Friday, January 4, 2008

Stock prices are to Earnings as Home prices are to Rents

Wall Street analysts throw around P/E (price to earnings) ratios all the time when digging into a stock and discussing whether it is under/overvalued. Historically, stock prices and sectors basically trade within certain a range of these P/E ratios. Remember the dot-com implosion? Of course you do. Why did it happen? Basically, because there were little, zero, or even negative earnings to support the exorbitant stock prices. When the dust settled, the market eventually returned to a state of normalcy where actual earnings reflect the value of the stock.

This fundamental principle does apply to housing values as well. As rents have climbed historically, so have home prices. Their relationship can fluctuate a little to a lot over the short- and medium-terms, sure. But not like they have in recent years. Three Fed economists (1 former, 2 current) have released a study - summarized here in the Wall Street Journal - proclaiming home prices need to retract 15% over the next 5 years, coupled with annual rent growth of 4%, in order to return back to normal levels. If rent growth is less than 4% or the correction period happens sooner, the drop could greatly exceed 15%.

Don't think you are the only one who feels it's insane that a $900k condo or house that carries $5000 in monthly debt service can only rent for $3000. It absolutely IS insane.

Thursday, January 3, 2008

Freak Beverly Hills Realtor vs. Peter "Dr. Doom" Schiff

See youtube video here.

Freak realtor who might be on coke: "I'm not going to bore you with all of these numbers. It's a terrific time to buy! A new home is going to cost so much more in a couple years!"

Schiff: "This is a terrible time to buy a house. It's a great time to sell one - IF you can find a buyer!"

Freak realtor who might be on coke (now yelling): "I completely disagree. You're misleading people - you spend too much time on Wall Street and not enough time on Main Street"

Schiff (barely able to contain his laughter): "Ma'am, I'm the only person who's not misled people on real estate over the years. I'm one of the few people who told people to ignore the cheerleading of realtors"

At this point, the show ends. And I'm sure the freak realtor who might be on coke made a beeline straight to the ladies room if ya know what I mean.

Peter Schiff regularly appears on CNBC, Fox News, CNN, etc. and has been coined "Dr. Doom" by the CNBC program "Bulls and Bears." He is one of the few outspoken prognosticators who called for the housing meltdown and mortgage collapse years ago. He is President of Euro Pacific Capital, a broker/dealer that specializes in foreign investments and securities.

(video and excerpt taken from HousingPANIC)

Tuesday, January 1, 2008

Oakland listings that tell the story of decline

While San Francisco pricing has held up rather well thus far and is gearing up for its coming decline in 2008, Oakland is altogether a different story. Its noticeable slide started in 2007 and has many current listings that show how bad it already has become. The following addresses surely haven't been helped by the credit crunch that began in August 2007 or the November/December holiday season, but I predict these many a short sale are indicative of things to come in 2008.

7049 Thornhill Dr is an example of a home that is ready for a price reduction after being listed for 54 days now. Purchased in April 2005 for $850k, they are already looking at a loss of $40k+ after commissions paid, and that assumes a full price offer. I personally toured this 4 bed/2 bath, 1920 sq ft home on a 1/4 acre lot in the Oakland Hills back in early December. It can use a little bit of updating here and there, but is a nice livable home with a fantastic, expansive rear deck and downsloped yard. It should see a price reduction soon.

6144 Valley View Rd is a Montclair home that was purchased for $610k back in November 2003, and has been listed for $625k for 64 days without a price reduction. Not much for pictures, but you can count on a house that begs for updating on a large 1/4+ acre lot in a nice area of Montclair. You could've pretty much bought anything in the Bay Area in 2003 and sold in 2005 or 2006 and profited $100k+, and in many cases, $200-300k+. Not anymore - oh how quickly the tide can turn.

6615 Snake Rd is an interesting listing. Listed for $674,900 and currently bank-owned, it changed hands for $865k back in March 2006. Then just 3 months ago in early October it sold for $734k. Talk about a continuous downward spiral, this home isn't even turnkey complete. It looks to be mostly remodeled and needing some finishing, but the bottom line is this: a 4 bed/3 bath, almost 1900 sq ft view home high in the Oakland Hills on a well-known street can be had for $200k less than what it sold for nearly two years ago. The previous owners who paid $865k are damn lucky they got $734k just three months ago!

There are many other listings like these, some in even worse financial shape.

Happy 2008! (as long as you aren't trying to sell a house in Oakland)