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Out of the Basement for Housing

The residential real estate market has hit bottom and will be inching up again soon. Pro or con?

Pro: A Reawakening Market

The NAR has been accused of denying the bubble to protect its members and their 6% commission, but the bullish attitude isn’t completely unsubstantiated. Sales of existing homes remained roughly flat from September, 2006, to yearend; from February to September, they declined 10%.

Total existing-home sales for 2006 reached 6.48 million, 8.4% lower than 2005 sales, but still the third-highest total on record after 2005 and 2004. Speculation drove sales up so much in the first half of the decade that that they were forced to adjust in 2006.

“The sky never did actually fall in 2006—or, to use that phrase that the media love, there were no ‘bubbles bursting,’" wrote NAR Chief Economist David Lereah in a January commentary. "But air did come out of some inflated balloons.”

In another recent display of relative strength, the NAR’s Pending Home Index, based on contracts for sales of existing homes signed in December, 2006, rose 4.9% that month, to 112.4, from an upwardly revised level of 107.2 in November. (An index of 100 equals the average level of contract activity during 2001, the first year to be examined and the first of five consecutive record years for existing-home sales.) The monthly gain was the biggest since March, 2004.

The NAR expects to see existing-home sales of 6.44 million by the end of 2007, and 6.64 million in 2008. The national median existing-home price should grow 1.9%, to $226,200, in 2007 after rising 1.1% in 2006, according to the association’s forecast.

Realtors aren’t the only ones optimistic about the housing market. The National Association of Home Builders is also predicting stabilization in 2007. Housing starts jumped 6.7% in November and 4.5% in December, according to the Census Bureau. NAHB Head of Research Gopal Ahluwalia has said starts will continue to pick up this year, backed by strong economic indicators like low interest rates and energy prices, and a high employment rate.

Has the market hit rock bottom? That may be stretching it—tops and bottoms can be identified only in retrospect. But the worst may be over. At the very least, the housing "bust" hasn’t been as devastating as many predicted.

Con: A Bounceback Will Be Glacial—If It Happens

Industry watchers keep wanting to call a bottom to the housing market’s decline. On Feb. 15 they pointed to a report showing improvement in the sentiment of homebuilders. The National Association of Realtors said prices fell in the fourth quarter in about half of the nation’s metro areas, but the Realtors’ ever-optimistic chief economist, David Lereah, said he suspects "the fourth quarter was the bottom of this current business cycle."

But then along came more evidence that housing is still suffering its own localized recession. On Feb. 16 the Census Bureau announced that construction starts on privately owned homes fell 14% in January, below even the lowest expectations. The annualized rate of construction was back to 1997 levels.

Eventually, the decline in construction will help dry up the inventory of unsold homes. But consider this: The number of empty houses for sale is at an all-time high. And loan givers are starting to tighten lending standards, especially in the subprime market.

That will force many marginal buyers out of the market. Some current owners who have to refinance could end up pushed into distress sales. Weakness in subprime is likely to filter through to the rest of the market.

"I believe the most apt description for the current trend is ‘suspended animation,’" wrote Liz Ann Sonders, chief investment strategist of Charles Schwab & Co., on Feb. 15.

Even if the housing market is near its nadir, what happens next? History isn’t encouraging. According to an analysis I did for a story last November (see, 11/6/07, "Boom! Bust! Boom?"), housing markets that go bust can stay busted for a long while.

I looked at big metro areas that had housing booms over the past three decades. In about 15% of them, prices adjusted for inflation barely got back to their previous peaks even after 15 years. And in 45% or so of the markets, inflation-adjusted prices were still down a decade and a half after their pre-bust peaks.

So, when housing does hit bottom, it’s likely to climb back very slowly. One. Inch. At a time.

Reader Comments


Look at the weather patterns hitting the U.S., and it doesn't take a rocket scientist to figure out why people are migrating to the Southwest in dramatic numbers. With 8,000 people a month moving to Las Vegas, it won't be long before all the housing here is taken. In an area of limited water resources and land it will be supply and demand that drives our home values through the roof. The smart ones are already here.


The market boom will be gone forever since it is manipulated by low-interest rates to keep the economy from a crash. In order to keep the housing market from dropping 50%, the dollar value has to depreciate 50%. One way or another.


Here is the big picture. For the past 10 years, the U.S. has been racking up debts in the tens of trillions, mostly in the form of bonds issued by the government and big institutions like Fannie Mae. Countries like China and Japan are financing this housing upsurge by buying U.S. bonds at low interest rates. They have to do this because they acquired trillions of dollars from trade surpluses with the U.S. that they must invest somewhere. Investing in nondollar markets will drive down the value of the dollar and hurt their exports. Fannie Mae is happy to take the cheap money and lend it to home buyers at low rates, thus the housing boom. But after five years of vertical takeoff in home prices, people found that even with the low interest rates, they still can't afford it. The low interests have simply been overrun by the surging prices. We can't keep spending borrowed money forever. A housing crash is bound to happen. The only question is when. The later it happens, the more damage it will inflict on the economy.


After more than a one-year struggle for a job even with eight years of experience and a higher education, I finally decided to sell my penthouse in New York and move to Europe. Now I'm paying $700 for a wonderful three-bedroom apartment in a big city, and my salary is as high as it was one year ago in New York. I'm wondering why we Americans are still flocking to some places that aren't worth paying for anymore.

w. anker kepala-butuh

We manipulate ourselves into a state of excitement, and now we have a real mess to mop up. It's called fantasizing, and this is what has happened across America, especially in regard to housing. Just keep going, we tell ourselves as we ignore reality and go for the big money shot. What goes up always goes down, and when it does—first drooping, then shrinking—the sense of shame at what we have done will be palpable.


Regarding Andy's comment: Are you sure you're not in Africa? Rent of $700 a month for a three-bedroom in Europe is unrealistic, unless it's in a remote Russian town. Sounds like a typical NYC liberal telling us how great Europe is. Hardly! Europe has all types of economic problems, like high unemployment, a poor work ethic, out-of-control immigration, socialism, taxes around 50%, and race riots. Have a great time in "Utopia," Andy!

Shailesh Gala

The S&P/Shille Case index hit peak 226.28 in June, 2006. It has been sliding since then. The lack of affordability is highest since 1991. I live in NJ (suburbs of NYC), and you just can't buy a house, even with two times the median income. Many retirees are trying to sell houses at peak prices in order to move to lower cost areas. The prices cannot remain this high for a long time, or else people like me (highly educated, with a good income) will flee areas with high cost of living. It's just not worth living in small houses or rentals, when you can go to areas where housing is cheaper.

david pate

Who knows where the housing market is heading? I don't, but I'm sure that your home is a shelter, and it should not be viewed as an investment.

James Smith

The tremendous liquidity in the capital markets due to the "saving" culture of the rapidly growing Asian countries will continue to lubricate both capital investment and the housing market in the U.S. Thas is, of course, until xenophobic politicians in the U.S. create policies that cause the Asian countries to become so disgusted with us that they quit lending. Let's hope that will not happen, and the housing market, along with the general economy, will continue to grow.

Doug Lifer

The housing loan business has packaged and passed risk so deep into derivative markets, even the experts can't figure out where it is anymore. This is how banks can lend at only a few points over what they pay in CDs. When enough people default on their ARMS, we'll see where the tear occurs. It's going to be great reading for those who like economic postmortems. But until this happens we won't know what will happen to housing. The housing bubble is really a finance bubble.

mike stewart

Where I live in southern California there have been nine homes on the market for a year. Not one has sold. Seven of these homes are now off the market. So in my mind, the numbers released about resales do not give the real picture. The homeowners that took their homes off the market should be counted as resales because that is what they have been and are. They cannot sell, because very few people can afford the payments, and they are priced too high because they took out home equity loans and must get a certain price. Easy money has created a lot of problems. I wish the real estate industry would be honest and stop the "spin"—which is similar to what the stock jocks are doing now. What goes up must go down. Always buy low, never high.


I don't know anyone willing to buy right now. All it takes to sustain the market is more loose lending and speculation. With the inverted yield curve fully in place and Wells Fargo the U.S.'s No. 1 subprime lender, the big boys are buying three-month Treasury bills.


Wow, interesting reading all the different views. I finally bought my home in the Bay Area after two years of trying to be creative with the interest-only loans. I was outbid every time. I was under the impression that if I did not buy then (2004) when we were all out there fighting for one property by outbidding one another, I would never have my own home. I agree with Doug. If these creative loans reach the interest-only period and go up to prime rate, how are borrowers going to afford a double payment? How can they refinance if their home is not worth what they paid for it? I sincerely hope those creative lenders are working on a creative program to keep these borrowers from losing their homes. And what will that do to the market? I am glad my home-buying experience is over and I have a comfortable home to live in while I am working here in the Bay Area. I was lucky enough to buy a below-market-rate home. It will appreciate as our incomes appreciate. Isn't that the way it used to be? There are lots of options out there.

Matt Brennan

The housing market is in a recession. The bottom dropped out in July, 2006, with 12 to 15 months of inventory on hand. I look for a modest return in the late third quarter as national and regional builders (Toll Brothers, M/I) have been hurt by the fallout and will return slowly with construction. The fallout is a natural adjustment to the return of sustainable inventory from near-record sales. It does not surprise me that the NAR and NAHB are dispensing "encouraging" words about their very livelihood. It doesn't benefit them to indicate the industry is in shambles. More fallout is on the way before its gets better, as high growth markets like Southern California and Florida see a large decrease in home values due to price/inventory adjustments.

anita ruggirello

I have been trying to sell my home in south Florida for the past five months and have not even had a nibble. I now realize that for what I have to offer, my house is overpriced. I am waiting to get rid of my real estate agent so I can sell it myself at a price some person can afford. This is a prime historic area that people would have killed to live in two years ago. Now the streets are lined with For Sale signs for months and even years. We all have to face facts: People just can't make the payments on $500,000 dollar homes. The taxes and insurance are killing everyone in Florida. I haven't seen any bubble it looks like it burst.


I see great movement away from suburbia and back into the cities. I see poorer Americans being placed in sub housing areas and supplying services to the wealthy. There will be life and death competition between illegal immigrants and poor Americans whereby the illegals will drive poor Americans out of the United States. Having been in Latin American countries I can clearly see this happening. Cities and luxury housing will continue to boom, with America as the home to the very wealthy and the very poor.

Robin Geppert

I agree with Dan. Andy must be joking—how much in taxes is he hit for? We live in St. Louis, Mo. The Midwest has not been hit nearly as hard as some places, No, it's not sexy, but we live in a cultured metro area of more than 3 million people (I'm sure most of you are surprised), and we have a great standard of living and quality of life. Our business depends on people moving, and we've been busy. Everything in life has ups and downs. It'll all work out in the long run. This is America—nowhere on Earth like it!

Fraud Investigator SAB

I've been a fraud investigator in the mortgage business for the last two years. I was telling my organization that the sky was falling, and they did not believe it until September of 2006 when they shut the doors. I've been telling my new employer the same thing for three months, and they recently laid off 100 people. These guidelines have sucked for years and only benefited the greedy. Now it's time to pay the price for the stupidity of these overeducated, greedy CEOs who can retire in Belize while Joe Underwriter loses yet another job in the industry. Just another American dream gone awry in a paper-tiger market exposed.


This is not only a housing bubble but also a mortgage bubble. By being so "creative" for so long, we have dug a big hole for ourselves. Like Buffet said, soft landing is probably just wishful thinking. The truth is we overbuilt, overbought and way overspent. It will be a long way down. You ain't seen nothing yet.


Peter is right on. The liquidity is what brought the prices up, and the liquidity is drying up and will dry up more so. This is only the tip of the iceberg. Mr. Vegas, you are in for a big wake-up call very soon. This isn't going to be pretty, and there will be a lot of hurt people out there.


We sold our old house last September and rented it until January 2007, after which we purchased a new quick delivery house; the original buyer was not able to purchase it and had to lose his or her deposit. We got a good deal and our down payment from our old house was great, but little did we know that our neighbor was behind on his or her payment and was being foreclosed. The foreclosure man knocked on our door and asked whether or not our neighbors had been around. We told him we didn't know, but we had seen them moving furniture in the middle of the night. They have a Sale sign, and it is a "short sale"—the bank will get whatever it can rather than undergoing a lengthy and costly foreclosure process. The property is being sold for $150,000 less than it was purchased for six month ago. I know this, because it was a comp for my house. Overall, real estate is bust.

Michael C

While walking in the Tallahassee Mall last week, I stumbled upon a copy of the Tallahassee Democrat on a table in the food court. One of the cover page stories was entitled "House to unveil bold tax concept, Plan would abolish some property taxes." This immediately caught my eye. I could not believe what some of these crazy politicians in Florida are now proposing. "Abolish property taxes on the homes of permanent Florida residents in exchange for raising the state sales tax two or three pennies"? Will responsibility and accountability ever return to the American mind-set and culture? When you see the government doing, or even proposing, stupid things like this, it seems that the answer is an emphatic "no." The government was established to govern, not to bail citizens out of problems caused by their own stupidity, greed, and desire to ignore common sense and reason.

Can anyone honestly say that they had absolutely no idea their irrational actions would lead to such consequences—higher taxes, increased homeowners insurance, less affordable housing, massive inflation, etc. I think the answer is no. It has never been kept secret that the government imposes taxes on real estate, and it was never a secret that property taxes are based on an assessed value of the property. Seeing that the institution of property taxes was public knowledge while people were playing Russian roulette with the housing market over the past five years, why are they so surprised their property taxes increased with the value of their house? I guess they are not surprised; they just don't like it.


I'm a Realtor (for 17 years) in Southern California. In my area, we had an inventory of unsold homes at 2,206 back in May 2005. Now it's at 8,305. Builders' unsold inventory is at a record high. We have record-breaking numbers of vacant homes in mortgage default. This is causing "subprime lender melt down." The many housing market problems include:
* Record unsold vacant home inventory (2.1 million homes in the U.S.)
* Rising homebuilders' inventory and cancellation rates
* Subprime lenders going out of business at an alarming rate
* Interest rates going up since a record low in June 2004
* Home prices that are still at record highs
All the elements are there to form the perfect storm that we never saw coming our way.


Jordan and Lifer, you explained very well in very few words what is a very complicated mess.


I've worked for a homebuilder in Southern California for the last 15 years. We are going through the highest inventory and cancellation rates yet. Southern California's real estate market took off in late 1999 and peaked in July 2005. And 2006 meant working out the supply and demand. What I'm concerned about is 2007 and 2008. We have so many unsold homes—supply far exceeds demand. Something has to give, and that's price. To make matters worse, mortgage lenders are having major problems. Housing affordability is at an all-time low. The housing bust is not here yet; it's just around the corner. This time, it could be worse than the early 1990s housing bust.


I have been hearing about the bubble bursting for several months now, but I don't see any major signs of it. Prices are still high in many of the big cities. I agree with most of you that we are in a very dangerous situation. But why hasn't the bubble burst yet?


Everyone needs a place to live. People keep having babies, so in time the babies will need a place to live of their own, and so on and so on. I don't see any of these people picking up a hammer and building their own house, so they will keep needing to buy loans for contractors to build their homes for them.


What better way to strip the U.S. population of its last area of wealth (its homes)? We have oversupply and underdemand, which means a plummet in home values. Good-bye middle class.

A Subprime Lender

I have been a subprime lender for sometime now and offer this for your thoughts. The industry was based on lending money to people with high risk profiles and charging them a higher rate of interest to compensate for the risk. Wall Street figured out a way to securitize the paper and sell it off in pieces to very large investors. As a result, the demand for paper grew. This was in the early 1990s. Many of us were savvy lenders who understood the risk and compensated for it in terms of interest rate and loan to value (loan as a percent of appraised value). We spent a good amount of time touching each loan and looking at each appraisal so that when we lent money, we did so with the intent of getting it back. If we couldn't, there was plenty of equity to offset the risk.

With the increase in investor demand for the paper, the market started to grow. By the late 1990s, there were aggressive standards that led to a similar period of retrenchment such as we will see now. The difference is that in the late 1990s, we had the long-term capital crisis that cratered liquidity, and subprime lenders were able to buy loans from loan brokers by paying huge premiums (commissions). As liquidity dried up, the market fell apart similarly in some respects to today, but yet again very different.

It took several years (into 2002) for the market to recover and rebuild.

As Greenspan started to lower rates, the demand for subprime grew again. Heck, if you can refinance a 10% rate to 8% and give the borrower more money, well maybe that is a good idea. With the wind in the subprime lenders' sails, volume grew, and so did competition. With competition comes the challenge of growing your business. Loan programs changed. The loan to values given to the riskiest segment of the borrowers were increased, and loans were made to people at amounts that might be considered overly optimistic. However, real estate values were appreciating dramatically during this time, and if a borrower became delinquent, the odds were he or she would be refinanced and end up on someone else's balance sheet. So it appeared that the loans were solid and delinquencies were good, but the truth is the problems were being deferred.

As the real estate market started to take a breather, the subprime market was at its peak, lending to people at the highest loan to value and basing their evaluations on income that may not necessarily have to be supported (stated income loans). These loans started to default. First a few, and then many. The bids for the loans decreased, and many small lenders were forced out of the market (late 2006). As volumes started to decrease, Wall Street players had time to look at the loans they had purchased, and their contracts permitted them to put back loans that missed their first few payments, back to the original lender.

This is where the foundation started to crack. Most of these lenders do not or (did not) have the therewithal to buy back these loans, and Wall Street said, OK but pay us 20% to 25% of the value, and we will not force you to take them. This put a cash squeeze and a credit squeeze back on the lenders. This is where we are today.

The industry will retrench and go back to lending at reasonable loan to values, and all will adjust. This will take some time, but it is for the best and is typical of a market that overheats with little barrier to entry.


I have been in the Silicon Valley real estate industry for 35 years, as a previous owner of a medium real estate corporation, in residential real estate sales, and as a buyer but rarely as a seller. Everyone needs to understand the real estate market has been and will remain a regional issue. One would be foolish to use the Silicon Valley real estate market as a business plan for purchasing real estate in an area that is not driven by lack of supply and heavy demand as we are here. Even with all the bad news from seemingly every reporting source out there, our market is still very healthy. Our average-priced home sells for more than $650,000, and if the home is neat and updated, we are even seeing a few multiple offers coming in. The homes that are in the $1 million-plus category are slow in moving, but believe me, they will sell if they are staged, cleaned, updated, and not greatly overpriced.

My husband is a mortgage broker with a major lender, and I can tell you our income has not suffered over the last year. I know this market has been something of a puzzle to those working outside "Na-Na Land," but we were looking for investment homes in the Nevada County area (this is a rural area in the Northern California foothills) this past weekend, and their prices have not suffered. As a matter of fact, we just received an unsolicited offer on one of our properties located in a gated community—lake, golf course, etc., and we turned it down. If my experience amounts to anything, please take my advice and hold on to your real estate. Don't sell unless you have to, because there will always be buyers who want to own their own home. Of course the younger buyers who drove our market through the roof with all their Silicon Valley monopoly money of the late 1990s and early 2000s are now finding it hard to keep up with their mortgage and the payments on both their Mercedes. Times are tough around the country.

Some words of wisdom: Get rid of the extra cars and toys, and stop those trips to Costco and Target for all that stuff you really don't need. Hunker down if you can. Move the kids into one bedroom, and take in a tenant who fits into your family life style. Take an evening job three nights a week. Borrow some money from your folks, but don't sell your real estate unless you have no other choice. Some lenders will work with you on deferring or even lowering the interest rates just to keep you making the payments. There are all sorts of creative ways to hold on.


The pendulum always swings from extreme to extreme. Loose lending standards turn into tight lending standards as the mortgage industry overreacts to mistakes.

Susan in Colorado

Ingredients for the perfect storm: Take $1.5 trillion in ARMs that will adjust in the next 24 months, add more restrictive mortgage lending standards, and then mix with housing appraisal values that won't make the 80/20 cut. Suddenly the subprime problem becomes much larger and has the potential to really affect the general economy.


Eve, with all this talk of belt tightening, you make it sound like we're in a recession. What's behind people's need to make sweeping lifestyle changes just to make the payments on their homes?


What about micro-markets like Kentfield in Marin County, Calif.? Who can explain why neighborhoods like these are insulated from real estate trends?


Prices are not falling in my area, even though sales are slower. We sold at the downturn in December and were glad to finally sell (we chose to lower our price 20%), but find we're unable to buy in our new area, even with a large down payment. The houses in our price range are laughable, even with a monthly mortgage payment three times our previous one. And this in frigid New Hampshire. Sellers and buyers are at a stalemate. Low-priced starter homes (read: dumps) do go quickly. If sellers could (would) lower their prices 20%, the stalemate would be over. Prices are too high for the average wage, and I'm stuck in a holding pattern until things change.


As certain as greed pervades the money industry, the blood-letting will continue its cyclic oscillations. Timing the changes depends on plotting not only the history of the sector but also the factors that affect these changes. Do you know what they are?


Twenty-six years ago, when Jimmy Cater was President, I was a new receptionist for a small broker. We had rates as high as 22% for subprime borrowers, and 13.99% was a good rate for a prime borrower. And does anyone remember the RTC? This market has had many cycles. I love this business. With my 26 years of employment in this industry—working with brokers, bankers, finance companies, and Wall Street firms to managing my own mortgage division—I have come to believe it's time to rethink for the sake of the people hit hardest: the borrowers. With all the creative talent in this country, we can find a way to get people into homes and not be marginal buyers. And for those who may become distressed, it would be better to find ways to keep them in their homes.


Here in San Diego, prices are dropping rapidly. Everyone is too scared to buy, and even if the builders have slowed or stopped building, the supply is still massive. Don't listen to Ms. Silicon Valley, above. Places like that and New York City are rare exceptions to the rule. San Diego is the jewel of the Southwest, and if the bloodbath is that bad here, I can only imagine what is happening in other overbuilt areas that are not as desirable.


Bill, If I gave you the impression there is extreme belt-tightening taking place in Silicon Valley, then I was not communicating the real picture here. What seems to be going on is the $1 million-plus home sellers are having to wait a few months instead of a few hours to receive offers on their homes. Anything below $1 million priced with approximately a 5% to 10% lift over the last sales price reported will sell. If the property is staged, clean, and has up-to-date kitchens and baths, we might even see multiple offers. My reference to using creative means to hold onto your real estate was meant for those folks located in areas where the market is not so great and are seeing declining values, which is most certainly not in most areas of Northern California. To make my point clear: As veterans of the real estate industry, we have made very good returns on our real estate by treating it as a long term investment, not quick-turnaround investing.

It amazes me how people in the under-45 set have continued to use their real estate to buy new cars, boats, and take that fantasy trip that used to be saved for after retirement. I do not sell any property I can instead use to acquire more real estate. We are rearranging our expenses now in order to afford retirement in six or seven years—that's all I was saying. Don't sell if you can hang on. The market, regardless of which region of the country you are in, has almost always come back, and frequently comes back strong. Exceptions have to be made, i.e., New Orleans and the Gulf Coast, but I believe even those devastated areas will someday rebuild, and there will be money to be made.


Oh, boy. So many truths here. Reality won't set in until the spring selling season is a bust and we begin the next leg down in prices. Expect a 50% haircut from August 2005 prices when the dust settles.


It is amazing how some businesspeople are still so optimistic about an imminent recovery of housing. Many investors and lenders have for years been abusing buyers who never could afford what was promised, and now the time to pay is just beginning. The future of housing is pretty dark. In a country with a collective debt of more than $2 trillion, who will be able to afford to buy a house? The prices will plunge. These investors and financial institutions thought that they discovered a new way to invert,or overcome, common sense.


At the moment, there is a stand-off between sellers and buyers. Sellers are expecting (hoping) that after this pullback, things will return to business as usual. This is not going to happen. By late 2007, sellers and investors will realize the market is not going to come back for many years, and that is when we will start to see the anxiety turn into desperation and much larger price cuts. Combine that with millions of subprime mortgages resetting to default rates, and it will become a foreclosure bloodbath driving down prices even more.

The point about banks selling the mortgages as bonds/securities is well raised. Who holds this risk? Let me tell you straight up, the American people do. It is pension and 401k funds that have bought these "investments." Some people close to retirement could be stuck in the unfortunate situation in which their housing investments become worth far less and their pension fund becomes decimated. There are going to be a rough few years ahead, and I would get into cash as fast as possible.

The La Jolla Guy

I just wrote a few blog posts about some of the fallout in the subprime world. It is very interesting the role hedge funds have in some of this. Feel free to come check it out:


Eve, don't worry. I understood what you were saying the first time. I appreciate your advice for those struggling. I think Bill read your input too quickly.


It is pretty easy to see who won this debate. However, I need some sound advice. I have been a renter ever since I sold my home in Texas in 2001 and moved to California. When the market started taking off, I was quickly priced out. I want so much to buy a home now to take advantage of the low interest rates that I know are going to disappear. If I do so, I will barely squeak by for several years. In the long run, though, it still seems like a good idea even if the market hasn't bottomed out yet. Any advice?


Travis, don't let low interest rates make you pay more for a home. By that logic, when interest rates rise, you'll watch your home value fall. You should place a value on the house based not on what you can afford, but rather on a reasonable metric. The best one is: how much you could rent an equivalent home for. Take that value and subtract out the expenses, etc. That would be your ROI on the investment. Now compare it to a T-bill or another investment and see how you're doing. The important point is to value a home based on the cash-flow generated by the asset either explicitly (by renting it to someone else) or implicitly (by saving you from renting).

Joe C.

This must be the most popular debate in 2007, and it will become the most frequently said "I told you so" in 2008 and 10 years beyond. We are in a slowly deepening recession. The big global economic wheel is gradually slowing down. There is one sign everyone can easily see: "Americans are spending less." The difference between this deep, long world recession and the 1930s quick U.S. depression is that there will not be any shock wave. We still have time to prepare for the worst and belt-tighten. Cash and commodities will be king and queen: fuel, food, energy, medicine, and other minimum living necessities. Those businesses that do not produce the necessities will suffer the most—software, entertainment, games, fashions, automobiles, electronics, etc. The stock markets will only be played by the few rich people who control commodities and cash. I am not a doom sayer, but the fact is the multitrillion-dollar debts have driven us Americans to initiate the global slowdown. The real estate market meltdown is only the tip of this iceberg. It is very hard to notice when your wealth is slowly eroding.


The housing market is slowing, and the lending standards will tighten. However, once inventory is sold off, the demand will gain traction. The population continues to grow faster than ever. I predict the homes prices will fall in order to make the home loans attainable, and we will have slow but steady growth. The home refinance and remodeling industry will probably be dead for some time though.


I sold my home in Hawaii (big Island) for a small fortune in early 2006. We moved to Florida to buy a home and gave ourselves at least a two-year window before purchasing. We have looked at probably100 homes, and 80% of those are vacant. I have my own read on this, and I offer it as hard fact. I view to get an idea of the anxiety level of sellers. I see more and more who must sell, owners who say Please help. A Naples broker keeps us posted on the market there. Just this month, for the first time, the broker actually said that 60% of the market in the area was still overvalued, 30% valued about right, and 10% desperate to sell. Timing is everything, but I know of a great forecaster who uses interest rate cycles, and he suggests the mother of all stock market bear markets is set to take place around October 2007. The bottom line: The Fed has juggled bubbles for too long, and sooner or later the price must be paid.

James lipton

The bubble has a long way to deflate. Dumb money is always the last to buy. I mean, when we stop seeing Flip This House on TV, the bubble will likely be about over. When people aren't proud to be flippers, the bubble will be over. When you stop seeing easy money loans, the bubble will be over. When owning makes more sense than renting, the bubble will be over. The bottom line is economics.

werner matzeit

When housing and land become too expensive, then industry has to close down or outsource—no other options.


To fix the economy, house prices will have to come down 50% or more, especially in the Silicon Vally.


My husband and I live in a suburb of Denver. We own a nice condo but would love to get into a single family home so we can start a family. Even though reports are saying housing is at a low, the prices we are seeing still seem exorbitant. Should we wait longer and see if the bubble truly bursts?


It's obvious that we created as a country and a planet another asset bubble. We had artificially low interest rates, artificially cheap illegal alien labor, artificially low imported goods (China pegged the yuan). We also have four things that all combined are problem:
1) Low taxes—compared with the 1990s
2) Low interest rates—compared with the 1990s
3) High government spending—yes, even compared with the 1990s. Spending from 9/11, Iraq, and Katrina all adds up
4) A weakening dollar
We need the rates to keep going up, or the dollar will drop further and create inflation via more expensive imports. Also, after Katrina, most coastal properties have skyrocketing insurance rates. These also tend to be worth far more than inland ones. So if the lower-ended ones in the subprime market are in meltdown and the high-end market on the coasts is in a meltdown, then what's left? Also remember that people usually want to retire to where it is warmer. How many baby boomers are going to stay in say, NYC, Boston, Detroit, Chicago, etc. When they leave, they'll take their money with them.


Regarding Jordan's comment about the trillion-dollar U.S. government debt, there is nothing to be worried about. Countries like China that hold large numbers of U.S. bonds do so because they thought and currently think they can rely on their country's savings on the U.S. dollar (backed by the U.S. government), which means they trust us. At this point, there is no way in the near future they will change their minds, since if they do, they will have more to loose; their savings are in U.S dollars. I believe buying a house during this market transition or market adjustment is perfectly fine as long as the house price is "realistic." That means valued at a price affordable for the average combined family income for its specific area.

It is true there are houses with inflated prices, as well as houses that won't be sellable due to their excessive loan to value ratios, or upside-down equity positions, but that doesn't mean all the housing market will crash. The cost of building new houses is higher, and the resale housing market is adjusting itself with less new home construction and families moving from one state to another. House rental prices are close enough to mortgage payments, which compels first-time buyers to apply for mortgage loans.


Blaine (formerly of Hawaii and searching for property in Naples) was my favorite post. He learned by experience how to ascertain the truth. (By the way, the cover story of Barron's only a few months back listed Naples, Fla., as the No. 1 overinflated "bubble" in all of the U.S.) I'm going to take the advice of the brilliant 94-year-old Sir John Templeton (a self-made billionaire) who advises not to buy any property for more than 10 cents on the dollar (from its height). The best opportunities of a century will be available for those without debt, who are big in cash, which will be king once more, before the Fed overreacts by hyperinflating our currency. By the way, keep in mind the demographics about to unfold: Some 77 million U.S. baby boomers are just now starting to retire. They will be liquidating homes and stocks in great numbers. Who will be buying? Almost 70% are now "bank-owners" (except for the smart one-third who have paid off their mortgages). Most have never saved a dime and will have to work till they drop, a new class of serfs never free of debt. Namaste, and good luck.


I own a home in Florida on the water, and I have no intention of selling it. It was purchased in the early 1990s. Two years ago I purchased a rambling old house in the Blue Ridge Mountains that is my second home. These two homes give me far more joy then any other investment. I always say, "You can't live in a stock certificate." For the sheer pleasure of a home and a home away from home, I plan to live happily ever after. It is clear to me why owning a home is the American dream.

Joe C.

My previous post only touched on the big picture of long-term global economic impact. Now let me zoom in on the U.S. real estate market. I like real estate investments just as much as stocks and commodities. Timing is what will make or break. As it was addressed by many other posts, it is a fact that deflation has occurred in many real estate markets. To make matter worse, the collapse of subprime and Alt-A loans will further choke off sales. The government tightening of easy money and exotic loans just adds fuel to the fire. Some markets are already busted to the bottom, and some have not been touched yet. The developing global-recession's impact on local economies varies from town to town. As a general estimate, those ex-red hot areas where deep price cuts are already in progress will probably bottom out by the summer of 2008. Those areas where the prices did not increase by 50% in the last boom will have a soft landing. For those deflation-untouched red hot areas, it is now the calm before the perfect storm. I will not buy anything in those areas even if the price is cut by 20%. Young first-time buyers, take this advice from an old self-made multimillionaire: Be patient, do not buy on impulse, save more cash, and get ready for that one shot at the perfect kill that will make you rich.


I'm 29 years old and have been married for almost two years. My husband and I really want to own a house. Our combined income is $120,000 a year, but we can't afford a decent house in Southern California. Our apartment rent is $935, and if we buy a $550,000 old house with two bedrooms and one bath in a bad area, it would cost us more than $4,000 a month before property tax. I've been looking at houses for sale, and they don't seem worth buying. I'd rather keep saving that $3,000 a month and live in this decent apartment five minutes from our jobs. I work so hard for my money that I'm scared to spend it all on mortgage payments for a house that doesn't meet my expectations. The house that I think is decent costs $750,000, which would be around $6,000 a month. That's both our paychecks, with nothing left for food, gas, or bills.

Cherif Medawar

Experienced real estate investors don't really worry about the whole market and the trends. They look for all the opportunities the negative talk brings. Experienced professionals analyze one property deal at a time and compare it to the local market value, or look at a property's potential in terms of price increase if value is added (via re-zoning, adding a master bedroom, splitting the lot, etc.) What people need is not more scary general news but more specific training. Negative news creates fear in the minds of the ignorant and opportunities in the minds of the informed.

Common Everyone

So many so-called experts on this board predict a housing bubble-burst. All I have to say is that in the last few years the U.S. housing market has been barely catching up to the real estate prices in the rest of the world. Have you guys looked at the house prices in places like Hong Hong, Singapore, Tokyo, Bombay, and many cities in Europe? Compared to these markets, the U.S.A. was a bargain—and now we are in the same boat. The bottom line is that people will make more and more money as years go by, and will need houses to live in no matter what. The prices may correct 10% or so in the short term, but no more than that.


I tried to tell everyone I knew that not only would the housing market fold but also the lending practices of many companies would affect the overall economy. I'm sorry it turned out as a I predicted.

Happy Renter

I don't have a home yet, and will look for one later. I am not worried at all about the rising home prices. Why? The price will come down eventually. (Or probably the price will double while our paycheck quadruples, as the dollar value falls like a stone.)

A home is a product, just like a car or CD player. The price may go up when the demand is higher than the supply. The price, however, is ultimately determined by its manufacturing cost. Building a home won't be more difficult in 10 years.

Will the land be used up as the population grows? I doubt it. Nearly one tenth of the population lives in New York City, so how large a population can use up all the land in this country? Unless everyone aims to bid others to move into the high-priced property, we have plenty of land in the beautiful countryside.

In the area I live, right now wall painters make more money than PhD's in science or arts, and bricklayers make more than engineers in electronics and computers do. It is hard to convince me that this will be forever.

When I studied in the graduate college, it was very hard to get a university dorm. Now many dorms are vacant as many Asian students from China and Korea moved out. They buy condos and think they can make easy money to flip the condo in a few years.

What I am thinking is people make money by providing services other people need. A condo is still a condo, maybe even older after the flip. This process generates no real value, not to mention 6% commission lost to the broker. A process that generates no value won't last too long.

This does not mean the price will go down tomorrow; it is not easy to predict how much greed can come into play. So if you cannot afford the high home price, take it easy. One day you will get up only to find the home becomes affordable.


Jeanne's comments were so illustrative of the basic fact that even the real estate market has fundamentals and the value is derived from those fundamentals. I bet that many of the real estate "investors" and "professionals" that I see around Southern California have no idea what "funadmental analysis" is. Roland clearly gets it.


I have experienced some shady business partners out there in this market. I have seen the lust and the greed. In 2004, I noticed a lot of housing activity, so I checked it out. It was crazy here in the Bay Area. An average 350K condo started selling for 410K, and one even sold for 575K; that was the peak. Now they are selling for 440K. The creative loans allowed this to happen, with promises the property would continue to go up as in the past. Those of us who believed that may be in trouble now. I have been hearing advertisements for legal assistance available if you were not properly educated on your creative loan before signing. Apparently, there are enough buyers out there with this problem. Law offices are offering help to get you back all or most of the fees added to your loan without your prior knowledge. Has anyone else heard of this? I am really concerned for those of us who bought a home in the past few years. What do you think about these interest-only and adjustable-rate mortgages that are floating around out there at 4.5% for 5 years? I believe some have a cap, but even with the cap, what will it do to the market?


"Common everyone" thinks home prices in the U.S. will go up to match the prices of Tokyo and Hong Kong. I don't think it is going to happen within 100 years, because the U.S. is too big and the population is too small relatively.

I just searched Wikipedia for some data. The U.S. has a territory about 8,722 times Hong Kong's (9,629,091 sq. km. vs. 1,104 sq. km.) Hong Kong had a population of 6.88 million as of mid-2004. This means the U.S. population needs to reach more than 60 billion in order to get the same population density.

That's 60 billion! Not 600 million, not 6 billion, but 60 billion. That is 200 times what the U.S. has, or 10 times the population of the whole planet. The U.S. has mountains and deserts, but most of of Hong Kong is also a mountain area, with a rocky seashore. The land scarcity is just not comparable for the U.S. and Hong Kong or other Asian metros.


If we accept the reasoning that housing prices in the U.S. should match housing prices in Tokyo and Hong Kong, we can also say that housing prices in North Liberty, Iowa, should match those in Manhattan.


I think it's funny that people think this is a housing/mortgage problem. This is the canary of the credit card debt problem. The housing crash will be the good ole days in a couple years.


The deterioration of our financial infrastructure has many causes; 1) a chronic mismanagement of our institutions; 2) financial permissiveness without adequate supervision; 3) a mis-allocation of funds for housing; 4) extensions of credit with essentially no restraints; 5) accommodation of special interest groups; and 6) an excessively easy monetary policy.

Managements have been given more and more freedom, or license, to compete. Managements, responding to apparent economic necessity, or because of greed or incompetence, engaged in reckless financial practices. Little wonder that many managers abuse these discretionary powers to enrich themselves and their collaborators.

In retrospect, these institutions should have been subject to more intense, not less, regulation. In reorganizing our financial institutions, the first requirement is to recognize that the competitive freedoms of the mercantile marketplace cannot be applied to the institutions that create our money or protect our savings. The scope of the operations of these institutions must be severely circumscribed and subject to rigorous and informed supervision.


Jeanne: Get real. There is no place in Southern California where you could rent a nice apartment for $935. Perhaps $1,935. A decent 2-bedroom apartment in a nice apartment complex is about $1,500, and in the upscale areas, $2,000 plus.


Just drop the price. Everyone who works deserves a home even if it is a simple one. Not just the upper class...greedy bums. I hope they lose their shirts, ties, and chest hair, too.

Keith G.

Is this another flavor of the week? What do we actually know about subprime lending as a percentage of the total mortgage market? These subprime lending practices are relatively new. And so many people have been tempted in to really affect an enormous market?

Maybe the subprime market is large enough to substantially affect the general economy; maybe not. I don't know and it doesn't seem like the reporters do either, since I haven't heard or been able to read anything about the substance of this, the most recent scare of the week.

The market so far has said a correction is needed. So what? Do we really need to pull out all the usual apocalypse pundits and extrapolate this out to an economic collapse?


Ed, in San Gabriel, a few blocks from San Marino, you can get one for $1,250.


Already, lending standards have tightened up. The 100% finance products are disappearing. No doc/low doc loans will be a thing of the past. What effect does this have on the overall housing market? It means that now there are a few million fewer potential purchasers of houses. This will further put pressure on sellers who are burning cash holding on for that high sale price that is never going to come.

The property boom of the last few years was nothing but a gigantic ponzi scheme driven by the availability of easy credit. Rising house prices were certainly not driven by true supply and demand or fundamentals. Easy credit equals asset inflation. Tight credit equals asset deflation.

For those who are still living the delusion and say it cannot happen, an example is Japan back in 1989. After that, Japan's house prices fell for 16 consecutive years. This was brought about by a collapse in the banking sector and consumers' unwillingness to take on any more debt or credit after the excesses of the 1980s.

Nor CAL A-paper wholesale lender

OK, there are some good opinions on these issues, such as those from Eve in the Silicon Valley, and a few others.

Bottom line, the market is driven by herd mentality. When it's good, everyone talks about how great it is, the media doesn't help with the problem, and it starts to skyrocket. When the market finally begins a small correction, the naysayers and media scream the sky is falling and pushes it even further; it tends to be seen as worse than it is. I am in northern California and have family throughout the state and throughout Oregon and Washington, and throughout the markets there is not even close to one scenario that fits the bill on future correction estimates.

The latest info on capital markets shows an overall correction of 21% nationwide in a combination of application volume for a-paper, and home values. Broken down further, I foresee an average of a 10% drop nationwide for value, and a 30% to 50% drop in applications until the Fed lowers rates again, which could be within the next 3 months if this gets uglier, and it will through most the summer.

Some of the best advisers to the lead wholesale A-paper lending institutions anticipate volumes for applications beginning to increase slowly in late summer/fall of 2007, steadily floating through the winter, and 2008 and 2009 are said to be the best years for mortgage banking ever, bar none.

If people used common sense in real estate, they would see that the guidelines in 2008 would begin to loosen slightly from this current clinching, people would begin to participate more in the market, and we would again start showing positive growth in real estate.

To all my subprime friends and colleagues: Hang tight if you can afford to, and build good relationships, because your brokers will love and remember you when this market starts thriving again.

By the way. I am currently purchasing a home that is a foreclosure bail-out. The old owner could not qualify for a refinance loan. The bottom line: Buy only what you can afford with today's income. Keep 6 months' to 1 year's worth of monthly expenses in savings, and you will be more then 90% less likely to be in a foreclosure situation. Hang tight for another year and values will be leveled.


Great comments from all in here (first time for me). For those of you with an interest in witnessing the "regional" market separation that exists in property, come take a walk with me in the Detroit area: more than 3,000 foreclosures a month, most in Wayne County (home of Detroit), with no end in sight. But for us eternal optimists, this clearly represents the greatest buying opportunity in this era. My partners and I are buying this market all the way down. We are, of course, hedging with property outside of the Midwest, but nowhere can you get the cash-flows like you'll find here.

And lest we forget: "...out here I had been putting what little money I had in ocean frontage, for the sole reason that there was only so much of it and no more, and that they wasn't making any more..."—Will Rogers

William Jorgensen

When has S&P foreshadowed a recession? Never would be the correct answer. The so-called "book-value" is based on a profit-cost ratio of a booming market; the market is not booming right now. Overvalued stock increasing their value without productivity gains has been the standard for too long and loose money is drying up. Anyone who sees the bottom of this "correction" now is using an old set of rules, is overexposed, or belongs to the Plunge Protection Team. "Conservative" prime loans, like every other financial instrument, are measured against the market and the economy, both of which are debt-ridden and debt-driven. Home equity loans taken out for big-ticket one-ofs in the middle of the housing boom are going to see problems as the world economy slows and the value of property and all assets declines. Even heading for the hills is out of the question as the hills are just as full of barbarians swinging axes. Precious metals and energy stocks are the only "safe" bet, and held bullion the best. Monday is going to be messy after a weekend of chewing on recent numbers, and the cheerleaders for the bull market are now out in force, but not to be trusted or believed.

Andrew P

What will happen to housing prices if we have a real oil shock? I have to think it will go bust if lots of strapped borrowers are forced to shell out big $$$ for heat and gas.


I'm a potential buyer in Northern California, the Bay Area to be exact. I have looked for a house for months but haven't seen any recession for houses below $1 million. If you look at the houses in Cupertino or Fremont, you'll find that any one in a good school district will sell within days, even the old, poor houses that I feel are unlivable. I've heard of so many houses sold after just one open-house weekend. It's a crazy market. With the crazy price for houses here, probably the most expensive in the U.S., I'm lost. If I buy now, it will be painful, with no income left after all the payments. However, if I don't buy now, and the market keeps going, I won't ever be able to afford a decent house in the Bay Area.


Rather than foreclose on all these defaulted loans and get stuck with houses to get rid of, the mortgage lenders should modify the loans, re-amortize them over a longer period, fix the rate, and add any past-due interest on to the back of the loans. Especially, with homestead housing, the people need the places to live, and the lenders need the money repaid. If they can put a man on the moon, they can work this out.


It's not the market that is preventing you from being able to afford a house. It's your income.

waiting to see

Joe, you're funny. You were joking, right? My thoughts are, don't buy just because you think you will be out of the market if housing continues to climb. We have been hearing for years now that even a double-income family with six digits can't afford to buy a home in the Bay Area. Be patient, and let's see how this turns out. People thought if they did not get in now, they wouldn't be able to afford later. They were fighting over properties and outbidding one another. Now some of us will have to find a creative way to keep our homes now that our creative loans are coming to the end of their teaser rates. Every family deserves a home. It is a place to live in first, then an investment.


Very interesting and entertaining thread. A few thoughts before bed...

1. I think we'd be better off as a country if we viewed housing (and medicine) as a human right and not an investment that needs to be profitable.

2. Plan your life on the big picture; things go up, and then they come down, but then they go up again. Plan conservatively, and you'll be fine.

3. I waited for the market to cool, and it has; with great fixed rates, I'm signing a P&S for my first home in Dorchester, Mass.

4. My house may depreciate a bit in the next few years; maybe it won't. I bought it to live in, though, and not to fuel my spending habits so I can live with that.

But, this is just me.

midwest redneck

Check out what you can buy in the Midwest for your money before you put down a half million for a two-bedroom one-bath shack on the coast. Do you want an investment home? Or do you want a home to build a life around? Try the Midwest. You can get a huge house for half the cost of that shack and still have a good job if you pick the right state and location.
—Happy in Wisconsin.

Jan B

Your situation is a perfect example of just how out of whack things have gotten, and how far prices will have to fall for the equation to level out. We pay $2,100 a month for a nice townhouse in northern Virginia, but the same place would cost us $4,500 a month to purchase. We really want to own our own place, too, but not at that kind of disparity. Taxes and insurance are eating people alive around here, and it's just not worth it to be so house poor. Save your $$ and enjoy the freedom you have. Trust me, a lot of the homeowners you envy are drowning in debt, and would give anything to trade places.


As an operations manager for a mortgage lender, I find one of the biggest problems is creative financing allowed by subprime lenders.

Mary Lee

I bought in South Florida's Broward County in 2005. Since then, the selling price for my home has increased by a minimum of $100,000. The Miramar area is a hotbed of new construction, and prices on new construction keep going up and up.


The lenders and their enablers, including the Fed, which set bargain-basement interest rates, enticed the borrowers into a feeding frenzy, and it's time to pay up.

Charlotte Native

Thank you all for your advice. Here is my take, if I may. I'm with Eve on this. I have two homes in the Charlotte area that are both close to downtown. As you know, we are a banking center. With fuel prices on the way up as well as foreclosures, I am renting the investment property and may rent the one I live in now. I am extremely fortunate to have purchased the investment property at one-third of its recent appraisal. With the updating and cash-out refinancing, I am debt-free except for the two properties, and I haven't touched the equity in the house I reside in. My point to all of this muttering is this: If you can rent your property (and even take a loss if you have to), do it. Depending on your situation, you can leverage the equity to pay off whatever you are paying high interest rates on. This way, you can ease your monthly burdens or invest in more property. Tighten your belt, and protect your investment. You can't insure your money in the stock market, but you can your property. In the long run, you'll be glad you fought to keep it.


We live in the Palm Springs area and while activity continues, prices are lower and the gaps between asking prices and bids are wider. Builders have cut prices by 10% to 20%. They are giving a new "3" series BMW with a $300,000 house. They are throwing in the pool. They are making the payments for the first year. In other words, they are doing anything to keep the selling price as near as possible to last year's number. Does the lender know?

We bought a home in a subdivision that is completed, but the builder is finishing up selling his last phase. His price for our model is $849,000. Our home has a pool ($50,000) and another $50,000 in upgrades. We bought from an existing owner and paid $710,000. His original listing was $899,000. The statistics for the desert do not show a price decline. I believe prices are lower, at least for the people that need to sell.


This will be my fourth real estate "bust" cycle. The first two were fairly easy and didn't last too long; the last one was from June, 1990, through about 1996. That one wasn't much fun, but from the looks of this one it is going to be a blood bath. Look at the ratios between owning and renting, and it all becomes very clear. Homes only have value in that they create utility (a place to live). That value can be determined quite simply by ascertaining the rental value and then capitalizing that income stream. The earlier post explained quite well how this is done, both externally (renting to someone else) and implicitly (living in it yourself). I'm looking for a drop of 50% to 60% from the highs of 2005. This one is going to hurt a whole lot of people and may just elect the wrong person President of the United States. It happened before.

R. E.

All real estate can be classified as any other commodity--similar to lumber, copper, cement, steel, oil, etc.--subject to the forces of supply and demand. We have been in a bull market for commodities for the past several years, which have increased prices. The reasons for the skyrocketing prices of commodities are debatable, but one thing is for sure: The price of commodities has risen largely as a result of supply and demand.

The more the demand and the greater the scarcity for the commodity the higher the price will rise. Vacant, improved land close to all supporting facilities is also a commodity, and if one has been around for any length of time, one will surely realize that vacant improved land in a good "location, location, location," has historically hardly given up any ground for any sustained period of time as far as price or value goes for as long as we have had recorded history.

As time goes on, one can only assume that our population in the U.S. and in fact in the world, will continue to grow and become more affluent as a result of many dynamic forces that will tend to support the demand side of the equation for real estate for an eternity. Where are people supposed to live in a dynamic society that is growing, in caves or tents, on free land? On the supply side, does anybody really believe the supply of basic commodities will ever be any more available tomorrow than they are today? Potential buyers are waiting for the impending burst of the bubble, hoping real estate prices will drop like a rock.

Problem is, if that ever came about, those same potential buyers in all reality would no longer have a job or be able to make a living and would not be able to buy the property even if it dropped in price/value by 50% or more. Does one really believe if the price of real estate plummeted that the potential buyers means of making a living would increase? Sellers are looking at their homes and realizing that they could not buy a replacement home with similar or greater functional utility in a similar location in today's market for anything near what their home's price/value currently is. So where do the seller's go if they sell their homes for less? Obviously, if it were up to the buyers, the seller would have to settle for less so that the buyer could have more. Fact is, the sellers may be getting a bum rap. But, one thing is for sure, real estate will continue its upward pressure on price/value for as long as commodities become more scarce and for as long as the size of our population increases.

fortunate home owner

I would think that since only 12% of us here in the Bay Area can actually afford a home (providing we have two incomes) without using a subprime loan, that the housing prices would fit more into our annual income limits. Home ownership should be attainable for any hard-working American--not just for those who purchased 30 years ago, or have inherited property. If interest rates are too high and we can't afford to buy, then the landlords raise the rents. If we can afford to buy, then the landlords lower the rent, because they need to make money on their property. Why does it always have to be about making money off of one another? Why can't a home be a shelter as I believe it was intended to be? I hope the prices do drop according to our incomes so that we all can enjoy the "American dream."


Most of the posts that I read are in inflated markets. The one point not mentioned is population growth. If graphed, you will find proportional housing growth to population growth. There are bubble markets both on the west and east coasts. The feds are smart enough to keep loan rates affordable. Loan criteria certainly needs tightening: the record foreclosure rate confirms that. Then there is another issue of aging housing stock. The last major housing boom was right after WW2. Many areas have housing stocks exceeding100 years in age. There are many variables that affect the market, perhaps eyes should come off bubble markets and onto the market as a whole.

Dan B

It sounds as though most people have a lot of education and experience in real estate. The issue involving real estate and housing prices is a big concern in the Central Valley. While I think that some areas may see a minor correction, I think areas like California's Central Valley will be devastated by the predatory lending (subprime) that has been going on since 2000. Everyone looks at speculation, but no one looks at the facts. I worked for a homebuilder in the CV, and one day they unveiled this master plan to build a golf course and do 1,000 starts a year for the next ten years. How dumb were they? The fact is that housing prices have gotten so high people can't afford their payments. If they can't afford their payments, then eventually they will go into default and foreclosure. Common sense says "let's get a fixed rate while interest rates are low." But some 67% of mortgages in the CV were done adjustable, interest-only, or worse. I could see people using an adjustable to help get into a small starter home and build equity and credit to refinance later, but that isn't what they did. Instead, they went out and bought the biggest house possible and chose the $1,300 adjustable payment because of the $1,700 fixed payment, and now that their payments are $2,000 a month or more, they are in distress. With a cost of living adjustment of 4% as your only raise, when did you think you were going to make an extra $700 a month? If incomes aren't up, mortgages must be down. You have a homebuilder trying to oversupply a market and a market with more people qualified to buy a home than should be. On top of it, all most baby boomers used real estate back in the eighties as an investment vehicle to fund retirement. If you think prices went crazy in 01 02 03, you should read about 81. the first wave of baby boomers hit 59 1/2 in July of 2005; it will only be a matter of time before they, too, need to liquidate assets to fund retirement. Oversupply with artificial demand = bust. I will say a positive for the market. There are a large number of youth (like me) hoping to buy into the American dream of homeownership. Once the market hits bottom, it will adjust up sharply and level off to its equilibrium (which would have happened naturally had these predatory lenders stuck to guidelines and qualified those that could qualify). I run into so many cases of fraud in which a broker fudged income numbers to qualify the homeowner.


After years of waiting for the bubble to pop, I am in the process of closing on the top-floor flat of a 2-unit TIC here in San Francisco. It is a 2-bedroom, 2-bath 1,300 square foot all-remodeled space, with 2 garage slots for me, each with its own entrances. I feel like I got a deal at $735k, as a 2-unit TIC easily converts to a condominium in about 2 years. Typically, one can experience a 20% rise in value after this occurs.

Trust me, I have been diligently looking for 2 years now. For all the troubles of the national housing market, prices have edged just a bit in the Bay Area, depending on location. The nicer properties still experience multiple bids. With a child on the way, my wife and I simply could not hold out any longer for a "bargain" price.

Moreover, I, too, thought the national economy had the ingredients for a perfect storm, perhaps causing a deep recession, whereupon I would swoop in and get property on the cheap. Well, I now believe that we may well get the soft landing Bernanke is looking for. Corporate earnings are robust. Jobs are plentiful. Asian creditor nations are generous. The national debt is not that much a higher percentage of GDP than it has been for long periods of history. Americans, in all their diversity, are more resilient and adaptive than given credit for.

And, I hate to say this, but the housing correction going on now is basically going to affect those who truly should never have gotten into untenable loan situations. I made sure I purchased something in line with what I can afford on a go-forward basis, as I paid 20% down and have a monthly mortgage about 1/4 of my take-home pay. It took me years of saving, cost cutting, and investing to build the down payment as well as a safety net for buying into the market.

As an immigrant myself and somebody who has traveled much of the world, I want to remind you all how many people still badly want to live in the United States. Because of my profession, I study other economies. I just have to say that we don't have it so bad here. I think that we still have firm economic foundations to help weather the type of economic corrections we are currently enduring. In fact, I think that, by and large, for those who planned diligently and responsibly, things will turn out fine.

If I am wrong, so be it. Obviously, I am betting that the United States will bounce back, that the sky isn't falling. A few mortgage companies and banks may fail, some people may lose their homes, but business will carry on.


Most of the blogs here exhibit the ignorance of the American public. Nobody mentions one thing about the dollar and the fact that it has plummeted against other currencies. Why is this happening? The fact is, the Fed is orchestrating what will no doubt go down in history as the greatest transfer of wealth ever. Average Americans will lose almost everything they worked so hard to own, starting with their homes. Jobs will become nonexistent and labor will become cheap again. The "amero" will replace the dollar, and the Canadian and Mexican borders will disappear as the new order begins its final move to take over the world. Think I am full of it or kidding? Well, let's just wait and see what happens then. I for one have liquidated all my stocks, sold the home I owned for 20 years, and am buying hard goods and gold. The dollar will be worth less than toilet paper. Mark my words. Look at the euro--good thing to convert your dollars to. Good luck. Doug H.


To Ed: Matt is right. Reasonably priced, nice apartments can be found in SoCal. I live in one, an easy 25-minute (non-freeway) commute from my job in Santa Monica. My one-bedroom apartment house is in an older building and has none of the amenities that I never used when I lived in apartments that had them: clubhouse, swimming pool, Jacuzzi, etc. What it does have is good-sized rooms, a kitchen the size of those usually found in houses, both a full-size coat closet and linen closet, and wall-to-wall windows and a sliding glass door in the living room opening onto a veranda triple the size of what most newer apartments offer. I have no neighbors beneath me or next to me, and the neighborhood is tranquil. There is no air conditioning...none required. When I come home from work in the summer, I open that sliding door and enjoy the rush of cool ocean air that instantly flows in across my veranda and fills my entire apartment. If so inclined, I sit on my veranda amidst my lovely plants and flowers, and enjoy the sunset and the view of all the lush greenery and the spectacular palms against the sky. Happily, the building's owners are renowned for not raising the rents here. What's my rent? It's $1,050 per month. So of course I'm saving money like crazy.

To DJ: You have just exposed the elephant in the room, and I wish the citizenry of this country would sit up and take notice. The situation is every bit as grim as you paint it. We are all being led to the slaughter, especially the middle class (Screwed--the Undeclared War Against the Middle Class by Thom Hartmann). We should be marching in the streets en masse over this, yet there is hardly a peep of protest to be heard. I'm sure the protests will eventually come, once the American people wake up to reality, but sadly, it will probably be too late by then. The new world order will be firmly in place, and the blood in the streets will be real.

Dean Carlson

The housing market will never come back as it has in the past. Good-paying jobs have been outsourced, and with homes valued as they now are, no one with an average income can afford to purchase a home. I wonder what this government and big business were thinking when they sent our good-paying jobs off shore--and still expected the consumer to be able to continue purchasing homes, cars, health care, etc.? Oh well, the new North American Alliance will take care of that.


when do agtens start SELLING houses instead of expecting sellers to GIVE AWAY there homes? Sticking a sign in the front yard with some flyers and listing on the MLS is not selling. Earn your 6%-7% “commission”. Quit deflating the price and expecting the seller to eat it. Sell the value of the property. otherwise you’re perpetuating your own demise. Reply

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