What all of these articles fail to point out is that current home prices are still out-of-wack with incomes. It's all about the income. Lending practices are changing and incomes will dictate house prices now, not speculation.

First-time buyers, WAIT WAIT WAIT! Current home owners are still delusional about their perceived home value. The bubble has bursted and those bubble prices are only dreams now. It will take time for these owners to come back to reality and offer reasonable prices for their homes. Not to mention many more ARMs will reset for the next 4 years and these people will not stay in their homes when their montly payment increases by 50 to 100% AND they are under water by 30% or MORE!

Educate yourself on the matter:
http://www.doctorhousingbubble...
http://patrick.net/housing/cra...

and save your $$$$$ for a downpayment when the bottom hits!

Joe in Campbell

Ah! Adam, thanks so much for explaining. So the idea is that at some point the government will be forced to make more actual physical dollars available, but those dollars aren't worth as much ... presto, inflation! Thanks!

That's a good point about seasonality, Colin. I hope it didn't seem as though I was trying to suggest the bottom is here. More like the bottom is closer. As soon as you say the real estate industry is trying to convince us that the bottom is here, that convinces me it isn't ;-)

You know, in 2004 after Fannie Mae's CEO Franklin Raines took early retirement (did he fall or was he pushed? You be the judge; the COO resigned shortly afterward) the National Association of Realtors was saying this wouldn't have an adverse effect and the real estate market would rock on for FIVE MORE YEARS. Yes indeed!

I doubt we're at the bottom yet despite the attempts of the real estate industry's efforts to convince us otherwise. What is being missed, I think, is seasonality. Even during the long decline of the '90's, prices tended to be flat/slightly increasing during the spring before resuming their decline for the rest of the year. I think we'll be able to see a bottom when prices hold up at some other time of year than spring.

Blue, all I can say is that for 30 years, the price/income ratio in the "near" East Bay (Oakland/Fremont/Hayward) has averaged around 6 and in the SF/San Mateo/Redwood City MSA has also averaged around 6-7.

If that makes it unaffordable, then it's unaffordable and has been for a long time (30 years). Wishing for the price to come down won't make it happen. People might think the economics will force the ratio down here, but I'm simply saying why would the next 30 years produce a ratio different than the past 30 years? It might drop a bit below 6, but probably not much below.

The only way for it to get cheaper in the "inner" Bay Area longer-term is for people to move out a la Detroit, or for a bunch of new supply to come on the market, a la Houston. The latter is next to impossible due to current landowners "protecting" their property values, red tape, and lack of land. The former could happen, but then people like you need to move out.

I lived in Chicago. It's a wonderful city, and you could live in a few nice 'hoods in Chicago proper in a single family on a $57K income..but not many. Do a quick search on Redfin and focus on the north and northwest side...you'll see what I mean. Otherwise, you're living in the 'burbs, just like out here (Antioch, Clayton or what have you).

The government is competing with the private marketplace for dollars by borrowing money. At some point, there's not enough money to go around so the government prints more money (not literally, but effectively by having the Fed lower capital reserve requirements). So that directly leads to inflation. Indirectly, the cost of borrowing goes up (as previously explained) which makes running businesses more expensive; that makes the cost of goods go up. It's also possible that these factors can lead to a recession (or worsening of the current recession). That usually, but not always, cures inflation (but it's a pretty nasty cure).

Well I say we the people rise up and march on William Syron's house with torches and pitchforks and demand our $42 million back! Now!

Ah, that's a great analogy about an individual having to pay higher interest rates for loans if he or she already owes a lot of money and hence is a bigger credit risk.

But why would the national debt lead to inflation? I can understand why, for example, high gas prices lead to inflation, because it costs more to truck goods in and the grocery store, for example, has to pay the trucking company more and then recovers it from the customers. But if the U.S. government owes more money, why would that make goods more expensive?

Fannie and Freddie got caught with serious accounting irregularities in 2004. There was a WSJ article recently that Richard Syron, the CEO who took over the reins at Freddie in 2004 ignored warnings from his chief risk officer about the growing number of bad loans they were taking on. The CEO was also warned that Freddie needed to increase its capital base (de-leverage). The new CEO instead did the opposite: increased Freddie's portfolio of risky loans and decreased its capital base to make more loans. These actions have led to Freddie's insolvency. Syron's compensation over the last four years: $42 million.

To understand why increasing debt levels make new debt more expensive, just think of an individual debtor. The first $10K you borrow is probably cheap because you have good credit. But if you try to borrow $10K when you already have $100K in debt lenders are going to be worried about your ability to re-pay. So you'll be charged a higher interest rate to compensate the lender for the higher risk. In the case of the government, the national debt also leads to inflation which causes interest rates across the board to rise (so its not just the government that will have to pay more for loans).

Adam, I am SO GLAD you posted. I have read many articles that say the taxpayers will take a hit for the Fannie/Freddie bailouts, and none of them explained why or how. When you say rising national debt will cause interest rates to rise, why is that? Really appreciate the explanations.

You know, Fannie Mae has been in trouble for a long time. In December 2004, Fannie Mae's CEO, Franklin Raines, took early retirement, and its chief financial officer, Timothy Howard, resigned Dec. 21.

The two left in the wake of a Securities and Exchange Commission directive to make accounting corrections that could knock out some $9 billion of Fannie Mae's past profit.

So er perhaps it was apparent that Fannie was having a bit of a problem, four years ago? Couldn't something have been done then to ward off the horrific disaster unfolding now?

Blue, I feel your pain, believe me. I can't afford to live in the city where I work, or at least I couldn't until now, so I bought a house in the only place I could afford.

The upside of that is that I own a house, the downside is I'm stuck in a place I'm not thrilled with now that prices are going down and I could afford a nicer city! Maybe there's a compromise there for you, perhaps a city that's at least closer to where you work?

(Sorry, David, I was addressing dg when I asked "David" if he was still looking. Having wrestled frequent commenter mdaccount three falls outta four over a San Leandro property you recommended, I'm well aware that you got a great deal on a property in that city recently.)

I want to give a specific example of a moral hazard that was created by bad government policy and is going to cause big problems.

Now that the sub-prime foreclosure wave has peaked, you can expect a wave of alt-A foreclosure to begin and last for years. Many of these loans to people with good credit were "option payment loans," technically referred to as negative amortization loans. These loans will are big trouble because the principal owed on such loans actually increases for the first five years until they reset into a normal amortization loan. When they do reset, the loan payments can be much higher. Meanwhile housing prices have dropped, so the loans can't be refinanced. This will lead to a new wave of foreclosures.

Amazingly, these option loans are not new. They were tried in the early 80's and found to be disastrous. So lenders stopped using them. The government should have created strict guidelines for their use. Instead, the government didn't regulate these loans at all. Greenspan essentially encouraged their use by saying people that have fixed rate loans are "leaving money on the table." As a consequence, even "honorable" lending institutions were forced to provide such loans (often to people with "stated income") in order to be competitive. It's only a matter of time now until these loans go bad and have to be written down.

I beg to differ on the comment that “regular folks” can’t afford to buy in a lot of places. NYC, Boston, parts of Chicago, LA, Miami, etc," THAT IS JUST NOT TRUE! I have been to every single place you have mentioned NYC, Boston, Chicago, LA and Miami and others as in Tampa, Orlando, and many many other great places in the country where one that is a teacher or firefighter or other even folks only making tips CAN afford to buy a home...but not just "a home" one with a garage, back yard and where the median income maybe $57K+..must I remind you that in CA the median income is just that $57K...how can one afford a house at prices such as $600K+ on that income? or even for that matter $300K++++?? see it just does not work! so prices will keep going down and MUST!

The tax payer will foot the bill for the Freddie Mac/Fannie Mae bailout in several ways:

1. The bailout will increase our budget deficit and, hence, the national debt. In the long run this will cause interest rates to rise. That means government and private debt becomes more expensive.
2. There is a fiscal debt ceiling. So anytime the government spends billions of dollars on something like a bailout (while, by the way, the executives of Freddie and Fannie walk away with millions of dollars), fewer billions of dollars can be spent on other potentially worthwhile programs (or be given back to the tax payers).
3. The tax payer eventually has to pay off the additional government debt.
4. It creates a moral hazard. Just as wall-street bankers believe they can take whatever risks they want because the Fed will come to their rescue if things go bad (the "Greenspan Put"), lenders will start to assume (and they already assume this to some extent) that the government will provide a backstop for bad debts. Thus, lenders will be encouraged to take on more risky loans.

Blue, "regular folks" can't afford to buy in a lot of places. NYC, Boston, parts of Chicago, LA, Miami, etc, and never have, or haven't in recent (30 years) history. A rare agreement with Michelle there. If you have a "regular job" and are dying to afford a house, you really need to move--there are a lot of nice mid-size, affordable cities across the country.

Michelle. You can think that it won't drop to 6X median income, but we're almost already there. Sorry. It might move up to a "permanently high plateau" (famous words of Irving Fisher right before the 1929 stock market crash), but I think the safer bet is that prices will drop back to the 30 year average.

As I also wrote, if you noticed, is that the trend line to 2001 is almost exactly the same as the trend line back to 1990. The "economic center" is different how? More rich people? Ok, but again, the 30 year price/income average has hovered around 6, and my preferred measurement, price/rents has hovered around 18-22 (depending on the city and ex-ing out the bubble years).

I don't see how you can think that prices won't drop. Clearly they already have, number one, and number two, all you need to do is go back to 1989-1997 to see price declines.

I don't know why you think you can extrapolate 1990 real estate numbers for the bay area and draw a straight line with average appreciation to make it work. The bay area as an economic center is a different place than it was in 1990. You are ignoring that, if you expect prices to moderate here and roughly rise with inflation starting in 1990. A lot of redfin readers are nascent buyers who want to buy at cheaper prices. You are talking your positions, so to speak. Median income doesn't mean much in Manhattan and it doesn't mean much here. Palo Alto won't fall to 6x their median income no matter how long you wait, sorry.

"2-4x annual median income instead of 6-8x" that needs to come down..."regular" folks just don't make enough money to afford a somewhat nice place to live in period! it is about time that Northern CA gets on the band wagon if it wants to compete with the rest of the nation for a really good work force that includes nurses, teachers and others that frankly in a place like Monterey can not do it Yet Mont is just too far away from the BAy area! The only jobs there are waiters and waitresses now tell us how one just earning tips can afford these prices and really they are just simply OVER Priced for what one get! So prices will go down more and must!

Eh, not looking anymore. but i wanted to double check my numbers and add some recent sales.

I find it interesting taking different slices that I find a convergence around the market hitting the long-term trend line between now and 2013. To me that indicates we're bottoming out as we write this, at least in my 'hood. I totally agree with dg that it's 'hood dependent (location, location, location really is true). The other number that backs up my 'hood bottom call is that after-tax buying costs are pretty much the same as renting.

The outlying stat in my area is price/income. I think that's skewed by the huge number of retirees in San Leandro. I should check on actual working-age people household income here, but it's late.

It's a "U" recovery around here because R.E. here is more cyclical than, say Detroit, where it's an "L" or more precisely "fallen off a cliff." But the flat part of the U will be starting soon and stretching to 2013ish.

An L shaped recovery? But it's a recovery, so it's going to go up at some point, right? Maybe it should be a LI recovery? (sorry, getting giddy)

You're right about having to focus on your own specific situation and parameters and then dig into the data with that in mind. You're still looking, then, David? I'm sure if anyone can judge the bottom, it's you. (Speaking of judging bottoms, I'm glad you found the first one amusing.)

The problem with listening to the MSM and even regional media is that most of us don't really care about the national bottom or even a Bay Area bottom. We care about where we live, where we want to live, or where we are looking to sell. That's why it rarely serves much purpose to care about the macro bottom.

The 2 areas I am considering buying next are very close geographically (Oakland/Berk vs SF) but light years apart in their respective cycles. Like David and some others do, you really have to drill down into the data for your specific decision making and analysis.

To answer your question Janis, it is generally considered an "L" shaped recovery.

And hilarious picture! (the first one)

Ahahahahahahaha just read David's comment about the young lady! Trying to suppress my laughter at work!

You know, every once in a while someone says something that may have vaguely crossed my mind but NOBODY has ever actually articulated it.

Mark's comment, "This overhanging inventory of people who want to sell but are unwilling to enter the market is what drives prices down for years after the bottom is reached. Once that inventory is gone, then prices go up," is an insight like that, just a real gem. Do I understand correctly that it's like tiny time capsules, these guys enter the market at staggered intervals?

When folks comment that taxpayers are going to suffer from the bailouts of Fannie, Freddie and whoever-all-else is going to hell recently, do you mean taxes will go up? If not, in what way will we take a hit?

Michelle, I agree that you can see the bottom at the low end. Also, good point that at some point the low and high ends have to meet. Or at least approach each other more closely, would you say?

Thanks to David for the strong reality check as always. So would it be more accurate to say recovery is U-shaped?

Red, that's a keen analysis of the Case-Shiller data and I appreciate your ability to make things clear. Very interesting to see that the high end appreciated far less during the boom years.

PS. I'd prefer you replace the photo with a young lady.

:)

PS again. Remember housing doesn't bounce back in a "V" chart either. The rate of decline will slowly decelerate before it flatlines for a year or two and then starts creeping back into positive territory. So no rush to buy a house, but if you buy in certain areas, like I wrote, probably won't lose your shirt either if you don't have to move in the next 5 years.

Just ran the numbers cuz it was bothering me. For me, the relevant housing units (3/2 SFRs and above)are in the Broadmoor in San Leandro (as I define, not Redfin's definition--above Bancroft, not below). Anyway, average $/sq ft started in 1990 at $125/sq ft. Now it's $275/sq ft, for a 4.7% annualized appreciation, or 1.5% annualized above the inflation rate for the same time, and pretty close to the long-term average appreciation for existing homes.

Now, taking that 4.7% appreciation rate, and applying it to prices in 1999, and you get the current average $/sq foot in 2013. Pretty much where "everybody" has been saying prices could start to go up again. Just an example, your mileage will vary, etc. but interesting to me at least.

Taking a different "slice" and we find that home prices in my 'hood are up 4.6% annualized since 2001 (but down 25% since 2005). A pretty "normal" appreciation rate again. So, the prices could still drop, but it would be going under the long-term trend line in my area, and would likely correct at least back up to the trend line in a few years. So again, as long as you don't have to move too soon and like your house, it's NOW possible to buy a house and not lose money. You won't be making a lot of money either, but it's a house, not your retirement account (ahem....as opposed to the general Californian philosophy).

I am so very interested in these comments, but San Mateo Home Sellers in Trouble pointed out that the photo is NSFW, I apologize to all and am going to swap it out right now. BRB.

I think a lot of loans are going to go bad in the next couple years. Also, sales are up because banks are dumping properties at firesale prices. Prices will only go up if demand goes up. Additionally, interest rates are going up so that would make prices go down.

P.S. That picture is a bit NSFW.

Janis:
Flat? Um, maybe. For the richest zipcodes only.
The tiered Case-Shiller data for the SF area shows that the price of the low end 25% of homes increased by over 300% between 1996 and 2006; the median home by 225%, and the highest 25% by "only" 177%; so there is much less for the highest end to fall. Since most of these high end owners can afford their payments, they don't have to sell. They also are likely to have significant equity in their homes that they are reluctant to lose. So we can expect very slow sales, many homes rented rather than sold, lots of weird buyer incentives in lieu of price reductions, owner financing, etc. These and a medium inflation rate with artificially low interest rates could moderate the drop in value of highest end homes to a few percent per year.
Then again, if the Alt-A penetration is enough, the economy tanks, and interest rates rise to reflect risk, the high end could drop like a rock this winter with the rest of the market.

The idea that housing will drop to 4X median income in the Bay Area is likely false. The 30 year average price/income ratio around here is about 6X (HSBC, "Froth-Finding Mission"). The only way for it to drop under 4X would be a serious disruption in the Bay Area economy. I'm not talking garden-variety recession, I'm talking Dust Bowl '30's style Depression or the past 10 years in Detroit. I think that's a very unlikely outcome. Similarly housing will bottom in the US around 3X income, as that is the long-term average. It might overshoot a bit to the downside, though, I'll admit. What does that mean? The US median existing home price is currently just under $200K. The current median household income is a bit more than $50K. In 3 years, the median household income will probably be closer to $54-$55K and the existing home prices will be $180K...with the house price and income meeting again at the long-term average in 2012 or so. Home prices are down about 20%, this is an additional 10% drop nationwide, so that's why I think it's 2/3 of the way done nationwide.

Locally, well, SF is still overpriced and because mostly financed by Alt-A loans resetting in 2011, it won't get hit until then. Therefore, it also won't drop as far if people are making a bit more money in 2011 also (thanks to inflation). The median house in the East Bay is now around $500K. East Bay median income is around $67K. 6X$67K=around $420K. but that's not going to happen all at once again. So, in 3 years when median income here is around $75K, prices will settle at $450K, another 10ish% drop (could drop more in the interim). Of course prices already have dropped more than 25% here. Again, about 2/3 of the way done. Of course, this is all nominal dollars. Adjusted for inflation, we're going to see 2000 prices in 2010, and it'll be like the bubble never happened. But you will have cash from your 2000 house to answer Janis's question, since it will have inflated up.

I actually prefer to do the calculations on a $/sq ft basis, but that's harder to get. I know that typical houses in two desirable hoods in SL sold for ~$200/sq ft around 2000, so I expect houses to sell for about $270/sq ft in 2009/2010, for no real appreciation over 10 years (but inflation gains exist).

Where you can see the bottom is in the low end. All the houses that are remotely desirable at the low end on the peninsula (which are under 500K in areas like parts of sunnyvale, santa clara and some areas of San Jose) are selling quickly and much faster than earlier this year. Those houses are selling for over ask and they are almost all REOs. I was just shut out of bidding on 2 REOs, both went for at least 10K over ask. I don't doubt that the high end is still falling but the low end was first to fall, and is recovering. This is not just true on the peninsula, even places like Sacramento are seeing recovery when a few months ago many said it would never happen. So what needs to happen now, is the high end and the low end need to meet in the middle. To Mark from the prior post, I think the price drops you are seeing are probably cancelled out by the over ask sales that these low end properties are seeing.

I do hope that we have hit bottom, but I don't see much actual evidence of it. In Redfin you can bookmark favorite properties and opt to receive alerts when things change. I have 113 properties bookmarked and every day I get an average of 2 those properties being repriced, always downward. In the course of a month that means 30 * 2 = 60 properties of 113 are having prices reduced, and that is about 50% of them going down a month! I am specifically looking for short sales and foreclosures, so these properties are more likely to go down, but they are also more likely to sell from what I have seen. The non-distressed properties with the unrealistic price expectations are simply not selling at all and many leave the market entirely without being sold. This overhanging inventory of people who want to sell but are unwilling to enter the market is what drives prices down for years after the bottom is reached. Once that inventory is gone, then prices go up. I bought my last house in 1995 just as there were signs of life in the market after 5 years of bottoming prices after the earthquake.

One of the problems with waiting too long to sell in this market is that your currently non-distressed property can become a distressed property as prices continue to drop. That's what has been happening and what has been adding fuel to this historic downturn. It is a classic credit induced panic that keeps rolling downhill, and the only thing that will stop it is more government intervention or the willingness to let Fannie, Freddie and many banks fail. I don't think that the latter will happen so I am guessing that the taxpayers are going to get one massive hit from this thing, and I think it could rekindle inflation out of necessity, because there will be no other way to deal with adding $1 trillion or more to the debt in such a sudden fashion. We will have to inflate the debt out of existence or endure Japanese style stagnation for years, which I don't think would be politically acceptable either.

Mark

Futures trading based on the San Francisco Case-Shiller index suggest that the median prices in the market will not bottom until 2010-11 and should see another 20% reduction.

When inventory levels come back to historical norms of 4-5 months of supply and median prices are more like 2-4x annual median income instead of 6-8x, then we will be closer to a bottom.

Calling bottoms is a dangerous game.

The bottom is not in site folks....we have not seen the last of it as of yet! Especially here in the bay area and Monterey...it will go down even more!

Oh, Red, that's a great rule of thumb, I really appreciate it! Do I understand correctly that you are thinking values might just go flat at the high end for 10 years?

Would that mean that in, say, San Francisco, those who bought when prices were high might simply see little or no appreciation for 10 years? So at least they'd be able to get something back if they sold their homes, right?

sw, I appreciate the perspective from the last slump. So in other words, not only do I have to wait out the slump ... but then it will probably take years for prices to climb again, yes? Bah!

Shall we take for example the Freddie Mac conventional Mortgage home price index? The headline is "National Home-Value Drop Moderates in Second Quarter"; - Good News - the number for the second quarter is much better than the first Quarter!, -Bad News- but the worst ever (since 1976) for a second Quarter. The year-over-year is by far the worst ever.
( http://www.freddiemac.com/news... )

So how far will each area drop? Well, the areas that have foreclosures are back to roughly 2002 prices, and given the likelihood that loans in the future will require 20% down and 28% max debt ratios, that 2002 value is looking like a pretty good guide. If a bubble areas prices are above values from 2002, it has more to drop. The high end may take years to get there though ... values may just go flat for 10 years, and high end homeownership will just be a bad investment, not a major loss.

the bottom may almost be in sight for sales, but that isn't as exciting as it sounds. prices typically continue declining for years after sales hit the bottom. just look at the stats for 91-95