1. Anonumous Banker on April 18, 2004 02:23 AM writes...

RE: California is headed for a massive real estate crash in the next 12 months and it's inevitable.

California is at the end of its 10-12 year recurring cycle of running up real estate values, and is now due for a correction. However this time, there are factors in play that will act like an accelerant on the decline in California real estate values like nobody's ever seen before.

In a nutshell, here's Why:

Real estate values have been artificially "pumped" up by the presence of interest rates that are at 50+ year lows.

Despite these very low interest rates, records are being set for the number of bankruptcies filed for almost every year of the last three years. See related article at http://www.abiworld.org/Template.cfm?Section=Press_Releases1&CONTENTID=5175&TEMPLATE=/ContentManagement/ContentDisplay.cfm

Increasing foreclosures and REO's are appearing in the same states (Texas, Arizona, Colorado, etc.) that immediately preceded our crash the last time. Foreclosures are up 400% (over 2000) in Dallas Texas per the article here... http://www.zwire.com/site/news.cfm?newsid=10717727&BRD=1426&PAG=461&dept_id=528197&rfi=6

California has a disproportionately high number of 1031 tax deferred exchanges. Consequently, and in order to avoid paying taxes, tens of thousands of real estate investors have allowed themselves to be suckered into buying (i.e., increasingly leveraging into) larger properties that are significantly overvalued.

California still has an ENORMOUS and UNRESOLVED budget crisis

California still has an ENORMOUS and UNRESOLVED energy crisis

If you think records were set for fixed rate mortgage refinancing, you're right. But what you may not know is that the number of homeowners who've taken out Home Equity Lines of Credit (HELOC's) on their homes (ever notice how many people "more" people are driving expensive cars these days despite the cost of gasoline) is far more than the number of people who have locked in low fixed rate mortgages. Keep in mind, ALL HELOC's (and credit card debt) are adjustable! When interest rates rise, these homeowners will get blown out of their homes, and when that happens, their low fixed rate mortgage will disappear (remember, fixed rate loans are not assumable!) and lenders will be happy to lend it out again at a much higher rate. Maybe now you can see why lenders are so happy to give you a HELOC that far easier to qualify for than a regular home loan. And I'll bet you didn't know that in 2001 alone the Prime rate dropped ELEVEN times that year. Imagine what will happen if the Prime Rate increases ELEVEN times in any one year!

The disparity between what it costs to own versus rent the same property has become nonsensical economically. I've heard from too many Californians about the so-called "sunshine tax", the excess amount people are willing to pay to live in California, and how it will always be that way. Well guess what, they're wrong. The only people coming into California are those coming from the south looking for a hand out. Anybody with enough money to rent a truck and leave California is doing exactly it and here's the PROOF!

If you go to Uhaul.com (as of mid-April 2004) and get a one-way quote from Las Vegas, Nevada to San Diego, California for their largest truck, it costs $200, but if you get a quote "leaving" San Diego for Las Vegas, the amount is well over $1,500!, a more than 700% increase! That's because so many of their trucks are leaving the state compared to coming in, that they have to price them for what they have to pay people to retrieve them and bring them back. I checked other cities that I've heard Californians are moving to and the rates all reflect the obvious, that the net migration pattern for San Diego (and likely other parts of California) is that tons of people are leaving! With more people (with assets) leaving the state, and more illegals arriving, in an increasing interest rate environment, economically, it's going to get very ugly for California!

Want to verify what I'm saying, get a quote from Uhaul.com at the link below:
http://reservations.uhaul.com/(5roksl45lnxsxdu31gpfqa55)/moveinfo.aspx?move=oneway

Other interesting articles related to this topic are at:

It's about the World real estate bubble, but it applies here.
http://www.economist.com/displayStory.cfm?Story_id=1794899

Britain's housing boom threatened by record bankruptcies
http://uk.news.yahoo.com/040408/325/eqm4b.html

How healthy is the US banking system?
http://www.brookesnews.com/040504usams.html

Housing Bubble
http://www.washingtonmonthly.com/features/2004/0404.wallace-wells.html

Housing Bubble
http://www.virginiabusiness.com/magazine/yr2004/feb04/ideas.shtml

Housing Bubble
http://www.baconsrebellion.com/Issues03/11-17/Housing_bubble.htm

Problems with Fannie Mae and Freddie Mac
http://www.larouchepub.com/other/2002/2924fannie_mae.html

Housing Bubble
http://www.msnbc.msn.com/id/4724213/

Housing Bubble
http://www.greekshares.com/real_estate.asp

Watch for news reports of slowing real estate sales that should begin in the 3rd quarter 2004 through the 1st quarter of 2005 immediately following any increase in rates by the Federal Reserve. Two increases by consecutive meetings of the Federal Reserve will officially launch the begining of a real estate crash in California and more so in San Diego, if not for the actual impact of the increase then for the psychology of back to back increases.

Remember to ask yourself this question about those who say there's no real estate bubble: What's their bias? The only people who are denying the obvious are those who stand to profit from it, real estate agents, lenders, title companies, and anybody who's so leveraged that any small decline in property value will destroy them.

2. Ken on April 24, 2004 07:33 AM writes...

I have been concerned about this for about 3 years now. I am a southern californian too. My question is: I want to buy a home after the destruction and in the mean time how do I position myself?

Ken

3. Howard on April 30, 2004 03:47 AM writes...

Houses in our city (Sacramento) have quadrupled in the past seven years, while the rents have remain unchanged. Give it a couple of years for all of the ARM's and interest only loans to come due. A flood of foreclosures is on the horizon. There are just too many economic factors (weak dollar, high national debt, over-leveraged public) pointing in that direction.

4. user on May 11, 2004 06:21 PM writes...

http://news.com.au/common/printpage/0,6093,9502043,00.html

May 8, 2004:

"The bank cited preliminary private research showing house prices dropped by 14.5per cent in Melbourne and 10.5per cent in Sydney in the March quarter.
....
Based on official estimates of the value of all dwellings in Australia, an 8.4 per cent fall in housing prices amounts more than a $60 billion loss in capital value."

5. Don on June 23, 2004 06:09 PM writes...

I, for one, sincerely hope that there will be a huge crash in real estate "values" in the DC area. I've known people who pay $375,000 for a house that sold for $85,000 less than a decade ago, have to take a second job to make the payments, and then cash out $40,000 in equity within a year! When I asked if that was such a great idea he said "I'm gonna sell it in 3 years for 4 times what I paid for it. I can't lose!"

I have heard this so many times that I can't believe Greenspan said that there's no speculation in the housing market. Our entire economy is built on speculation these days. People don't consider a house a home, they consider it an investment.

That's why neighborhoods are deteriorating even as houses get gentrified. Walk amongst the million-dollar shacks of certain DC neighborhoods and try to find anyone interacting with their neighbors. I'd be curious to see how many recent homebuyers even know their neighbors names!

I do believe there is a huge bubble in certain markets, but I don't know that it will burst anytime soon. As long as deficit spending keeps bloating the bureaucracy of the Federal Government, those lucky enough to get a piece of the pork will continue to drive up the real estate market. And, as long as baby-boomers keep setting up trust funds for their brats, uberexpensive trendy condos will continue to displace affordable housing. And as long as people keep popping the kids out and moving here in record numbers, the demand will never decrease.

I so hope that all these people who have followed each other like lemings onto the top of this bubble fall to horrible financial deaths if it ever bursts.

6. JJ on July 14, 2004 02:55 AM writes...

I too believe that CA is on the verge of, at least, a housing price plateau, but your U-Haul example is just wrong.

Las Vegas is the fastest growing metro area in the US and the U-Haul prices reflect that more than any supposed exodus from California. Repeat your experiment for someplace like Denver or Seattle.

7. RES on October 14, 2004 04:57 PM writes...

Don,

I too have a friend who purchased a property despite his financial situation. He said the same thing as your friend, "I know I'm going to make money when I sell in 3 - 4 years". Yeah, right!

Recently, his (1 bedroom condo) property appreciated from $100k to $125k. Do you know what he did? He added, $6k of credit card debt, $12k for a new car, and $3k for new student loans, $2k for a new computer system, and $1k for leather chair.

Correct me if I'm wrong but that is a total of $24k spent since his property went up in value by $25k. So that means even if he refinances and consolidates he has $1k left in equity. Interesting.

Now I see that he has made money but yet he has spent almost ALL of it!!! Whats worse is if his property value stays flat and he incurs additional expenses due to homeownership repairs, or the price of the home deflates and he would be upside down on his mortgage.

GOOD LUCK!

8. RES on October 14, 2004 04:58 PM writes...

Don,

That same friend also no longer eats out and buys groceries.

Sad but true...

9. monty on November 13, 2004 02:30 AM writes...

Finally, the end of the bubble is here. Here is what you must look for happening in the next 6-8 months. As these things begin to happen you will know that the California and other over-priced markets are in HUGE trouble.
1. News reports about housing not "moving" anymore.
2. News reports about the housing inventory increasing quickly.
3. Continuation of the trade deficit and federal budget deficit in late 2004, and into 2005, with no end to the deficits in sight.
4. Dollar sliding (plunging) against the Euro.
5. The dollar being the currency for oil sales worldwide, watch for the dollar cost of oil to skyrocket in dollars. (Understand that this is NOT because the price of oil has actually gone up, but simply that the value of the dollar has collapsed. I.E., the price of oil in the Euro would remain stable)
6. Fed moves to increase the interest rates even though the economy is not improving significantly, in order to stop the decline of the dollar.
7. As the interest rates go up (and they MUST in order to slow down the decline of the dollar), that will cause the interest rates on everything from the credit card debts, home equity lines of credits and other adjustable rate payments to increase quickly.
8. The above will act as an additional tax on the consumer (along with higher oil prices) and the consumer will see more bankruptcies and/or belt tightening.
9. As the interest rates go up (expect mortgage rates to up up to 9 % by early 2006, there will be utter collapse of the California real estate market with huge number of bankruptcies. Remember, refinancing will NOT be an option for homeowners behind in their payments because of the much higher interest rates. Hence, bye bye, home... hello, rental.
10. Smart people who have been diligently saving their money will then need the guts to come out and buy up the properties at firesale prices.

ENJOY THE PARTY, FRIENDS. THE FUN IS ABOUT TO BEGIN SOON!!

10. Heath on November 13, 2004 01:25 PM writes...

Way to go Monty, you are such a genius. The majority of what you said to "look for" is already happening. One thing you left out was to look for "aeroplanes" that carry people from one area to another (in the air!!) as a sign of something.