Expert Says California’s Real Estate Crisis Will Be Worse Than Most Analysts Realize

RISMEDIA, June 22, 2007-California's real estate downturn will be deep and long lasting, with home prices falling 15 to 30% during the next 36 to 42 months, according to a real estate expert.

Bruce Norris, who correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices, said the downturn will reflect a perfect storm that includes record numbers of foreclosures, a sharp decline in migration to California, substantial increases in unsold inventory, and, of course, falling prices.

"We are in for a very rough ride in California's real estate market, which is likely to be far more severe than analysts, state officials and real estate industry associations have acknowledged," Norris said, adding, "Foreclosures alone are likely to be more numerous than anything we've ever experienced, with bank repossessions ultimately accounting for as high or as many as 25-30 percent of all homes sold during the next three years. But like any storm, this, too, shall pass.".....(We need to) come to terms with the fact that analysts, state officials and the California Association of Realtors are either not being frank about the severity of the coming crisis or they simply aren't looking at the right categories of statistics...he expects California real estate prices to again rebound in 2011 as foreclosures decrease, the number of homes for sale declines to a manageable level and as California again experiences a net increase in population migration...the trouble with the analysis given by most real estate observers is that it's based on flawed assumptions, including the widespread belief that interest rate adjustments can somehow hold back the looming real estate crisis.

"Interest rates alone do not determine the direction of prices,".... the last time we had a real estate downturn in California. Interest rates were actually lower in lower in 1997 than they were in 1990. Yet prices declined by as much as 35 percent...The most reliable indicator of a downturn in California is low affordability....

"We still have strong employment and historically low interest rates," Norris said, "yet we continue to see the inventory of homes soar, even as builders lower prices and give huge sales incentives. This change in the market caught economists off guard because they said that without an increase in unemployment, you can't have a real estate downturn. That wasn't true!".... "If prices were heading upward and if demand for housing was strong, (builders) wouldn't be walking away from these land option agreements," he said.

Most people, however, are still being misled my misinformation that is being fed to the news media.

"Many economists and real estate observers and even government officials continue to offer rosy assessments because they are under political pressure to say nothing or because they are simply l

I can hear Barney now,

"Ralphy-boy, so let me get this straight....

and let me remind you before you answer, I have been reading this Tanta chick, she's not buying the shit your feeding the press...

roughly 150M in margin calls leads to a 3.2B loan as a bailout of one fund?

splain this shit to me Ralphy....

Geez, how can anyone look at that first chart and not see economic mushroom clouds in the future?

Danger, Will Robinson! Danger!

It's somewhat like in a comedy where someone says-"Well, at least it's not raining", and the thunderclap comes.

In this case, the problem has been "confined" to a "few months", "a year at most", "a few regions", "a few homebuyers", "a few undecapitalized brokers", "a few brokerages", "a few funds".

Talk about moving the goal posts. For those of you who think there are hapes of confining this read this May 31 Bloomberg article

(Quote)You can't compare these CDO ratings with corporate bond ratings,'' Duffie says.These ratings mean something else -- entirely.''

Corporate bonds rated Baa, the lowest Moody's investment rating, had an average 2.2 percent default rate over five-year periods from 1983 to 2005, according to Moody's. From 1993 to 2005, CDOs with the same Baa grade suffered five-year default rates of 24 percent, Moody's found.

Non-investment-grade CDOs, rated Ba, had an almost identical default rate of 25.3 percent in the same period. ``In CDO-land, there's almost no difference between Baa and Ba,'' says Cifuentes, a former Moody's vice president who helped develop the company's original method of rating CDOs in the late 1990s.
(end quote)

Historical default rates for CDO's of 25% over 5 years. How much money is balanced and leveraged on the basis of this?

"What would it take to bring down a overvalued, completely unattainable real estate market that was still roaring? "

I don't know but thats the same situation where I live - Mobile, Al. No recession here, a new $4bil steel mill being constructed (just announced), A $600mil NASCAR ratetrack going up, the port under going major enhancements, now we may get a major AF tanking deal.

My house has increased $50k in value in the past 6 months, I was mowing the grass a couple of months ago, a realtor stopped, got out of his car and asked me if I wanted to sell.

Yet, at the beaches 40-50 miles away very little is selling but construction is going on and on.

Beats me.

winjr -- thank you!

derivatives exposure-

http://www.occ.treas.gov/ftp/deriv/dq406.pdf 

With US consumer demand falling, this would eventually take a big chuck of inflationary pressure off the global system. The next 1-2 yrs should be net positive for high grade bonds, BBB+ and above.

After this 2-3yrs of cooling off period, inflation would shoot up exponentially with the next cyclical upturn in the economic cycle. That is when the great bear market for bonds would begin, where the sky is the limit for bond yield.

The US housing market is pivotal to kick start the downward slide in global demand.

I am looking forward to that as the world would be greener and fresher, and perhaps, the people would start thinking more about what is important. The last global slowdown is a bit to short for people to do much reflection about life.

Vikas,

It's hard to time the components of deflation and inflation that follow a credit crisis. One guide we have is politics. Ask youself, "what will voters want most."

IMO, what they'll want (and here Im talking about the middle class exburb dwellers that swing elections) is a bail out of their debts. That implies the government will put a fair-size chunk of debt on its books just when social security draw-downs become an issue.

An explosion in the deficit is not hard to imagine. These come in two flavors: the tight-money variety, which results in high real rates, strong dollar, high unemployment; and the fed-financed variety, where inflation is the dominant feature. Which will voters prefer?

Given that over-indebted voters are the initial problem, its hard to imagine we'll have a tight-money solution, as that would exacerbate the debt crisis. An easier path would be low real rates that help voters service their debt.

In other words, inflation.

People make the mistake of thinking Fed policy is independent of the political will. This would be a misreading of the post-war history of "independent" central banks, including our own.

besides people can vote only for democrats or republicans. why are the us troops not coming back from iraq when congress is under democratic control? see, people can vote what they want, politicians do what they want

And so, the industrial might of the US is now house building. Thats it.

The speculation being the buying and selling of worthless pieces of paper supposedly representing the value of these useless shacks and dumps. Nice.
Hazard | 06.23.07 - 11:26 pm

Yes, Grasshopper, you can see the way of the wind, now.

People make the mistake of thinking Fed policy is independent of the political will. This would be a misreading of the post-war history of "independent" central banks, including our own.
David Pearson

David, I enjoy your comments. The problem now is that the political will choice will only push the earth to the breaking point, as the global development is correlated with increased carbon dioxide emission.

What is really needed is to slow global growth to a crawl to reflect what the world needs to be sustainable. Simply cutting rates to bail out the SUV-driving, over-indebted Americans is likely to pacify people for a few years, but the overall consequences will be devastating in just a few years more.

This is a real pickle. What is needed is an emergency break to stop excess global consumption. Some authority has got to start recognizing real responsibility. (Hey, I can still dream, can't I?)

Question:

From the posted graphs, it looks as if starts have been within their normal range over the past decade. Foreclosures, while up and quickly increasing, are not at historic highs, yet.

If it's not overbuilding (starts) or foreclosures (existing inventory) What then is the cause of all of this excess inventory?

My sense is that although home vacancy is up significantly, home vacancy is the only REAL increase in inventory that will have any pricing pressure effect. The remaining homes are owner occupied and will not sell unless the owners get their listing price (sticky pricing).