Sunday, August 2, 2009

Tsunami or Squirt Gun?

Lately I've been noticing debate is heating up over the so-called "foreclosure tsunami" that the more bearish among us are convinced is imminent.

The debate primarily surrounds whether or not a "shadow inventory" even exists, and if it does, whether it will see the light of day in the form of a flood, causing an explosion in supply and a crash in prices, or a trickle, resulting in a slow, painful, indelibly frustrating return to fundamental valuations.

I used to believe it would be a flood, but given the shenanigans of the large banks and a government and regulators complicit in allowing them to delay the foreclosure process for a year or longer (as well as delay a realization of losses), it seems abundantly clear that this supposed bottleneck of distressed inventory is unlikely to suddenly bum rush the market and cause an utter collapse in prices.

Sorry, uber bears. I just no longer think it's going to happen.

Even with the massive amounts of foreclosures in the past year, according to Redfin Long Beach inventory is down 33% YOY.

Hell, 4% of that decline in inventory was just in the last 30 days! And in the middle of the Super Summer Selling Season, when more people should be trying to sell!

I know some of us sit here in slack-jawed amazement as dumpy houses and cramped apartments sell for WTF prices but you also have to understand that many people have been priced out of the market for YEARS. Pent-up demand absolutely exists--there's no doubt. Hell, I'm part of the pent-up demand! And if you're reading this right now, odds are you're part of it too.

See what I mean?

But the extremely bearish are betting that PUD in Southern California will wane, for that supply of gainfully employed, cash-flush buyers to "run out." After all, with unemployment in the double digits with no signs of improvement just how many people with 20% saved and stable incomes can possibly be left?!

Well, a lot apparently. A lot more than I previously thought.

And to make things worse, this contingent of eager buyers is fighting over an ever-shrinking pool of inventory, thus the bidding wars and the price declines dragging on for ages. This is the intent of the banks and the government, and it appears that is the way it will remain.

I certainly don't have the answers and anyone who claims to (especially those who earn a commission to) is full of brown. You hear me? FULL OF BROWN.

But all of the data I'm looking at indicates So Cal house prices won't be on the way up for a long, long time. On the other hand, it's increasingly unclear how much lower prices will go and how quickly. So what now? Just sit here in limbo?

Look, just as I think the constant bottom calling is absurd, I think it's foolish to wait for skyrocketing interest rates, 40% unemployment, or a fire hose of inventory to suddenly be turned on. The only one who can determine if "now is a great time to buy" is you, using rational, time-tested calculations. If you're paying close to what you would it would cost to rent the same place, if your debt-to-income ratio is within traditional bank-determined parameters*, you plan on being there for a long time, and you love it...well, shit, are you waiting for a sign from the heavens? Do it!

But if not, then don't worry about it. The irrational (and wholly misguided, according to the evience) fear of being "priced out of the market...again" is gripping the market. Don't succumb to it. If the numbers don't work, keep saving, stay sharp, listen to both sides of the issues, and most importantly...good luck.

*Front End Debt-to-Income: gross annual salary X .28 / 12 months = maximum monthly payment (yes, including HOA).


  1. Great post. You pretty much nailed my wife and I. We have the neighborhood we love (Carroll Park area) and have a sizable down payment (and income). We're just waiting for a listing and a price that makes sense.

    BTW heres a WTF for ya.

    Backup offers accepted. On RedFin for 7 days. A 823 sqft shack on a 2500 sqft lot going for $659 /sqft. WTF?!?!?!

  2. For the record everybody, I nailed THE SITUATION Eddie and his wife are in. Lest there be any confusion.

    Backup offers don't impress me much, just as super low prices on short sales hardly register. But, although the price on that St. Joseph house is OUTRAGEOUS, it is in a killer neighborhood.

    Wait, what the heck? Now it's off the market! In the few minutes I was looking at it, it disappeared.

  3. um, did I say you nailed my wife and I?!? WTF?!?!?!


  4. With FHA in play, the downpayment question is a moot point. Just about anyone can put together 3.5% in a few months (and, actually, get most of it back at tax time next year).

    What I don't understand is how people are actually qualifying for WTF monthly payments (especially with such low down payments) under new lending laws. My husband and I are the fabled "doctor-lawyer couple" that all the sellers and realtors are supposed to drool over. But guess what? We're young, and that means we have HELLA student loan debt. We looked briefly into buying, but Wells Fargo thinks students loans (despite their ridiculously low rates and flexible repayment schedules) are the equivalent of owing Master Card at the moment and (even with sterling credit and a good sized downpayment and reserves) wouldn't approve us for a monthly payment that was less than our rent. It's a weird system out there--I have to wonder who's actually winning (because someone has to be). I would, however, argue that the fact that the young doctor-lawyer couple can't get a mortgage is REALLY BAD news for people with overpriced condos--we're their dream market.

  5. Anon,

    That's a great point about FHA. But you're also correct that a lower down payment equates to a humongous monthly nut.

    I seriously don't know how people are doing it.

    And I'm sorry to hear about you and your husband's situation. You're right though that the atty/doc couple is the target demo for these luxury condos. And I always ask myself how many of those couples can possibly be out there.

    But if those dream couples are unable to get financing (due to loans commonly associated with those professions) then you really have to wonder who the hell are these buyers?

    Inheritance recipients?

    Lottery winners?

  6. Good questions all, and the point being to steel ourselves in this ongoing trying time. Inventory is coming off the market- mostly because of sellers trying to wait until things recover. has an ongoing series of blogs about the coming Tsunami of Alt-A and option ARM resets that won't even start till late fall 2009 and won't peak until 2011 (over 600,000 in California alone). If there is "shadow inventory" now, if he (and many others) are correct, things are going to be getting REALLY ugly in a couple of years. He therefore estimates that bottom won't be in till 2012. If this is all true, I think he's optimistic, since it usually takes 6 months- 1 year for late payments to become foreclosures. Then for how long they will sit at the bank?

    Wait if you can, things will only get better the more time that passes. This was the mother of all housing bubbles. It's going to be the mother of all housing bubble deflations as well, and it's going to just take a lot longer to get things sorted out.

  7. The unknown problem in Long Beach is how many people refinanced beyond their means and are now holding off foreclosure. You won't know that until there is a direct relationship from NOD to REO. As long as the gvmt, banks, and the legal process keeps slowing them down you won't know the true situation. It is the summer selling season with a reduced inventory of home at "real" prices. They are supposed to change the mark to market accounting rules this month. Give it till January and then lets see if you feel the same way.

  8. We were really disappointed... right up to the point that we realized that the rental market crashed even harder than the housing market. We snagged an ocean-view condo for, oh, 50 FREAKING PERCENT LESS than the monthly payment (assuming 20% down) on the comparable units in the building for sale.

    But don't mind us--we're just deadbeats throwing money away. :)

  9. good stuff... we just sold our house in LB in 3 days of listing with multiple offers... some were fha and they were reaching for their affordability ceiling, while several conventional buyers bid up and we accepted an offer. we bought in '99 and I don't want to pass up the bubble equity we accrued... we'll be renting over the next year or 2 to see how it plays out... gl all

  10. Anon,

    Congrats! Sounds like you played it right and weren't too greedy. Nice to hear success stories.