by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I’m going to republish a little forecasting I did, about ten months ago, on Active Rain. I’ll offer some comments in italics (discussing 2009) and welcome yours in the comments section:
Lenn Harley caught something I said a year ago and found it to be prescient (her word); I wish I were wrong. The comments in her post suggest that I should talk about the upcoming year; I really don’t want to do that because I don’t have great “visions” for 2008. Some thoughts about the next 12-18 months:
1- More not less of the foreclosure activity we saw these past 5-6 months will continue through 2008. A combination of ARM resets, tightened loan guidelines, and affordability problems will affect American homeowners in a dramatic way. It’s easy to levy the blame on Greenspan, mortgage originators, Wall Street, or REALTORS but at the end of the day, the “greed” ultimately came from the homeowners. The American homeowner, aided by some opportunistic market participants, got drunk on the drug of materialism, financed by a world wide capital glut.He partied up the profits while the clock struck twelve. The foreclosures and continued short sales will be the hangover from the five year orgy we had in the first part of the decade.
Well, duh. I didn’t need a looking glass to see that. It now looks like Wall Street was the sugardaddy that financed this party, by borrowing from foreign investors. They’re paying dearly for it today. The good news for 2009 is that those drunken sailors from Wall Street (my apologies to beer-sipping Navy veterans) are getting rounded up and placed in rehab programs. We might see some stability after this most recent intervention.
2- The housing recession will extend to the American economy. Homeowners drew upon home equity like a a high-roller draws chips at the Venetian hotel in Vegas. Nobody will “stand up” for them with the bookies anymore. The money spigot is shut and won’t be turned on no matter what the Fed does to interest rates. Less money means less disposable spending dollars. While, Virginia, there still is a Santa Claus, he won’t be staying long at your house this year and might just skip you next year.
I’m not sure about this. The economy seems to keep growing… and growing… and growing. I might have underestimated the ability for the American economy to innovate. Robert Kerr and Michael Cook will probably offer some opinions and facts that support last year’s statement. Today, I’m more optimistic about the economy than I was last year.
3- There will be a marked class distinction that develops within the next 6-7 years. It won’t be determined by assets but by debt and its utilization. Those that respected money will get more of it; those that didn’t respect it will lose it. That will have a profound effect on productivity as the “hourly worker” will become despondent about his life and stop pushing for the overtime. Why work the extra hours to make the mortgage payment when the house was lost in foreclosure? A commitment to mediocrity will be the mantra of the American worker because every disposable dollar will be spent paying the bar tab he ran up five years ago. Personal bankruptcies will rise.
This was the first real “social” observation I made. I suggested that the “rich will get not rich and the poor will get clobbered” in San Diego County. What I was most concerned about was that the American “spirit” would be broken. If the middle class dream is taken away, crime and anarchy can run rampant. I suspect Greg Swann will have some good observations about why the “middle-class dream” is a necessity in a peaceful society.
4- Housing prices will drop…more. The aforementioned reasons for foreclosures rising will be the same pressures felt in the housing market in 2008. Prices will continue to drop until a level of affordability can be established. That means that the investors (real investors put 20% down) will step in when the deals cash flow. It also means that until the rent v. buy figure is at parity, the incentive to own will be tabled until the economics of homeownership make sense. Determine the median income for your metro area, multiply it by 5 and that’s your new median price. In San Diego, the income is about $70,000 which predicts a median price of $350,000, far below the current $470,000. That suggests another 15-20% drop in prices here.
I think I underreached here. Four times median income is more reasonable for San Diego, which suggests a median price under $300,000. I was right; San Diego County’s median price hit $350,000 but I think I was softening the blow by stopping there.
I mentioned on another post, that weblog since disappeared, that the San Diego County housing market would bifurcate. I suspected that any income growth would happen on the top end and that the bottom half would see little to no income growth. Combine that with a liquidity crisis and the lower-end homes would get slaughtered while the upper-end would just decline a bit. That happened in San Diego County; lower priced homes are starting to make lots of sense right now.
Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline. The median price may very well drop but the lower-priced homes will hold value. The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year. Watch Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit. Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).
5- Real estate agents and mortgage originators will flee the industry faster than teenagers bolt from a keg party when the cops show up. It is my belief that fully 9,000 of the 14,000 licensees in San Diego County won’t make a living wage this year; expect most of them to be on to another job next year. The remaining practitioners will be fielding calls and e-mails from disgruntled homeowners like a an airport gate agent in a snowstorm. Learning how to say “No, I’m sorry I can’t be of assistance” will be the single best script to learn for next year. Smart practitioners will learn how to properly qualify WILLING buyers and sellers and will profit immensely from it.
6- People will buy homes, they always do. A culture of opportunism will develop among the buying pool and if left untrained, they will drive practitioners insane. The wise REALTOR or originator will assess motivation as much as qualification before accepting a brokerage or financing engagement.
Of course, the sellers have to play ball as well.
7- Fundamental underwriting guidelines will reign supreme for the next 12-18 months. Think Y2K when you think of lending. If you weren’t around back then, ask me for help. FHA financing, being touted as the “catch-all” for the wounded borrowers, will be woefully inadequate to handle this debacle. While FHA offers expanded credit and LTV guidelines, the ability to repay the loan is still required. John and Jane Homeowner just don’t make the money to support their debt-load. 100% financing won’t go away for those with sufficient credit, reserves, and income. First-time home buyers will emerge as the predominant players in the home buying market. Relationship building, counseling, and firm but encouraging advice will need to be dispensed.
No big surprise. I was correct and incorrect here. FHA is a BIG player now, in San Diego County, Since loan limits have been expanded to $697,000 (soon to drop to $625,000) and PMI companies are in the tank, government lending is an important part of mortgage finance. 100% loans are gone unless you’re a veteran or if the Nehemiah folks prevail in the groundswell efforts. The US government is supporting low down payment housing finance in the $625,000 and below market, for San Diego. Everyone else will be screwed.
8- More home buyers will go online to start their home search. By reading this article, you are at a decided advantage over your competition…you’re here, already. The very nature of the on-line home searcher demands that you do free work before you ever talk to them. Successful practitioners will “convert” these modern day “open house looky-loos” into viable prospective clients by getting them onto the phone, then to a lender, and ultimately into their office to sign an exclusive buyer brokerage agreement.
This, to me, is the real opportunity for practitioners. Economies and industries go through paradigm shifts every 20-30 years. The website is the new “open house”. Thirty years ago, the mantra “listers last” was all important advice to a new real estate agent. Today, inventory has been democratized through the IDX search on a website. Open houses then, are a good time to work on your SEO. A REALTOR who controls the SERPS rather than the inventory should profit best from this buyer-centric market.
2009 should offer great opportunities for San Diego agents and originators who get focused on activity. I think there will be a lot of activity in the lower end and profitable activity on the luxury end of the market. If you dominate the luxury home market in La Jolla, don’t change a thing. If you’re working with buyers in Eastlake, you should do well. It’s the listers of $800,000 homes, in Carmel Valley, who may be in for the biggest surprise next year.
PS: If you’re headed to the NAR convention, in Orlando, you might consider this marketing session. For the price of a tank of gas, you’ll learn how to shift your business and learn how home buyers find their REALTOR and lender.
PPS- If you’re a San Diegan and not in the real estate or lending industry, you might want to pick my brain or argue with me; both are encouraged. You can find me here.
Keith says:
Totally agree with #8! Although listers will last, it is this new element of SEO, Serps, and helping buyers with the best and most information that will weed out agents who are not razor sharp and on the edge of new technologies!
September 21, 2008 — 1:33 pm
David Shafer says:
Excellent as usual; right on more than off the mark!
#3- Don’t worry the American spirit will not be broken, although you are right about the class divide. But this has been going on for 20 years and is generally not related to the recent mortgage/housing crisis.
However, I think the real crisis is going to be the boomer retirement crisis. As a group they are not prepared for retirement and since they are generally healthy will generate many changes including working much longer, demanding higher taxes to cover social security and medicare commitments, and increase the demand for health care of all types. This will open up brand new opportunities for non-traditional real estate development and also add to the supply problem as seniors try to get their equity out of their homes by selling!
#5- Already happening here in Florida as previous productive agents have had to find alternative employment to pay the bills. Question is how many will return?
#7- Waiting for underwriting to go back to “evidence based” methods. Why should a small business person with 780 credit scores and $500,000 in a retirement plan and $100,000 in the bank not be able to get a SIVA? Why shouldn’t folks have to put down a down payment when all the evidence points to folks who put down 10% have such lower foreclosure rates?
The bottom line is that all this bad news will pass and it won’t be long that everyone will forget the bad stuff! We, as a culture, have a short memory, which is good and bad of course.
September 21, 2008 — 4:45 pm
Barry Cunningham says:
LMAO…you are wiser than wise, the prognisticator of prognosticators and 90% or more of realtors are appearing like morons in dinghies in new Orleans a few days before Katrina hit, as they just expect it to “blow over”.
I have seen one too many “top-producers” hanging onto the life raft of lister ideology and all I can say is …how sad.
September 21, 2008 — 5:34 pm
Brian Brady says:
“Why should a small business person with 780 credit scores and $500,000 in a retirement plan and $100,000 in the bank not be able to get a SIVA?”
He can, it just costs a lot. Either pay the taxes or the interest (most choose the interest).
“Why shouldn’t folks have to put down a down payment when all the evidence points to folks who put down 10% have such lower foreclosure rates?”
Those who put down 30% have lower foreclosure rates than 10% down payment.
We basically agree, Dave; I think we should allow every loan program we used to have-just properly price it.
On a side note, I don’t even know WHERE to begin on the Glass-Steagall question. I think that’s a doctoral thesis. With this changing economy, I need less formal education and more practical education.
If you start the discussion, at your place, I’ll join in and try to follow up. Sean, Tom and Dan would be good participants on their weblogs. Expect great comments from Bob Wilson and Robert Kerr as well.
September 21, 2008 — 5:53 pm
Tom Vanderwell says:
Fascinating discussion – I think we should and could talk for hours or more on it. Unfortunately, only time for a few quick thoughts:
1. I agree with Dave that the American spirit will not be broken…..
2. I just read an article that Greg forwarded me about the Mentos economy (always ready to go Pop!) I’m not so sure that it’s going to be different this time….
3. I’ve been telling people in my area that those with good credit, a downpayment, and verifiable income will still be able to get a reasonable mortgage. The “Unreasonable” ones will be either hard to get or very expensive.
4. I agree with Brian’s assessment of the Jumbo market.
5. Flee the industry – yep, in droves and boat loads…..
6. In Michigan, the housing recession is already into the rest of the economy. Has been for a while and will be for a while…..
That’s all I’ve got time for tonight….
Later guys!
Tom
September 21, 2008 — 6:15 pm
Bob in San Diego says:
The jumbo housing market will be the next casualty. The list price of my short sale inventory is rising. problem is that those above $700k aren’t selling.
Just for kicks, what income do you have to prove to buy an $800k property with 20% down?
September 22, 2008 — 9:21 am
Brian Brady says:
“Just for kicks, what income do you have to prove to buy an $800k property with 20% down?”
About $160,000 today and $180,000 after January 1, 2009
September 22, 2008 — 9:31 am
Bob in San Diego says:
This is why we are not close to the end of this mess. A large number of people in these properties could not buy their home today. If they have to move, the number of buyers qualified to buy above this price is low. The result will be a large drop in prices in these higher priced areas.
The argument that several agents and brokers have been making that coastal properties will retain their value will be proven to be a joke.
Keep in mind that many $800k properties today sold in the $600s in 2001. if we drop back to those levels, the lower end plateau will drop again.
“Rent vs own”
When we near that equilibrium, the bottom will be in sight.
September 22, 2008 — 10:15 am
Michael Cook says:
I have always wondered what Californians do to make so much money. In New York City, I know finance, marketing, etc, but is San Diego really the hot bed of employement? Are there really that many people making $150k+? I have to agree with Bob, this equation seems way out of wack.
September 22, 2008 — 2:06 pm
Bob in San Diego says:
“Are there really that many people making $150k+?”
Not any more.
September 22, 2008 — 2:41 pm
Judy Orr says:
Thanks for the link to “A Reality Check for Home Sellers.” Just another article not written by me for my arsenal to send to unrealistic sellers.
September 22, 2008 — 4:52 pm
Brian Brady says:
“Not any more.”
Many Californians state the opposite 🙂
September 22, 2008 — 5:06 pm
Sean Purcell says:
Michael & Bob,
I hesitate, on a purely ego basis, to point others in the direction of a someone clearly much smarter than I, but it needs to be done here. Dan Melson posted a study that gives a pretty good idea of the income distribution here in San Diego. The short answer to your question: you are neglecting to count couples, partners or whatever we call duel income home buyers. Only about 6% – 7% of the population here makes over $150,000 individually, but as a pair 30% to 50% of the population can afford the prices you mention.
September 23, 2008 — 11:01 am
Bob in San Diego says:
Sean, that doesn’t take into account debt, and more importantly, jumbo rates at 9% today.
September 23, 2008 — 6:18 pm
Carolyn Gjerde-Tu says:
I agree that it is going to get even more difficult to finance loan amounts over $600,000. I’ve been involved with real estate in some fashion since 1992, financing today is much more difficult than any other time in this period. I’m not sure how much more the pendulum can swing without really impacting the market especially in the upper price ranges. Very interesting observations.
September 23, 2008 — 6:52 pm
Sean Purcell says:
Bob,
Sometimes I have difficulty following your argument:
You: Just for kicks, what income do you have to prove to buy an $800k property with 20% down?
Brian: About $160,000 today and $180,000 after January 1, 2009
Michael: Are there really that many people making $150k+?
You: Not any more.
Me: (reporting Dan Melson’s study)… as a pair 30% to 50% of the population can afford the prices you mention.
I am simply reporting the results of a study that contradict your assertion. Your argument now is:
that doesn’t take into account debt, and more importantly, jumbo rates?
Are you questioning Brian’s calculation of the income needed or Dan’s calculation of the income distribution?
September 23, 2008 — 8:45 pm
Bob in San Diego says:
I’m not questioning Brian’s calculations, but assume it takes into account very little debt beyond $8k in property taxes.
Sean, you stated “30% to 50% of the population can afford the prices you mentioned”.
Since we are no longer in a world of stated income loans, gross income doesn’t have anything to do with the ability to afford those prices, without factoring in debt, which is now a huge qualifying factor.
30% to 50% of households (that’s a huge spread, btw) may make $150k or better, and have a minimum income requirement to qualify, but that isn’t the same as able to afford.
Of course those numbers are also based on Melson’s report, which is pure conjecture and assumption, and based on data where he doesn’t even know the source of the info that he cites as “the most current credible statistics”. I can promise you that info isn’t current enough to be considered credible. His conclusions can’t be considered valid because his data is outdated.
As for the original premise of my statement, there are not as many making $150k now as just a few years ago. The losses in the real estate and mortgage industry alone has seen to that.
But let’s take this back on point. Raise the price to $915k, which may get you a 3000 sq ft home in many of the coastal areas of San Diego’s North County and now we are in jumbo loan territory and the qualification numbers are staggering.
Instead of $150-170k in annual income, it’s now closer to $300k. That assumes only property taxes as debt.
Bottom line is that anything close to current pricing will put huge downward pressure on values in the jumbo loan price ranges. As those fall, the middle and lower ranges that have started to plateau will fall again.
Melson is wrong. This isn’t the bottom, and as long as there is a 2-3% spread between conforming and non-conforming, the bottom will continue to drop.
September 23, 2008 — 10:39 pm
Michael Cook says:
Sean,
The US Census Bureau quotes the median income to be $59,591 as of 2006 for San Diego County. Unless there was a huge spike in income or every household started dealing drugs (a lot of drugs), 30-50% seems like a stretch. How sure are you about your data source for that 30-50%?
September 24, 2008 — 8:13 am
Sean Purcell says:
Bob,
I’m not questioning Brian’s calculations, but assume it takes into account very little debt beyond $8k in property taxes
So you are saying that Brian’s calculations are accurate… but not valid?
…those numbers are also based on Melson’s report, which is pure conjecture and assumption, and based on data where he doesn’t even know the source of the info that he cites as “the most current credible statistics”. I can promise you that info isn’t current enough to be considered credible. His conclusions can’t be considered valid because his data is outdated.
What Dan said was: “According to the most current credible statistics I could find” which is not at all the same as your characterization. As for the credibility of his post, I will leave that to Dan to defend. I usually find him to be awfully smart. Here is the link to his post again, if you care to dispute it:
Is San Diego Market Underpriced or Overpriced? A Thought Experiment for August 2008
I do agree with you on the problems and pressures still to come for the Jumbo folks. They may have to sit still for a while. Worse yet, they may be forced to sell and lower their prices accordingly. This could wreak havoc on the conforming turn-around I see coming. I wrote about this in more detail here.
September 24, 2008 — 8:58 am
Sean Purcell says:
Michael,
My only recommendation is to check Dan’s post. I am simply reporting the results of someone I find to be intelligent and credible. He does a great job explaining his conclusions and it makes no sense for me to mangle them here.
September 24, 2008 — 9:02 am
Bob in San Diego says:
Michael,
The problem is Dan’s data. It is outdated and therefore not credible enough to be able to base any 2008 conclusions on with any degree of certainty. I know, because I have first hand knowledge of the age and source of the data that was published on the site he cited as his source. I was the original owner and completed the sale of my interests in it this year.
It is a safe bet that the census data you quoted from 2006 is not representative of income levels today. Since 2006, we have seen huge income losses in the real estate and mortgage industry, as well as biotech, as companies like Pfizer and others have moved many biotech operations out of San Diego.
I should have said, “Not as many as before”.
September 24, 2008 — 10:27 am