A friend forwarded me a copy of a report "The Bell Curve of Doom? - The Case - Shiller Price Index." I thought the following paragraph from this report did a great job of putting price declines in perspective:
According to the Case-Shiller Composite 20 (metro areas) index, the price of an existing home peaked in July 2006. From the July 2006 peak through January 2008, the price of a representative home has fallen 12.5%. To put this in perspective, if someone had purchased an existing home in July 2006 for $1 million with a downpayment of $125 thousand (12.5% of the purchase price), that someone’s equity in the house as of January 2008 would be approximately zero. Unless there was a radical reversal in the direction of home price changes in February, that July 2006 home purchaser was upside down – i.e., had negative equity in his or her home. The Case-Shiller home price index represents a bell curve of doom for recent home purchasers and home lenders.
Note, you don’t have to be a hoodwinked, no equity down subprime borrower to be in trouble. All that has to happen for a borrower to be in trouble is to have purchased a home at the wrong time and paid more than historic fundamentals warranted. Why does this make a difference? Look at this claim from a recent Businessweek article:
Standard & Poor’s Ratings Services believes that the bulk of the writedowns of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007. There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of writedowns taken against various types of exposures, in our opinion the magnitude of some writedowns is greater than any reasonable estimate of ultimate losses.
According to Ben Bernanke, chairman of the Federal Reserve, subprime first-lien mortgages only account for about 14% of of first-lien mortgages. Clearly though, writedowns will not be limited to subprime mortgages- not with so many prime borrowers upside down.
Twist,
not everyone who bought (including myself)within the last year has negative equity. I do know that the comps have gone down since we bought about 50k but if you know what is happening and purchase right you can get a great deal. We only put down 5% and still have 50-75k of equity left before we come to par. We also refied right after to use existing comps and get the PMI removed…In Oct 07′ the house appraised at 495k and now it will barely come in at 445k. Values are slipping fast (we purchased at 360k)BUT, there has to be a point were folks say this is a true value. They will never be free (or will they?) lol
aaaudio:
There was a post on one of the other bubble blogs two weeks ago titled, ‘Hundred dollar homes’ .. someone had done a RE search for homes at that price point or under…. think it was Michigan. Found a thousand or so, I think.
That’s what happens when a region loses its job base. Phoenix jobs are something around 35 percent or more RE related.
We could be wrong about this, don’t know your area, etc….. but…. I would not want to have bought a home in the last three years, period. The Bell Curve of Doom may toll for thee.
Me, I’ve had the same home for 13 years. I take pride in my sloth.
WOW! That is amazing. I sold my old home of 12 years and stuffed 40k away while I could get what I could. If things get that bad in PHX we all will be in trouble no matter what you paid for your house. Work will be hard to find and it won’t matter what your rent or mortgage payment is.
Yossarian,
Do recall which site?
@Yossarian
“Hard work has a future payoff. Laziness pays off now.”
The things your parents never taught you…
These writedowns are going to be MUCH worse than the banks are reporting. Here’s how it works…for financial reporting purposes securities are categorized into trading, available for sale, and held to maturity. Companies are required to “mark to market” any securities that fall into the first two categories (which is what we are talking about with these writedowns). Held to maturities can be carried at book value.
Now the game starts. There is no “true” market value so the banks start by nominally writing down the value of the securities (as little as possible as to not decrease profits). Then the auditors come in. The particular firm, or even the particular partner on a given audit plays a huge role in the final numbers. As the auditors, they are ultimately responsible for coming up with a “reasonable estimate” of the value of the securities. There can be a bit of back and forth, but the auditor puts their firms stamp of approval on the final financials.
If a bank gets a conservative firm or audit team, it gets a fairly realistic set of financials. It was a different situation, but as we saw with Enron, if the bank gets a creative audit team….well….NOBODY knows what their financial position really is.
These writedowns WILL BE much larger than have been reported. And don’t be suprised if we see another large CPA firm (Arthur Anderson) take a fall along with the banks!!
twist,
(Quarter-seriously) That looks like copyright infringement to me!
Agnostic-
I checked with my resident expert, who says he’s confident that quoting one paragraph in this manner falls under “fair use”. I’ve never had any complaints for using material in this manner- and I often get thank yous from writers who appreciated the traffic. [Even when I'm criticizing them, which I'm not in this case!]
twist,
Ha, I’m talking about their use of the word “doom”!
Agnostic-
Now you’re right there- Doom’R Us!
The peak date range varies. With rare exception, closings in November/December ‘05 and January ‘06 largely represent the highest sales prices for particular models in the NW suburbs of Phoenix: North Peoria, Surprise, parts of Glendale. They did not drop dramatically at that point, but the number of sales dropped and inventory rose (stating the obvious, I know). Prices dropped when the rare sales took place.
What I find interesting are the knife-catchers that are now in foreclosure. One house that I looked at sold after many months on the market and closed in January 2007. It sold for about 20% below the late 2005 peak. It had been built in 2004 and never lived in. The buyer apparently had not heard of the housing bubble ending and must have thought that it was quite a bargain. It was still priced well over the 2003 and 2004 retail builder prices for the same model in the same subdivision. I saw the same house re-listed a few months ago as an REO. It closed again a few weeks ago at about 35% below the peak.
LOL. Funny misunderstanding. But seriously I think something’s going terribly wrong out there. I had a huge increase in showings on my house when I lowered the price 16% in January, but ever since the begining of March traffic has almost ground to a halt. Like worse than December - BEFORE the price cut! And we never really had much of a boom here in San Antonio. I think the bust is accelerating.
Russ-
I’m still watching the prices in my old Gilbert subdivision. My landlady bought the house I was renting in March 2005 [with an Option ARM] - then tried to sell it for 42% more in 2006. She tried to sell it off and on for the next couple of years always at a price that would have worked six months before, but never priced it right for the current market. She listed it again when I moved in December- for I think about 23% more than she paid for it. Once more, she rented it out rather than lowering the price.
As an agent, you’d think she’d know better, but so far the reality fairy has passed her by.
I have to say the homebuilders models I sit at on Saturday every now and then has decent traffic here in Gilbert/Chandler . It is priced a little high at around $125 a sq ft and I feel that is why they aren’t selling. I did a search on my old neighborhood in Glendale AZ today and since I sold in Feb 08′ for 216k (1543 sq ft) 1983 the comps are now at 193k Most selling for 175k avg -WOW what a one month plunge. I was thinking about Yossarians statement and wondering if that could really be true? Twist have you seen that?
Aaaaudio-
If you go to Realtor.com and do a search for homes under $5,000 in Detroit, you will have 1,368 matches. I believe the cheapest home is $250. I made the mistake of showing my son, and now he wants to buy some $500 home just for the heck of it.
I don’t know enough about Detroit neighborhoods to know if I would dare live in any of them, but some of them look pretty decent. You should check out what $500K will get you- almost any mansion in town.
I spent a lot of time looking at Detroit homes, and the scariest part was how very difficult it was to find an OO home for sale- I’d guess that 95% of the listings I looked at were lender owned- and I checked a number of price brackets.
Detroit has lost a third of its population since the 1950s which has created their surplus.
While I don’t see Phoenix turning into Detroit any time soon, the worrisome thing for Phoenix is that the number the economists kick around is that one in three jobs in the Valley is tied to RE in some way. If RE were to come to a standstill, what does that do to our economy?
I’m not predicting homes for $250 [Although I'm not betting against them either in some of the far reaches of say Pinal County.] but I believe there is still a big downside risk for home prices should the economy worsen significantly.
tc, I am in the San Antonio market. Been here since Sept 2007. What is your take on the local RE market and how long have you been in San Antonio?
Thanks.