This page has been archived and commenting is disabled.
High-End RE = "Dead Money"
Two articles this morning lead me to conclude that housing still has no upside. The first from the NYT the other from Bloomberg.
The Times reports on what I (and others) have been warning about for
some time. The lending limits for the GSEs and FHA are scheduled to be
cut on 9/30/2011. Bloomberg reports on a growing trend, seller financing.
The GSE lending limits were increased as part of the 2008 HERA (bailout)
package. Housing was in free fallback then; there were no private
lenders. It (sort of) made sense to increase the limits in the overall
effort to stop the economy from tanking.
The limits have already been extended once (end of last year). I’m sure
that there is going to be a push by some in Congress to extend them
again. I think the effort will fall flat. Fannie and Freddie have cost
hundreds of billions. Extending the limits just keeps them alive and
helps them grow. That is not a very popular position to take one year before an election. The additional argument will be made that the higher limits just support rich people. To some extent that is true.
The big change in limits will come from the areas that have the highest home values. These are pretty significant drops:
Monterey Co., CA down $247,000 (34%)
Monroe Co., FL down $201,000 (28%)
Hawaii Co.,HI down 250,750 (41%)
Some interesting changes. Blaine Co. ID (home of Sun Valley) has its limit cut by $272,000 (37%) while Eagle Co. Co (Vail) gets a haircut of only $104k (14%). The new limit for Vail will be $625,000 while the poor people up in Sun Valley will be capped at a lousy $458k. Look for the folks up in Idaho to make a stink over this.
In my neck of the woods the very toney Fairfield Co. Ct (home of
very-very toney Greenwich) gets whacked by $195k down to a max of $514k
while neighboring (and much less toney) Westchester has it’s limits cut
by a more modest $104k keeping the lid at $626k. I assure you that there is not logic to this.
There are 88 counties across the country that will see their limit cut by more than $100,000.
The Bloomberg bit on seller financing is an interesting development. I
have been seeing this in action in S. Florida. These are not the
distressed properties owned by banks that go for auction. Those are cash
buyers. There is a separate market for higher end (and Uber high-end)
properties that have been trying to get sold for several years. Finding
buyers is very hard. Prices have come down a bunch. As much as 50%; but
there is still too many properties. Sellers who are looking to
distinguish their home are offering cheap financing to lure buyers. Low
interest rates and a five-year bullet are common terms. These are
million dollar notes. By definition, there is no liquidity in these
notes. In reality this type of financing is just a rental with an option
to buy. Depending on the size of the down payment there is a very good
prospect that these “sold” homes are going to revert back to the
original owner in the not too distant future.
My conclusion from these two reads is that the availability of mortgages
is going to shrink quite substantially in a few months. That there is
already an evolving ‘solution’ to the problem called ‘seller financing’
is like we are reverting back to the stone ages of mortgage finance.
I think the steps to downsize Fannie, Freddie and FHA are necessary. I
hope the cries to keep the ‘emergency’ limits are ignored. But there
most certainly will be consequences from this. High-end real estate
is going to fall a fair bit in the next year. It will continue to act as
a dead weight on the broader economy.
»
- advertisements -
http://www.theatlantic.com/business/archive/2011/05/fannie-needs-another-85-billion-from-taxpayers-but-freddies-okay/238618/
Freddie needs $8.5 billion....It think govt should talk to MSFT, they like buying orgs for 8, 5 billion that have lots of customers but still don't make a profit
Without being rude, you have to be 100% idiot to buy a house right now.
4-8% fees on the way in....10% closing fees on the way out....so your house needs to go up AT LEAST 10% for you to even break even, not inclsuing all yoru time and frustration having to listen to the BS real estae agents, bankers, and other parasites.
Couldn't agree more. Hence the title. No Upside.
Isn't it axiomatic that with an ever shrinking middle class, upper middle class, upper upper middle class both in terms of numbers of them and their incomes declining, their own homes not moving, that this problem will never go away?
If we aren't 'movin' on up', then we are going backwards and there is no forward gear to pull us forward.
This doesn't seem cyclical, but structural and will not cease. I see the disUnited States as a Europe, 2.0.
The part that really really sucks for owner financing is all of the BS gov't regulation that was claimed to be to help the "little guy" ended up screwing a lot of people who actually have money.
I've taken a different direction. I pool up friend's FRNs they don't want to piss away in the stock market, go buy foreclosures from the banks (at a steep discount), then I fix up the house to like new condition. Then sell it into the market at a reasonable price (not uber inflated), with owner finacing. The new buyer gets a nice clean house they can afford, I get to buy it on the cheap from the bank, and once my buyer gets their life/credit restored, they just refi into a regular loan, or work hard to pay me off. If they fall on more hard times, I can just sit down with them and figure out if the deal can be saved.. (I don't want their house back.)
There are tons of people with cash down payments wanting these deals. I just sold one in less than 24 hours! My next one is already "spoken for"..
Now to time my cash outs of these deals with more silver purchases...
Peace out!
Exactly, however i am seeing this more in the commercial realm than in residential. In Lakewood CO i have a friend who owns a commercial building for selling kitchen equipment. The value has dropped dramatically yet his taxes increased 32% from the prior year. Needles to say he is fighting the increase.
Nice article. Here are some observations.
Monterey County: This includes Pebble Beach (yes, where that famous Golf competition takes place every year). After the crash of 2008, I have never, ever seen so many houses for sale there all at one time. And this goes back decades. It will be interesting to see how things pan out if Jumbo loan limits are reduced. The multi-million houses won't be impacted as much. But not everything there is all cash for the wealthy.
In Silicon Valley, the high end places haven't been impacted much. This will change if Jumbos are reduced. But people here are just in complete denial; under the impression that places like Palo Alto are immune.
Bruce: I do hope you are right about the loan limits not being extended. But pardon my sceptiscism. I'll believe it when I see it. There's just too much effort being placed in trying to extend and pretend. Throw in a market decline of 20% (say) with the end of QE2, and I have to wonder about new life being breathed in to the extension.
I agree. There will be strong voices in support of an extension of the higher limits. Every one of those 'voices' is being paid by the banking/housing/RE lobby.
Look for Barney Frank to lead the charge on this.
This will prove to be a dangerous political choice for those deciders that push for extending. They will go down in the next election. They know that. So I say it does not happen. We shall see.
If they sneak this through Congress with some midnight omnibus bill, I will yell and scream.
Bruce, this type of seller financing has been popular in the "ethnic" restaurant business in your area and the tri-state region for decades.
Same for mechanic's shops.
A guy owns the restaurant and building, finds a aspiring entrepreneur to buy the business but not the building, original owner self finances the deal, PLUS charges the guy rent on the building.
Within three years over 78% of the buyers are out of business, the original owner retakes the business. IN the mean time the original owner gets an income stream, goes on vacation, and gets tax deductions.
On the occasion the original owner gets fully bought out, he simply starts oevr in another location....
I don't see any difference with the high end homes in Florida. A continuous rental year round at non-vacation rental prices is far preferable to the alternate scenarios. If the buyer defaults, you can write off the difference between the note and the future devalued price of the property lowering your future cost basis.
And it's not just Florida shore, closer to us, the toney towns in the New Jersey shore are feeling it too... I've seen a few seller financing offers in Manasquan in the last year.
And seller financed mortgages ARE NOT ILLIQUID ASSETS ANYMORE.
IF any ZHer is holding one thinking he's illiquid, reply to my post and I can forward details of private note exchanges that trade these particular assets.
NJ Shore RRE article:
http://www.nytimes.com/2011/05/08/realestate/08njzo.html?_r=2&ref=reales...
Thanks for this input. Question for you.
A $1.2mm first mortgage. 5% equity. Five year bullet. Interest only first five years. Interest rate fixed at 2.5%.
Borrower is retired. Has no earned income. Will have to dip into savings to cover fixed costs. Property located in SW Fl.
What price would you put on that loan??
bk
Fixed costs such as water district, community dues, (gated community with all the whistles and bells), and the like become part of the equation.
Who wants the house? In other words, what market segment are we talking about?
A working professional, business owner, or a retired billionaire?
I've seen first class homes in SW Florida that sold for $550k a few years ago as new builds, some that have never been lived in - located in manicured gated communities, golf course, pool, fountains, recreation center, sell in the mid 100's this year.
So with that in mind ..... just do the math.
"Investor" owners who got stuck can't even afford the electric bills - stupid people in the Northeast don't understand how important it is to keep the A/C at min 79F to keep out wood rot and mold. I've see penny wise pound fullish disasters just on this one.
Fixed costs such as water district, community dues, (gated community with all the whistles and bells), and the like become part of the equation.
Who wants the house? In other words, what market segment are we talking about?
A working professional, business owner, or a retired billionaire?
I've seen first class homes in SW Florida that sold for $550k as new builds, never lived in - located in manicured gated communities, golf course, pool, fountains, recreation center, sell in the mid 100's this year.
So with that in mind ..... just do the math.
Fallout New Vegas Dead money.
http://www.youtube.com/watch?v=eyvkQk9tSAE
Yes lots of radiation and wrong doing, plus some cool graphics.
Life imitates' art.
the .gov will feed us and tax us and keep us safe from war
Yes, just like the .gov did for the Katrina "victims".
RE market won't bottom until its a motherfucking cash-only market, with no credit or leverage extended. In fact, it may be worse than cash-only, as prudent buyers at the bottom may very well need to reserve for motherfucking property taxes and unanticipated motherfucking expenses.
for a real long view I look at Japan's housing market, for a more near term view, FL has been a few years ahead of rest of country...they were doing short sales before most in country know what the term was
I think you read the market correctly
Caution to those who think now is the time to buy lower end rental property as this has now become the main idea of all RE investors; this herd mentality will lead to a surplus of rentals as is already happening in Los Angeles and other larger cities. There are many people who will gladly rent a room in someone's house or stay with relatives if rents increase at a faster rate than wages.
Interesting point, as i am currently looking to purchase a low end rental. My concern, is that in the market I am looking what if the rentals (which are currently being bought cash at 60-70%) off peak prices, drop even further in value?
Then my renter who is paying $900/mo, can get a nicer, newer, bigger rental for $100 less per month. Opinion?
All real estate is local. So you have to look at this from that perspective.
IMHO rents are going to go up much faster than inflation for the next few years.
And yes, the value of the property could fall in value, even if rents are rising.
once whole housing market is cash, then only those with cash wealth will own...then housing is a game of monopoly, rich get richer, poor pay rent
Was the game monopoly was created by the NAR?
if there is an oversupply of houses than households that can afford rents, the houses will still be cheap. multiple families will begin to live in one mcmansion.
This is not a very uncommon in China.
I'm surprised more people with long-term listings aren't extracting oxidation equity from these properties.
Holy Shitz, another fucking subprime crap. WTF. Enough of this crap.
OMG take a look at this !!!
http://www.businessweek.com/magazine/content/11_20/b4228031594062.htm
Here we go again!!
repeat deleted
Yep, here we go again, D.C. mandating that banks lend to the "disadvantaged" so the "poor" can buy houses they can't afford and sensible banks get penalized for not loaning to those who can't afford a house. Yep. Right out of Atlas Shrugged.
yeah, and the whole bubble from easy FED money, countrywide, Cali where no govt money at all invovled...that was ALL due to govt pushing poor people into loans....WTF...would someone please read the freaking news some time....Bruce did an article about big money houses crashing in value because govt is tightening credit for high end houses and you guys are still acting like the whole housing bubble was due to govt pushing money to poor....and exactly what were those hedge funds doing that got blown up by the subprime market were the hedge funds GSEs?!?!? in Cali bubble blew up strictly on private money, how did Countrywide fund Cali loans....COMMERCIAL PAPER!,,,that is your John Gault private market that blew....and that market blew up because it was free to fail, it was free to blow a bubble and pop, it was unregulated and it freaking popped...If govt was concerned about poor like state govts were, like black community leaders were in Baltimore and Cleveland were as far back 2000, they would have been regulating the subprime slimesters that were refi-ing people ALREADY in homes into exploding loans. Those predators took little old lady houses when they were still worth something. The states tried to stop the subprime predatory loans because they lied cheated and frauded people with predatory loans. But W admin did not like States rights, so had the Federal agency OCC claim pre-emption to shut down any consumer protections that states tried to implement....
So the private market pillaged, unpoliced, and at first made a huge money lending to poor, so Wall Street wanted more and more, til they were giving loans to illegal immigrant farm workers...that was not Fannie...it was private fraudulent mortgage brokers funneling crap loans up to Wall Street who paid them huge money to bring them crap that they could pretend was good, sell it to their private investor customers and then make bets against the crap they just sold to their customers. But yeah, its all because the govt wanted to get poor people in houses....argrrrrg...the complete ignorance of what has gone after 5 years to survey the housing mess collapse is unbelievable....yeah go all John Gault on the govt and look away from the big banks, look away from the private banking cartel that controls our money printing for the benefit of their rich friend rather than democratically elected officials, look away from the massive fraud used to take peoples investments and throw their money down a crap hole while the sellers made huge money selling crap and betting that the crap the sold would stink...just keep thinking some poor single mom working at McDonalds getting so much help from a government that loves her so much, and hates Wall Street and the rich and private market so much is the source of all evil in this country....or freaking read something...like Matt Taibbi...and tell me, was Wall Street forced by govt to lend to poor? Was Wall Street oppressed by heavy govt regulation from 2000-2008? Were the working class people asking for bigger wages stopping them from making huge money, was red tape in the way of hedge funds? But yea, govt money to poor, the oppression of the rich, regulations of Wall Street, that was the problem in the US.....NOT!!
straight out of Atlas Shrugged
The bubble burst. Class warfare is fully engaged, oh the "rich" might benefit, that's not allowed under Marxism. All the whiners are crying about their lost "investment" and paper money they never had, never understanding the market they were "investing" in. Houses are consumer items. So many eager to swallow the propaganda. Personal responsibility has unraveled from the fabric of society. Doomed, they are. And "they" deserve it. I live in Monterey County. The run up was totally insane. 34% drop (78% increase) is a small percentage drop when houses doubled yearly for several years.
Yep. The moral hazard was unleashed long ago.
FEMA trailers bitchezzzzzzz. yeah the fences and the driveway with BMW are long gone.
The low end of the housing market has already seen the vast majority of the potential pain, because these properties are now renting for amounts which people can afford.
As Bruce says, most of the future housing market pain will come in the range of $350K to $500K and up. Looking forward, percentage declines in the Case/Shiller index might not be as great, but the total DOLLAR amounts of the declines will be very large. When your $750K house takes a 10% hit vs. your $250K house taking the same hit, the absolute dollar loss is obviously 3X.
BTW, I just bought a home in SW FLA where the seller had to bring a $270K check to the closing. I asked him why he didn't just walk and he said nothing.
Some of us poor suckers still think signing a loan obligates us to actually repay the loan (vs merely signing a put option that says I will pay if things work out, otherwise I will put the property back to the bank). Repaying loans when bad things happen is a terribly old fashioned idea, the death of which is not going to help things long term.
Yes, I know, rarely did the borrower have more than 10% culpability in making the loan - they should never have been expected to understand the loan terms or able to resist buying such a nice house (or the pile of refinance cash). The borrower was dazzled, misled, confused, and the lender made too much money (as well as its CEO). Those damn lenders. Hence no real obligation to repay.
[No - not a banker or even close to one]
The ghettos are where the real trouble lies.
No. Just like the middle class think that they are wealthy, these folks think one of the following;
1) the government will save them (after all it learned its lesson from Katrina)
2) Jesus will save them
3) they are well armed compared to any riot police or SWAT units or armed forces that will be called in.
All three are lies. There, that ought to get me junked a thousand times over as well as get the nut-jobs to come out of the wood work. On a serious note, what is next for commodities? position limits for everyone?
No. Just like the middle class think that they are wealthy, these folks think one of the following;
1) the government will save them (after all it learned its lesson from Katrina)
2) Jesus will save them
3) they are well armed compared to any riot police or SWAT units or armed forces that will be called in.
All three are lies.
The ghettos have always been real trouble.
The "ghettos" have always been the problem indeed. It is the new slavery propigated by the socialist / fascist DEM party. Keep 'em housed, fed, and angry. Have Lame Stream Media play the race/class card ad nauseum. Result -= an unknown radical, black man with a classifed history become President.
Best option now is to privatize the projects / ghettos. All public housing to be sold at a CRA Act price to those living there. They will be given mortgages and have to pay them or else get foreclosed upon. Hey they could sell them as well if they wish...because they are now freed slaves.
You can create money just like the Fed. Get out a note and type it up, it has value.
Yeah it's dead money until QE3, QE4, and QE5.
I actually think the higher end market will do OK. True jumbo lending was completely gone, but is now coming back. And the agency jumbo guidelines were never that loose to begin with.
The hardest hit, as usual, will be the middle class, as the FHA premiums were just raised (again), and the gfees are going up. Soon down payment requirements will be raised is my guess.
The folks in Greenwich aren't going to be the ones hardest hit.
The "rich" are paying cash.
Go long bulldozers.
My daughter-in-law is a broker and I went on a tour of VACANT $600K+ (already discounted from over $1 mill) homes in S. Fla. With electric shut off, the mold is palpable. Potentially $150k+ to bring back to normal. Landscaping untended for 2 years+, possible roof problems in several. So what do you bid? BTW, no one issuing jumbo loans anymore, even with 50% down.
Got that beat. Go to auction.com and pull up the 14 mm dollar house with a cliff view going for 1.3mm. A flash crash is coming as we near 75% of all homes underwater. Deleveraging is so 2011 and 2012. We have a ton of rollover arms, even neg am arms hitting this year and next. Blood in the streets, I'll tell ya'.
That arm story crisis is so 2009. What is the herd spooking threshold/plunge?
It's only a crisis if you were a fool. If you sold and rented you're doing swell.
Tide Fighter implied crisis, I am a debt free Home owner seeking protection from the fools!
That includes the Bernank and the O
Finally, the bubble burst and all the whiners who "invested" in a market they didn't understand finally lose their shorts. It burst when the overbidding stopped but no one drunk would listen. Now they're dizzy with their hangover. Oh the weeping! LOL