October 16, 2007

Housing Reality: $1.2 trillion lost already, $4 trillion more next year, builders walking away, foreclosures, bankruptcies and a historic crash

It should all be coming so clear now for Americans. The NAR may keep spinning, realtors on commission may keep lying, The Worst President Ever may keep quiet, and Wall Street may keep there head in the sand (or not).

But when it comes to the US housing market, an epic collapse is underway. And we're just getting started.

If you haven't sold your home yet, and you want to preserve any of your equity, sell now, sell at any price, and rent. If you bought at the peak and are already underwater, just walk away. Stop making payments, preserve your cash, and prepare for foreclosure. And if you're renting, keep renting. This crash will take years until we see bottom. Buy again when it's cheaper to "own" than "rent".

What happened to housing around the world these past few years was a classic financial mania, fueled by historic leverage and massive speculation. The market will take care of itself and wash away its sins. It hath been foretold.

Builders Giving Up On The Sinking Market

In California, where developers have been racing to turn farmers' fields into subdivisions, they're now walking away, leaving houses partially built.

Those who have already moved in wondering what will hit next.

“I'm concerned that once the weather starts getting bad, there's tile piled on the roof that could just fly off,” homeowner Marius Gieske told CBS News correspondent John Blackstone.

Dunmore Homes had building projects in a dozen California communities from Bakersfield to Yuba City. Now it’s halted work everywhere, giving up on a fast-falling market.

“We couldn't sell a moving target,” said John Slaughter, vice president of construction and operations for Dunsmoor Homes. “What we wanted to do is stop.”

That moving target, collapsing house prices, has already cut $1.2 trillion from the value of American homes. And the losses are mounting, going to $4 trillion by one estimate, by the end of next year.

25 comments:

Anonymous said...

GOOD!!!

westwest888 said...

Keith,

I manage to avoid most advertisements on network TV and other "public airwaves", but I've seriously heard about half a dozen ads from the NAR about how it's a great time to buy. There's this soothing voice that talks about choices and low rates. wth? They're littering the airwaves with their joke campaign. Sadly, not everyone knows how to use the internets and trusts anyone with enough money to buy air time.

Anonymous said...

Dear Editor (just sent!):

The subprime/ adjustable/ HELOC/ ALT-A and other mortgage schemes have an estimate loss of 2.8-4.0 trillion dollars (see below). Today, only a few banks and mortgage companies have reported losses of some 20 billion dollars (see below). The vast majority of these crazy loans (that never should have been made) will not reset until 2008. For comparison, the entire loss for S&L crisis was $150 Billion in 1988 dollars (see below). We are in the 1st inning of a massive write down of wealth that will affect nearly every aspect of financial life.

Consumer spending is 70% of our economy. For the last 5 years this has been greatly driven by these housing bubble and by people taking out Home Equity Loans on their ever increasing house equity to buy stuff. This has now come to a screeching halt.

The music has stopped. In fact - we are going in the exact opposite direction. I expect, on average, houses to lose 50% of their value from peak. Now imagine how that will affect the economy. Add in oil at near historical highs, the stock market at historic highs, gold at near historical highs, the dollar at historic lows and long term interest rates moving higher – something has got to give.

Regards,

Marky Mark


--------------------------------
Builders Giving Up On The Sinking Market In California, Developers Leaving Behind Housing Projects — And Their Tenants

http://www.cbsnews.com/stories/2007/10/10/eveningnews/main3355299.shtml


That moving target, collapsing house prices, has already cut $1.2 trillion from the value of American homes. And the losses are mounting, going to $4 trillion by one estimate, by the end of next year.

-----------------------------

http://www.truthout.org/docs_2006/091107R.shtml
Recession Time! The Housing Bubble Bursts the Economy
By Dean Baker

Subprime mortgages accounted for one-fourth of all mortgages issued in 2006. The equally troubled Alt-A mortgage category accounted for another 15 percent. With segments that account for 40 percent of the mortgage market going into convulsion, there was no way that the housing market as a whole would not be affected. Of course, record supplies of unsold new homes and vacant homes also ensured that there would be substantial downward pressure on house prices.

However, the direct impact on the housing sector is just the tip of the iceberg. The housing bubble created more than $7 trillion in housing wealth. Homeowners have used this bubble wealth to support a surge in consumption over the last five years, pushing the saving rate to near zero. They borrowed against their home equity to pay for vacations, new cars, or just to meet necessary expenses. As this bubble wealth disappears, consumption of all forms will be cut back, slowing growth and leading to more job losses.


40% x $7 trillion = minimum of $2.8 trillion in losses


---------------

Bank of America, JPMorgan face $3B hit - report Combined loss would bring total writedowns from subprime-related securities to $20 billion, says the Financial Times.
October 8 2007: 6:55 PM EDT
http://money.cnn.com/2007/10/08/news/companies/banks/index.htm?source=yahoo_quote

NEW YORK (CNNMoney.com) -- Bank of America and JPMorgan Chase are thought to be on the verge of announcing combined losses of $3 billion from mortgage-backed securities and leveraged loans when they report third-quarter earnings this month, according to a news report today.
The announcements would bring total losses at the world's leading banks from subprime-related assets to $20 billion, said the Financial Times.
JPMorgan (Charts, Fortune 500) is expected to announce losses on leveraged loans of $1.4 billion, Sanford Bernstein analyst Howard Mason said in the report.

---------------
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis
The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."[1] The ultimate cost of the crisis is estimated to have totaled around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large budget deficits of the early 1990s. The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession.

Anonymous said...

>> Buy again when it's cheaper to "own" than "rent".

I did, and it is, about 2 weeks ago, in a non-bubble area.

Anonymous said...

Keith,

You are the Master of Hyperbole and generalization. If you "own" a home in a non-bubble market that never experienced the crazy recurring double-digit annual appreciation, you bought a home at a reasonable price (say, $60-80 per square foot), and you like your house and where you live, there is no justification for selling, period. I bought my house in Dec. 2004 for far less than it cost to build it. We plan to stay in the home for anywhere between 10 and 20 years. I have about 41% equity in the house right now. The value of my house isn't going to plunge - it was reasonably priced to begin with. For me to lose money on my house, the value would have to drop to $62 per square foot for a very nice, custom home. It would cost double that to duplicate it today. If we did sell our house now, we would end up spending just as much on something else - either in rent, or monthly P.I.T.I.

While your suggestions may make sense for the majority of people, you should qualify your advice rather than making blanket statements. There are still pockets of the country and unique situations where it really makes no sense for a homeowner to sell now.

panicearly said...

REALITY CHECK anyone?
http://www.cnbc.com/id/20094014
In answer to the question: “How worried are you that you will have difficulty making your mortgage payments over the next year?” Eight percent answered, “Very worried”, 7% “Fairly worried,” but 66% “Not worried at all.” Now the 15% that were worried was up from 9% in a 2001 poll, but still, it’s not that much, given everything we’ve been talking about with the subprime crisis and all the resetting adjustable rate mortgages.

------
Polling JoeSixPack

Eric - All-State Housing said...

I agree that it is only going to get worse before it gets better. That doesn't mean there aren't areas that are stable or even growing so I believe you are being a little to general in your overall outlook on the market.

Places like most of California need a correction and the market has seen "similar" corrections in the past. Anyone who has been involved in Real Estate for a long time has experienced the ups and downs.

Were we both agree on 100% is that purchasing traditionally is a big risk right in a lot of areas since your home will most likely be worth less next year than it is right now. That is why my approach is so appealing right now and while most of the real estate industry is all doom and gloom I am booming and helping hundreds of buyers and sellers across the US.

Nice informative blog! Definitely will be checking in from time to time.

Eric West
No Down Payment, No Qualifying, No Credit Check
http://allstatehousing.blogspot.com

Anonymous said...

Foreclosed families abandon pets in repossessed homes in SW Florida. It's not just about flippers and speculators anymore. It's real people being tossed out of their homes, and Fido gets the short end of the stick.
http://www.youtube.com/watch?v=2exOP2Fa45w

Anonymous said...

...and after trillion comes quadrillion.

bob said...

If you bought at the peak and are already underwater, just walk away. Stop making payments, preserve your cash, and prepare for foreclosure... Buy again when it's cheaper to "own" than "rent".

Oooooh, I love the appeal to personal responsibility!

I also like the idea that you will be able to "walk away", keep any cash at all, and ever get credit to buy anything again - right! That'll happen!

Remember, the test has gone *way* up from "fog the mirror".

Someone may some day give you a credit card at 30%, though.

I bought in 11/2005, with fixed rate mortgages I can afford. Yes, I'm one of those terrible people who did a piggy-back loan, fixed rate, though. I may be upside down now, after commissions and fees anyhow, as I only had 5% down. Should I just walk away?

Knowing what I know now, 11/2005 was not the time to buy. Unfortunately I was not very savvy. But markets are local and not everybody is going to lose 50% or whatever it is you think they will lose. Panic selling into a panic is not the way to save money everywhere.

Also, if the dollar is going to hell and hyper-inflation is coming, what happens to *rent*? Have fun thinking about that....

LisaK said...

I now have two auctions on my list to attend. Here's hoping I can get a steal... both homes are "fixer-uppers" to one degree or another -- but at the prices we're willing to pay, more than reasonable (one at $150,000 for a 2600 square foot home, the other one $250,000 for 4,000 sq. ft. home, plus 3 acres, plus 10-car garage and a guest house...

Yeah, that would be better than keeping my family of 6 in our 900 sq. ft., partially-finished rental!

You're talking 1996 prices for both of those! For once in our lives we'd be "house rich."

Maybe I'll be one of the lucky ones and the only one to show up! After 5 years in the basement due to a way over-inflated market, it would be like winning the lottery.

And what the heck do you do with a 3,500 square foot garage?

Anonymous said...

Hmmm....I wonder if the people wo were polled were the same people in that recent survey who are confident that prices will go up. OR I wonder if those are the same people in the CNN Money poll who don't know how their current ARM works and what it can adjust to.

People are by and large financial morons unfortunately. Why should they be worried about not being able to make their payments in 2 years.

LisaK said...

I'm hoping we get "lucky" during this panic.

After spending 5 years in a 900 sq.ft. partially-finished basement, due to an over-inflated market (even though our income was going up rapidly -- it wasn't 20% a year like the market!).

Now, the are bubble has burst, and we're now on the "auction" trail. Sure, the homes may be fixer-uppers, but if only one or two people are showing up at many of these auctions, my odds are pretty good that I can walk away with an incredible bargain.

One of the homes is 2600 square feet, the other is 3,500 square feet, both with finished basements, attached garages, etc.
One is in a nice established neighborhood -- and the other is on 3 acres. The house with 3 acres has a 10 car garage on-site, plus a guest-house and pool.

What does one do with a 10 car garage? I suppose it could be an indoor rollerblading or biking area during rainy days for my 4 children.

Here's hoping, that the bubble will work FOR me and I can get my family OUT of the basement and keep some cash in my pocket to boot!

bob said...

“We couldn't sell a moving target,” said John Slaughter, vice president of construction and operations for Dunsmoor Homes. “What we wanted to do is stop.”


Shit, it's about time, ya think?

Tangelo Mozilo said...

Bob said . . .

"Also, if the dollar is going to hell and hyper-inflation is coming, what happens to *rent*? Have fun thinking about that...."

------------------

Rent won't go any higher than people can afford. Landlords need to fill their buildings.

Also, considering the number of empty houses sitting around and condo conversions coming online, I expect it to fall significantly here in D.C., at least relative to incomes.

Anonymous said...

Sadly, not everyone knows how to use the internets and trusts anyone with enough money to buy air time.

October 16, 2007 1:25 PM

That is not sad. That is funny.

Anonymous said...

Consheeper maxed out credit cards check. 401K loan maxed out check.
House foreclosed check. Stick your sheep snout into a big pile of blow and check out.. Check.

Anonymous said...

Rent will go down because of supply and demand. There is more housing units than is needed right now. The inflation will be in the form of commodities like metals, energy, and food. Imports will also cost more due to the falling dollar. Think about that.

Anonymous said...

With builders walking away from their projects, those holes that they will leave behind might be the death of us all.

They're called MOSQUITO BREEDERS!

We here in Seattle got our own Olympic-sized swimming pool version in Wallingford where a supermarket once stood, now an abandoned site with a thirty foot deep hole in the ground.

Will fill up every year with enough water for the West Nile virus-baring mosquitos to descend on us like an Old Testament plague.

WE have it coming to us.

King of the Bitter Renters

Anonymous said...

KEITH,

START A THREAD ON THE LOCAL ECONOMIC CONDITIONS OF PEOPLE IN THIS BLOG. FOR EXAMPLE, HERE IN THE INLAND EMPIRE CALIFORNIA IT IS STARTING TO GET VERY BAD. I AM PERSONALLY INTERESTED IN WHAT ITS LIKE IN CITIES ACROSS THE COUNTRY AND THROUGHOUT THE WORLD.
I AM SURE THAT THIS WILL SHOW THE DOUBTERS ON THIS BLOG THAT THE ACTUAL PROBLEM IS WIDESPREAD BEYOND OUR IMAGINATION.

hold the onion rings said...

Reality Check: * * * * * * * * *

15% are worried, and another 10% to 20% SHOULD BE. With Bush still in charge, anything bad (and worse)can happen at any time. You should know that by now. And will.

That extra 10% to 20% are the homeowners that will loose their job(s) over the next 6 to 24 months at the height of the Bush-co economic collapse thats been going on since their 9-11 fake attacks and illegal wars on Afgahnistan, Iraq and America.

Now that 35% which equals aprox 26 million homes x $225,000 ave. =
-$5,850,000,000,0000

(that's -$5.85 trillion)

Funny how our elected officials turn their backs to their dry-drunk crimes, path of destruction and economic recklessness.

How sad to watch our country sink faster and faster each day without a single word of impeachment or prison for the gang of chilling thieves and illegal war profiteering republicans running wild in Washington DC.

Impeachment can be done in ONE DAY.

That's ONE DAY.

But Noooooooooooo!

Our elected officials (both republicans and democrats)think Bush and Cheney are better than Jesus! They love Bush and Cheney!

OMG! We are soooo FU*KED!

><

Out at the peak said...

I checked on my old house that I sold in Oct/Nov 2005. It was just sold two months ago for $80K less than what I sold it for. It must have been a short sale or REO (the buyers had a $50K down payment). I drove by it and it's on the market now (full commission agency). Either some flipper is trying to resell it or the bank is.

I an going to submit an offer for what I paid for it in 2000. That would be an additional $170K loss.

Meanwhile, there is one sign twirler who must be 60 that I see in an intersection every single weekend. He use to have a fancy condo sign, but starting last weekend, the sign is now just a big red arrow with "AUCTION" on it. The minimum bid is $225K (Sonoma Co, CA). They are worth maybe $150K IMHO.

Out at the peak said...

lisak: Good luck.

Hopefully we start seeing auction/REO success stories where people are paying year 2000 or before prices.

Anonymous said...

"That extra 10% to 20% are the homeowners that will loose their job(s) over the next 6 to 24 months at the height of the Bush-co economic collapse thats been going on since their 9-11 fake attacks and illegal wars on Afgahnistan, Iraq and America. "

No one really gives a shit about what you have to say, you tin foil hat moron!

Anonymous said...

>> START A THREAD ON THE LOCAL ECONOMIC CONDITIONS OF PEOPLE IN THIS BLOG. FOR EXAMPLE, HERE IN THE INLAND EMPIRE CALIFORNIA IT IS STARTING TO GET VERY BAD. I AM PERSONALLY INTERESTED IN WHAT ITS LIKE IN CITIES ACROSS THE COUNTRY AND THROUGHOUT THE WORLD.

Why don't you do something a bit more productive, like getting a 2nd job, and stop being "interested" in the demise of other population areas. Better yet, get the hell off this blog - you're wasting precious time.