Posted on 12/13/2006 4:40:07 AM PST by GodGunsGuts
Wednesday, December 13, 2006
Falling prices trap new homebuyers
Neighbors in a new Garden Grove tract say a developer's plan to slash prices by about $140,000 has left them owing more for their homes than they're now worth.
By JEFF COLLINS
The Orange County Register
(Excerpt) Read more at ocregister.com ...
It affects me because of the industry I work in, but it will correct itself and then prices will again begin to rise once people start buying the now-discounted homes and demand again increases.
Meanwhile, in the South and Midwest, the same home would only cost $140,000 TOTAL in the first place.
The developer isn't hosing them by lowering prices on new homes in their neighbourhood, they hosed themselves by buying overpriced homes that they could barely afford. Cry me a freaking river.
There has been an uptick in rental rates in the city of San Francisco lately, but his estimate is pretty accurate for the rest of the Bay Area. Rents aren't even close to monthly mortgage payments - usually around 50-60% as much.
In low-cost areas, it's more advantageous to buy. In expensive areas, rent is often still cheaper, as you show.
The drawback being, you have to live in the South or Midwest. ;)
It's still all about supply and demand, and way more Americans want to live in Orange County than in Houston or Indianapolis.
It's funny how what you're used to shapes your perception, isn't it? My husband is from Pittsburgh, and on one trip back there, we toured a nice suburban neighborhood. There was a lovely house for sale, for $635,000, a house that would be easily twice as much (if it existed) here in the Washington, DC area.
My husband's brother and his wife live in the Houston area. When we got out of our cars and compared our impressions of the house we'd seen, ours was "That's so cheap!" and theirs was, "That's incredibly expensive!!"
I've always wondered that. Here in Ohio, a new house of 2500 square feet on a decent lot might sell for $275,000. It costs the builder about $240,000 to build. I've always wondered if that same house in CA or Northern VA still costs the same to build, but sells for $700,000 giving the builder that much more profit, or if the labor/material costs are higher too.
Your point is exactly right. If you thought the house was worth what you borrowed when you got it, price fluctuations after you are in it aren't really relevant, unless you were intending to flip it all along, in which case that is the risk you took. No one will get thrown out of their house due to lowering values. To the contrary, if you get into a pinch, the bank will be even easier to work with, now that their collateral has lost value.
Not me.
To get me to live in OC they'd have to offer to pay me at least $200 grand a year. I make upper five-figures now.
Sounds like we'd better get down there even sooner than I'd planned. :)
Interesting. I realize supply and demand matters, but last time I checked Houston had a good economy and growing population just like those other cities. I wonder why it has remained so reasonable.
It still doesn't change the fact that demand for real estate had reached the saturation point and then fell. No matter how much they lowered rates they could not attract new demand. That's pushing on a string.
Renting is cheaper in insanely prices markets. In normal markets, buying is usually better.
Don't forget the cost of the land; in Northern Virginia they're not making much of that any more, and the cost of an infill lot (with or without a house to tear down) can be in the high six figures before you even build anything on it.
Keyvan Samini, an attorney for some of the buyers, said the purchasers relied on the lender and its appraiser to confirm the homes' $800,000-plus price tags. But appraisers ended up using homes about three miles away as a guide for the first appraisal, and subsequent loan appraisals were based on the first one, Samini said. The appraisals "were way too high," Samini said. "I believe that the builder knew they were too high, or should have known. And it's not the fault of the buyers. They rely on the expertise of those appraisers." Barisic, Brandywine's sales VP, said he doesn't know anything about the comparable homes used in the appraisals. "The appraisers are not hired by Brandywine Homes," Barisic said. "They're hired by the lenders, which the homebuyers chose themselves."
And oh that sound of the worlds smallest violin can be heard all over OC now. It's not my fault, it's the builders fault, they made me buy more house than I can afford! Everyone said I could make a ton of money buying a house! They are not making any more land! Prices will never go down!
One of Samini's clients said he's facing the possibility of foreclosure because of the price cuts. Dunn said he's in a financial bind because he's using an exotic mortgage called an Option ARM, an adjustable-rate loan in which the homeowner can pick his monthly payment from a variety of options. Eventually, he'll be responsible for making full payments of $6,000 a month, he said, adding, "I don't know how we'll be able to pay that." "It's not just the financial aspect. It's the emotional," Dunn said. "We can't eat, can't sleep. I can't concentrate on work. This is all I think about."
Here are all of the factors that are creating a 'Perfect Storm' housing bubble:
1. No more buyers. 1st time buyers are exhausted, and unable and unwilling to take on ridiculous unaffordable mortgages to buy a home when they can rent for half the price.
2. A tightening sub-prime mortgage market. As companies like Ownit have gone under due to bad loans defaulting back to them, watch the others tighten their lending standards. Without the ability to pay for hyper-inflated real estate with 'suicide' loans, the pons scheme revenue source is over.
3. Without new buyers, current owners can't sell to move up to bigger homes. It's like those fan rooms where you wear a billowing suit under a giant fan and are supported by the air. The fan has been turned off, and prices must fall.
4. Owners are tapped out credit wise and many have indeed ATMed their house to the point they owe more than its worth. These people are already in deep doo doo, and are 1 job loss away from foreclosure as they have no savings and would have to bring cash to the sale, if they could sell.
5. Watch the Spring sales season become a 'Silent Spring'. I expect to see a flood of home sales unlike anything seen last year.
6. Job losses in construction and real estate are mounting and are a major part of the economy. This will lead to further pressures to sell existing homes and raise inventory.
7. No likelihood that the Fed will lower interest rates any time soon. However, I do not believe rising interest rates have anything to do with the housing slowdown. The issue is affability and mortgage rates are still ridiculously low.
8. Equity locusts are taking their gains if they can sell and bailing from unaffordable areas such as California. The gains are being banked or sank into areas like Texas. this itself is creating another bubble in this relocation areas.
Keyvan Samini, an attorney for some of the buyers, said the purchasers relied on the lender and its appraiser to confirm the homes' $800,000-plus price tags. But appraisers ended up using homes about three miles away as a guide for the first appraisal, and subsequent loan appraisals were based on the first one, Samini said. The appraisals "were way too high," Samini said. "I believe that the builder knew they were too high, or should have known. And it's not the fault of the buyers. They rely on the expertise of those appraisers." Barisic, Brandywine's sales VP, said he doesn't know anything about the comparable homes used in the appraisals. "The appraisers are not hired by Brandywine Homes," Barisic said. "They're hired by the lenders, which the homebuyers chose themselves."
And oh that sound of the worlds smallest violin can be heard all over OC now. It's not my fault, it's the builders fault, they made me buy more house than I can afford! Everyone said I could make a ton of money buying a house! They are not making any more land! Prices will never go down!
One of Samini's clients said he's facing the possibility of foreclosure because of the price cuts. Dunn said he's in a financial bind because he's using an exotic mortgage called an Option ARM, an adjustable-rate loan in which the homeowner can pick his monthly payment from a variety of options. Eventually, he'll be responsible for making full payments of $6,000 a month, he said, adding, "I don't know how we'll be able to pay that." "It's not just the financial aspect. It's the emotional," Dunn said. "We can't eat, can't sleep. I can't concentrate on work. This is all I think about."
Here are all of the factors that are creating a 'Perfect Storm' housing bubble:
1. No more buyers. 1st time buyers are exhausted, and unable and unwilling to take on ridiculous unaffordable mortgages to buy a home when they can rent for half the price.
2. A tightening sub-prime mortgage market. As companies like Ownit have gone under due to bad loans defaulting back to them, watch the others tighten their lending standards. Without the ability to pay for hyper-inflated real estate with 'suicide' loans, the pons scheme revenue source is over.
3. Without new buyers, current owners can't sell to move up to bigger homes. It's like those fan rooms where you wear a billowing suit under a giant fan and are supported by the air. The fan has been turned off, and prices must fall.
4. Owners are tapped out credit wise and many have indeed ATMed their house to the point they owe more than its worth. These people are already in deep doo doo, and are 1 job loss away from foreclosure as they have no savings and would have to bring cash to the sale, if they could sell.
5. Watch the Spring sales season become a 'Silent Spring'. I expect to see a flood of home sales unlike anything seen last year.
6. Job losses in construction and real estate are mounting and are a major part of the economy. This will lead to further pressures to sell existing homes and raise inventory.
7. No likelihood that the Fed will lower interest rates any time soon. However, I do not believe rising interest rates have anything to do with the housing slowdown. The issue is affordability and mortgage rates are still ridiculously low.
8. Equity locusts are taking their gains if they can sell and bailing from unaffordable areas such as California. The gains are being banked or sank into areas like Texas. this itself is creating another bubble in this relocation areas.
Location, location, location.
I've purchased numerous homes and rental properties in the Midwest over the past twenty years. I've never lost dime-one and have always made at least $30K profit on every sale.
And this was starting in the early 80's when interest rates were still high, all through the dot-com boom, and up until the present day. Slow and steady wins the race. :)
I'm sticking with my farm now, though. This little puppy is a goldmine. In another ten years I'll be able to sell it for easily 3x what I paid for it, as development encroaches. (We're land-locked due to farm zoning and a lake and public hunting land.)
However, I could be hit by a bus tomorrow, but that's my plan, anyway. ;)
Japan went into a deflationary period because their banks had trouble making new loans for the reason I've already given you. Interest rates in Japan were almost irrelevant. That can't be compared to where the United States is today.
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