Wow. Big Media Matt just discovered why people love 'em some Real Property.

Anyhoo, Real Property is about to go as bust-o as it can.

Heh. If you want to get a real warm fuzzy about the housing market, you need to read Mike Shedlock. He watches the US real estate market, gleefully tallying up the dead and dying. You can almost feel the smug "I told you so but did you listen to me, nooooo." self-satisfaction dripping from his fingers as he writes about various builders and agents struggling and failing to make their numbers, cut deals, etc.

He appears to have some facts on the ground about ARMs, about rents vs sales and a bunch of other real-estate related topics.

I'm at the far end of the ripple effect right now, and I'm wondering how the crash will affect us. I don't know of any studies, but people cash out their houses in SF and buy cheaper, better houses in Portland, the Porltand people buy houses in Olympia or Missoula, and the Missoula people buy houses in godforsaken places like Deer Lodge (away from the Hollywood infested mountain areas.)

I'm in Minnesota and our ripple starts in Minneapolis via St. Cloud, and my little town has seen a big population increase in the last 15 years, and a lot of new homes better than most of the already-existing homes. How long will it take a depressed market to reach this place?

People are even moving to North Dakota, where the prices of abandoned houses have risen from $3,000 to $25,000 in the last twenty years, a 700% increase. This obviously can't go on.

asbestos

I typically haven't found all that much asbestos in buildings from that time period and most of it has been encapsulable. But in any case the cost to mitigate asbestos in demolition would if anything be higher than the cost to mitigate during repair.

sPh

Disclaimer: hire a licensed asbestos technician and/or lawyer if you need advice about asbestos.

I dunno. Anybody watch This Old House? They just renovated a brick DC rowhouse (I think close by to Matt's Shaw neighborhood). I think there's a good number of those.

I was kidding, guys. Do you think that $20,000 is a high price for a house? $30,000?

Depends. Is it close to the shops?

It's really close to the only shop within 20 miles.

still, let's congratulate matthew for recognizing the basic element of housing: in many cases, the owner doesn't have to sell (not all, of course, but many).

interestingly, the big driver in "core" inflation right now is that rents are going up, so even as an historic housing boom didn't move the scales at all in terms of cpi, a softening market is being accompanied by a rising cpi.

Atrios had a post a while back about the tearing down of the old antebullum houses in Charlotte SC and putting up cookie cutter McMansions in their place. From what I'm told, McMansions are made of cheap shoddy materials and will be falling apart in 20-30 years.

Re trades, the children of the trades people are going to college and looking for an office career. Couple of reasons I can figure out. One is that Dad told them to get a job where they weren't out working in all kinds of weather. The other is uninsured illegal immigrant labor that is driving the trades out of business. I know of one competent roofing contractor in my area, and he's retiring in 5 years, fed up competing with uninsured hacks.

For maintaining older houses, I would say a major problem there is that plastering is almost dead as a skill, since drywall took over after WWII. If you want to learn DIY, you'll have a very marketable skill if you lose your day job. Unfortunately too many people gut these things and reno with DW. It's like being in a hotel afterwards, sigh.

Yes and no.

First, ARMs have been becoming the dominant method of financing homes in the last few years. From somewhere less than 5%, in fact nearer 2% of all loans six years ago, they were 42% of all loans last year, IIRC. Worse, many of these loans were not merely ARM's with 4% or 5% rates, adjustable as rates would increase (or decrease) according to some benchmark indicator, but negative amortization loans where the borrower pays less than the stated amount of interest, often as low as 2% or 3% on an interest rate of 5%, 6% or higher, with the difference being added to the principal balance of the loan. Then in a few short years (like now and next year) the whole thing adjusts to the current rate, which even if rates didn't go up, would nearly double loan payments. Not only that, the banks book this phantom interest, which is not actually being paid, as income, which makes their books look that much better. Sweet. Kind of like Enron accounting was sweet, for a while.

In most areas of the nation that have experienced property value increases of more than 50% over the last five years rental income will not be enough to meet mortgage payments, taxes, insurance, repairs, etc. let alone the exposure if there is a vacancy. Renting SFRs is a much riskier proposition than owning an apartment house, or portfolio of SFRs, like more than 20.

It's not all that pleasant when an investment requires a constant cash outflow of up to hundreds of dollars a month, while its asset value decreases. Some owners can carry this for a while, some can't, few can easily do it for a few years.

If one can stay in their house, make the payments and enjoys living there, then it doesn't matter what the putative asset value is. Just don't lose your job or have to move. This applies to perhaps even the majority of homeowners, but it does not take a majority of owners needing to sell to cause a panic and a crash. Ten to twenty percent will do just fine.

Some figures to think about. I live in Southern California, during the last bust, which started about 1990, SFR median prices dropped 27% between '90 and the trough in '93. Factor in inflation and that's a drop of about one third. It was not until 1996 that the median price was at its former level, and that's without factoring in inflation. (Figures from the CAR) That's six years of holding a non-performing asset.

Looking at things like the rents ratio, cost of funds indexes, and general levels of specific price inflation in the market, things are a lot, lot, lot glummer now than in '90. My gut tells me a drop in prices of between 30 to 45 percent, a rash of forclosures that will make the measles look mild, bank failures and real pressure on Fannie Mae and especially Freddie Mac. A real sour note is that consumer debt is at an all time high, the economy is about to slow down if not actually enter a recession and the government's flexibility to do something about it by messing with interest rates, fiscal policy or government deficit financing is just about non-existent, given the gross mismanagement of the last five years. In fact, it is the mismanagemenet of these last five years that has helped bring this about with artificially low interest rates, huge deficits, banking deregulation and a falsely inflated economy.

I've seen this before (I guess I have nearly 25 or 30 years on you) - and take it from me it won't be pretty. I expected it to happen two years ago, and only exotic mortgagage instruments and government fiddling have prolonged the bust from starting for this long. That, of course, will only make it that much worse as it happens.

The upside is that you will soon be able to buy a house for two thirds to one half of what they are now.

Full disclosure: I have been a licensed real estate Broker for 20 years, and though I do not participate in the SFR market as a rule, my interest in apartment buildings and other commercial properties sort of keeps me up on what's happening.

When you buy 1000 shares of Thisisagyp.com stock, you only own a piece of paper, that others have persuaded people is worth what you had to pay for it. The paper, if the shares are in printed form and big enough are good for covering a plastered wall, but otherwise have no intrinsic value. That is pure speculation and you can very well lose it all if others decide it isn't really worth what you paid for it, or even a reasonable fraction of what you paid. That's because the stock pays no dividend.

When you buy a house, you pay what others have been persuaded it is worth to own that house. You can live in that house, you can rent it out, you can demolish it and build a bigger building on the lot, you can add to the house, etc. It is an actual asset. Since everyone has to live somewhere, the house cannot lose its entire or even most of its "value" on the market. It is an investment, a speculative investment maybe, but still, unlike the stock, it is an investment.

That is the real reason why housing market busts involve a small decrease in selling price, followed by a long stagnant period. As investments go it is pretty well insulated from the risk of a total loss of the investment.

Of course, when you buy it for no money down, with a variable rate mortgage, things change a bit. First, you don't own anything except the right to use the house as long as you can make the mortgage payments. But, you also don't have much, if any, of your assets tied up in the house. So, it is still relatively speaking a low risk investment.

No, I don't sell real estate, I just own my own home.

Hoppy in Sacramento

matt-- did i miss something; are you no longer blogging here?

You want to talk about housing. I want to talk about food.

You think we're all so cute and cudly don't you Yglesias, that we spend all our days in nature preserves and zoos gnawing on bean stocks and bamboo chutes? Ho ho ho.

What do you think happened to that Chandra Levy, and Natalie Holloway? Are you so naive you'll believe that Kimberly Drummond died of a valium overdose? And what about all those episodes of In Search Of?

84.7% of all disappearances and at least 64.1% of all suspicious deaths can be attributed to pandas. We've been watching you Yglesias. You look delicious.