My apologies for disappearing last week, but some clients came in for the air races, so my focus went that way. Don’t forget, I only get paid for closings, so once in a while I have to focus exclusively on hustling real estate.

Yes, for anybody wondering, I did post a contentious little piece about the real estate industry mid week, then decided to yank it after only a few hours online... blogging late at night after a long day at work isn’t necessarily a great idea, and I probably said a little too much, to the point where people were coming up with some unintended, inaccurate conclusions. So it had to come down. My plan is to clean it up and repost soon. Smarten and NAS, your comments were outstanding. 

The Chase Estates Tour went really well, and this year we extended it to Reno for the very first time. Bill Driscoll, my new best friend over at the RGJ, visited me at the Caughlin Ranch house and wrote a nice piece about the property. I can’t tell you how many neighbors stopped by that day, absolutely delighted that after years of passing by, they finally had an opportunity to experience the property first hand, from the inside out. (And yes, I know how you all feel about the price, so please leave the poor dead horse alone.)

The interesting thing is, so many people who live nearby feel an affinity for this house. They know it’s a piece of history, the love that it has been so well preserved, and they are almost protective of it as an icon of the neighborhood. After almost a year of pitching this private home as a nice place to live if you want country in the city, I am now beginning to believe, more and more, that the ideal buyer for this property is a benefactor who cares about preserving Nevada history. Someone who needs a multi-million dollar tax break, who will buy the property and donate it back to the community.

Already zoned parks and recreation, there are so many uses The Caughlin Ranch could fulfill: community art center, historic museum, meeting place, wedding facility, organic garden, animal farm, charter school, library, corporate retreat... the list goes on and on. Unfortunately, the current owner is not in a position to make such a donation, but for someone else, such a transfer could be a real win for the community.

On the PR front, I was recently quoted in the UK Telegraph for my, uh, creative work pimping houses on YouTube... Yes, we are totally cutting edge here in little ‘ol Reno, Nevada.

Okay, back to reality. What’s happening in the market?

Survey says: 1/3 of purchase loans failed to close during month of August. I experienced this one first hand. One of my clients was surprisingly declined for his loan in the last few days of a long escrow and had to scramble to find alternate lending. Fortunately, we closed, but a week late, well into September.

Also last week I had the pleasure of spending some unexpected quality time with a couple of lenders. Talk about the you-know-what-about-to-hit-the-fan... both of these professionals, each with many years in the business and totally unrelated, were describing to me in gory detail, just what they think is about to happen in our marketplace. It’s essentially what you negative nellies have been saying for about a year or so on this blog (and, kudos to you, I mean it, you are the soothsayers)...

Major, shocking resets start this October, AB440 is a disaster for the self-employed, and the next 18-24 months are going to see an onslaught of foreclosures.

This may sound dramatic, but this is the message I was getting from totally normal, conservative people in the industry. They themselves seemed floored by the magnitude of what is to come. One of them even had a friend who owns a major employment agency in town, and pretty much everyone coming in these days is a lender, title person or real estate agent. (Darn, there goes my plan B!)

What is AB440? Pretty much, state income loans in Nevada will cease starting October 1 due to nebulous language in recent legislation... which can only further increase pricing velocity downward in our local markets as even the honest self-employed are now essentially screwed.

Lately, I’ve been wondering if I even need to keep on paying my mortgage. I mean, seriously, since American Home Mortgage went under a few weeks back... if the offices are closed, can’t I just stop paying and keep my home for free? Would anybody really notice? (Well, actually, Green NV would, so I guess I’d better stay off that NOD list.)

Just kidding of course, we know we owe, so we keep on paying. A promissory note must be honored, and I’m sure that somebody does care and is keeping track somewhere.

Yet now we learn that maybe that our servicing company isn’t passing along our tax and insurance impounds to the appropriate companies? This is truly maddening.

From Inman News: “The bankruptcy of American Home Mortgage Investment Corp. could create headaches for thousands of homeowners because the loan servicer is allegedly collecting property tax and insurance premiums that are not being passed on to those who are owed. Government-sponsored mortgage repurchaser Freddie Mac said it has seized $7 million in payments homeowners sent to American Home before the company's Aug. 6 bankruptcy filing. Freddie Mac alleges the company stopped making payments to government tax collectors and insurance companies on Aug. 24, the Wall Street Journal reports. Freddie Mac is seeking to block the sale of servicing rights to more than 4,000 loans American Home is currently collecting payments on, saying homeowners are at risk of losing their insurance policies because of nonpayment of premiums, and that unpaid tax bills could eventually force tax foreclosure sales.”

Great, one more thing to worry about.

As for real estate agents, let the purging begin. According to Inman: “There are more real estate agents than home sales in some markets -- and simple economics tell us that something has to give, said Jack McCabe, a real estate consultant in Deerfield, Fla. McCabe said that there are already examples of Realtor membership declines in the Fort Myers-Cape Coral, Fla., area, and in Palm Beach County, Fla., as well as real estate brokerage office closures and consolidations. The Realtor Association of Greater Fort Myers and The Beach reported that membership has declined about 7.8 percent year-over-year, to a current total of about 6,000 members. ‘Those are fairly anecdotal of what's going on in marketplaces all around the country -- especially in housing-bubble markets,’ McCabe said. Those markets that saw the ‘most dramatic increases in real estate salespeople and mortgage salespeople and so on are now seeing job losses in the thousands.’"

It will be interesting to see how many of us actually renew this year in the Northern Nevada MLS.

Meanwhile, it’s begun: Brokerages going out of business.

But that's Las Vegas. Here in Reno it’s different (Lindie, RI, please, don’t say it, we all know...) It’s a great time to buy according a local builder: “We have just reduced the pricing as much as $25,000 on some of our available units here at The Village of Idlewild Park. Now is a great time to buy, with many incentives available!”

The art of the aggressive offer: Standard operating procedure these days.

And this from a long time reader: “Here’s an example of priced right in action.  When I saw this, I said to my wife I wish I could jump on this.  I told her they'd get an offer over the weekend.  Look how quickly it went pending.  It says pending loan too, not pending something else.  It wasn't too long ago these were selling in the high $300k's. 1668 Glen Oaks is listed at $279K, 4/2/2 1860 sf”

Meanwhile, the new head of the Nevada Mortgage Lending Division points out that people with spotty credit only represent 15% of the market. So what’s the problem?

Sacramento toast, Reno next?  Just a little YouTube fun...

What’s the point of a bailout? I don’t get it. It was a big party, we drank too much, we got a little crazy and did stupid things. Now we’re dealing with the aftermath, the nasty hangover. I think we just need to suck it up, suffer through it, and most of all... learn from it. As in, don’t do it again? Sign me up for that lesson.

The Day After

Stupid Diane Tricks: I knew this would happen, and I meant to circumvent the situation by bringing it up first, but while I was out last week hustling real estate, Reno Ignoramus beat me to the punch. He started quoting the best of Diane (and Guy) when we were, like, still kind of positive about the market. Fortunately, he didn’t cite my most embarrassing post of all, the bubble is so annoying piece... so let me bring it up as a public service and save you all the trouble of searching for it. Where is Gotlots now? This is his big, I-told-you-so-moment, and he’s missing out.

The funny thing is, I occasionally get private complaints about the comments on this blog... how negative they are and so forth. (Okay, yeah, some are truly worthless jabs at each other, I’m sure we can all admit that.) But those aside, some of those negative comments were truly accurate predictions of what has only begun to occur.

Reno Ignoramus and Gotlots were among the first. And you know, they were right, they’ve been right for more than a year, they were the canaries in the coal mine, providing balance to my want-to-be-positive agent attitude (because you have to be at least a little bit positive to survive in a 100% commission environment) and despite the controversy, I truly appreciate the conversation that their insights have provoked.

In other words, you were right, and I was wrong. Thank goodness for the wisdom of crowds.

Along those lines, this fascinating post turns some of my past, baby-boomers-will-save-us-all theories right on the ear.

Interestingly, I think maybe the Reno Realty Blog has become a blueprint for decline. If someone actually took the time to sift through all the clues that surfaced along the way in each post and every comment, I’m sure you’d end up with the step-by-step process by which a market unravels, every clue tagged and cataloged like the findings of an archeological dig.

These last three weeks have been enlightening.

I now believe that prices will come down at least 10%, perhaps more, that 2008 will see a significant number of foreclosures, that 2009 may be the bottom (but who really knows) and that if Guy and I are to survive and thrive, we’d probably better go after the bank-owned properties, because those will be the ones that drive the market downward. I’ve heard REO departments are hiring.

Most of my buyers, unless they MUST move or have other motivations, are sitting on the fence, waiting to see what happens next. Honestly, I don’t blame them. The best deals are yet to come.

As for my sellers, the story has darkened. If they’re serious, they need to price below recent comps. If they’re not serious, it’s better to stay out of the market for the next four years. Wait, rent, whatever... the worst is yet to come.

See, look! You’ve all got ME trained. Now I just parrot what YOU say.

Disclaimer: I have no crystal ball, I was wrong about the bubble, and these are just my opinions based on what I’ve seen and heard this last week. As conditions change, my opinions will continue to change with them.

 

Comments

[smarten]

Diane stated "the message I was getting from totally normal, conservative people in the industry [was] they themselves seemed floored by the magnitude of what is to come."

Ah, it's the old the spouse is the last to know story. Isn't it amazing how real life seems to mimick...real life?

[Move to Reno?]

If you really must buy now, rent instead. I'm thinking 4th Q '08 or 1st Q '09 will have some good deals.

[MikeZ]

Diane: "AB440 is a disaster for the self-employed ... What is AB440? Pretty much, state income loans in Nevada will cease starting October 1"

I was self-employed for 4 years and always had tax returns available to document my income.

As long as the self-employed borrower has been filing accurate tax returns, what's the problem?

[DaveInLosGatos]

"As long as the self-employed borrower has been filing accurate tax returns, what's the problem?"

I've been self employed for 17 years and the problem is that tax returns are not an exact science. I have NEVER filed a false tax return. However, I do take EVERY legal advantage offered to me by our government.

The government gives self employed people many tax benefits and incentives, since we employ a vast majority of the American workforce.

Having said that, my tax returns and those of many of my self employed colleagues do not nearly reflect what we actually make. Right or wrong, the system is what it is.

So, was the "stated income" loan originally meant for self employed folks? dunno. Was it highly abused by many? yep.

[2sleepy]

Good to see you back Diane, and I'm glad you still have clients who are actually buying.

Here's an interesting rent vs. own calculator

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1190174400&en=47731f19ac7c7187&ei=5070

and a link to an article I thought some of your readers might enjoy:

http://drhousingbubble.blogspot.com/2007/09/real-cost-of-picket-white-fence-3.html

[Ann]

The employment agency owner said that "pretty much everyone coming in these days is a lender, title person or real estate agent."

Is it safe to say that a lot of people in the real estate/housing field are self-employed? Even a lot of people in residential construction? The official government employment statistics haven't been very good lately. How scary would the numbers be if all of these so-called independent contractors were included?

I love your ideas for the Caughlin Ranch house, and I hope the right person agrees with you.

[BanteringBear]

Diane posted:

"I am now beginning to believe, more and more, that the ideal buyer for this property is a benefactor who cares about preserving Nevada history. Someone who needs a multi-million dollar tax break, who will buy the property and donate it back to the community...Unfortunately, the current owner is not in a position to make such a donation."

Hahahahahahaha!!! I'm sorry, that just struck me. Good luck finding someone with a bucket of money and a box of stupid that big. The kind of people who have the funds to do such a thing aren't going to decide to just hand over $4m for a property which isn't even worth half of that. No how, no way. Better not hold your breath on that one. How about a big fat PRICE REDUCED sign on that alligator, instead? Those sellers need to get real, bigtime. Sorry Diane, but I couldn't resist after I read that. I'm holding the seller accountable for the price tag on that thing, not you. With nary a reduction, they're hoping to hit the lottery. Not gonna happen. Unreal.

[GreenNV]

Bad Bear! Bad Bear!

So now Cindy Bear (Google it if you're under 40) has to go into a listing interview for that nice, "nearly new" 2005 Toll Brothers place up on the hill. Seller wants to know where to price the house, and Cindy Bear asks "What's the amount of you first mortgage?"

That's where it is today, kids. And that may not even be strong enough to cover tomorrow. Obviously Cindy Bear didn't get the listing, and the seller will ride the market down into foreclosure, a short sale, or a FICO saving greater loss - or hold on to the alligator (great word, BB). Some of the banks holding REO's are writing off the Seconds and HELOC's, and they still aren't selling. Most banks are trying to prop up the market (and save their portfolios) by pricing their REO's "at market" - it isn't working. I give that strategy about 30 more days before capitulation. Gravity sucks.

[Reno Ignoramus]

Diane, my friend, it has never been about being "right", but it has been about being genuine and accurate. I look back 12-18 months ago when Gotlots and I would "double team" you (you didn't have Guy then) and through it all you stood tall. Ok, a bit kool-aid intoxicated, but tall nonetheless. For the 40th time or so, I commend you for your integrity to keep this blog up. As Lindie posted the other day, this blog has become the only accurate and honest source of info about the Reno market around.

Some people say this has become a "bubble blog." Well, how could it not? The unvarnished truth is that the Reno market is a bubble market. Any honest discussion about the Reno market must, necesarily, encompass discussion about this bubble. The truth is what the truth is. It never was just an "unimaginative metaphor."

Finally, a word about the idea that "the worse is yet to come." Well, that depends on where you stand, doesn't it? Some might say the best is yet to come. Some might say that when this housing market returns, and it will, to a place where median income households can purcahse a median priced home without having to commit financial suicide at the hands of a Voodoo witchdoctor, that that will be the best of times. Not the worst.

[BanteringBear]

Diane is a really good sport which is why I'm not too hard on her. When Diane regurgitates a little Kool Aid now and then, it's actually kind of endearing. It's the eternal optimist in her. The boat is full of holes in shark infested waters, and she's working on the grocery list for next weeks party. Gotta have those kind of people around to keep this a balanced, happy world. If everybody was a cynic (who me??), well, NOT FUN!

I've got to question those posters who like to deride us REALISTS, and label us doom and gloomers. Should we all pretend that everything is just fine and dandy in the Reno real estate world so as to not harsh out their Kool Aid trip? Puuuhhlleeeeze.

The bottom of this market is likely a long ways away. This isn't some credit crunch this week, hot market next week sort of affair. The rug was just pulled back to reveal the rotting elephant carcass. The time has finally arrived for us to pay for all of our sins. Nobody honestly knows how bad things will get, but it isn't going to be pretty. It's quite feasible that a bottom won't be reached until all of the bubble gains are given back, and then some. There are many people predicting price drops of more than 50% in certain areas. They might not be far off. Equity? What equity?

[Grand Wazoo]

Where's dERRICK when we need some light hearted commentary?

SeREIOUSLY diANE, mad props to you for finally seeing what some of us have all known - a market where the average home is priced beyond what the average two-earner professional paycheck (this is not you DeRRIcK) can reasonably afford is a market that must some day make a huge and painful correction.

Welcome.

[smarten]

I have to disagree with Grand Wazoo's assessment that "a market where the average home is priced beyond what the average two-earner professional paycheck...can reasonably afford is a market that must some day make a huge and painful correction."

Diane and I both come from the San Francisco Bay Area where the average home has been priced [by traditional standards] beyond what the average two-earner family can afford for 20 years or more. Yet look at what has happened to median prices! The last time I looked [at least in Silicon Valley] they were approaching $800K.

Now wages may be higher in Santa Clara than Reno but certainly not that much higher for a family of two to afford a home priced twice as much as in Reno. So I don't think reliance upon the "affordability index" in a vacuum necessarily dictates prices.

Now I'm not saying I have all [or even any] of the answers, but I don't take the position prices in Reno will drop to what by traditional standards a two wage earner family should be able to afford. Just take a look at oil prices; we probably won't see $40/barrel oil regardless of what the two wage earner family can afford. That was then and this is now.

Furthermore, one man's two wage earner family [in San Francisco] may be able to afford so much more than another man's two wage earner Reno family. After all, this is the very reason why so many Bay Area families sold them homes and moved to Reno where they could purchase twice [or thrice] the house.

Housing prices are a function of supply and demand. For years Reno's housing "demand" has come from Bay Area expatriates. Currently this class of transplants has dried up. And compounding matters, because of relaxed land planning, miles and miles of undeveloped acreage and massive overbuilding, Reno has an oversupply of housing. Until the fundamentals change, prices in Reno will continue to drop.

Reno must create more high paying jobs or take advantage of its other attributes/incentives [like falling real estate prices] in order to attract more people. When it does, the oversupply of housing will be eliminated and prices will begin to increase whether or not a two wage earner family can afford those prices.

So will prices continue to drop? I think so. Will they drop back to 2002 prices? Maybe. Will they drop by 50%? I just don't think so.