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alstry (35.96)

California Homes Practically Worthless????

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June 14, 2009 – Comments (15)

In the past five years, Californian's took out mortgages far exceeding their ability to service the debt. Now residents are suffering massive wage cuts and job losses.....many simply can't afford to make their mortgage payments and foreclosures are exploding.

The problem is simply not just home buyers who purchased homes, but the thousands who borrowed against their existing homes to sustain a "California" lifestyle:

The latest argument comes from Michael LaCour-Little, a finance professor at Cal State Fullerton. He is lead author of a new study, which found that during the housing boom some long-time owners borrowed against all their property's equity gain, or paper profits. They treated their houses like cash machines.

People who owe their bank as much or more than their home is worth are most vulnerable to foreclosure. When they suffer a job loss or other drop in income, they can't sell, because the sale price won't cover the debt.

It's long been assumed that home buyers who purchased at housing's peak with little money down are among the most likely to face foreclosure. They owed more than their property was worth once prices tanked.

But the study concludes 'cashing-out' is about as predictive of foreclosure for the same reason: negative equity.



Think of the countless number of elderly, small business owners, and others that survived over the past few years simply from extracting millions of dollars from perceived home equity......and now that the supplemental income has evaporated.....few can sustain their lifestyle and the equity is gone.

Many families are in financial distress and that distress is driving DOWN home values. Pricing projections are constantly being revised lower. Most recently, Fitch is calling for an ADDITIONAL 30% decline in California.

The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010.

Fitch-takes-various-actions-on-543-2005-2008-us-subprime-rmbs-deals

With countless numbers unable to make their payments.....California is struggling with the torrent of foreclosures flooding its court system every month.....a court system already stretched due to budget constraints. Things have gotten so bad that lawmakers are suggesting a moratorium on foreclosures....

California is imposing a 90-day moratorium on housing foreclosures under a new law that takes effect Monday.

The law is expected to make lenders try harder to keep borrowers in their homes. Loan companies must prove they tried to modify the delinquent loans before they can begin foreclosing.

But supporters acknowledge the California Foreclosure Prevention Act won't stop thousands of foreclosures from eventually happening. There have been more than 365,000 foreclosures in California since early 2007, with many more already scheduled.



However, the moratorium will accomplish little other than delay a growing problem of affordability....evidenced by the most recent federal moratorium's failure to slow the rising the tide once lifted.

Foreclosures occur as a result of insufficient income and savings to service debt and other obligations. Without good jobs, savings or easy access to the home equity machine......many more in CA face eviction. In addition, the state faces the loss of billions in property tax revenues at a time when it's $24 Billion in the hole.

If wages continue to evaporate and jobs sliced like limbs on a sepsis patient....pretty soon there won't be much left to cut in California. Few will be able to afford much of anything.

Due to budget constraints, California faces the biggest cycle of wage cuts and job losses in its history. Especially vulnerable are high paid government and health care workers(and those that support government)....the cuts could easily affect millions of residents.

As many know, to destroy home values, it doesn't take every house on a street to be in foreclosure to impact all homes.....just a few distressed homes in the same area can drop values dramatically.

The most extreme case right now is in Michigan where home median home prices in a number of municipalities have dropped below $10,000.....simply due to the fact that there are no jobs and/or very low incomes......

It has become so bad in some areas that the government is now leveling ENTIRE sections of towns to save money!!!!!

Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

California will be no different, although not likely to reach Michigan extremes for a variety of reasons, if you think that CA home prices have come close to reaching a bottom......you may want to sit back, have a drink, and watch the spectacle. Fitch is only predicting an ADDITIONAL 30% decline, I am predicting at least 50% MORE.

If we continue down this path of government spending money it just doesn't have, few will consider supporting our uncontrollable welfare payments and interest rates will likely climb into double digits in very short order destroying affordability. Conversely, if we lower government spending to income, California could loose or cut wages on hundreds of thousands of jobs imposing MASSIVE pressure on an already stressed state.

The above exemplifies why we, as a nation, are stuck between a rock and a hard place!!!!!

Economists used to laugh when I predicted homes values would drop 50-70% a few years ago. We are already there in a number of areas across America. The problem is the problem is a BIG problem....and not very funny, especially for those getting evicted from their homes and families destroyed.

Now the distressed home issue has morphed into a state concern. Tax revenues are evaporating and the burden of taxation is being focused on fewer and fewer. If this process continues, soon there will be few left in California to support state services. I am already aware of a number of wealthier Californian's who have migrated from the state due to fear of draconian taxes. For confirmation, just give the Austin, Texas MVA a call and see how many of the new license applicants are from CA!!!!!

Without tax revenues, California's economy faces serious hurdles maintaining the states standard of living. Right now tax revenues are imploding. If the situation is not reversed soon, many of you may be surprised how many may leave California. And if you are surprised by the migration out of the state, you will really be SHOCKED how low home prices can go in a state with negative population growth.

For those of you who think Great Depression pricing is the bottom, you may want to talk to residents in Detroit. What receives little commentary is that in the 1930s, property taxes and insurance payments were insignificant. Ask yourself, how much more of a home could be purchased today if you didn't pay taxes and insurance on your house and deduct it from its current value.

Soon you will begin to understand that massive structural change is ahead. Alstry is confident of this and very confident of a very bright future. However, the change will be very convulsive to many existing paradigms and few are prepared.

Are you ready to leave the matrix??????

Let's hope our government officials don't take us on a path of WAR to distract us from the symptoms of change.

15 Comments – Post Your Own

#1) On June 14, 2009 at 1:11 PM, alstry (35.96) wrote:

The reGRAVELING of AMERICA!!!!!!

LANSING, Mich. (AP) - Some Michigan counties have turned a few once-paved rural roads back to gravel to save money.
     
More than 20 of the state's 83 counties have reverted deteriorating paved roads to gravel in the last few years, according to the County Road Association of Michigan. The counties are struggling with their budgets because tax revenues have declined in the lingering recession.
     
Montcalm County converted nearly 10 miles of primary road to gravel this spring.
     
The county estimates it takes about $10,000 to grind up a mile of pavement and put down gravel. It takes more than $100,000 to repave a mile of road.
     
Reverting to gravel has happened in a few other states but it is most typical in Michigan. At least 50 miles have been reverted in the state in the past three years.

http://www.wwmt.com/articles/roads-1363526-mich-counties.html

Leveling entire sections of cities.....reverting roads back to gravel.... 


Too bad I got rid of my Hummer......

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#2) On June 14, 2009 at 2:00 PM, topsecret09 (38.70) wrote:

I was born and raised In Fresno, California. I am currently rennovating a rental house that I Intend to sell. The housing market In this area has stabilized,and homes are selling here. Prices In this area have dropped by as much as  60% from their peaks,and prices are slowly RISING. I have lived here for over 40 years,and I can tell you this much... Prices will not go much lower,even with our 15.5% unemployment rate. Houses In this area have already fallen back to the levels that they were In 1992,before any of this current mess even began,and the houses were UNDERVALUED then.......   Jim

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#3) On June 14, 2009 at 2:55 PM, jesusfreakinco (28.97) wrote:

Alstry,

Finished homes are not like raw land.  Their prices / value cannot go to $0.  They have rental value and will bottom out at the DCF of the rental income.  

With dropping wages, the prices can still decline because potential rental income will decline with falling wages.

You should have said CA homes worth less, not worthless.  Don't overstate the position.  

JFC

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#4) On June 14, 2009 at 4:08 PM, swingtrader930 (28.12) wrote:

To me it sounds like its time to buy.

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#5) On June 14, 2009 at 4:35 PM, alstry (35.96) wrote:

We have already discussed on CAPs that land now has no value due to the high cost of property taxes and maintenance and no use commerically. 

Where my office is currently located.....my rent is lower than the cost my landlord pays for property taxes, insurance, and maintenance......at the rate I pay....the building has a NEGATIVE economic value even if the building was GIVEN for free.

Due to massive vacancies around the nation....more and more landlords are facing the same situation as my landlord....

it is occuring in shopping centers, office buildings and more.....

if the government can no longer afford to pay welfare or subsidize rents....expect negative value to spread to low income residential rentals.....as more and more jobs are lost and wages cut...expect it to move up to middle income housing.

we are already seeing it at its most extreme with the destruction of entire sections of towns, or an inability to keep paved roads paved....expect this phenomenon to spread rapidly as the economy deteriorates and cities and states can simply no longer afford to maintain depressed parts of cities.

 

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#6) On June 14, 2009 at 4:48 PM, UKIAHED (35.31) wrote:

We have already discussed on CAPs that land now has no value due to the high cost of property taxes and maintenance and no use commerically.

Link this for me please - would love to see the discussion (I must have missed it some how)...

Thanks

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#7) On June 14, 2009 at 5:58 PM, alstry (35.96) wrote:

Uki,

Go back and read some of FloridBuilder's, mine and other blogs........you are obviously not a player in the purchase of land these days.....

Not only does raw land have no value, negative value in many cases....municipalities have now determined that it is now more efficient to level entire sections of towns to dirt than keep them standing.....

It started in Michigan and now spreading across the nation......

Uki....soon it will impact larger and larger areas as the economy shrinks smaller and smaller....

pretty soon your local government will run out of money and they will ask you for more and more...until you and all around you have no more to give....it is not really a big deal, simply the process of the way things are and we can't do much about it....

Soon you too will realize that this destructive process is necessary to set the foundation for future change.....

Let's just hope that war is not part of the destructive process.

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#8) On June 14, 2009 at 7:21 PM, UKIAHED (35.31) wrote:

you are obviously not a player in the purchase of land these days.....

Wow - quite the assumtion on your part.  You kinow next to nothing about me - yet presume that I am not a buyer/seller of land "these days".  ROFL

Go back and read some of FloridBuilder's, mine and other blogs........

No thanks - not worth the effort - I was hoping that you would spare me the time of wading thru all the blogs - but that's ok.

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#9) On June 14, 2009 at 11:29 PM, alstry (35.96) wrote:

Uki,

No assumption.  I am certain you know very little about the current value of developable land.....

Anybody who is any kind of material buyer of raw land knows that raw land is basically worthless these days (not farm land)....

As an attorney and with knowldege of real estate...especially development land....it ain't too difficult to spot ignorance...with so many deals being done at a nickel or a dime on the dollar....assumptions are not necessary in this environment;)

So who do you think is really laughing????

 

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#10) On June 15, 2009 at 12:31 AM, elboxeo (< 20) wrote:

There is such a disconnect in california with regards to house prices in some areas. when people talk about affordablity in areas like fresno or even the inland empire, thats not really where the impending damage is comming from... WAIT till people in irvine or south orange count start gettin even more of a haircut in prices as that demographic is going to get hammered...

 

people who bought 400k houses in areas of central california or in the inland empire have already been weeded out and in reality people already knew that anybody that had TONS of money or a GREAT career was not going to relocate to those areas... but in areas like south orange county prices are still in wtf ranges and closer to the beach its even worse... all those people are just as vulnurable to job losses as the people already forclosed on in the crappier areas of california. 

 

So while there might be a slight downward risk in prices in those not as desirable areas, in areas that are more desirable , the prices are still crazy and when those things start falling another 30% is when it will get interesting...

 

 

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#11) On June 15, 2009 at 11:44 AM, AdirondackFund (< 20) wrote:

Anybody who thinks it is a good time to buy anything isn't truly a thinking, rational person.  There is no evidence of a rally forthcoming in any markets...housing, real estate, land, rental properties, stocks.  It's just not there.  You need to wait until the storm has passed and stop trying to outguess the markets.  Alstry is right.  There is a chorus of very dangerous events about to swirl throughout the world and world economies.  It is really just that simple. 

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#12) On June 15, 2009 at 12:00 PM, Entrepreneur58 (36.15) wrote:

I wouldn't be surprised to see a federal property tax soon as the feds stuggle to find new sources of revenue.  Land owners are an easy target once you get past the real estate lobbyists.  Those who benefitted most from the boom should pay for the clean-up.

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#13) On June 15, 2009 at 1:12 PM, UKIAHED (35.31) wrote:

No assumption.  I am certain you know very little about the current value of developable land.....

Anybody who is any kind of material buyer of raw land knows that raw land is basically worthless these days (not farm land)....

As an attorney and with knowldege of real estate...especially development land....it ain't too difficult to spot ignorance...with so many deals being done at a nickel or a dime on the dollar....assumptions are not necessary in this environment;)

So who do you think is really laughing????

That would be me – a good laugh is great for the soul!.  I mainly specialize in large tracts of forest land that can be subdivided.  Turns out – not worthless – and yet I develop it (that would make it developable land doesn’t it?) and sell it.  Just for kicks and grins I looked at the MLS for Northern CA.  I figured – Hmm – let’s get out of my area of expertise – let’s look at other types of land.  Yeah – as I though – no land for $.10 on the dollar (I based on 2006 prices).  Then I though – maybe we are looking for areas of excessive development – maybe Southern California.  So I looked at a few articles, I found this nice little summary:

"As both residential and commercial developers pull back on new projects, land prices have decreased by as much as 40 percent in some regions of the country."

Hmm – still not $.10 on the dollar.  So, please find me some land on the west coast for $.10 on the 2006 dollar.  I would love to put an offer in…

Entrepreneur58 - I wouldn't be surprised to see a federal property tax soon as the feds stuggle to find new sources of revenue. I wouldn't be surprised to see a federal property tax soon as the feds stuggle to find new sources of revenue.

Hmm – now that is an interesting idea.  I would be in favor of this approach – much more progressive than a sales tax.  The logistics would not be that intense – just put a surcharge on to the county tax.  I wonder what the legal ramifications of this would be – Al – you’re the land attorney – any thoughts?

Adirondackfund - Anybody who thinks it is a good time to buy anything isn't truly a thinking, rational person.

The best time to buy anything is at the time when most people want to sell.  What you buy is all about investment time horizon. 

There is no evidence of a rally forthcoming in any markets...housing, real estate, land, rental properties, stocks.

Over what timeframe?  If you truly believe that the future is so grim that there is no future – I am sad.  I do not share your beliefs.  I do, however, have some great rural parcels of land that have great water, and would be a great place to runaway from any impending doom. 

BTW – didn’t we just get a great rally in stocks and energy?  I know my accounts think so…

Have a great day all

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#14) On June 15, 2009 at 1:56 PM, ati2ud (28.86) wrote:

alstry, and anyone....

I have seen people linking this article from the UK about bulldozing houses.  Have you or anyone seen this from a local paper?  It would be nice to see it from the actual town paper is is reported to happen in.

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#15) On June 19, 2009 at 4:49 PM, AdirondackFund (< 20) wrote:

Hey Alstry.  Are you sitting down?  I hope so.  Today, I spent four hours on the phone with the customer service people at my Bank.  Here's the situation.  I use a debit card to pay miscellaneous bills.  Here's what is actually happening with this card.  I go to the merchant and make my purchase.  The merchant puts in a hold on MY DEBIT CARD.  Three days later, they collect the cash.  Here's the rub.  They then leave the 'hold' on hold until they feel like removing it.  Even though they have already been paid in cash, they are leaning on my Bank Account to help support their own accounts with Visa and Mastercard.  The skinny on this is simple.  If I spend $100, it costs me $200 in cash to make the transaction.  This Banking 'Policy' directly sucks TWICE the amount of cash out of the Financial System for all purchases. 

Now, the last time that I had this exact same problem with my DEBIT CARD was in the middle of September of LAST YEAR.  I hope you are following what is going on here.  Because this is happening today, it is my guess that we will see a major crash beginning on MONDAY of next week.   

This transaction is occurring because the merchants themselves do not have access to cash or credit.  It is that simple.  So, they have decided to borrow mine at a 0% interest rate, and without my permission.  Remember, the authorization to bill my card is for the amount purchased, not TWICE the amount purchased.  Not only is this ILLEGAL, as the amount of Funds used for the transaction are TWICE what are authorized, but these folks are completely unapologetic for the transaction that has occurred.  Furthermore, they have no power to reverse the 'hold' at my Bank.  That must come from the merchant themself.  There is a paperwork process which must be intitiated through Visa and Mastercard to force the 'hold' to be removed.  But I ask you, who has time for this nonsense?  How is this not a violation of Banking Law?  Isn't this a massive incentive for persons to remove their money from the Banks?      

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