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California Home Prices Will Probably Drop Another 15-25% in Coming Years

Not exactly sparkly news to start off your day, but it’s even unhappier not to have a clue it might be coming whether you’re buying property or the paper secured by it.  Check out this post:

The financial psychology of negative equity – 1,880,000 California mortgage holders have no equity in their homes. California home prices will fall 15 to 25 percent in the coming years. 1 out of 3 California mortgage holders at risk of walking away or defaulting.

A special thank you to Jeremy Roll, co-founder of FIBI (For Investors By Investors) for turning me onto this blog.  You can find FIBI meetings in Southern California by searching on the term “FIBI” on  I highly recommend Jeremy and Ellis San Jose and their other partners.  Great information, real opportunities, no pitching or selling.

Here is my free association stream of thought, Freudian style…

  • If I wanted or needed to sell one of my properties any time in the next 10-15 years, then I’d better get on the market ASAP.  Sure, the Fed is determined to keep interest rates low, but when they’ve pulled out their last impotent card to play and it no longer stimulates anything (we’re pretty much there), it will probably mean much higher interest rates, putting more downward pressure on the price of homes.
  • If I’m buying a property, I need to go in with my eyes wide open and not depend on appreciation to save me from a marginal purchase.  Either it’s got to be a home I know I’m going to love living in for the next several years and can easily afford, or it’s got to have positive cash flow and carry itself as an investment.  If I’m getting conventional financing, then I’d want low long-term fixed rates.  I’d try to find free and clear properties where the owner might carry for me for even better terms than I could get from the bank.
  • If I’m brokering hard money to real estate investors involved in buying and flipping property, then I’m going to be especially conservative (keep LTVs low) in order to protect my private lenders.  In some areas, the profit margins are disappearing on rehabbers almost over night.
  • Given all this, I know that in some local pockets there are still multiple offers on homes priced from $500,000 – $3,000,000, with many of the offers all cash, or CTNL with 50% down or more.  Will this last?  I don’t know.
  • If I’m buying seller financed paper, then I’m going to want my ITV (investment to value) to stay at or below 60%… more like 50% if it’s in CA, AZ, FL or NV.  In fact, I’d attempt to buy partials to keep my ITVs under 40%, and minimize my exposure to inflation.
  • I would counsel my seller consulting clients to take the largest down payment they can possibly get, and create paper that amortizes as quickly as possible to preserve protective equity (even in depreciating markets) which will help the value of their note in the private secondary mortgage market.

Does my thinking make sense?  Please leave a comment below to share your thoughts and describe what are you seeing in your neck of the woods.

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