This article by Berkland is the best I've seen yet! PLEASE READ, complete overview of California Real Estate.Population loss: The cost of housing is so high that people are leaving in droves, moving inland. This is great news for us. The Antelope Valley is the inland there talking about. Just look around and see the massive Commercial and Industrial growth were seeing here in the Antelope Valley . Great news! Lot 's of jobs and I mean lots of jobs! Just about any home under $300,000 is moving and seeing in many cases multiple offers. Please remember Frank & Fidelity Title, were here to serve you with great serviceJ
Sick and tired of inaccurate housing reports, Schahrzad Berkland started The Berkland Group, a consulting firm which provides straight talk about the Southern California housing market. You can see Schahrzad's housing forecasts on californiahousingforecast.com.
Thank you for taking time to complete this interview, Schahrzad. We are very excited to share your views and data on housing with our readers. Can you let everyone know how long you have followed the housing market in Southern California ?
Since October of 2005.
In your opinion, what are the biggest problems in the So Cal housing market right now?
- Excess prices and risky loans: CA's prices are far removed from their fundamentals of wage and rent multiples. A large percentage of the population lives in California , and the banks are very exposed to CA real estate--so there is a lot of paper profits and risky bank loans, whose collapse will ripple through the entire country.
- Wages: Salaries here are not high enough to truly afford the homes, so in CA we resorted to risky financing. In San Diego , 68 percent of all mortgages in 2005 and 2006 were IO or ARMs. People cannot afford their homes, so they are renting them from the bank, thinking they own them. This is happening in California more than anywhere else, which means the dollar amounts involved in overpriced homes and loans-about-to-go-bad is so much higher. For this reason, California is where you'll find the most risky loans, the highest mortgage equity withdrawal, and the greatest impact of all that consumer spending from the housing ATM.
- Population loss: The cost of housing is so high that people are leaving in droves, moving inland or to cheaper states. (See #1 below.)
- Job growth: Employment growth is too dependent on real estate.
- Looming foreclosure crisis: With no skin in the game, people in foreclosure now are not even listing their homes for sale. They don't even have 6 percent equity to hire a realtor. So they live rent free for 7 - 9 months until evicted after auction. Foreclosures will go through 2 waves through 2012. For more info, see the chart on my homepage: californiahousingforecast.com
Some recently published news stories have lead readers to believe that wealthier neighborhoods in California are not experiencing the same housing market issues as other nighborhoods. Are the problems really limited to a specific group of people, i.e. the poor to middle class?
Even the wealthy are in over their heads, with rising property tax liens, cash-out refinancing, and foreclosures. I'll just give you one example of each. In Maderas golf course community, where some of the Padres players live, we've got a half dozen 2004 tax liens on $2 - $3 million homes. A guy on the water in Encinitas took out a $1 mil HELOC last year...
I go through hundreds of listings through the MLS, foreclosure.com, and ForeclosureRadar.com. One thing is clear: the more expensive the home, the more cash was taken out. It is rare to see anyone who abstained from the housing ATM. Last, foreclosures are rising all over the city. While they are highest in new subdivisions (because you had entire communities who got 100 percent financing at the peak of the market with short-term teaser rate loans that are resetting), they are rising in middle and upper income areas too.
Is there anyone in particular to blame for these problems?
The Federal Reserve created and nurtured the housing bubble. They ignored all the Homeowner Relief Acts and other banking legislation, all predatory lending guidelines. They wanted the stimulus of cash-out refinancing, to avoid a recession in 2001 from getting worse. So who knows what they have in store for an encore. Just like the housing bubble covered up the stock bubble collapse, what is the next bubble? The Fed is printing money at 10 percent per year, creating high inflation is anything that is not imported from Asia . So consumer goods are cheap, but prices are rising for US services like education, healthcare, oil, and food. What's next?
Do you think what we are seeing now is normal bubble behavior? For example, do you think the current bubble in California is similar to the housing bubble that occurred in Japan ?
I have not studied Japan , but Dr. John Talbott discusses this in his book Sell Now. Their prices kept going up, but then reached a maximum when their elderly population reached 12 percent of the total. Also, Japan 's Ministry of Finance didn't want the banks to write off all their bad mortgage loans, so they kept it covered up, letting the losses be offset by income over a 10 year period. With all those losses to cover, banks had to be more conservative, and lending really dried up. Too much saving means low consumer spending.
Do you see the same thing happening in California ?
CA economy will stall as cash out refis dry up, property tax and sales tax falls. House prices will fall further once reality sets in after the recession is realized. We are already in a recession, but it is not yet reported in the media. Q1 GDP growth for US was 0.6 percent. This quarter could be well negative already.
Can the Fed balance everything out?
The Fed will panic and lower interest rates. They will do the wrong thing. They don't want to learn anything or make a long-term solution. I am sure they are terrified of a banking crisis and credit crunch, as our entire economy is addicted to ever rising access to credit. If you take away credit cards from Americans, our economy will melt down immediately. People just don't have money from their productivity or savings to even pay their basic living expenses. So the Fed is worried, but they won't learn a thing. They will just keep printing money at 10 percent a year and create another asset bubble.
Remember, the Fed is not a government agency, but a consortium of private banks. This would be a good research project for a media organization: who are the shareholders of the private banks making up the Fed, and what is their mission? The Fed is operating outside the Constitution. Our Founding Fathers explicitly stated that only gold and silver could be legal tender, because they had used paper money before and it caused such severe depressions that they did not want us to go through that again. So the interests of the shareholders of these huge banks, which by the way is secret (nobody knows who they are), are not aligned with the interests of the American citizen...so they will do what makes them richer.
So the right thing to do is...?
The right thing to do is stop printing so much money, and only spend what we earn. We have to pay down our debt and stop making entitlement promises that cannot be kept.
There are optimists who think Southern California will defy the housing downturn because the area is such a desirable place to live. What do you think of this view?
Two things:
One: CA has always been desirable, but just because people want something doesn't mean they can afford it. After all, if it's so desirable, why are people leaving in droves? CA houses now cost over twice as much as they used to compared to salaries. Despite all that exotic financing, people are simply priced out. Wages have not kept up. So people are voting with their feet, and walking away from 'desirable CA'. So they are leaving high-priced cities in CA in droves. Last year, per the US Census Dept, 40,000 people left San Diego , 229,000 left LA, 42,000 left San Francisco , 6,800 people left Santa Barbara , and 8,400 left Ventura County . In contrast, 63,000 moved to the Inland Empire last year.
I have a good one for you: whiskey is so desirable among alcoholics, that grocers can charge whatever they want...people will pay it. Guess what! Alcoholics switch to wine or tequila or beer. So people only pay what they can afford or are willing to pay, and then they switch products. In the case of housing, they buy a house in Kansas . My realtor friend was showing 5 houses one weekend, and every seller was planning to leave and buy a mansion with his CA sale proceeds, in a cheaper place.
Two: Stricter lending puts a cap on what people can pay. That forces prices down. People are getting turned away by lenders, so they can't buy, even if they want to. Now we have lower demand as buyers are priced out, turned away by lenders, or leaving the area. So sales are way down. To make matters worse, sellers keep adding more homes for sale. Foreclosures are projected through 2012, so we're going to have lots of homes for sale for many years to come.
If half of all buyers could get $600,000 loans with no money down, but now half of all buyers can only get $250,000 loans because they need a down payment, anyone who wants to sell must lower their price down to that $250,000 level. So prices will need to drop to the point where a teacher can buy a small single family home on 2.5x her income.
Exactly how far do you think prices will drop in each of the following counties: Los Angeles , Orange , San Diego , and San Bernardino ?
Prices will fall in half. We'll go back to 1999 prices. It could be worse. Don't be surprised by my statement. Let's just look at what happened in the 1980s and 1990's downturns. It's easy enough to look up at the County Recorder Office, or on the MLS, but neither the County Recorder , nor the realtors, wants to advertise the ugly truth: CA has 15 year housing cycles and prices fall 30 percent to 50 percent in a downturn.
I have many examples. I'm talking about homes in Laguna Niguel, Encinitas , Del Mar, La Jolla, Poway, Pacific Palisades .....the most desirable properties, which are still rising now by the way, fell 40 percent in the last downturn. The media needs to start asking realtors this tough question: 'How much did superior properties fall in the last housing downturn?' When I posed this question on a Carlsbad realtor's blog, he blocked my internet address.
So it's not a question of what I think will happen to prices. It's a matter of fact what actually does happen to prices. History tells us.
Your estimates probably aren't far off from what many people think, but they are quite a bit different than the estimates presented in the media. Is there something they're not telling us?
Nobody is going to give you the straight scoop on CA's housing bubbles. Realtors and mortgage brokers need their commissions; journalists are English majors and don't even have access to the MLS so they rely on realtor salesspeak; economists are paid by governments or investment banks so they have to keep quiet; and local municipalities try to promote growth of their region.
Gregory Smith, the San Diego County Assessor, is promoting real estate purchases...he's encouraging more fools to enter the pyramid scheme. This housing market is in a bubble, and no public official should be encouraging anybody to buy homes right now. Of course, he might be worried about falling property tax revenue, but the rising tax default rates are worse in the long run. In the 1990's, our property tax default rate was near 5 percent. This time housing prices climbed much higher.
There has been talk of a recession caused by housing, but for the most part, the mainstream media has been quoting economists who don't think there will be a recession. Is this another case of not getting the straight scoop or are economists optimistic for the most part?
Economist Dr. Dean Baker wrote that economists never predict a recession, saying 'I happened to get a copy of the Blue Chip top 50 forecasters' projections for 2001, dated Sept. 2000. Not one forecaster in this group projected a recession. In fact, the lowest growth projected by any of them for 2001 was 2.4 percent. Keep in mind, the stock market had already begun to unravel at that point, so it shouldn't have been too hard to imagine that there would be some economic impact.'
What about median home price tracking-a method most media outlets use to report the market? You mention on your website, californiahousingforecast.com, that median prices, average prices, and $/sq ft measurements are useless indicators of what is really going on in the market. Can you tell us why?
The median, average, and $/sq ft measure the prices of homes which sold that particular month. First time buyers are priced out, or they can't qualify for a loan, so now we have fewer cheap homes selling. The snapshot of sold homes has really changed. How can we measure the median or average price of a basket of produce when one month people are buying mainly apples, and the next month they are buying mainly mangoes and blueberries? We can't! The high end homes are 50 percent more of the market, so they are skewing the data up. They used to be around 6 percent of sales, and are now around 9 percent of sales.
The $/sq ft is falling for the same reason that the median is going up. I know that sounds backwards, but it's correct as written. Remember, our sales mix has a smaller portion of starter homes now. The low end is priced out and can't get loans. The rich are still buying, so they are skewing all the data.
Big homes cost a lot less per square foot, because land is a fixed cost and due to economies of scale. A 1000 sq ft house is $400/sq ft, while a 3000 sq ft house is $300/sq ft. See what happens when you have more homes at $300/sq ft? The $/sq ft goes down when you sell more big homes. So we are measuring the distribution mix again. Some people think they are analysts, because they see a number go down and jump to the conclusion they finally found a way to measure the price drops. This is why I scolded Rich Toscano publicly. You may know, or not, that I emailed him privately several times before going public. But anyway, it's a distribution number.
Here's another problem: any method which uses sold homes to measure the prices of all homes, will always be wrong. You cannot know the price of a house that didn't sell, because it has not sold yet. And in this market the homes that didn't sell will have to be severely discounted. So you can't know the price of homes not on the market, or those languishing on the market, based on those that sold. The homes that sold are the cream of the crop.
How can you know the price of the 2000 sq ft house on the highway that ain't gonna sell in this market where buyers have a ton of choices, based on the price of the 2000 sq ft house with a stunning kitchen, next to a park in the beautiful subdivision down the street? They are both 2000 sq ft homes, on the same size lot. The buyers are going for the good one, and leaving the bad one behind. The spreads between good and bad are getting bigger. Mr. Highway has to take a huge deduction if he wants to sell.
In a hot market, everything sold, so the sales prices accurately reflected the value of the entire market. But in a weak market like we have now, only the good homes sell. So by measuring only the sold homes, now we've shifted our data collection to the good homes. We don't know the value of the bad homes, because they are not selling. If you want to improve the median, then make every homeowner lower his price to the place that his house would sell, and then see how much the median drops.
What about the Office of Federal Housing Enterprise Oversight? They claim that their house price index provides more information and is more accurate than other indices.
The OFHEO index has problems too, which I explained on my site. Just one: it does not measure the huge amount of remodels. Every one of my friends tore out her kitchen or put in a backyard barbeque with those nice Viking outdoor barbeques and refrigerator. Of course the house will sell for more now than 5 years ago! But it's not because housing prices are rising! The OFHEO and Case-Shiller indices are not adjusting for that at all, they can't. They're just using county sales records. So again, the house with the $60,000 kitchen upgrade will sell, but the one next door with original 1980 kitchen will not. So it seems like the housing price is going up, but really you are paying more for that kitchen.
All housing metrics use data from sold homes...so that is a lot cheaper than hiring appraisers to do walk-throughs on thousands of homes. I doubt anyone is going to devise an appraisal methodology. Where is the incentive? Who would pay for it?
The ONLY way to measure housing prices is an appraisal method. Someone needs to design a sample set of homes and appraise them every quarter. The appraiser must do a walk-through appraisal, so he can adjust for remodeling. This would be expensive.
What indicators should investors and the everyday homebuyer be using? Where can they get reliable info?
What people need to do is watch the number of homes listed and sold in their neighborhood. As long as listings are increasing and sales are falling, prices will come down. Only 10 percent of homes are selling, so people who want to sell, have to lower their price, and inevitably, will set the new price for the area.
You can get home sale and listing info from your realtor. Don't let them sweet talk you into buying a home. Insist on knowing this data:
- How low did housing prices fall in the last downturn? You have to see samples of homes which sold in two specific time periods: 1989-1990 and again 1995. There will be some. You need to see those.
- Figure out months supply. Ask your realtor for sales and inventory data for that area. Sales/inventory = months supply. As long as that is above 4, prices have to come down.
- Wait to see how badly the foreclosure wave pummels the market. Do not buy any real estate until the ARM resets are behind us. The bulk of ARM resets ends in 2008, so a one year lag means the highest REOs will be at the end of 2009. You might get a great buy then. But the foreclosure wave will continue, as the prime borrowers hit their resets on their 7 year IO loans in 2011. I am waiting to see how much prices get pummeled after my friends in their $1.5 - $2 million homes have their loans reset. So wait to buy until after the REO wave is over.
When do you think the market in So Cal will finally bottom out?
Not before 2012. CA real estate cycles are 15 years long: 5 - 7 years up, 5 - 7 years down.
There is not one clear month for the top of the housing bubble, since the top happens in waves, starting with the lowest end and working up, over 3 years. Condos peaked in the spring of 2004, single family homes peaked in the spring of 2005, and the prime properties in Carlsbad and on the water are still rising.
How can people watch for the bottom? Or more precisely, how will they know when to buy?
People should keep reading blogs and my forecast. Watch for the foreclosure wave to end, and when panic is high and nobody wants anything to do with real estate, then go in and buy. I bet all the people reading this, who are waiting for prices to drop, won't want to buy once prices have dropped. The people reading blogs are priced out...they are not market timers like me. Some sold and are renting, like me. Many are first time buyers, who are waiting for prices to come down to their comfort level. But those same people will be scared to death to buy after prices have gone in half...foreclosures are everywhere, as they will be afraid of further price drops.
When I see sales pick up after the foreclosure wave is finished, then it' time to buy. Look for the market to completely wither and die, and then start showing signs of life.
On the other side of the coin, what can sellers do to avoid losing their shirts?
Sellers are hurting themselves with false pride. They really need to look at the comps and go look at other homes in their price range. They'll find they are overpriced, and their home won't sell. When they are overpriced, they won't even get anybody to come through the door to look at the home. So no traffic means no sale. If you can't get traffic, how can you sell? If every seller would lower their price by 10 percent to get to where they need to be, they could have a chance at selling their homes.
Thanks for the info Frank Donato
Comments(0)