weblog/wEssays     archives     home
 

Stories from the Front Lines of the Housing Bust   (November 1, 2006)


Let's start with a "ground zero" report from astute reader David S. in Florida:

I'm at ground zero here in SW Florida and I have personally seen dozens of mostly empty subdivisions within a 25 mile radius. This mess is going to end up worse than ugly, with the end result a bad recession if not depression. One thing that really disguises the current huge drop in sales price is the misuse of MEDIAN price to reflect price drops.

I'm sure you know that the median price is irrelevant in depicting real price decreases, but the MSM is so ignorant to what this figure actually represents (midpoint of price people are paying) nothing at all to do with current individual home prices. I know this is masking the real situation to the majority of the public and I feel this is a HUGE disservice to the potential buyers out there. It amazes me the way almost everyone I talk to uses this as a gauge of current value.

Median price only reflects the midpoint of what people are paying, not how much house they got for that price. The media presents it as though they are comparing equal homes. Example would be the median fell 4% but what you don't see is that for that 4% drop they also got much more square footage,better amenities, closing costs paid, etc....

To sum up, even though they report that prices fell say 4%, in actuality and from what I'm seeing, the prices on homes that are selling in this area have dropped by more than 20%. But you talk to locals and they believe prices only fell 4%.
Thank you, David, for highlighting the inadequacies of "median home prices." (Sharp-eyed reader Anton S. pointed out my confusion of "median" and "mean". I had written "This number can also be skewed by a handful of very expensive sales, which effectively raise the median price." As Anton observes: "Mean price is skewed by a handful of expensive sales, Median is NOT, and thus it is a preferred 'average'.")


chart courtesy of Michael Goodfellow


Next up, a report from knowledgeable reader Todd N. in southern California:

In your latest piece you write, "Let you imagine that I have made up the first stair down..." and then quote the LA Times piece from Friday. Here's another bit of evidence: builders offering $100,000 off if you close by the end of the year.

My family went down to San Clemente, CA, this weekend to look at some houses in an area we adore - but feel are over-priced by 2-3x.

Pulte Homes: Sabella At Talega (San Clemente)

The first words out of the greeters mouth when we walked into the welcome center was, "Have you heard about our $100,000 promotion?" Apparently business is so bad they're offering $100,000 "discount" off any home within the development if you close by the end of the year.

I was quite shocked at two things: First, this is a 10-15% drop in price for most of the home. Second, that was her greeting. She wasted no time in getting right to discounts. No attempt at selling us on the location, the homes, etc. Straight to the discount.

From previous visits I knew they were expecting to build 77 homes in the neighborhood. In April 2006 their goal was to complete all 3 phases by Nov of this year. Phase 1 is complete (25 homes, 3 of which are models) and construction on Phase 2 will be completed in March. Phase 3 hasn't been scheduled yet! Of the 22 homes for sale in Phase 1, 10 are still available after > 6 months in what was still a relatively hot SoCal market.

As we left I told my wife when they got around to offering $400,000 discounts we'd consider making an offer. For now we're content with our Year 2000 Just-Before-The-Bubble townhome.

Step 2 of your 39 is right around the corner...
Thank you, Todd, for this frontline report on the "$100,000 discount"--a number I have heard in other first-hand accounts from the overbuilt areas around Sacramento. (And such a nice round number it is, too.) Please see the October 30 entry "39 Steps" for background--the link to October entries is at the bottom of this column.

Frequent contributor Michael Goodfellow sent in these links to excellent charts of the housing bubble here in the U.S.:

California Housing Prices

Inflation-adjusted Housing Prices (U.S.)

100-Year History of Housing Prices


And just in case you missed the rise of non-performing loans even as lenders rush to loosen already absurdly risky lending standards, here's a piece from the Wall Street Journal:

More Home Loans Go Sour Though New Data Show Rising Delinquencies, Lenders Continue to Loosen Mortgage Standards

I have firsthand knowledge of just how pervasive low lending standards have become. A friend of ours recently obtained a mortgage from Bank of America--presumably a lender with much higher standards than the subprime lenders we hear so much about. The loan amount was substantial--above $500,000--and my friend is self-employed--a situation which basically begs for tax returns or other verification of income.

So how much documentation does the cautious, careful Bank of America require for this mega-mortgage from a self-employed borrower? Nada. Zip. Zero. They did obtain a credit report, but that was all. My friend didn't even have to pay a visit to the loan officer. A few emails zipped back and forth and the Bank coughed up well over $500K--and threw in a $150,000 equity line of credit, just for good measure.

If this isn't analogous to Japan at the peak of their bubble, when lenders were throwing wads of cash at virtually anyone willing to sign on the dotted line, then what is?


For more on this subject and a wide array of other topics, please visit my weblog.

                                                           


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.

                                                           


 
  weblog/wEssays     home