Wednesday, November 07, 2012

Real Estate is Coming Back??

If you read the papers, it looks like real estate is coming back, prices are rising. The inventory is “drying up.” But look a little deeper. According to Zillow 31 percent of homeowners are underwater. And CNN Money reports, half of mortgage borrowers under 40 are under water. That kind of makes some of this “inventory shortage” a tad bit soggy.

I don’t see anyone lining up for a “Liar Loan,” anymore. The rush to buy before you are priced out of the market is gone. The median housing price is rising for a very simple reason. There are no low priced homes in the statistics to bring the average down. Do you want the 300k 1500 sq ft starter home? Or for 75k more you can buy a McMansion with 2400 sq ft?

Sources are reporting that a large portions of sales 30% are cash only. Kind of boggles the mind unless you figure when a bank wins the bid on a home in foreclosure (by bidding the amount owed by the borrower), that’s considered a cash sale. As a real estate transaction, you have a new owner, the bank, and it is a cash sale. Of course, throw in the words “foreign buyer” and everyone nods, they must be doing the cash sales. That many foreign sales ought to set of sirens at the office of immigration.

Out here in California, earthquake insurance isn’t really affordable, so you let the bank own most of the house and you make payments --- if a quake wrecks the house, give the bank the keys. Paying off a home in this economy isn’t too smart, especially if you lose your job. Banks won’t do a home loan if you’re unemployed.

The economy is just peachy keen, and no one is worried about losing their job, and real estate is doing just great. “Now is the time to buy a home, ” interest rates will never be this low again. I hear that shouted in my ears all of the time. Do you get the feeling that there is inventory out there that they need someone to sign for on the dotted line? If you buy a 300k home in California, you can’t flip it. It isn’t appreciating and the 18K in Realtor commissions is staring you in the face.

There is the normal crowd of people buying homes as there has always been. But the speculative zip is gone. The demand is only about 1/2 of what it was in bubble times. And getting financing is a real chore. When I read these headlines that the housing market is coming back, I have to wonder, coming back to what? 6 cars in front of every home, doesn’t suggest to me that housing is booming.

The one thing that really bothers me, I can’t see any bank in the country writing 30 year loans at 3 percent -- 5 years maybe. Can we believe what we read in the newspapers? Is real estate back like it was in 2006 with a full punch bowl? Did the recession really end in 2010? The election is over, maybe it’s time to take off the rose colored glasses.

Copyright 2012 by Jim Brubaker


ATP said...

How many homes have been taken off the books by banks to "dry" the market up?

Btw Jim... As of November 7th, all ports of entry into the United States will now say... "Welcome to Venezuela."


Anonymous said...

Jim, my opinion, you just don't get it!!!!
you can't look out of your window and analyze the economic condition of the u.s., i.e. 6 cars in every driveway.

The foreign buyers are real!! any european, greek, asian, middle easterner, etc. with money is bringing it to the shores of the u.s. i see it everyday with REAL people, buying real estate.
If you are a millionaire in china and tight with the government, you are doing well but you also know that if ever shit hit the fan and your caught on the wrong side of the politics. they are going to drag you out and kill you, bc that's the way it works in other countries.
However, that same chinese millionaire know that if he buys a house in califrnia, there is a good chance chart even if his fortune is seized in china, if he can get out, he has a nice nest in california.
70% of chinese millionaires have real estate holding outside of china, and mostly in the u.s.
same is true with the well to do greeks, they all took their money in the past two years and ran, if they were rich, they came to the u.s. and if they were not as rich, they bought in canada and Australia.

These people are real bc I talk to them everyday! the problem is you don't realize that you are living in the greatest country in the world and what you may thing is so, so, people in other countries will give their right arm for, literally.
There is also a strong migration form colder climates to warm dry climates of the southwest, so specifically, california is in the sweet spot, doesn't matter, s.f. to s.d.

lastly, a lot of people expect housing to go down further and crumble. but why don't you expect your food prices to go down, how about gas prices, how about rent? the point is that inflation alone will pressure housing prices higher, period.
and if that inflation is above 3.5%, you win, bc inflation will pay your mortgage. and i know about property tax but you also get tax savings from your mortgage %, so they offset.

i believe inflation will run 5-10% per year, I'm not talking about fixed dpi numbers, i'm talking about real inflation.

so while you wait for the world to collapse into the abyss, there are others who are betting on better times and thereat thing is that, time will tell us all who was right.

Anonymous said...

anon 2:01 here, sorry for all the mistakes in the post, had to write fast.
good luck and god bless.

Jim in San Marcos said...

Hi Anon 2:01

Look at it this way, 1.2 million homes were foreclosed on last year and 4.5 million homes were sold. That comes out to 26% went to the banks. There are no bean counters out there counting cash sales.

Foreigners may be buying homes for all cash, but how many are there? A real estate agent wants to sell you a house. So don't take much stock in what they say. Just ask a Realtor if he has a home with a bad location--they don't exist.

Joseph Oppenheim said...

Yes, cash always does. Banks are sitting on homes mostly because they don't want to mark-to-market homes they own or else their assets would be visibly worth less, thereby bonuses would be less or non-existent for their execs.

Personally, one of my kids short-saled their underwater condo in 92129....and we are waiting to get a short-sale home in 92127. With a new government program my kid and spouse got an extra $3000 for moving expenses.

Short sales are a very slow process and difficult because they only really work well with cash because a short seller's credit rating is ruined for 2 years, so in our case, I'm doing the financing for my kid and spouse, then will live with them and forgive part of the loan each year, that being effectively rent I would pay, but because it isn't income to them, but a tax-free gift and when I die the loan will be totally forgiven, leaving them with the home free and is win-win.....but it takes time.

About EQ insurance, I always bought it when I owned homes. I self-insure where reasonable, but EQs are a real CA risk....but, I don't go overboard, just insure for a reasonable amount. Where I skimp are on deductibles for other home insurance, etc and financing fees...that's another reason cash works.....being one's own bank.

I look at home to live in as a consumer item with investment only a secondary consideration...if I want a home I buy one, and like with everything if I don't have the cash I don't want it. People often forget that maintenance costs for a home, especially a house, can defeat the whole investment reason for owning.

Overall, it does look like the home market has bottomed and heading up, but running the are not a bargain as around 1997 or earlier years.....renting is still the, I say the only reason to buy a home (a residence) is because one wants one and can afford for investment and/or inflation protection there is that aspect, but not the main reasons since there are other ways to do San Diego, that other places where homes are much cheaper I do say homes are CHEAP.

dearieme said...

"... earthquake insurance isn’t really affordable, so you let the bank own most of the house and you make payments --- if a quake wrecks the house, give the bank the keys." Now that's really instructive, though I don't see how the banks can make a sensible living when handing out quasi-earthquake insurance like that.

One aspect of American house financing I've never understood - the way you borrow at a fixed interest rate for a fixed term, with the borrower allowed to renege on the deal but the lender forbidden to. Who subsidises this one-sided bet? No doubt it's the taxpayer, but how is the trick done?

Jim in San Marcos said...

Hi Dearieme

It is confusing. Part of the confusion revolves around what we call a bank. Presently banks hold very few real estate loans, investors own most of them. The bank manages depositor money and the payments from the home borrowers to speculators holding the real estate loans. If a bank were to take 100k and write a home loan and then sell it to a speculator and retain a half percent management fee and do it 20 times in one year, they have a net return of 10% on th 100K Or they could loan money short term at 20% for credit cards.

Borrowers do walk away from loans, and in normal times the most a bank could lose in the deal was nothing. With 20% down, the house had to be worth 21% less before the bank took a loss. With the old no money down VA loans for Veterans, the government only guaranteed the first 20 percent of the loan.

The worrisome thing in todays world, is that gold is no longer linked to the currency and interest rates are artificially low while inflation is ramping up. This anomaly could bring the system down. The home buyer is borrowing hard earned dollars today and paying them off with very inflated dollars down the line.

This dichotomy of low interest returns vs long term real estate inflation offers the long term investor nothing more than confusion. The net result is that people will find more reward in consumption than savings.

You're right, the taxpayer is subsidizing the real estate mess for now. But when people stop saving, that leaves less dollars for the government to borrow and they need them all. As you suggest, there are some smoke and mirrors involved and it could get ugly.

Anonymous said...



In going through her father's papers, A dear friend found her hospital bill for a tonsillectomy from 1962:

Room. $16/day
Operating room $18
Medication $3
Physician $9
Dressing 10 cents

Thank goodness there is no inflation!