Bill, when we talk about the "bottom", it depends on what we are talking about. For existing home prices (what Anderson was talking about), and based on historical bust patterns, I'd expect prices to fall steadily in real terms for seveal years (maybe 5 to 7 years).
As I've noted many times, housing "bubbles" typically do not "pop", rather prices deflate slowly in real terms, over several years. Real estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.
This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes. This is exactly what we have seen.
Based on previous busts, it would be incorrect to expect a rapid price decrease - and it would also be incorrect to say there is no bust because median prices haven't fallen in nominal terms. We are seeing a classic housing bust, and median real (and nominal) prices will most likely fall over several years - slowly, steadily, and for many homeowners, painfully.
BTW, this also makes it hard to decide when to "jump in".
CR, This bust should have a record breaking level of foreclosures, for all the reasons we already know about, most notably MBS lienholders that may not be in a position to work with borrowers. That will make "this time different" on at least a few fronts. It's very possible one of the differences we'll see could be a lot less stickiness on the way down.
But nominal price is likely to bottom well before real price. I won't rule out that nominal price could bottom in 2008 unless we slide into deflation. Uncle Ben will have to come with some clever idea (no, helicopters do not work) to prevent this. At this point I see both inflationary and deflationary paths possible.
Yal -- I think it's foolish to ignore TA in any market (even though I'm a "fundamentals" guy at heart). Regarding the bonds, my personal opinion is that 109 16/32 to 110 is the level to watch. If we break there (or, let's say, 4.8%-4.9% on the 10-year yield), it's "uh-oh" time on the interest rate front.
For the most part I agree with CR's comments above. But as Barely pointed out we have not seen this level of foreclosures before. I always refer to the Credit Suisse Arm Reset chart which shows we have not seen the worst of the ARM resets. There will be a high number of properties hitting the market as a result of the foreclosure tsunami. It does make a case we could see some increased liquidity on the way down. Banks will want to get those off their books as soon as they can.
Housing prices are sticky but the long length of the bust is by no means certain, especially if there is a crisis. In Hong Kong after the Asian crisis in 1997, house prices dropped by half in one year.
Moreover, if you average over the whole country (or large region), it is difficult to get huge changes as the boom-bust phases are not perfectly correlated. But if you look at one small place, the drop can be quite quick.
Anybody has data about the Texan bust after the oil bust?
CR: I agree "stickiness" and unwinding were the pattern. I would put forth that much of that had to do with borrower equity exposure and the price of alternatives. This time with little/no equity and the alternative (walk and rent) costing 1/2 or less of "holding on" there is far less stickiness. I would additionally suggest that the shift to multiple mortgages will also contribute to instances of stairstep pricing instead of stickiness. When the 1st forecloses the 2nd takes a 100% hit and the 1st has no incentive to price higher than their being made whole; typically 80%. A stairstep.
Is this a classic housing bust? I would argue that there are many factors likely to cause steeper price declines than past cycles:
-the number of borrower households with already-negative cashflows is greater (given stated income lending).
-the number of households subject to negative cashflows should interest rates rise is greater, and therefore inflation does not "bail out" homeowners.
-the number of households subject negative cashflows when their loans reset (of ARM) or recast (of OA's) is greater.
-the inventory of unbuilt land backed by debt is arguably greater (outside of the builders, leveraged land banks own a significant portion of for-development land).
-the liabilities of a large portion of creditors (i.e. hedge funds) are shorter term and not guaranteed by the government.
-a larger amount of stable-liability creditors (pension funds) hold mortgage debt based on the credit insurance extended by undercapitalized insurers (Fannie/Freddie).
and lastly,
-the housing downturn is being felt nationally, where as previous cycles were arguably "fenced off" to a few regions.
Given the above, why would you expect prices to behave as they did in previous cycles?
Treasuries marching higher. Can't be good news for those facing resets. HELOCs adjust monthly - OUCH. Talk about debt service taking a bite out of discressionary.
Dang, looks like my prior comment was Haloscanned.
This isn't a typical housing bust. Too much speculation, fraud, lax lending, etc. The product mix is all wrong -- condos & McMansions -- and sub-prime is not a stable target market. Just the prevalence of zero-down, stated income, monster DTI, NegAm & I/O loans is enough to bring this house of cards down fairly fast.
barely -- keep in mind that many HELOCs price off the prime rate, which essentially moves in lock step with the federal funds rate, NOT market rates. The real significance of a move up in longer-term Treasury yields (should this one gain steam) is on potential refinancers. Lots of folks who have ARMs facing imminent reset dates were supposed to be able to refinance into longer-term fixed-rate mortgages to save them from financial trouble. If 30-year loans get more expensive, some of those people will be shut out.
Seems to me that loose lending (to the extreme) and psychology will make this time different.
In neighborhoods with significant subprime borrowing the prices are already collapsing pretty quickly (as the price supports they required are disappearing along with the lenders themselves).
If defaults really start spreading beyond subprime, which most of us here expect, I think the price drops will also accelerate in all neighborhoods as lenders above subprime remove start to disappear and remove loose-lending price supports.
Also, the degree of shift from unprecedented optimism to the coming revulsion could be greater than ever before. Ongoing revelations of tragic loss, scandal and greed will put the level of buyer skepticism above normal, shifting housing demand well below normal.
On top of all that, the government and Fed have their hands tied somewhat as far as a bailout is concerned. We have wars and entitlement programs to fund, plus the threat of a crashing dollar.
All, we might see faster price declines for all the reasons in earlier comments - but I think people shouldn't underestimate the power of "stickiness". It's hard to measure, but stickiness is real - and we have definitely seen it so far in this bust.
Obviously some areas will see faster price declines than other areas. But in general I think we should expect the normal bust pattern.
In the early '90s, nominal prices in San Diego fell from less than 1% to almost 4% per year for six years. Maybe the percentages will be slightly higher this time, but I expect something similar for many areas, with nominal prices flat to down 5% annually - lasting for several years.
My forecast for national nominal median prices in '07 is a decline of 1% to 3%. That still sounds about right.
How are national price averages computed? Is it weighted by number of sales across the board or is it like the Senate, where 1 vote in WY cancels 1 vote in CA?
To amplify one of David's points, I think the prevalence of subprime loans with sharp interest rate resets early in their lives compounded by the effective removal of the product (that is the only reason they got into the house to start with) from the mortgage market at the point they need to refi, does add a distinction from previous cycles. We also have much more widespread securitization which we know will probably result in more foreclosures on the margin and perhaps a self reinforcing cascade of failed loans in some neighborhoods.
It looks like the truth is starting to slip through the cracks, now Wells Fargo is stating that housing prices will fall in So. California. It won't be the first time, and it won't be the last. In 1990-1996 we lived in a place called Rossmoor/Seal Beach and it was hit hard by the last big real estate recession. This recession will ruin a whole lot more people than were harmed by the real estate recession of 1990-1995.
BTW I read this morning that a large number of CDO tranches may be given new credit ratings because of a huge increase in risk. This is going to be really ugly to watch.
Measuring the progress of this housing bust by looking at the Median Price is extremely misleading. At least in the Bay Area, we have a severe distortion of the Median Price because high end properties are moving, and low end properties not at all.
There is a very sharp dropoff in volume in the starter home market (which here is in the 700K range). But thanks to a bubbly stock market and IPO market, high end sales are moving briskly.
Perhaps it makes more sense to look at the aggregate of the transaction in dollar terms and compare those with earlier years. View From Silicon Valley (I am not connected with vfsv in any, but enjoy their posts) has some stats along those lines.
Or instead of a single median price for the entire market, it might make sense to divide the market into 3 segments (low, mid, high) and look at the 3 segments separately.
The unravelling has been swifter in the low end/starter home end this time around thanks to the credit collapse in the subprime area. That has to have an impact in the move up market at some point.
barely, there are some problems with the OFHEO index (they only use conforming loans, so many home in California aren't included), but in general it is pretty good.
Brian, this time could definitely be worse. I'm just saying expect the normal bust cycle (maybe a little more price declines), and you probably won't be too far off. Those people expecting no real price declines, and those expecting a 20% crash, are probably both going to be disappointed.
ba_lurker, good point. Right now the transactions at the low end have fallen more than the high end - and this is distorting the median. Dataquick noted this in their most recent release.
I was a very active RE agent throughout the 90's bust in the San Fernando Valley. The reality on the ground was much worse than what is reflected in the OFHEO and NAR/CAR stats. The OFHEO is not very useful in SoCal as there are very few homes that meet its criteria to be included. The NAR and CAR only provide medians and averages which can be skewed based on market mix.
During most of the bust last time, interest rates were falling, and falling quite dramatically, from a high of over 10% to something in the 7% range. Even still, many houses dropped 40-50% in price (nominally). My own townhouse went from a high of about $190k in '89 to a low of about $100k in '95.
In my opinion, things could be worse this time. Affordability is at unheard of levels, much worse than '89-90. Interest rates will not be able to soften the affordabilty blow as they did last time. In a city like LA affordability is the real problem. Only 2% of homes sold were affordable to the median income household in Q4 '06. LA has always been expensive, but the Wells Fargo Housing Opportunity Index was over 50% as recently as 98-99. Prior to the run-up, the index has never been below 40%. Pretty shocking.
CR, If the OFHEO reports only include conforming it can't possibly capture the bulk of the declines since the areas that had the greatest run-up and will likely suffer the sharpest drops will be excluded. And I would think those areas had the most activity.
I guess the run-up was also under-reported for that matter. WHat other independent source is there for data?
CR - "jump in" when the entry level priced homes begin a sustained reversal in total sales using 5-20% cash down payments that aren't the result of any non-profit laundered builder incentives
The CME housing futures market is showing housing price declines into February of next year for LA of $4.0 and for San Diego of 4.2%. Over-the-counter forward markets that track longer-date views are reflecting LA down about 6%. The markets use S&P/Case-Shiller indexes for tracking and settlement.
The housing market has softened much more than is being reported. We have been advising our retainer clients for more than one year about misleading national sales information, both with the Existing Home Sales and New Home Sales data. We are now going public with our concerns because we are concerned that policy makers are relying on national data to conclude that the housing market correction has not been severe.
Here is our support:
Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55% of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22% if you compare sales over the last 12 months to the prior 12 months. On a straight year over year comparison, the decline is much more.
Mortgage Bankers Association (MBA) Data: The MBA Seasonally Adjusted Purchase Application Index, which is a measure of the number of people filling out loan applications to buy a home, is down 18% from its peak in September 2005.1 With presumably more applications being filled out by borrowers who now have to shop around for a loan, how could sales have fallen by less than 18%?
Builder Data: The nation's two largest homebuilders, D.R. Horton and Lennar, are reporting that orders have declined 27% to 37%, year-over-year. 2 3 D.R. Horton and Lennar have dropped prices significantly in many markets to generate sales, while the resale market has not. How could their sales have fallen more than the resale market, even if new home communities tend to be in fringe areas?
Realogy Corporation Data: Realogy, which is the parent company of Century 21, Coldwell Banker, and ERA, participated in roughly 1.9 million brokerage related transactions in 2006 compared to 2.3 million in 2005, representing a year-over-year decline of 18% nationwide.4
2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested.
New Home Data: The Census Bureau calculation of new home data does not calculate sales net of cancellations, and cancellations are running much higher than normal right now, which is why the sales numbers overestimate actual sales.
Name, as credit contracts the highest priced homes will see the most erosion in terms number of qualified buyers. That's where the most leverage was and most of the dollars were made on the way up. The high(er) end market will see the sharpest declines, later in the cycle - In dollar terms for sure.
Think of a range of possible home price volatilities, with the "sticky price" scenario you posit being the most likely. I argue that the likely range looks different depending on the type of funding used by credit intermediaries.
In a "stable deposit" system, lenders have ample time to work out loans. Time allows incomes and job growth to catch up with mortgage payments, and it allows for orderly disposition of impaired collateral.
In a "hot money" system, collateral values and funding can experience a feedback loop: declining values cause a loss of funding, which in turn results in collateral being dumped on the market, which causes declines in collateral values. This feedback loop CAN cause dramatic price declines of the type that are rare in the stable deposit system.
Is there a historical example of the "hot money" system? One has to look at the time before deposit guarantees, but then home mortgages were probably not prevalent pre-New Deal. Its possible that the combination of widespread mortgage finance with "hot money" funding has no historical precedent.
"Are non-depository subprime funders beginning to see some relief in the secondary market? Prices are ticking up every so slightly, one executive told us, but nothing to write home about. "If we get 101 for a loan we consider ourselves fortunate," said the president of one West Coast-based B&C shop. "If we get 101.5 we consider that a fortune"
Sources also indicate that prices might be firming up in the scratch and dent loan market, but one participant says he thinks the increase could be temporary. "A lot of mom and pops are entering this business," he said. Prices offered for nonperforming second liens that were part of 80/20 combos are still at rock bottom -- in the range of $0.08 to $0.10 on the dollar "
Why is this time different and why the outcome will be different...
o Record and increasing inventory
o Record and increasing foreclosures
o Record use of leverage
o Record ARM loan originations
o Record use of risky loan products
o Record appreciation
o Unheard of risky lending practices
o Record low interest levels at loan origination
o Record "homeownership" levels
o Record MBS market financing levels
o Record lows for lender loan loss reserves
and all this during record low rates and record low unemployment....which means of course that it wasn't supposed to happen, and if it did, well...it just couldn't happen.
But now that it has...not much room for improvement in the jobs and rates arena.
Go to zillow and and narrow the search feature to sales within just the last month (left hand side). Zoom out over a good sized area and move your curser over the yellow flags. All will be recent sales. Look how many sales are below zestimates. If any are well below, then it's likely a forclosure, as they show up in the sales stat, yet it's still an empty house. Pick some newer areas (like East Chula Vista, ca) and youll see most are well below zestimates, and most in the new areas are actually forclosures and still are out there for sale (I know I drove and checked, they are empty and run down...and many were never listed for sale...alot of hidden inventory out there ready to explode).
barely said: "the areas that had the greatest run-up and will likely suffer the sharpest drops"
to which Name replied: "That sounds logical, But I don't think it should be taken for granted. Poverty has a floor, but wealth has no ceiling..."
Which brings up the point of volatility. Just because one area's housing market is more volatile than another doesn't necessarily mean the market is "better" or "worse" than another. It may only mean that the price swings are wider, and that's all.
I think at least part of the volatility in Southern California's housing market is related to liquidity, by which I mean the relationship of qualified buyers to affordable housing.
Home ownership nationwide is around 69%, but it's down in the high 50%'s in California. Also, on an absolute basis CA housing is among the most expensive in the nation.
Fewer qualified buyers in relationship to the affordable homes translates to a more "illiquid" market, with wider price swings.
tanta, Record low interest rates at origination when in CA buyers were using ARM rates with 1% intro rates so they could keep their payments low. ARMs were running in the 80%+ of loans issued range in CA in 2003-5 when short term rates were at historic lows. Now what?
This has epic RE bust written all over it. RE market is in a corner 1000 ways here and as REOs spike the end game is in sight...
You say that people expecting a larger than 20% drop (in nominal prices) are going to be disappointed. I have to disagree with that. Granted, a larger than 20% drop in the nationwide (nominal) median price is unlikely. I am not sure from peak-trough what the median price drops were in N.CA and S.CA in the early 90s downturn.
But if you look at specific properties (that are not moving), we can already see > 10% drops in list prices in many of those. And as most of us agree, we are pretty much at the beginning of the downturn (a quip on Ben Jones blog said "we haven't even arrived at the ballpark yet" )
I think it's a bit misleading to use recent indicators to predict the housing market. All the 'records' that barely listed are already in place. It's the unknown 'records' that will drive stickiness.
The behavior of these factors:
-global wage arbitrage
-changes in savings rates
-unemployment swings
-cleaning up the appraisal mess
-China's Yuan behavior
-rate of change of liquidity
-investor psychology
etc.
will determine the rate of housing price drops.
I do think that a high national foreclosure level combined with 'valid' comps would do a lot to remove stickiness. For example, a house listed in my area (Howard County, MD) was listed @650K and is now in bankrupcy for $475K. I have several other examples as well. If used, this would crush the financing options for buyers.
Here in the Northwest suburbs of Chicago MLS listing counts -- already high last month -- leapt astonishingly last week. But sales (real sales, i.e., closings) are sluggish.
In the $400-500K range where things are still moving somewhat, there are 166 listings in Arlington Heights, but only 43 closed sales this year thru April 12.
In the million-plus range there are 29 listings, with just one sale so far -- and only two more in the $900k range. About 70% of these are vacant new construction, not listings just "testing the market", and not homes of wealthy people so flush they're moving up into even more expensive homes, with no pressure to sell. It's going to be very interesting to see what happens when the speculators can't carry their loans any longer.
Down below, in the $700-$999K range, are about 80 more pygmy white elephants also about 70% vacant new construction. If the million-plus real white elephants have to fall into this price range to sell, how far will the pygmies fall?
Well I am not in OC but I sold a house recently in Colorado. My list price was 600000 and magically the list was 575000 when my house sold for 575000. Don't believe a single figure out there. The Realtors are a lying sorry bunch. I like mine because he got the deal done but there were some things about the deal I don't want to know about. ie appraisels and such. I do feel sorry for the people who bought the house but it was them or me and they signed with open eyes. A new long term renter at least till 2024. We have a long dark period ahead due to the baby bust 1970 to mid 1980's. This housing boom ended right as they started into their peak buying years.
Any predictions on 09' or is next year expected to be the bottom?
Bill, when we talk about the "bottom", it depends on what we are talking about. For existing home prices (what Anderson was talking about), and based on historical bust patterns, I'd expect prices to fall steadily in real terms for seveal years (maybe 5 to 7 years).
As I've noted many times, housing "bubbles" typically do not "pop", rather prices deflate slowly in real terms, over several years. Real estate prices display strong persistence and are sticky downward. Sellers tend to want a price close to recent sales in their neighborhood, and buyers, sensing prices are declining, will wait for even lower prices.
This means real estate markets do not clear immediately, and what we usually observe is a drop in transaction volumes. This is exactly what we have seen.
Based on previous busts, it would be incorrect to expect a rapid price decrease - and it would also be incorrect to say there is no bust because median prices haven't fallen in nominal terms. We are seeing a classic housing bust, and median real (and nominal) prices will most likely fall over several years - slowly, steadily, and for many homeowners, painfully.
BTW, this also makes it hard to decide when to "jump in".
Best Wishes.
CR, This bust should have a record breaking level of foreclosures, for all the reasons we already know about, most notably MBS lienholders that may not be in a position to work with borrowers. That will make "this time different" on at least a few fronts. It's very possible one of the differences we'll see could be a lot less stickiness on the way down.
Is banker still around ?
he was laughing on TA for bonds.
10 Yr is already down 16/32 in the last 3 days.
But nominal price is likely to bottom well before real price. I won't rule out that nominal price could bottom in 2008 unless we slide into deflation. Uncle Ben will have to come with some clever idea (no, helicopters do not work) to prevent this. At this point I see both inflationary and deflationary paths possible.
Yal -- I think it's foolish to ignore TA in any market (even though I'm a "fundamentals" guy at heart). Regarding the bonds, my personal opinion is that 109 16/32 to 110 is the level to watch. If we break there (or, let's say, 4.8%-4.9% on the 10-year yield), it's "uh-oh" time on the interest rate front.
For the most part I agree with CR's comments above. But as Barely pointed out we have not seen this level of foreclosures before. I always refer to the Credit Suisse Arm Reset chart which shows we have not seen the worst of the ARM resets. There will be a high number of properties hitting the market as a result of the foreclosure tsunami. It does make a case we could see some increased liquidity on the way down. Banks will want to get those off their books as soon as they can.
Housing prices are sticky but the long length of the bust is by no means certain, especially if there is a crisis. In Hong Kong after the Asian crisis in 1997, house prices dropped by half in one year.
Moreover, if you average over the whole country (or large region), it is difficult to get huge changes as the boom-bust phases are not perfectly correlated. But if you look at one small place, the drop can be quite quick.
Anybody has data about the Texan bust after the oil bust?
CR: I agree "stickiness" and unwinding were the pattern. I would put forth that much of that had to do with borrower equity exposure and the price of alternatives. This time with little/no equity and the alternative (walk and rent) costing 1/2 or less of "holding on" there is far less stickiness. I would additionally suggest that the shift to multiple mortgages will also contribute to instances of stairstep pricing instead of stickiness. When the 1st forecloses the 2nd takes a 100% hit and the 1st has no incentive to price higher than their being made whole; typically 80%. A stairstep.
CR,
Is this a classic housing bust? I would argue that there are many factors likely to cause steeper price declines than past cycles:
-the number of borrower households with already-negative cashflows is greater (given stated income lending).
-the number of households subject to negative cashflows should interest rates rise is greater, and therefore inflation does not "bail out" homeowners.
-the number of households subject negative cashflows when their loans reset (of ARM) or recast (of OA's) is greater.
-the inventory of unbuilt land backed by debt is arguably greater (outside of the builders, leveraged land banks own a significant portion of for-development land).
-the liabilities of a large portion of creditors (i.e. hedge funds) are shorter term and not guaranteed by the government.
-a larger amount of stable-liability creditors (pension funds) hold mortgage debt based on the credit insurance extended by undercapitalized insurers (Fannie/Freddie).
and lastly,
-the housing downturn is being felt nationally, where as previous cycles were arguably "fenced off" to a few regions.
Given the above, why would you expect prices to behave as they did in previous cycles?
Anybody has data about the Texan bust after the oil bust?
Here's some data for Houston:
Paper Economy - A Real Estate Bubble Blog
Treasuries marching higher. Can't be good news for those facing resets. HELOCs adjust monthly - OUCH. Talk about debt service taking a bite out of discressionary.
This summer will be interesting.
Dang, looks like my prior comment was Haloscanned.
This isn't a typical housing bust. Too much speculation, fraud, lax lending, etc. The product mix is all wrong -- condos & McMansions -- and sub-prime is not a stable target market. Just the prevalence of zero-down, stated income, monster DTI, NegAm & I/O loans is enough to bring this house of cards down fairly fast.
barely -- keep in mind that many HELOCs price off the prime rate, which essentially moves in lock step with the federal funds rate, NOT market rates. The real significance of a move up in longer-term Treasury yields (should this one gain steam) is on potential refinancers. Lots of folks who have ARMs facing imminent reset dates were supposed to be able to refinance into longer-term fixed-rate mortgages to save them from financial trouble. If 30-year loans get more expensive, some of those people will be shut out.
Seems to me that loose lending (to the extreme) and psychology will make this time different.
In neighborhoods with significant subprime borrowing the prices are already collapsing pretty quickly (as the price supports they required are disappearing along with the lenders themselves).
If defaults really start spreading beyond subprime, which most of us here expect, I think the price drops will also accelerate in all neighborhoods as lenders above subprime remove start to disappear and remove loose-lending price supports.
Also, the degree of shift from unprecedented optimism to the coming revulsion could be greater than ever before. Ongoing revelations of tragic loss, scandal and greed will put the level of buyer skepticism above normal, shifting housing demand well below normal.
On top of all that, the government and Fed have their hands tied somewhat as far as a bailout is concerned. We have wars and entitlement programs to fund, plus the threat of a crashing dollar.
All, we might see faster price declines for all the reasons in earlier comments - but I think people shouldn't underestimate the power of "stickiness". It's hard to measure, but stickiness is real - and we have definitely seen it so far in this bust.
Obviously some areas will see faster price declines than other areas. But in general I think we should expect the normal bust pattern.
In the early '90s, nominal prices in San Diego fell from less than 1% to almost 4% per year for six years. Maybe the percentages will be slightly higher this time, but I expect something similar for many areas, with nominal prices flat to down 5% annually - lasting for several years.
My forecast for national nominal median prices in '07 is a decline of 1% to 3%. That still sounds about right.
Best to all.
How are national price averages computed? Is it weighted by number of sales across the board or is it like the Senate, where 1 vote in WY cancels 1 vote in CA?
AC,
Looks like a 24.7% OFHEO-HPI drop from Q1'83 to Q1'88 for Houston/Sugarland (if HPI is linear).
Longer timeframe than I expected but the drop is not as deep as I would have thought.
CR,
To amplify one of David's points, I think the prevalence of subprime loans with sharp interest rate resets early in their lives compounded by the effective removal of the product (that is the only reason they got into the house to start with) from the mortgage market at the point they need to refi, does add a distinction from previous cycles. We also have much more widespread securitization which we know will probably result in more foreclosures on the margin and perhaps a self reinforcing cascade of failed loans in some neighborhoods.
Looks like a 24.7% OFHEO-HPI drop from Q1'83 to Q1'88 for Houston/Sugarland (if HPI is linear).
Longer timeframe than I expected but the drop is not as deep as I would have thought.
Inflation was higher then, though. In real terms I think the drop was closer to 40%.
Calculated Risk
Thank you for this site
It looks like the truth is starting to slip through the cracks, now Wells Fargo is stating that housing prices will fall in So. California. It won't be the first time, and it won't be the last. In 1990-1996 we lived in a place called Rossmoor/Seal Beach and it was hit hard by the last big real estate recession. This recession will ruin a whole lot more people than were harmed by the real estate recession of 1990-1995.
BTW I read this morning that a large number of CDO tranches may be given new credit ratings because of a huge increase in risk. This is going to be really ugly to watch.
Measuring the progress of this housing bust by looking at the Median Price is extremely misleading. At least in the Bay Area, we have a severe distortion of the Median Price because high end properties are moving, and low end properties not at all.
There is a very sharp dropoff in volume in the starter home market (which here is in the 700K range). But thanks to a bubbly stock market and IPO market, high end sales are moving briskly.
Perhaps it makes more sense to look at the aggregate of the transaction in dollar terms and compare those with earlier years. View From Silicon Valley (I am not connected with vfsv in any, but enjoy their posts) has some stats along those lines.
Or instead of a single median price for the entire market, it might make sense to divide the market into 3 segments (low, mid, high) and look at the 3 segments separately.
The unravelling has been swifter in the low end/starter home end this time around thanks to the credit collapse in the subprime area. That has to have an impact in the move up market at some point.
barely, there are some problems with the OFHEO index (they only use conforming loans, so many home in California aren't included), but in general it is pretty good.
Brian, this time could definitely be worse. I'm just saying expect the normal bust cycle (maybe a little more price declines), and you probably won't be too far off. Those people expecting no real price declines, and those expecting a 20% crash, are probably both going to be disappointed.
Best Wishes.
ba_lurker, good point. Right now the transactions at the low end have fallen more than the high end - and this is distorting the median. Dataquick noted this in their most recent release.
Best Wishes.
I was a very active RE agent throughout the 90's bust in the San Fernando Valley. The reality on the ground was much worse than what is reflected in the OFHEO and NAR/CAR stats. The OFHEO is not very useful in SoCal as there are very few homes that meet its criteria to be included. The NAR and CAR only provide medians and averages which can be skewed based on market mix.
During most of the bust last time, interest rates were falling, and falling quite dramatically, from a high of over 10% to something in the 7% range. Even still, many houses dropped 40-50% in price (nominally). My own townhouse went from a high of about $190k in '89 to a low of about $100k in '95.
In my opinion, things could be worse this time. Affordability is at unheard of levels, much worse than '89-90. Interest rates will not be able to soften the affordabilty blow as they did last time. In a city like LA affordability is the real problem. Only 2% of homes sold were affordable to the median income household in Q4 '06. LA has always been expensive, but the Wells Fargo Housing Opportunity Index was over 50% as recently as 98-99. Prior to the run-up, the index has never been below 40%. Pretty shocking.
The current market shown here...
http://i12.photobucket.com/albums/a216/Pixbucket/07-05-16_SoCal_RE_Price_Small.png
...is going to turn into a replay of last time, shown here..
http://i12.photobucket.com/albums/a216/Pixbucket/90sbustreal.jpg
...or even WORSE, right?
CR, If the OFHEO reports only include conforming it can't possibly capture the bulk of the declines since the areas that had the greatest run-up and will likely suffer the sharpest drops will be excluded. And I would think those areas had the most activity.
I guess the run-up was also under-reported for that matter. WHat other independent source is there for data?
(Haloscan ate the last post, apparently)
CR - "jump in" when the entry level priced homes begin a sustained reversal in total sales using 5-20% cash down payments that aren't the result of any non-profit laundered builder incentives
Oh, and I think we're many years from seeing that "jump in" point...
You can barely buy a 1bd condo in SoCal using a conforming loan, so OFHEO stats tell us nothing... which is exactly why CR's prediction is a safe one.
The CME housing futures market is showing housing price declines into February of next year for LA of $4.0 and for San Diego of 4.2%. Over-the-counter forward markets that track longer-date views are reflecting LA down about 6%. The markets use S&P/Case-Shiller indexes for tracking and settlement.
barely,
"the areas that had the greatest run-up and will likely suffer the sharpest drops"
That sounds logical, But I don't think it should be taken for granted. Poverty has a floor, but wealth has no ceiling.
If you believe "the rich get richer", then you should not also believe what you wrote.
The housing market has softened much more than is being reported. We have been advising our retainer clients for more than one year about misleading national sales information, both with the Existing Home Sales and New Home Sales data. We are now going public with our concerns because we are concerned that policy makers are relying on national data to conclude that the housing market correction has not been severe.
Here is our support:
Closing Data: We purchase and compile actual home closing data for approximately 181 counties across the country, which captures the counties where about 55% of the U.S. population lives and a significant percentage of all of the counties where the large home builders are active. This data shows that sales have fallen 22% if you compare sales over the last 12 months to the prior 12 months. On a straight year over year comparison, the decline is much more.
Mortgage Bankers Association (MBA) Data: The MBA Seasonally Adjusted Purchase Application Index, which is a measure of the number of people filling out loan applications to buy a home, is down 18% from its peak in September 2005.1 With presumably more applications being filled out by borrowers who now have to shop around for a loan, how could sales have fallen by less than 18%?
Builder Data: The nation's two largest homebuilders, D.R. Horton and Lennar, are reporting that orders have declined 27% to 37%, year-over-year. 2 3 D.R. Horton and Lennar have dropped prices significantly in many markets to generate sales, while the resale market has not. How could their sales have fallen more than the resale market, even if new home communities tend to be in fringe areas?
Realogy Corporation Data: Realogy, which is the parent company of Century 21, Coldwell Banker, and ERA, participated in roughly 1.9 million brokerage related transactions in 2006 compared to 2.3 million in 2005, representing a year-over-year decline of 18% nationwide.4
2005-2006 NAR State Data: The National Association of Realtors state data does show sharp year-over-year corrections in major states: 28% drop in Florida, 24% drop in California, and a 28% drop in Arizona. Our data, however, shows the sales have probably dropped by 34%, 27% and 38%, respectively. The national numbers include some large states where sales volumes have not corrected substantially, such as in Texas and Ohio, but we believe these markets are not very healthy for other reasons. Interestingly, our calculations were tracking very closely with NAR data through 2005, as illustrated above. We did investigate NAR methodology and have found absolutely no reason to believe that the NAR is intentionally misleading anyone, as some have suggested.
New Home Data: The Census Bureau calculation of new home data does not calculate sales net of cancellations, and cancellations are running much higher than normal right now, which is why the sales numbers overestimate actual sales.
The preponderance of evidence
Name, as credit contracts the highest priced homes will see the most erosion in terms number of qualified buyers. That's where the most leverage was and most of the dollars were made on the way up. The high(er) end market will see the sharpest declines, later in the cycle - In dollar terms for sure.
CR,
Think of a range of possible home price volatilities, with the "sticky price" scenario you posit being the most likely. I argue that the likely range looks different depending on the type of funding used by credit intermediaries.
In a "stable deposit" system, lenders have ample time to work out loans. Time allows incomes and job growth to catch up with mortgage payments, and it allows for orderly disposition of impaired collateral.
In a "hot money" system, collateral values and funding can experience a feedback loop: declining values cause a loss of funding, which in turn results in collateral being dumped on the market, which causes declines in collateral values. This feedback loop CAN cause dramatic price declines of the type that are rare in the stable deposit system.
Is there a historical example of the "hot money" system? One has to look at the time before deposit guarantees, but then home mortgages were probably not prevalent pre-New Deal. Its possible that the combination of widespread mortgage finance with "hot money" funding has no historical precedent.
"Are non-depository subprime funders beginning to see some relief in the secondary market? Prices are ticking up every so slightly, one executive told us, but nothing to write home about. "If we get 101 for a loan we consider ourselves fortunate," said the president of one West Coast-based B&C shop. "If we get 101.5 we consider that a fortune"
Sources also indicate that prices might be firming up in the scratch and dent loan market, but one participant says he thinks the increase could be temporary. "A lot of mom and pops are entering this business," he said. Prices offered for nonperforming second liens that were part of 80/20 combos are still at rock bottom -- in the range of $0.08 to $0.10 on the dollar "
http://data.nationalmortgagenews.com/columns/hearing/
Why is this time different and why the outcome will be different...
o Record and increasing inventory
o Record and increasing foreclosures
o Record use of leverage
o Record ARM loan originations
o Record use of risky loan products
o Record appreciation
o Unheard of risky lending practices
o Record low interest levels at loan origination
o Record "homeownership" levels
o Record MBS market financing levels
o Record lows for lender loan loss reserves
= RECORD BUST.
Forgot the perhaps biggest concern that factors in stagnant wage growth where price increases far outstripped incomes...
o Record low affordability levels
Barely, nice summary....
and all this during record low rates and record low unemployment....which means of course that it wasn't supposed to happen, and if it did, well...it just couldn't happen.
But now that it has...not much room for improvement in the jobs and rates arena.
Neat trick,
Go to zillow and and narrow the search feature to sales within just the last month (left hand side). Zoom out over a good sized area and move your curser over the yellow flags. All will be recent sales. Look how many sales are below zestimates. If any are well below, then it's likely a forclosure, as they show up in the sales stat, yet it's still an empty house. Pick some newer areas (like East Chula Vista, ca) and youll see most are well below zestimates, and most in the new areas are actually forclosures and still are out there for sale (I know I drove and checked, they are empty and run down...and many were never listed for sale...alot of hidden inventory out there ready to explode).
Record low interest levels at loan origination
Barely, why would this magnify rather than mitigate a bust? (As a separate issue from ARMS?)
"Barely, why would this magnify rather than mitigate a bust? (As a separate issue from ARMS?)"
Because it is more likely that interest rates will be going up from that low point?
barely said: "the areas that had the greatest run-up and will likely suffer the sharpest drops"
to which Name replied: "That sounds logical, But I don't think it should be taken for granted. Poverty has a floor, but wealth has no ceiling..."
Which brings up the point of volatility. Just because one area's housing market is more volatile than another doesn't necessarily mean the market is "better" or "worse" than another. It may only mean that the price swings are wider, and that's all.
I think at least part of the volatility in Southern California's housing market is related to liquidity, by which I mean the relationship of qualified buyers to affordable housing.
Home ownership nationwide is around 69%, but it's down in the high 50%'s in California. Also, on an absolute basis CA housing is among the most expensive in the nation.
Fewer qualified buyers in relationship to the affordable homes translates to a more "illiquid" market, with wider price swings.
JMO.
Sebastia
tanta, Record low interest rates at origination when in CA buyers were using ARM rates with 1% intro rates so they could keep their payments low. ARMs were running in the 80%+ of loans issued range in CA in 2003-5 when short term rates were at historic lows. Now what?
This has epic RE bust written all over it. RE market is in a corner 1000 ways here and as REOs spike the end game is in sight...
CR
You say that people expecting a larger than 20% drop (in nominal prices) are going to be disappointed. I have to disagree with that. Granted, a larger than 20% drop in the nationwide (nominal) median price is unlikely. I am not sure from peak-trough what the median price drops were in N.CA and S.CA in the early 90s downturn.
But if you look at specific properties (that are not moving), we can already see > 10% drops in list prices in many of those. And as most of us agree, we are pretty much at the beginning of the downturn (a quip on Ben Jones blog said "we haven't even arrived at the ballpark yet"
)
I think it's a bit misleading to use recent indicators to predict the housing market. All the 'records' that barely listed are already in place. It's the unknown 'records' that will drive stickiness.
The behavior of these factors:
-global wage arbitrage
-changes in savings rates
-unemployment swings
-cleaning up the appraisal mess
-China's Yuan behavior
-rate of change of liquidity
-investor psychology
etc.
will determine the rate of housing price drops.
I do think that a high national foreclosure level combined with 'valid' comps would do a lot to remove stickiness. For example, a house listed in my area (Howard County, MD) was listed @650K and is now in bankrupcy for $475K. I have several other examples as well. If used, this would crush the financing options for buyers.
now Wells Fargo is stating that housing prices will fall in So. California
Wow, predicting the past is really becoming a growth industry. How can I get in on the action?
Here in the Northwest suburbs of Chicago MLS listing counts -- already high last month -- leapt astonishingly last week. But sales (real sales, i.e., closings) are sluggish.
In the $400-500K range where things are still moving somewhat, there are 166 listings in Arlington Heights, but only 43 closed sales this year thru April 12.
In the million-plus range there are 29 listings, with just one sale so far -- and only two more in the $900k range. About 70% of these are vacant new construction, not listings just "testing the market", and not homes of wealthy people so flush they're moving up into even more expensive homes, with no pressure to sell. It's going to be very interesting to see what happens when the speculators can't carry their loans any longer.
Down below, in the $700-$999K range, are about 80 more pygmy white elephants also about 70% vacant new construction. If the million-plus real white elephants have to fall into this price range to sell, how far will the pygmies fall?
Arlington Heights 2007 recorded sales, by price
Arlington Heights 2007 recorded sales, by date of record
Local realtor comments
Well I am not in OC but I sold a house recently in Colorado. My list price was 600000 and magically the list was 575000 when my house sold for 575000. Don't believe a single figure out there. The Realtors are a lying sorry bunch. I like mine because he got the deal done but there were some things about the deal I don't want to know about. ie appraisels and such. I do feel sorry for the people who bought the house but it was them or me and they signed with open eyes. A new long term renter at least till 2024. We have a long dark period ahead due to the baby bust 1970 to mid 1980's. This housing boom ended right as they started into their peak buying years.