SF Bay Area Housing Crash Continues
Entire US Real Estate Market Falling
Why?
1. Prices disconnected from fundamentals. House prices are far beyond
any historically known relationship to rents or salaries. Rents are less
than half of mortgage payments. Salaries cannot cover mortgages except in
the very short term, by using adjustable interest-only loans.
2. Interest rates going back up. When rates go from 5% to 7%, that's a
40% increase in the amount of interest a buyer has to pay. House prices
must drop proportionately to compensate.
82% of recent Bay Area loans are adjustable, not fixed. This means a
big hit to the finances of many owners every time interest rates go up, and
this will only get worse as more adjustable rate mortgages (ARMs) get
adjusted upward.
3. A flood of risky "home equity loans". An adjustable-interest home
equity loan is often a serious mistake. These loans do not have defined
limits on interest demands. When the interest rate adjusts upward, it can
double monthly payments.
4. Massive job loss. More than 300,000 jobs are gone from Bay Area
since the dot-com bubble popped. This is the worst percentage job loss in
the last 60 years. It's worse than Detroit car problems or Houston's oil
bust. People without jobs do not buy houses and owners without jobs may
lose the house they are in. Even the threat of losing a job inhibits house
purchases. Santa Clara County posted its fourth straight year of job losses
in 2005, so it's not over yet.
5. Salary declines. From
http://www.mccallstaffing.com/need/needsal.html we hear that "salaries have
in fact returned to 1997 and 1998 levels." Local incomes are not even half
of what they need to be to sustain current house prices.
6. Population loss. San Francisco continues to lose population at the
fastest rate of any city in the US and most of those are professional jobs.
The problem is not only the dot-com crash, but also the outsourcing
technical jobs to India, which continues at a frantic pace as corporations
realize they can pay an Indian only 20% of what they must pay a similarly
qualified employee in the Bay Area. Fewer people in the Bay Area means less
demand for housing. It recently (Aug 2005) cost $3623 to rent a UHaul from
San Jose to the midwest, but only $1800 to move the other way. This is
because far more people are moving out of the Bay Area than are moving in.
7. Stock market crash. The NASDAQ at about 2000 is still only 40% of
the 5000 it was at the peak of the recent stock market bubble. The crash in
the NASDAQ probably hit the Bay Area harder than anywhere else because of
all the stock held by employees of tech companies. That money would have
been spent on housing, but is now gone.
8. Extreme use of leverage. Leverage means using debt to amplify gain.
Most people forget that losses get amplified as well. If a buyer puts 10%
down and the house goes down 10%, he has lost 100% of his money on paper.
If he has to sell due to job loss, he's bankrupt in the real world. Even a
small price decline will bankrupt buyers with small equity. Buyers foolish
enough to buy with no money down are already bankrupt, but still unaware of
the fact.
9. Shortage of first-time buyers. According to the California
Association of Realtors, the percentage of Bay Area buyers who could afford
a median-price house in the region plunged from 20 percent in July 2003 to
14 percent in July 2004. Strangely, the CAR then reported that
affordability fell another 4 percent in 2005, yet claims affordability is
still at 14%.
10. Surplus of speculators. Nationally, 25% of houses bought in 2005
were pure speculation, not houses to live in. It is now possible to buy a
house with 103% financing. The extra 3% is to cover closing costs, so the
buyer needs no money down. All this is on the unwise assumption that
housing will rise ever higher, covering interest payments through
appreciation. Even the National Association of House Builders admits that
"Investor-driven price appreciation looms over some housing markets."
11. Lightbulbs going on in many brains in the Bay Area: "Hey, I can just
go to New Mexico or Oregon, buy a gorgeous house outright, and comfortably
retire on the price difference. My neighbors just did it, so I'll have
friends there too."
12. Trouble at Fannie Mae and Freddie Mac. They are now being forced to
tighten up sloppy lending. This means they are not going to keep buying
very low-quality loans from banks, and the total money available for buying
houses is falling.
13. The best summary explanation, from Business Week: "Today's housing
prices are predicated on an impossible combination: the strong growth in
income and asset values of a strong economy, plus the ultra-low rates of a
weak economy. Either the economy's long-term prospects will get worse or
rates will rise. In either scenario, housing will weaken. Caveat emptor."
full: http://patrick.net/housing/crash.html
--
www.marxmail.org
