Reno Ignoramus has been forwarding links to Diane and me all week. I thought I’d share them with our readers. Caution: these reports portend a dire future for the housing market, mortgage and banking industries, and the value of the US dollar. In fact, according to some of luminaries below, the entire US economy may be on verge of collapse.
“It will be the biggest housing-price decline since the Great Depression.”
Bloomberg.com: Worldwide (April 12, 2007)
“…there’s a good chance that the return on real estate will be negative, substantially negative, over the next 10 years…”
Robert Shiller: Mr. Worst-case scenario – CNN Money.com (Apr. 12, 2007)
“We are likely to see the first bank failures since the late 1920s…”
Trouble in Squanderville by Mike Whitney, April 18, 2007
…a total of 1.1 million foreclosures with losses of about $112 billion will occur over a period of six years or more with roughly 500,000 homes going into foreclosure over the next two years.
U.S. Credit Perspectives – May 2005 by Mark Kiesel – PIMCO Bonds
[Reno Ignoramus points out that PIMCO Bonds is the largest bond trading company in the world]
U.S. Foreclosure Filings Rise 47 Percent in March
Bloomberg.com: Worldwide (April 18, 2007)
Foreclosure Activity Increases 7 Percent in March According to RealtyTrac™ U.S. Foreclosure Market Report
IRVINE, Calif., April 18 /PRNewswire/
27 comments
More doom and gloom. I swear some people get off on this stuff. It’s just like Y2K, 9-11, Bird Flu, etc. Sure, we should be concerned about housing bubbles and foreclosures on high-risk loans, but I don’t think real estate is going to nosedive like some are predicting.
Justin,
Diane’s own figures, posted on this blog, show that the median price in Reno-Sparks is down 16% in the last year. Just what would you describe as a “nosedive”?
Does the median have to drop 30% in one year to constitute a nosedive? 40%?
Housing markets simply don’t deteriorate that fast. Houses are not liquid assets that can be sold in a day like a stock.
This is one of the rare times that I agree with some of the doom and gloom predictions:
No, I don’t think it’s going to be The Great Depression nor that the dollar and stocks will collapse and we’ll all be using gold to buy food … but, I *do* think that:
1) The economy is not nearly as robust and healthy as the official government numbers indicate
2) We’re headed into an unavoidable recession
3) We’ve just entered the beginning of a severe housing downturn that will dwarf all prior downturns since The Great Depression
Well, it looks like another seller just got religion in Somersett. Take a look at MLS# 60022915. 2335 Ridge Field Tr.
Asking price just took a $300,000 haircut. This house sold on 12/20/05 for $781,906. Curent asking price, $699,000, is $83,000 below what seller paid for the house 16 months ago. Or, 11% lower than purchase price.
Let’s say the seller gets 96% of current asking, or, $671,000. (Diane says her buyers only pay 96% of asking). That would be 14% lower than seller’s purchase price. Let’s say seller’s costs are 5%, or, $33,550. Seller’s net sales proceeds are $637,450. Seller loses $144,450 in 16 months.
Damn good thing the market in Reno hasn’t taken a nosedive. Can we imagine what things would be like if it did nosedive?
Let’s look at another Somersett non-nosedive.
MLS# 70001692. 2250 Maple Leaf Trail. Sold on 12/09/05 for $624,637. Current asking price: $550,000. Current asking price is 12% below seller’s purchase price.
Let’s say the seller gets 96% of asking. (Following the Diane Cohn approach.) That’s $528,000. That would be a 15% drop from seller’s purchase price. Let’s say seller’s commissions and costs total 5%, or $26, 400. Seller’s net sales proceeds are $501, 600. Seller loses $123,000 in 16 months.
I’m sure this seller would be delighted to hear that prices in Reno have not nosedived.
Still my favorite. MLS #60026271. 1900 Russell Pointe Cr. in Somersett.
Sold on 9/26/05 for $1,065,798. Current asking price: $ 839,900. Current asking price is $225,900 below what the seller paid, or 22% under the seller’s purchase price.
Let’s say the seller gets 96% of asking, or, $806,400. That would be 25% less than what the seller paid. Let’s say the seller’s costs of sale are 5%, or $40,320. Seller’s net sales proceeds are $766,000. Seller loses $300,000 in 19 months.
This house has been languishing on the market at this price. May well see another haircut one of these days.
You think this $300,000 upside down seller would agree the market has not nosedived?
I agree Real estate has already had a healthy pull back with another 5-10% possibly in the cards. but this is just more doom and gloom. People like to over react as you can tell. sorry not going to happen ignornat anus. keep saving those pennies though I hear atlantis has some new slots!
I’m probably going to regret this but… Mr. Shiller made a good point.
“Answer: Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.”
I agree 100%. In the late 90’s it was buy tech stock, you can’t loose and ultimately they did. Then it was get out of stock and into real estate, you can’t loose. Now real estate is off and it’s you should put your money in stock the return is better over the long run.
During Y2K it was, get yourself a generator the world is coming to an end. Airplanes will fall out of the sky. Then there was Radon gas. It’s a killer, you’d better get your house inspected. Mad cow disease is epidemic. Atkins is the only way to loose weight. In the 80’s we were convinced the Soviet Union would attack us. Remember “Red Dawn?”
I know that economies are far more complicated than some of my examples but, people are negative and pessimistic by nature. This is why the evening news is negative. This is why stories get blown out of proportion. This is why rumors spread so quickly and never end up as they started out. This is why so many are convinced everything today is worse than it ever was. This is why people believe the Internet hoaxes so readily. Does anyone have extra duct tape and a gas mask as we were recommended to get?
Am I saying that everything is rosy in real estate? No. Would I buy a house right now, probably not. Will I buy another eventually? Yes. Do I regret buying my house? No. I don’t know what the future holds for me or my home’s value but it’s mine. Before I’m reminded that it actually belongs to the mortgage company, I know. The bottom line is I have to live some place and I couldn’t rent my house for what my payment is. When I’m done paying for it some day down the road it’ll be mine, whatever it’s worth. If I rent for the next 20 years I don’t think any landlord is going to cut me in on a portion of the home’s value when they sell it and ask or should I say tell me to move.
Thanks RI, for the real life examples. The only thing I would suggest is that your calculation of selling prices being 96% of asking may be too optimistic. I think we are at the point where lots of sellers are taking less than 96% of asking. I am aware of two houses that went into escrow within the past 30 days at 92% and 93% of asking. So the outcome for these underwater sellers may be in fact worse than you depict.
I appreciate the real time examples, RI. Derrick your personal insults are not appreciated and maybe you should just take them somewhere else. I am sure these VERY REAL examples provided by RI are distressing to the market cheerleaders, but they very clearly prove that sellers today are lucky to get 15-25% off 2005 prices.
“The bottom line is I have to live some place and I couldn’t rent my house for what my payment is.”
Then you made a smart purchase, assuming of course you are in a 30 year fixed mortgage and not some suicide special. But with todays home prices, it makes much more sense to rent than buy. Why pay a $2000 per month mortgage on a $hithole starter home when a much nicer place can be rented for $1500? It’s a question many unhappy individuals are now asking themselves, albeit a little too late.
Nosedive is a matter of perspective. If I bought in the last 2 years, and I have lost 16% of my homes value, I would probably consider it a nosedive. I sold 2 properties here in Reno last year. The house I sold in April for $555K I bought in 2003 for $268K. The property I sold in November for $480K I bought in ‘97 for about $200K. I still have 3 other properties here in Reno. Two of them have trippled in value since ‘97, and my most recent purchase in 04 is probably up 25%. So if my current 3 properties decline another 25% would I consider it a nosedive? Not really. I feel bad for the the people who jumped on the bandwagon thinking 30% appreciation a year is normal, but I think most professional investors will be fine. The next time you see your school teacher friends or the local bartender buying houses or tech stocks as “investments” be scared of that investment, be very scared.
Actually MikeZ,
I don’t think that the next Great Depression is at hand either. Neither do I think that we will all be out there in our camoflauge outfits hunting for food and bartering with gold bullion. When I sent some of these post to Diane and Guy, I said some of them border on the tin-foil hat fringe.
But like you, I also believe that we are about to witness the largest decline in housing values ever. It’s interesting to me how for some folks the fact that we just went thorugh the biggest run-up in housing values ever from 2000-2005 is regarded as somehow normal, when it was anything but. The suggestion that we may take the next 5 years seeing the market return to historical valuations is regarded as “doom and gloom.”
I own two houses, a primary residence and a second home, both bought and paid for well before 2000. Yes, I am no doubt older than most posters here. I was able to purchase two homes at pre-bubble prices and pay them off because the mortgages were not backbreaking. So for me all that is happening now is that the funny money “equity gains” from the 2000-2005 period are going down.
At the risk of saying too much, let me share with you a bit of my own experience with the pre-bubble market here in Reno. I bought a house in 1978. Sold it in 1984 for a $16,000 gain. Yes, $16,000 in 6 years. I bought another house in 1984. Sold it in 1989 for a $4,000 gain. Yes, $4,000 in 5 years. I bought another house in 1989. Sold it in 1996 for a 38,000 gain. Yes, $38,000 in 7 years. I bought my primary residence, that I still live in, in 1996. From 2001- 2005, the value had gone up more than 2.5 times what I paid, the gain being over $275,000. That has been slipping away since mid 2005. And it will continue to do so in the next several years.
Look at those numbers. Between 1978-1984, I made a total of $16,000.
Between 1984-1989,I made a total of $4,000.
Between 1989-1996, I made $38,000.
I made about $3,000 a YEAR gain, on average, between 1978-1996.
Between 2002-2005, the gain on my house was about $5,000 a MONTH. But this was no bubble, right?
You think my experience was somehow unusual?Hardly. I invite anybody reading this blog to simply go to the many available websites and just look at the price history of thousands of houses in Reno. You will observe that what I describe happened all over Reno-Sparks.
Please don’t insult me and tell me that 2000-2005 was a “new paradigm” in real estate. Nonsense. It was a speculative bubble driven by cheap money handed out by Voodoo lenders to far too many people.
PLease note that I have not personally insulted anybody with this post. Just sharing my experience and my beliefs about where we are about to go. Which is back to fundamentals. And it will, I believe, be a long and slow journey.
maybe some day you guys will save up enough money to buy youre 1999 priced home. Best of luck to you on that. 15-25% off 2005 prices Is a far cry from 2002 prices let alone 1999 prices. If I remember correctly never have I been a cheerleaderinfact I have acknowledged the current condition of RE isnt that bright. But just because a person should of bought 5,6,7 years and didn’t does not entitle you to a 1999 price. get real. I am. I never said price were going to be going up nor that we hit a bottom. I merely stated that too many people on here have this attitude as if they deserve a 2nd chance to pay prices of 5,6,7 years ago. That is truly rediculous
My wife and I have always told lenders to stick their voodoo pins in someone else. 30yr fixed.
Thanks RI, for the two posts. I agree the real life references to real life declining values are quite informative. Also, thanks for the post about your experience in the Reno market. Maybe being over 50 and having an AOL email address just means you have some wisdom to offer. Your post really highlights the impact of the 2000-2005 bubble.
As far as prices returning to 2000 levels, I agree that will not happen in nominal terms. Of course it won’t. Now, will values return to 2000 levels adjusted for inflation? In other words, could we see 2000 values, plus about 40% added for inflation? (I think the current CPI calculation is cooked and I think most people know it is. So I am using about 5% annual inflation).
Well, that is the big question, isn’t it?
Let’s have ONE thread where we all actually act our age. Because when we attack each other, we actually invalidate our own comments by reducing our perceived age and intelligence to grade school level. That goes for BOTH sides.
Now as far as this post goes, perhaps it’s safe to say that in the current and future real estate market, if you bought a home just to flip as an investment, or you bought a home in 2004+ with the full intention of selling it within 5 years, that probably wasn’t the smartest decision.
So maybe we Americans need to go back to the mindset that a home is a long term investment geared toward putting a roof over head and your children’s heads, and that (shock) you should own it for the 30 years it takes to pay it off (assuming you have that kind of mortgage and you don’t refinance), and that the people who promoted homes as a short term investment and way to make money perpetuated and casued the situation we’re in now? I dunno, I am sure I am wrong, but in the ‘old days’ i.e. 80’s and 70’s, it seemed like my parents and family owned their homes for far longer than 3 to 5 years, and I remember my dad telling me when I was a kid that a home that is paid off makes a great additional to an investment portfolio for retirement. Perhaps the recent trend of trying to make a quick buck as fast as possible dilluted the original reason for owning a home?
That makes sense. I bought my 2 bedroom, 3 bath 1321 square foot Park Towers condo in 1990 for under $90,000 (gasp, rememebr those days?). I occasionally get appraisals just to see where I stand. Various sources state my condo is currently ‘valued’ at $372,000, and other 2 bed condos in my building are for sale in the high 300’s. I’m smart enough to know how inflated that number is. I am expecting my condo value to drop back down to 2003 levels, around $226,000. When I look at market trend graphs, especially for my own condo, From 1990 to 2003-ish there is a slow, slow, but steady rise in my property value. Then, toward the end of 2003, it shoots up from $226,000 (appraisal) to $372,000. I’m sorry, but if it takes my property 13 years to gain $138,000 in value, and then after that only 4 years to gain $146,000 in additional value, there’s obviously factors artifically inflating the market. Did any of these home buyers in the 2004-2006 frenzy do any market research at all and think it was just a little suspicious home prices and values raised the same amount in just 4 years that it took properties to gain in value 13 years previous to that?
RE: “maybe some day you guys will save up enough money to buy youre 1999 priced home.”
Excuse me?
Derrick, you’re assuming that the bubble heads here are sitting on the market sidelines for lack of cash.
The fact is, until just recently, ridiculously easy credit meant that everyone had the means to leap into the Reno RE market, if they wanted to, regardless of income or FICO score.
So, you see, it’s not money that kept us out, it was intelligence.
“Perhaps the recent trend of trying to make a quick buck as fast as possible diluted the original reason for owning a home?”
Once again you are right on, Mike van H.
Think back to 2001-2002. We started seeing the late night infomercials about how to make a killing flipping houses. Send in your $395.00 now for the 12 CD course. Or, attend a weekend long seminar with the gurus of the flipping industry. For only $1395.00 you could find the secret to a fortune. Houses became nothing more than another asset class to trade.
So, as we moved into 2002-2003, people started buying houses with the intention of “owning” them, not for 2 or 3 years, but for 2 or 3 months. All financed with cheap easy Voodoo money.
There was a phony false demand for houses in Reno that picked up steam in 2002 and lasted to 2005. Remember the RGJ stories of people camping out at builder’s offices to put down a deposit on a house? What the RGJ never said, because it never understood, was that 40% of those campers were flippers who never intended to live in the house.
So how big was the phony false demand? How many houses are on the market today, empty and vacant, owned by flippers hanging on until their ARM Voodoo Special resets and explodes in their face? Try to find a honest realtor, like maybe here on this blog, and ask that question. What percent of the Reno-Sparks inventory is vacant? I believe it is huge. At least 33%. Maybe 40%.
How long can these debtowners (it is difficult to call somebody who bought with nothing down on a house that has lost 16% of its value a “homeowner”)hang on? How long before they either drop the price, effect a short sale, or walk? Under all of these scenarios, prices have to go down. And down.
I have asked Guy to post about his recent experience with this very issue–vacant inventory. Hopefully he will do so. It is a huge issue for the market.
RE: “I have asked Guy to post about his recent experience with this very issue–vacant inventory.”
Craig King (http://tinyurl.com/2qbpeu) says that 2.7% of all US houses are empty:
Empty houses and condos at record levels
The number that got all the attention this week was 2.7 percent. That’s the percentage of homes that are sitting empty across the United States. And it’s certainly noteworthy, because in the four decades since the Census Bureau began tracking that number, it’s never gone higher than 2 percent.
…
Revi,
Could you give me some history about Park Towers? I thought they were apartments up until the early 2000’s. I acutally have one of those brochures when the lady from Tahoe was selling them. Did they actually sell some of them in 1990?
MikeZ:
I can assure you that the percentage of vacant houses on the market in Reno is WAY WAY WAY higher than 2.7%.
Heck, even that Ted Jones guy from Stewart Title who spoke in Reno last week (that Diane blogged about) acknowledged that 33% of the standing inventory in Reno is empty.
I know several realtors in Reno. They all tell me that at least 33% of the MLS listings are vacant, and some peg it at 40% or higher. And now see Guy’s post from today where he recounts taking some potential buyers out this past week and 50% of the houses they looked were vacant.
I’m telling you all. These are never before seen times in the residential real estate market.
There was a huge fire in Park Tower in 1997 in which it was to referred to as Park Tower Apartments. Maybe they did co-ops are something.
In any case, check out the condo sold on 3/11/07 and how far below the ‘Zestimate’ it sold for….compared to the ones in 2006 which sold near or sometimes above the ‘Zestimate’. http://www.zillow.com/search/Search.htm?addrstrthood=280+Island+Drive&citystatezip=Reno&GOButton=%3CSPAN%3EGO%3C%2FSPAN%3E
I believe there has also been a recent foreclosure in Park Towers. Foreclosoures.com indicates that Unit 807 was recently foreclosed upon.
RE: “Ted Jones…acknowledged that 33% of the standing inventory in Reno is empty.”
FYI, Reno Ig, the 2.7% figure is for all houses, not 2.7% of unsold inventory.
Good thing I read this post and the comments today. I was actually lusting after a condo / townhome type unit this weekend near Virginia Lake. I am now sufficiently sobered up. Thanks! Time to wait the summer out.
Housing has always been about supply and demand. There is plenty of supply in the Reno area. The demand at this point appears to be on the sidelines waiting for much better and fundamentally realistic prices.
Been in Las Vegas the past 2 weeks and there is no way I’m moving to here. They just got water for another 500k people.