history has always been the price a willing seller will sell for and a willing buyer using some of his own money will pay. The last 8 years we have had buyers using OPM (Other Peoples Money)for down payments, thereby driving the prices up to unsustainable levels. Now that the OPM providers (sub-prime lenders) are out of the picture we will see what buyers using their own funds are willing to pay. Speculators who used OPM are already gone from the market, and the only buyers I see in the market today are people not from California who do not understand the OC market or people who have more money than common sense. The number of people in OC with loans that they cannot afford to make the payments on is in the tens of thousands. I talk to hundreds of them every month. When all of these people have their loans adjust to higher payments they will be forced to sell since the liar loan programs that they have been using to keep their houses are no longer available. This is going to be a multi-year process.
Sold at the top for the 2nd time (July of 89 was the first) I will be renting and waiting for the coming drop in prices. Down 15% by the end of this year and 30% by the end of 2008.
50% may be the worst it could get, but it is not out of the question. Schiff may seem like he’s crazy for that prediction, but the people who are really crazy are the people who i see on this board who ask questions like “will late 2007 be the time to buy”, or “do you think prices could fall 10%”. Of course prices can and probably will fall substantially, and it will take several years to play out, probably 2009 or beyond. Do the math people. What is the median household income in this county? What is the median home price? Is there sufficient cash flow availale in the incomes of today’s buyers to take on the debt necessary to buy houses at anywhere near today’s prices (without neg-am, pay option loans). If you answer yes to this than you are a lot crazier that Peter Schiff. It is hysterical to me that people regularly try to compare this county with places like New York City, Hong Kong, etc. What a joke! This is a nice place to live, but the high paying industries that dominate places like those (and therefor drive home prices) do not dominate this county, and one of the few high paying industries we have is collapsing as we speak. Guess which industry I am talking about?
The situation now is truly complex. It can be compared to the 90s but then it can’t be compared. There was no subprime meltdowns or toxic in the 90’s, but the job market was much worse in the 90’s due to downsizing of the aerospace industry. but then again, this downturn is just beginning. It’s reasonable to postulate a 50% decline, considering that the median income for OC household is 71K, which is too low for the median house. just think about this. Without toxic loans, there will be no buyings.
I have to give him credit for speaking his mind. Everyone else is hedging what they say; this guy is no nonsense. Bold action like this is what separates a rich guy from everyone else.
Actually, I have alot of experience in real estate, thank you very much. I have read this blog from the begining and it is my evaluation that the doom and gloom prognosis on this blog seem to lack common sense when they assess the market. You under estimate the power of lenders to adjust to the market, you assume that families wont be able to pull together and manage, you are in denial about supply and demand economics. Quite frankly, I believe you all are bitter that you missed out on the appreciation over the past few years. Get over it.
Peter Schiff called the subprime meltdown in 2004. He is darn good. He’s a prophet. Based on the 2004 article, one must believe him.
OC real estate is “solid gold”. It always has been and it always will be. The 20% drop in the early 90’s was a “perfect storm” of financial problems that will never happen again. The demise and closing of the defense industry. The bankruptcy of the S&L’s for bad lending practices. A national recession, in the middle of which, our CA govt decided to raise state taxes. John Maynard Keynes turned over in his grave. It was the only drop in real estate values in the history of OC.
There will be a plateau in prices but no price drop approaching 50%. There are too many buyers just waiting for any pull back. They represent
“instant demand”.
If OC real estate sneezes, the rest of the US will get pnumonia.
My house is paid for.
I 100% agree with Mr. Peter Shiff. Good to have an interview of somebody that understands the economy and isnít blindly in love with Real Estate due to the recent appreciation. Thanks for sharing this with us.
Today while I was driving in my car I listened to a radio show on 97.1 Free FM. It was one of those 1hour or so Real Estate ìinfomercialsî where listeners can ask the experts (sales people) for advice. This one guy calls in and states that he owns 11 (eleven!) properties and has positive cash flow on all of them. Next he says that he purchased most of them in 2005 and after that. That already tells me that he is lying and doesnít have positive cash flow as no renter would pay that much to cover his cost. Iím a renter and pay $1000 per month less than the adjustable mortgage my landlord pays every months. And that doesnít even include the gardener, the HOA fees, and the property taxesÖ
What makes me mad is that those ìexpertsî arenít there to help people; their main objective for their radio appearance is to get callersí business. Nothing wrong with advertising but I think itís wrong to mislead listeners about current market conditions. Our caller with the eleven properties asked about the Real Estate bubble. ìThere is no Real Estate bubbleî was the answer of course. Real Estate is different, itís not like the stock market was the reply. The stock market was a bubble because companies with zero profit experienced stock appreciation due to speculation. While that is true, I donít agree that Real Estate is different. They also mentioned that Real Estate is always needed unless we humans move all away from planet earth. They make it funny to distract people from the real question. As I said before Iím a little angry that the so called ìexpertsî can buy their air time to mislead people. Iím sure that there are some people that listened today to educate themselves about this subject. Yes, they could go online and read blogs, read books, etc. so here are some FACTS that everybody should know:
Cyclical Real Estate market: Real Estate is cyclical in nature. Having 10 years of appreciation only followed by a small break or ìbuying opportunityî as the Realtors call it and seeing prices skyrocket after that again, is not cyclical. Ask any Realtors whether Real Estate markets are cyclical and theyíd agree. But they still say that markets will go up again soon because they want your money. They want to do your loans and/or be the buying or selling agent on you property.
Real Estate bubbles do exist Japan experienced a Real Estate bubble in the 80s/90s. Their home prices appreciated just like ours. And the reason behind it? Historically low interest rates, easy lending standards (hint: subprimeÖ), euphoria, speculation, and phrases like ìhome prices will always go up here as there is ìonly limited land availableî were the norm. Sounds familiar? After two years of no appreciation (a.k.a ìbuying opportunitiesî as the Realtors call it) the market tanked. Within two years home prices depreciated by 40%. That was not the end though. Home prices continued to decline for 15years, crashing by up to 80% from their 1991 peak!
The U.S is different Says who? Realtors and loan agents sure use that argument. They sure always use ìfactsî to justify that there isnít any Real Estate bubble. But they always miss the key facts when they try to convince you that there is no bubble. Did you know that we had a Real Estate bubble here in the U.S? In the 1920 Florida experienced growing home values. People made huge profits, and many people became involved with Real Estate. Everybody got rich in Real EstateÖuntil the market crashed. Right here in the U.S. Of course nobody cares to read up on financial history. (Why should we, instant gratification is the key to success. At least in the short termÖbut whatís after that?)
This time is different Youíll always hear that one. They said so in Japan, in Florida, during the stock bubbles, and they are using that phrase now. But in the end, itís history that repeats itself.
The Real Estate market should have corrected in 2002. Many key market indicators have shown that. But Mr. Greenspan lowered the interest rates to 1% and ìsavedî the economy from a recession. In 2003, all indicators signaled that home prices would again appreciate again. Everybody was happy, times were good. The only problem is that by doing so he didnít solve the problem. Everybody can drink the problems ìawayî only to wake up to an even bigger mess.
Some didnít buy because they were told in 2001 that there is a Real Estate bubble. Itís too bad that you werenít informed by the person that told you about the bubble back then that changes in monetary policies gave Real Estate a new breath. But donít be bitter over not buying when it was cheaper just to buy at the top. Youíve patiently waited and the future will reward you soon. Some might argue that they can lower interest rates again. But you have to look at the big picture, that would most likely send the dollar into free fall. And lower interest rates cannot always save the Real Estate market. Japan lowered its rates to 0% and things couldnít turn around. It sure doesnít look good for Real Estate and the U.S economy.
“Maybe DonS should read the Fed’s weekly reports from now on. It’s not the tax payers job to bail people out who bought homes they can’t afford.”
No, not just the tax payers. Holders of US Dollars everywhere in the world, doesn’t matter if you are renting or owning. There’s this hidden tax called…inflation!
You have to remember that the Fed was created for economic stability, but they are not doing their job. All they care about is making money. And those bankers sure did over the last couple of years…
How can he predict the future? Forget it!!
ah, jon the point of your blog becomes clear. you obviously are more interested in sensationalism than you are in real data and information. obviously you know the bulk of your readers are bears and would froth at this complete nonsense.
bravo to you, i guess. you’ve got the comments flowing, but what else?
do you honestly consider this good information? good diaglog? it’s one man’s extreme view and you knew it would get the bears in a frenzy and you’d collect comments. perhaps you bloggers at the register have some silly game to see who can collect the most comments. i guess the joke is on us, eh?
I believe in Peter Schiff. I’m a 23 years old professional living in OC. Prices in OC are ridiculous. I make about 80K as a business consultant for an engineering firm. I have friends that are lawyers, architects and scientist that make about the same salary as I do and yet we cannot buy a house or condo in OC. If top professional cannot buy a house/condo, then who will? I see a 60% decline in real state.
Schiff was right and will continue to be right. What will be funny later on is ALL the idiots that thought people could afford 800k house as if that was cheap. Job growth? WAKE UP AND SAY WHAT THOSE WAGES ARE WITH THAT JOB “GROWTH”. These bubbles are common and collapse each time. There will be nothing new here when it fully comes down.
Nick said:
“do you honestly consider this good information? good diaglog? it’s one man’s extreme view and you knew it would get the bears in a frenzy and you’d collect comments. perhaps you bloggers at the register have some silly game to see who can collect the most comments. i guess the joke is on us, eh?”
What a coincidence. I would consider most OC RE bulls to be extremists. They don’t care whether or not the entry level buyer is shut out. They don’t care that housing costs are eating a greater part of someone’s paycheck. They hope for interest rate cuts, to the detriment of the majority, to save the industry. They refuse to acknowledge that OC is economically interconnected with the rest of the world. Most of all, they refuse to acknowledge the fundamental relationship between costs and benefits.
Hey nick, how about you address some of the real issues that have created the downward pressure on RE?
Great discussion. I don’t think 50% is out of the question. Now, the only way to make money in RE investing is through price appreciation. As long as people believe prices will go up it works. When they stop believing, then real estate becomes a balance sheet issue. Why buy a house that is not going up when you can rent for half? And values decline. When does it stop? When you can make money even if the house continues to lose value. Ask yourself, how much would I pay if I could only make money though rent. For most homes in OC, 50% lower is a good bet.
It’s only common sense that if your average middle class OC resident can’t afford a home because of the inflated prices (plus the fact that sub-prime lending is going kaput) that home prices will fall. If prices scale back 50 percent, we’d basically be back to where we started from pre-boom. I’m really hoping for that, and that it happens soon. I’ll be sitting tight until then.
I ask RE Bulls a serious question that none of them can seem to answer. I make a good living, upper middle class in my area. Yet there is nothing in my price range (350kish in the DC area) that is anywhere near comparable to what I currently have to rent.
I do want to buy someday, but when I can rent a great 2 BR house for $1500 a month and the same house would cost me almost double to buy, what is the motivation and value for me to buy?
Without instant blogging there will be much name calling and little progress.
I call for instant blogging. Then the readers could introduce some structure to this process for those who wish it.
For instance
Question 1- Does OC compare to London, Paris, SF, NYC as a real estate market.
Answer- It has better weather and fewer high paying jobs.
How many times do we have to see this restated. We should just give it a name say “The super city proposition” and then have names for the standard answers like the “good weather hypothesis”.
This is the way real debate moves forward. You start with a base of things that are uncertain, build a more certain base and then move on to the next issues. This blog has trouble establishing a base.
News events are essentially establishing the base. For instance we now have the accepted label of “subprime meltdown” which basicly means that a huge portion of subprime lenders are out of business. But we have yet to establish a “subprime freeze” in which it becomes impossible to get the NINJA loans, though it appears that is happening.
We need to apply names to hypothesises and then assemble the trees of evidence.
We need a name for the people who claim you cannot predict the real estate market with any certainty and then go on to tell you just what cannot happen.
We need a name for people who believe that a certain point of view based on evidence is really a hidden agenda base emotional problems.
We have a name for experts who give predictions that have little evidence but would benefit them financially. It is called conflict of interest.
Give me instant blogging or give me name calling.
Nick said:
“do you honestly consider this good information? good diaglog? it’s one man’s extreme view and you knew it would get the bears in a frenzy and you’d collect comments. perhaps you bloggers at the register have some silly game to see who can collect the most comments. i guess the joke is on us, eh?”
Sounds like you must have recently bought with an ARM at the highest price.
I think we all agree that a 30-50% drop will occur in O.C., so this mans view isnít extreme at all.
A 30-50% drop will bring prices back down with true inflation and medium incomes where a balance would then stabilize the market.
You buying (literally) into the hyped up feeding frenzy and then thinking it would survive forever is an ìextreme viewî.
To Price of Bad Tidings: You speculate that Schiff is a Democrat. Actually, he is a free-market libertarian.
The “perfect storm” of financial problems that caused the 20% drop in OC real estate prices in the early 90’s had at least 4 legs.
1. Closing the defense industry. So CA actually lost population.
2. Bankruptcy of S&L’s, mostly those created in the late 80’s, because of bad lending practices. I remember that appraisals were not necessary to get a loan. “If it sold for that, it must be worth it, and we will make the loan”.
3. A national recession. A bad one that our democratic state govt saw fit to raise taxes right in the middle. Adam Smith would not have approved. I am convinced CA’s recession was extended because of this political move.
4. The end of an “over development” boom caused by changes in Fed tax depreciation deductations from 15 to 27.5 years, grandfathered in, for all property “started” after a late 80’s date. An amazing amount of “new” real estate came on the block in the early 90’s. A flood that saw a deminishing population in the middle of a recession.
Today’s situation, even with the sub prime exposure, is nothing compared to the situation that arose in the early 90’s. And, the loss in value of real estate then was only around 20%. Not 50%.
The cities of London, NYC, Paris, San Fran do have somthing in common with OC. There is no more land. In every metropolitan area of the US, if they want more houses, they go to the edge of town and build more. Where is our edge of town?
It’s called eastern Riverside County.
There are two other blogs here to support my statements. One is on investor owership in different cities and the other is the USC’s Lusk Center’s latest statement about rents in 2007.
And, yes, the Fed does have responsibility for the US economy. Their statement about not saving individual home owners was correct but they will attempt to save the macro economy.
If they lower rates, it will be good for OC real estate. If they raise rates, to fight inflation, it will be good for OC real estate. I can’t see a 50% drop in real estate ever happening. To believe it will, ignores sanity, and politics.
The real estate market is experiencing an anticipated correction. The cycle is predictable, the exact timing is not. People get rattled upon predictions like this because of their personal stake, which is understandable.
Guys like Schiff have credibility mainly because of things theyíve said in the past were accurate, and rightly so. However, their outlooks become extreme because the try to use their same formula to predict the future that they did in the past. Real Estate is affected by the economy and so is it affected by it’s direction. Unfortunately/fortunately, the economy is dynamic, complex and difficult to grasp. As the years go on and technology increases, the FED continues to improve their handling of their responsibility to influence the economy. They’re not perfect, but compared to the rest of the world, they continue to do a good job.
Over the last several years, Iíve monitored what the FED says at Congressional hearings and have found Greenspan or Bernanke to produce good forecasts. Their statements referencing the coming months and years are usually pretty accurate and for over a year they’ve been making comments about Real Estate’s direction, but few hear it. Maybe that’s because the press usually makes a big deal of small sound bites, which do not contain the full text of their comments and so most donít hear what the FED says and this skews the message originally given.
The FED has an army of economists year after year studying market forces and are armed with computing power to the hilt. That, combined with the power to influence both interest rates and control the money supply is significant, period. The FED has a legitimate role to play in the economy and is there to help control inflation, which is critical to our economy.
Barring an incident of 911 proportions, this market is beginning to cycle through a correction and will probably take a few years to complete. Those leveraged to the hilt are going get smacked if they donít have the resources or strategy to deal with it, period.
Love Peter Schiff and think he is spot on about the 50% decline.
The fact is that without the zero down subprime easy lending fiasco the run up in prices would’ve died down rather quickly perhaps in 2002 or 2003 itself.
The current insane runup in prices was caused by two factors - easy lending and speculation.
When you offer something for nothing (i.e. zero down interest only) of course there will be loads of people who will sign up for it. And if you offer it to delinquents they will be the first to come onboard.
Not only that you had speculators left and right using the zero down loans as leverage driving up prices even more.
Now that lending has tightened let us see which buyer has $60k cold hard cash to put down on a house. Let us see who has even $30k to put down on a house!
To save $30k is no joke, at $1k a month would take almost THREE YEARS!!! Think about that. Someone has to have that much discipline, and we’re taking about only $30k for a downpayment on a $300k house. How many people are able to save $1k a month and still drive their Lexuses, drink their $4 lattes and go on their $5k vacations like they have been doing? And all this while the cost of energy, transportation, insurance, health care is skyrocketing.
Even a $300k house is a BIG purchase that few people can afford in the absence of zero down, interest only, negam etc. and all that other nonsense.
Now, how many buyers are still going to be in this market even at a $300k price point? That’s 50% off.
With the sub-prime bust in March, 2007, we need to face the facts. In todays O.C.’s Real Estate market, buyers as well as those who need to refinance now need to qualify for their new loan.
All those credit report and a heartbeat loans with no qualifications are history! We all must face the fact that the medium joint household income in the great O.C reported by the Franchise Tax Board is a whopping $71,624 per household on their joint filed tax returns.
As an experienced Real Estate professional with 15 years of experience, I must present that numbers are the only truth in the market place. A property is only worth what a borrower can get a loan for. Having said that, let’s look at that medium income and how it relates to the medium sales price in the Great O.C.
In California, it has been reported that 6 out of every 10 loans funded were of the 100% financing type. These used to be available with no documentation to $1,000,000.
Today for the medium income buyer to purchase at 100%, the borrower(s) need to qualify. Employment, high FICO scores and the documented ability to pay will give this type of buyer an appox loan amount of $315,000. This would be based on an 8.000% rate on a no MI loan program. With half of these buyers can finance more and half get less, depending on their documented income. (By the way, this assumes no debt, of any kind, not even a car payment.)
Should the other 4 out of 10 have some downpayment and or equity, they will fair better. The add on’s to the interest rate are reduced as the downpayment and or equity position increases. Let’s look at the 20% down payment buyer. The rate will be at or about 6.000%. You might even get to a place where a purchase of $500,000, with your $100,000 down payment will get you that dream home. Your loan payment on a $400,000 loan without property taxes with an interest only payment will be about $2000 a month. That’s in line with the medium income in the great O.C.
Somehow, the income in the great O.C does not add up to a $650,000 medium sales price. So the question would seem to be: What should be the medium sales price in the great O.C.?
With borrower qualifying criteria considered, my guess is it should be about $350,000. That may not meet the 50% down-turn in the value of homes, but it’s close enough.
This correction of value will most likely take about 3 to 5 years to play out.
Nick,
90% of the time you’re complaining. The other 10% of the time you’re actually somewhat entertaining. Your general opinions give some insight into the thoughts of the delusional homebuyers in the past few years. What many would consider to be “extreme views” given the recent deterioration in the market. Be glad you’re not in a profession that is linked to RE (as a significant percentage of OC is) because the ship is sinking.
Jake–
You are right on the money with your call for “instant blogging.” When we have to wait 2 - 12 hours for responses to post, the thread becomes incoherent.
Seems like it’s not that hard for the Register to get some sort of computer screen that allows instant blogging on most posts, with others directed to a human screener.
Or regulars to this site agree to a code of standard in return for instant posting privileges. They mess up, they lose the privilege.
Or get some “intern” from CSF (oops, CSUF) or even Santa Ana City College or even some volunteers among us bloggers to screen?
This “lost in a time warp” blogging just doesn’t cut it!
Jake, there’s plenty you post that I disagree with, but when it comes to “instant blogging,” you’re right on the money!!
Jon, please prevail upon the bean counters or whomever’s standing in the way, & get us out of this time warp!
“Give me instant blogging, or give me . . . . a 50% decline in value?
k374’s comments nail it. Good job.
DonS said:
“Today’s situation, even with the sub prime exposure, is nothing compared to the situation that arose in the early 90’s. And, the loss in value of real estate then was only around 20%. Not 50%.”
I agree. Our economic situation is much worse. America, and OC, is more vulnerable to the effects of globalization. Our economy is less diverse and more debt-ridden. What new industry will replace RE this time around?
“The cities of London, NYC, Paris, San Fran do have somthing in common with OC. There is no more land. In every metropolitan area of the US, if they want more houses, they go to the edge of town and build more. Where is our edge of town?
It’s called eastern Riverside County.”
That’s a tenuous association at best and does not fully explain overpriced OC RE. New York and San Fran are the most densely populated U.S. cities. London and Paris have densities of 3.2K/km2 and 24.8K/km2 respectively. OC’s density is relatively smaller — 1.4K/km2. If these cities could pack at least twice as many residents, why wouldn’t OC, which is several times larger, have room to do so?
“If they lower rates, it will be good for OC real estate.”
Don’t agree with that. Higher inflation will hurt all other industries and eventually RE.
“If they raise rates, to fight inflation, it will be good for OC real estate.”
I agree with that. OC RE must undergo a painful correction to its overvalued assets.
“I can’t see a 50% drop in real estate ever happening. To believe it will, ignores sanity, and politics.”
Sorry, your logic does not inspire sanity in this insane RE market.
k374’s comments nail it. Good job.
I have been a part of this blog for months and today will be my last day of participating. This blog has turned into nothing more than entertainment over education, which I think is what jon intended….to get a feel for peoples “opinions” in the area. I don’t know what the future holds for all of us, but good luck. I hope all of you find happiness, success and enjoy yourself with how many years you have left on this earth. I am going to unplug.so long and goodnight.
“If they lower rates, it will be good for OC real estate.”
“Don’t agree with that. Higher inflation will hurt all other industries and eventually RE.”
“If they raise rates, to fight inflation, it will be good for OC real estate.”
“I agree with that. OC RE must undergo a painful correction to its overvalued assets.”
Why am I laughing?
You are argueing from both sides of your mouth.
“Sorry, your logic does not inspire sanity in this insane RE market.”
I agree. One of us is sane.
Price of Bad Tidings…
You may be right about San Fran, London and Paris haveing higher densities.
They have been facing this problem for more years than OC. They are also much more EXPENSIVE! Or did you miss that somewhere?
I want to thank you for proving my entire point. You are absolutely correct. As long as you agree with me.
No more land, eh?
Wasn’t Manhattan fully built-out by 1910? RE has crashed there quite a few times since. You’re forgetting that we can build vertical.
They aren’t making any more sky, you know.
Well I have to agree with the article, as there is and national average of 6 to 7 mortgage companies going out of business a week nation wide right now, and I speak from being a loan agent for the past 10 years and getting laid off by my company who went bankrupt last June after 18 years in business in OC. IE “Pacific Shore Funding” aka “123 Loan LLC.” Our economy was kept afloat by increasing property values up until 12 months or so ago, and all the increase has all but stopped or went down dramatically. I see most of the people who disagree with the facts to be either devoted real estate agents and or brokers. I think more people need to take a look in their own neighborhoods, and around town at what they see IE ìPRICE REDUCEDî and even take a look at the weekly news letter called the “International Forecaster” Read and get informed.
K374,
You have guts, You have added a gallon of gas on to this blazing topic. I think you are on to something. Ameicans have a negitive savings rate of -.05%, living far beond their means (OC as well). The examples that you gave in your post basically identify many people in the OC.
“How many people are able to save $1k a month and still drive their Lexuses, drink their $4 lattes and go on their $5k vacations like they have been doing? And all this while the cost of energy, transportation, insurance, health care is skyrocketing”
The fact is, NO ONE knows where RE prices in OC will bottom out at, not even Gray “Crystal Ball” Watts. The comments by Peter Schiff sure do make for a lively chat. CASH IS KING!!!, buy low sell high.
Okay, after reading many of the comments left on this blog I thought I would add my two cents.
First, I am not an economist. I am not involved in the real estate industry. And I am not a homeowner.
That being said…I believe the market will correct itself. How this correction plays itself out is unknown, but anyone with a little common sense can see that the LARGEST issue at hand is the percentage of homebuyers that cannot AFFORD the homes they live in…using traditional ratios associated with a stable/viable economy.
I believe whole heartedly that a significant reason for the dramatic rise in home values that we have seen nationwide, and most specifically in areas with substational new home construction, is directly related to the finance/mortgage industry’s ability to market hybrid loans…on a “need-to-loan” basis.
Lets see:
1. Traditional 30
2. Zero Down
3. ARM
4. Interest Only
5. Option ARM
6. Traditional 40
It seems to me, as a lay observer, that as we have moved along the spectrum of avaible mortgage options, from conservative to exotic (risky0, home prices have risen substationaly. Once the market was tapped dry of available buyers able to afford to buy, given the most current loan type and then-current prices, the mortgage industry has been quick to market a new loan type to tap the next available market of buyers. Each step along the way, lending to buyers whose incomes are futher away from historical levels of affordability.
Where do we go next? Well, I believe it is completely up to the mortgage industry. As long they can continue to market newer and newer hybrid loans to meet the ever shrinking pool of buyers able to purchase (notice I did not say AFFORD) at that moment’s current price levels, prices will continue to move up.
Obviously this cannot happen, because the mortgage industry appears to be out of OPTIONS, no pun intended. THE MARKET IS TAPPED. Short of slowly introducing 50, 60, or 70 year loans, the GROWTH of the mortgage industry is over for a period of time.
How long? I believe until home prices reach levels at which traditional buyers can AFFORD to purchase with traditional 30 year mortgages…that is, when prices meet relative historical levels of affordability.
How much of a decline until we get there…10%, 20%, 30% or more? I don’t know. Like I said I am not an economist. Just someone with common sense!
I would appreciate feedback. Do you agree or disagree.
anytime anyone want to sell their $500K home for 1/2 price…. please let me know… will pay cash
Household income is almost the same as 6 years ago while living expense are skyrocketing from taxes, gas, and everything else. How many people can afford to have a $400,000 house in Orange County? Not many. The worst has yet to come.
RealtorDave,
I would agree that we would disagree on almost everything, but with instant blogging we could discuss our disagreements, and I am glad we agree on that!
Give me instant blogging or give me name calling!
–jake and realtordave
What a joke. The major difference between the 90s and today is that we are not OVERBUILT in OC versus the 90s. Outside of OC is probably going at higher risk.
Everybody still wants to live here, and I would be really surprised if home prices went down even 15%. I think we are really down 5-10% off the highs already, anyway.
Many of the Doomsday bloggers here fail to take into consideration any mitigating factors in the economy. True, the Fed is not concerned with OC’s micro market, but is concerned with the macro market. It will adjust accordingly. If the economy goes into a funk, the Fed can adjust downward to stimulate the economy.
Presumably, if the employment situation is good and the stock market responds positively, the 10-year bond yield normally increases (home loan interest rates are tied to the 10-year bond and not the Fed rate everyone is preoccupied with in these blogs). This acts to increase the cost to homeowners. If the stock market tanks, the 10-year yield goes down. This is a good thing for homebuyers (read: more demand).
I’m not saying that all these mitigating factors will act to reverse the downward trend in the housing market, but they can’t be ignored either. Many economists don’t take these into account. Remember also, we had a perfect storm in OC in the mid-90’s. Does anyone remember the riots, earthquake, OC bk, loss of the entire aerospace industry (not a portion of an industry), etc?
At times this site looks like a support group for disgruntled renters that missed out on the last housing boom. I see a “malaise” in the housing market and a gradual decrease in home prices over several years. Remember that OC is a great place to live and will command a premium over other locations. OC is a “branded” and is here to stay.
History knows cyles, and we look to be at the end of this one. However, I don’t subscribe to doom and gloom. Sure the .COM crash happened and the early 90s real estate fall happened (down up to 20-30%). But Y2k doom didn’t happen (I realize this is not a market thing, but there were some wise experts). We’re hearing of this real estate crash for 2-3 years; in 2004 it was to happen in 2005; in 2005 it was to happen in 2006, in 2006 it is to happen in 2007…
The key fact here is that there are jobs; lots of them that are independent (directly or indirectly) of real estate problems. Tech is taking hold once again. These loss of real estate jobs and loan jobs ends pretty much there. These jobs are a tiny fraction of the jobs in OC, even though there are big, well-known firms. In the early 90s, defense companies withdrew subsequent to the cold war disappearance. 1000s of jobs (a lot more than real estate-related jobs).
Subprime potential buyers are now locked out, which is a good thing. The rest of them may have some equity, and now may have to sell, but not in a mad rush.
I’m no expert, but I’ve been around and see a max of a 10% decline. People generally prefer to buy. Only time will tell who is right, and by then these predictions will be a blur of the past.
Hey selltome…anytime you want to sell one of the $500K houses you got for $250K to me at half that price…let me know…I will pay cash!
“You may be right about San Fran, London and Paris haveing higher densities.
They have been facing this problem for more years than OC. They are also much more EXPENSIVE! Or did you miss that somewhere?”
No I didn’t miss it nor did I claim otherwise; you’ve either missed my point entirely or you’re deliberately misleading. One of your explanations for OC’s expensive RE was that it, like these cities, has no more room to build. I’ve refuted your claim with relative population densities. Now if you want to throw in the cities’ other problems, that’s another issue.
“I want to thank you for proving my entire point. You are absolutely correct. As long as you agree with me.”
If you want to dilute yourself in your own confusion, I can’t stop you.
DonS said:
“Why am I laughing?
You are argueing from both sides of your mouth.
Sorry, your logic does not inspire sanity in this insane RE market.
I agree. One of us is sane.”
“You are argueing from both sides of your mouth.”
You know what, I just realized that you may be right if certain conditions transpire. If you increase interest rates at current prices, demand dries up further. This would be bad for OC RE. However, if this encourages prices to come down, then yes, interest rates hikes will be a boon to the buyer who likes to save up. Conversely, lower interest rates will devalue the dollar and jack up the costs of critical imports such as oil, gas, building materials, electronics, clothing, etc. OC RE will be the least of our concerns.
Home price went up 300% in 5 years without any complaint. Why am I seeing so many objections about only 50% drop in price?
Can one bear give me 3 data driven statistics that show housing will either minimally decrease or remain flat?
As for us bulls I think we have stated them all:
1) low savings rates
2) sub-prime lenders closing shops
3) inflation is outside of Feds “comfort zone”
4) inventories are at or near all time highs
5) NOD are at or near all time highs
6) builder incentives very popular
7) builders profits decreased significantly
8) builders unloading everything possible to improve cost structures
8) top execs at many of the builders have been dumping shares at an alarming paces…look at Mr. Toll
So other than a weather forecast that compares OC to North Dakota please supply. Otherwise, I personally will believe that the dumb money that brought on unrealistic appreciation over the past several yrs is still pretty dumb…if not dumber.
back after a nice long weekend of golf at
pebble beach/ spyglass- compliments of citibank-
as for schiffs call- hes spot on- the day of
reckoning is close at hand- at this point in
time anyone who cant see the handwriting on the wall is oblivious to FACTS– the spoiled children
of orange county are about to get their cummupence- naughty naughty children- living
beyond their means on imaginary home “equity”-
by the way wheres ezbabbler been hiding these days- even that knucklehead can see whats comin-
aint that right babbler
Oh, i love this….the doom and gloomers really loved this one. All you have to do is visit all the other blogs related to real estate in orange county and its the same people, the same thing. For example, see graphrix posts on,
blogs.ocregister.com
http://www.irvinehousingblog.com
http://www.oc-fliptrack.com
bubbletracking.blogspot.com
ocecon101.blogspot.com
And you might also visit some of the realtor’s blogs/posts and you’ll see the same crowd too. Borders on obsession, really.
rants, et. al. are the same fish. Fish with lots
of time on their hands. The same crowd, the same sky is falling.
one question. How many times has everyone said, “this is the beginning…”
I’m getting bored with the cherry picking. Market goes down, oil goes up, subprime woes, inflation fears, etc. etc. all as precusors to doom? Where is it?
Hey Yawl -
I’ve read a lot of housing and econ blogs over past year and I gotta say, this one has a lot of intelligent comments - and of course it’s share of ego battles, name calling etc. But in general, quite good.
Also, I agree with Jake, threaded blogging would add nice structure to this info and cut down on the repetition of basic ideas/concepts that have been out there for a long time.
cheers!
Many posters have mentioned a further decline in the dollar. I am curious if a decline in the dollar would have a stabilizing effect on hard assets such as real estate.
One person’s loss is often another’s gain. I have been waiting to buy and just renting and saving for a down payment. I really want that house badly, but not so badly that I will take out a crazy ARM or other silly loan. It’s back to basics people, and once prices go down 50%, people like me are going to finally get that house at a reasonable price, and with a traditional, safe fixed-rate mortgage.
I do feel sorry for those who just bought, but what can I say? You got greedy, you got caught up in the mania.
Clueless, come on bro, think about it. how can you have a 300% drop in real estate? you can’t. obviously there is a finite bottom to prices, but an infinite top. a decline of 50% is far more dramatic than a 300% increase. not to mention we’ve had triple digit increases in the past and only one, yes one, decline in over 30 years. in that same 30 years prices have increased 1000s.
real estate has always been and always will be a place to build wealth. that’s a fact everyone seems to ignore here.
It is unfortunate so many did not purchase OC housing before it ran up. Now, many are praying that prices will crash and they will get a second chance to fix their mistake. Unfortunately, that may be the best plan. Fortunately, you have a temporary window where prices have stopped rising. Your best move is avoid all the crash prophets, locate a decent house, and purchase it. Ten years from now, you will be the fortunate one, and all the doom sayers will be broke.
The turnaround in the housing market is just around the corner. By 2008, the least expensive home in California will be listed for $3,000,000. 500 year mortgages will be in vogue.
Nick…wealth does not come from owning a home. If you believe that ask the people that saw prices go up hundreds of percentage points that last couple of yrs, take out HELOCs, and are now faced with the daunting question of how am I going to make my payments.
Observant RE…again another bull that believes prices will be going up or flattening out. Have you not looked around and seen all the incentives the new developments are offering…in essences that is a short-term way of off-setting price reductions. Again, give me some data driven points on why this market will just “flatten” and then you will have my attention. Until then, like I said before…the dumb money is just getting even dumber!!!!
TIMING IS EVERYTHING is the most important 3 words to remember. Stated income ( liar loans) drove the last 3 bubble years and that is a fact - not an opinion. Taks away stated income and the market falls 50%.
FACT japan declined for 11 years and they had a very fixed supply. Very little reward/incentive to tell the truth. Male (unearned) egos don’t like to be fooled and will never admit they where wrong.
All the bashers, put your money where your mouth is. I dare you to go buy real estate now. Do it.
And what does it have anything to do with Republican or Democrat? Stupid.
Fact of the matter, for those ignorant of economics, is houses are not meant to be an investment tool, over the long run. What he said is basically true: housing prices reflect personal income. Too bad the past 5 years or so pushed real estate prices out of whack, thanks primarily to speculation. In the long run, prices will adjust back to where they should be: that is, relative to personal income.
What goes up must come down. By how much or when is the only real issue.
observant hypocrite- what are you doing wasting time looking at all the other blogs- youre
actually the most unobservant person I ve read-
clueless fits you so much better- then we have nick- the economist fireman who makes the
statement- real estate creates wealth- please
educate us nick just how does real estate
CREATE wealth– its inflation that takes the
price higher– NO WEALTH was ever CREATED-
now I see why youre a fireman–
NOTE TO SELF- listen to jim rogers and peter
schiff — ignore the nicks and “observants” of
the world
jim, good point.
midwest man, are you kidding? so some people weren’t smart and got in trouble. that is always going to happen no matter the ‘market’. but you’ve got a lot to learn if you think real estate isn’t the single easiest way / most prolific way that individuals, communities, corporations, etc have all built wealth. seriously, are you joking?
Jim said:
“It is unfortunate so many did not purchase OC housing before it ran up. Now, many are praying that prices will crash and they will get a second chance to fix their mistake. Unfortunately, that may be the best plan. Fortunately, you have a temporary window where prices have stopped rising. Your best move is avoid all the crash prophets, locate a decent house, and purchase it. Ten years from now, you will be the fortunate one, and all the doom sayers will be broke.”
Jim’s thoughts is a sad reminder of the “me now” attitude that is contributing to the decline of this country. Just as we are mortgaging our children’s future to satisfy our current needs, the RE industry and bulls are willing to shut out the next generation of potential customers by sustaining unreasonable affordability levels. The pool of qualified buyers will slowly age and dry up. Yep, it was too bad that you weren’t born a few years earlier…
Jim…good thought about buying now. In fact, if you are thinking of buying now go ahead and purchase some stock of some of the major home builders and sub-prime lenders.
Then come back on here and let everyone know how you lost tons of money all the while “us doom-dayers” are putting money into our investments accts earning anywhere from 8% to 12% a yr and are cashflow positive.
OC will be the epicenter this time around, just like West Los Angeles (loosing 43% from 1990-1996) was last time. The reason is the same. It was the S&Ls headquartered in West LA in the 1990s, it’s the Sub-prime and Other Lenders Headquartered in OC from 2006-2011.
Who will accept negative cash flow when prices are declining?
Although I agree with Peter that a 50% correction in OC is likely (from Peak to Trough is how it is calculated), his view on residential real estate is too broad. In Denver Colorado (soon to be home to est. 7,000 engineering/ancillary jobs from Huntington Beach and SD) you can purchase a nice 2-bedroom condo in a good school district for $60K. Denver has run counter-cyclical to CA, and this time will prove the same. Denver’s Condos are about 10% of the cost of a condo of similar quality and location in Southern California. True, there is no beach, but people earn the same there and their population and economy is expanding, no contracting. Also, the positive cash flow is strong (i.e. 10 cap).
midwest man,
to keep you from changing the subject, read my post again. give you the data the market is flat? uh..no need to provide you with data. Just look at what has been sold, who much the price has dropped and their is your answer. you are capable, aren’t you?
When there are 107 posts on a topic, people come screaming out of the gate. when i go surf the web and the same people pepper all the other real estate blogs, it seems a little curious to me why some spend almost their entire day trying to paint a picture. I just haven’t seen any doom and gloom emerging. But everyone says, just wait, just wait. I’ve been waiting since last year, but nothing has happened.
You explain to me how my above post makes me a bull and you can call me a bull.
So if OC is going to take a big dive what will happen to places such as San Bernadino County or Riverside? I used to live in OC. And I remember that RIverside and San Bernadino were considered a cheap alternative. Of course, they are no longer.
Why would somebody for example want to pay the same amount out there as they would in OC? Just curious. I think that there will be differences. But OC by itself won’t be the only place to go down severely.
So if OC is going to take a big dive what will happen to places such as San Bernadino County or Riverside? I used to live in OC. And I remember that RIverside and San Bernadino were considered a cheap alternative. Of course, they are no longer.
Why would somebody for example want to pay the same amount out there as they would in OC? Just curious. I think that there will be differences. But OC by itself won’t be the only place to go down severely.
Peter Schiff is a very insightful man.
He understands the housing bubble issue in connection with the US economy’s fundamental problems. US has been suffering the notorious twin deficits (federal government budget deficit, and US current account deficit), and the 2002-2005 housing bubble prolonged the bursting of the US economy bubble.
When you take a loan to buy a house, where does the money come from? Nowadays, Americans over-spend and don’t save. The government over-spends too. The loan we took from the banks came from foreign countries, which invested into US for high returns. Their investing sustained the US dollar value. Once foreigners start to pull their money from the US, the following will happen reinforcing each other:
1) economic recession;
2) higher interest rates despite recession (in order to keep foreign investment);
3) declining US dollar;
4) housing market collapsing; and
5) US domestic stock market declining.
Peter is right. The houses in Orange County will decline in valye by 50% compared to their peak values in 2005.
This guys right on the money.
Listen, for you idiots that don’t know about the Japanese housing market or what a credit-induced boom is really about, shut your damn mouths.
This country is in big financial trouble and most people just don’t want to face it. Everyone wants something for nothing — get over yourselves.
March is always a slow month for housing because people are paying their property taxes and IRS deadlines. When the sun is shining in beautiful Orange County buyers will start shopping, again. The increases in rents will prompt tenants to move forward and find solutions to become homeowners. The states that have more affordable housing are inferior places to live.
Nick, did you really read what I wrote? I never mentioned a 300% drop but instead an increase. The drop I mentioned was the 50% prediction of this article.
I other words, a 200K home in 2000 becomes 600K home in 2005. If the 50% drop becomes true say in 2010, then the price will be 300K 2010. Thus for 10 years, the 200K home in 2000 still increased to 300K in 2010. What is so “extreme” about it as you put it?
“The increases in rents will prompt tenants to move forward and find solutions to become homeowners.”
You mean that average tenant will have risen 100% by then or cheap 100% financing will be available? Sweet!
“The states that have more affordable housing are inferior places to live.”
So why not rent at a fraction of the price of buying?
Peter Schiff knows what he is talking about. Read his book, and study the historical data he presents, and then deny that he is actually a realist. By the way, he was the only one that recently predicted the hiccup in the Asian market that caused the calamity on the US stock markets. Mark at CNBC was very quick to dismiss Peter as a “gloom & doom” economist…he promptly apologized a week later. If the tree is falling where you are standing, why would you not want to know what was happening so you could protect yourself? What is the worst that could happen by preparing?
Observant RE…well here is some information that supports one of my arguments. These are all in the wonderful Telaga area and are considered Townhomes if I recall correctly. Regardless ownership has been b/w 1yr to 1.5yrs and they have lost on avg about 20% of their value. I will try to find some single family homes in a bit.
13 PASEO VISTA, San Clemente, CA 92673 ($599,000)
MLS: P569178
Sales History: 10/31/2005 $750,000
Percentage Depreciation: 20.13%
122 PASEO VISTA, San Clemente, CA 92673 ($599,000)
MLS: P569198
Sales History: 12/22/2005 $755,000
Percentage Deprecation: 20.66%
70 PASEO VISTA, San Clemente, CA 92673 ($579,000)
MLS: P569187
Sales History: 11/18/2005 $755,000
Percentage Deprecation: 23.31%
58 PASEO VISTA, San Clemente, CA 92673 ($579,000)
MLS: P569185
Sales History: 11/07/2005: $755,000
Percentage Deprecation: 23.31%
Hold on to your cash,
Midwest Man
What goes up must come down.
The higher it goes up the more it will eventually go down.
Anyone who says “the old rules don’t apply” is inevitably proven wrong and when almost everyone is saying it (i.e., the new internet economy, southern california real estate, etc.) you better watch out because the end is definitely near.
This stuff isn’t rocket science. The coming collapse in real estate will begin to kick in during the election next year but will not hit high gear until after and will not bottom until the next president has finished his or her term. It’s gonna get ugly, so buckle up and if you’re in the market to buy then listen to the man: DON’T!!!!!!!!!!!!!
For the guy who started off this comment about when he should buy — See the last paragraph in the story. You should wait until everyone else says it is a bad decision to buy real estate. People that want to buy the first time there is a little down will catch the ideot’s rally. People that want to buy after it falls a bit more will catch the sucker’s ralley.
So how long will it take to notice the polluted ocean, the ever present smog, the huge traffic jams, and the immigrant quality of life? Yes, Orange Country looks great — compared to Shanghai or Mexico City. We are the suburbs of Los Angeles, after all. Just as soon as the solid gold real estate begins to tarnish, you will also notice the cramped neighborhood of homes without any yards, and the insane feed lot architecture of your maximum spending planned communities. The delusion that “we’re different” will wear off soon enough.