A question, given that housing markets aren't efficient (at least in the near-term), nor homogenous, any guess as to what the kind of demand decline you illustrated translates to in terms of real and nominal prices nationally over the next say five years? Or if you prefer, just the coastal regions?
tj & the bear, I was thinking AZ and NV too - so I guess "coastal" isn't a good description. This flipper type speculation was in most areas with rapid price appreciation.
The more widespread speculation was the speculation with leverage - i.e. home buyers using nontraditional mortgages to stretch into homes.
BTW, I saw the state sales tax data for AZ, NV, CA and FL today - it is ugly and it appears MEW is hitting retail.
Nice job CR. In the previous bust, early '90s in CA where it was more pronounced, do you spot an uptick in your sales chart, after the slowest period, in '94-'95 or so that might represent a large supply of REOs that sold cheap, for a period and then a lull again?
banker, price declines - over the course of the bubble - are the difficult to predict. Price declines are definitely local, and prices will probably decline slowly over several years.
I think real prices will decline at least 20%, from peak to trough, in many bubble areas. Maybe 40%+ declines (in real terms) in some areas.
In the '90s bust, we saw 20% to 30% real price declines in several areas of California. I expect at least that much of a decline.
For other readers: five years of flat nominal prices is probably about a 12% to 15% decline in real terms. So it doesn't take much of a nominal decline over 5 years to get to 20% in real terms.
barely, that is an interesting question, and unfortunately this is national data. In much of California prices were still falling in the '90s (through '96), but it looks like sales volumes picked up before prices. But I don't know if that was related to REOs.
Well, I can see the bottom from here, but to get there is going to cause a large portion of the current financial system some stress.
Excellent analysis, CR, but I think that it will take a while for your interest rate demand shift to come into reality. The reason why interest rates will not come down quickly is that lenders will build in a default rate premia again, and until defaults/foreclosures drop they will attempt to collect that premia to keep their cashflow positive and account for busted deals. When the great passoff scheme was in full tilt selling every bit of the mortgage but the squeal at over par prices, the need for the premia vanished into somebody else's portfolio and lenders could compete by squishing that premia out of their interest rates. With BBB tranches running 50 cents on the dollar and discount all the way up the food chain, the only way to get back to even in the face of potential 4% defaults on any pool is to keep the rates higher than they have been in the past.
Now throw in decining asset values and one can easily see a near total lockup in the markets that will only be solved through federal intervention of 1% rates, or of fiscal stimulus through the taxcode.
ARCO will be beautiful for real estate investors- the surviving investors, that is.
Cal, I agree. In fact I think the interest rate shock was gone by early 2004 - and sales should have fallen back to '98 to '01 levels. Instead they kept climbing. The interest rate demand shift is long gone - leaving speculation as the driver.
tj & the bear, you are pointing to the shortcoming of these Supply and Demand diagrams - they work pretty well for efficient markets, but housing isn't efficient on the downside. Demand could just freeze up since supply and demand haven't found an equilibrium price.
Last Friday, I noted: The above diagram works well for commodities, like corn, and these facts - shifts in supply and demand - would lead to falling prices, bringing the quantity demanded and the quantity supplied back into equilibrium. But, for housing, prices are sticky because 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.
With perfect information, sellers would reduce their prices to P2, and the markets would clear. However, with imperfect information and sticky prices, we usually see a precipitous decline in the quantity demanded instead.
I guess I dont think someone who in normal times got turned down by the bank as a speculator. I'm just splitting hairs, I agree wholeheartedly with your conclusions. I think it is all a matter of how much time it takes to get back to equilibrium (or as you point out, beyond).
I was thinking that the majority of foreclosures reported by dataquick today probably havent even hit the market yet (if you remember Ivys Zelman foreclosure timeline). If you look at Leo Nordines site (REO specialist) and look at his residential inventory, there is a lot of it "Not on the market" yet (still occupied or being worked on).
CR, if you look at studies of prices, thre is a correlation of high zoning with high prices, because builders are prevented from responding to demand in a timely way. That is the reason for boom and bust cycles in CA and in AZ too. Compare to Texas, which has high growth but no boom prices, due to efficient zoning.
My prediction for June sales is a little worse than economists' predictions. However, with the recent mortgage tightening, publicity on price declines and foreclosures etc., my hunch is that sales will decline rather more sharply into the fall.
After waiting for quite a while, it almost seems surreal to see the lenders like CFC and DSL take such big hits. The mortgage insurers MTG and RDN were both down 6% today. I bought some puts on MTG yesterday and the position was up 80% today.
Schahrzad Berkland, naturally everyone wants to know about prices. Even though sales will probably fall significantly, prices are sticky and will decline slowly over several years.
I think it is extremely remote that prices will fall back to '98 through '01 levels. Small real declines over several years - until wages catch up - is my expectation.
Nominal prices in San Diego have declined approximately 15-20% YOY for condos already. This includes condos in highly sought after coastal areas, not just overbuilt exurbs.
Single family homes have taken less of a haircut thus far. From the repeat listings I have gotten for the last two years, I'd conservatively estimate that single family homes have had a 5-10% haircut from the peak.
Many overbuilt exurbs here will take 40% nominal price drops. If you check out the bubbletracking blog you will see that many individual properties already have.
June sales are predominantly those escrows opened in May (and some early June). Because of the big interest rate move up in May those interested buyers with locks would have been "motivated" to buy. So I think the sales wont be as bad as July or August will be.
We wont see the next leg down in the housing numbers until at least next month numbers. The credit tightening resulting from the S&P/Moodys downgrades just happened in the last few weeks, the higher interest rates are really just filtering into the market. The rest of the year looks to be pretty grim, but the NAR numbers will lag significantly where we are in reality today. It wasnt until late May the numbers even took into account the subprime blowup in late February.
I think that what has been done to the financial system is way beyond a rate cut.
Lowering the interest rates will only destroy the dollar in terms of all we import including oil but not limited to that. That leads to higher prices for everything else besides housing. So the squeeze is on from all sides. Those with over priced homes are in serious trouble. The fed and the government created this mess with to low of rates for to long and absence of regulatory oversight.
Why do I think this that there is nothing that can/will fix this mess? Wide spread credit deterioration.
People seem to see a trend and project in their minds that the trend will go on for ever. Stocks always go up. Houses always go up. When people with good credit buy as a part of the frenzy, many of them got into ARM and even more exotic loans. Many with the belief that housing would keep going up and that they could always sell if they needed to. Afterall, there was a shortage of homes for a while as the number of homes listed for sale was so low that bidding became common. As with all trends or manias, things always change.
We have a lot of just regular people, that had good credit, that will be hammered by what has started with the slowing demand and lowering of prices. This is going to go way beyond the last few housing down turns. This got way beyond REAL with price appreciation and funky loans to support them. Almost every one that bought in the last 5 or 6 years is going to regret it. Not to mention what all this is going to do to the pension funds that support millions of retirees or the insurance companies or ..
Even though the demand curve has headed toward the down side, builders are still building. Now we have way to much inventory for the number of house holds. On top of that credit is being squeezed because many found that houses dont always go up in price and when the reset came, they couldnt afford the home and now can not sell it. This is not a one time event. This will go with these people for years. Affecting the cost of their credit cards and anything else they have to buy on time.
This is going to be quite a process of unwinding and there is nothing to prevent it. Wages/incomes of the average worker have not gone up so a return to even normal risk/reward loan pricing leaves an extreme number of people out of the money. They can not afford to live where they are and they can not afford to move. Their credit will be mangled and they will then no longer qualify for any reasonably priced loan of any kind. They may be relegated to only ATM cards for their existence for years.
This leaves a huge hole between existing pricing and inventory and qualified buyers. The prices will have to come down a lot more than CR thinks for this to get worked out. Actually I think we need to demolish about 2+ million dwelling units and halve the prices to be back near balance.
Greed rules until it doesnt any more and we have reached a point w
Kokopelli, I agree with you, however, things are never as bleak as they seem or as good as they seem.
Something will be done to fix this problem to the extent that it doesn't cause complete panic and dislocation on a grand scale. My thoughts are Fannie & Freddie etc will end up getting a waiver to take up more of the slack. But it could be something else, including RTC V2.
Best to keep an even keel Even though the shorting and puts seem like they will last forever, they won't. Still a little more here I think though...
All the IT and JIT advances in the world cannot eliminate the creation of external speculative storage...the business cycle, it seems, is alive and well -- it's just been outsourced to speculators.
I agree with you on that point. Bubblenomics dragged drastically more supply into the market. I see a final price point well below P3-Q1 as Q'1 will be a supply curve somewhere to the right of S1 (S'1). That's the really frightening thing about this.
Not ALL markets experienced an increase in supply, but So Cal, Fla, Phoenix, LV certainly did, on a rather massive scale. I drive by an area in Woodland Hills CA regularly, with tons of overpriced units still going up. They're right next store to two 350 + unit sites that are currently half empty. Not good.
CR,
US population growth (including legal immigration?) is ~1% yoy ..so since 98, say ~8% more homebuyers at this time...so may be buying will bottom @2001 level?
Compare to Texas, which has high growth but no boom prices, due to efficient zoning."
Yeah, deregulation has a great historical record of smoothing out boom and bust cycles in Texas (?!?!?!)
And while we're on the subject of how Texas-style government can improve things for ordinary people, any chance of you Texans taking back your crappy ex-governor a year early?
1 - interest rate changes don't just temporarily change (owned) housing demand, they have both temporary and permanent effects. When rates drop, some people become homeowners earlier, causing a temporary increase in demand that will go back down of its own volition (borrowing from future demand, as some call it), but there is also a permanent effect. As interest rates drop, the annual cost of owning a house decreases and people will want to buy bigger/fancier (more) houses. So long as rates are low, the quantity of housing demanded, measures in square feet, not houses, will be higher, and the result is, as we observed, tear downs of older/smaller places, "luxury" units, and McMansions. When rates go up, not only do fewer people want to own houses, but people want to own smaller houses - that's when you start seeing big places start to get cut up, deferred maintainance causing former "luxury" units to slide down the quality scale, etc. Those effects of rate changes are permanent.
2 - I'm less sanguine than CR in the non-bubble areas. The S-D diagrams are out of Econ 101. If you think back to Econ 301, think of "putty-clay" models. Stuff is malleable, and responds to price incentives, until you build it. Then you are stuck with it, no matter the price incentives. In "coastal areas" (loosely defined) where housing supply is inelastic (in Phoenix and Vegas there's a lot of empty land, but the process of getting water rights - BLM sales, etc. is painfully slow, unlike say Indianapolis) the increase in demand showed up as a big increase in price, but in the middle of the country the increase in demand showed up as a big increase in quantity. If that demand evaporates and the new construction doesn't all go up in suspicious fires then price is falling anyway. What I'm not sure of is just how much of that new construction was new owned housing instead of new rental housing. If it was mostly just a substitution in type of housing (more single family detached, less apartment) then I assume the rental market will absorb the stuff without a lot of heartache. If all those new townhouses on the outskirts of Columbus are vacant and owned by hopeful flippers, god help Ohio prices. And I'm just not sure what the story is.
3 - I'm less sanguine than CR about the speed of fall in the coastal areas. When prices are 5% or 10% out of whack they are sticky and fall slowly. But Houston in the late 1980's unraveled pretty quickly - major declines over 3 years. Now that the ball is rolling in Sacramento CA and Bradenton FL it might fall pretty fast. Foreclosures are coming on line, builders are still building. If prices don't fall fast existing home sellers won't sell squat and inventories will be ginormous (of course, for S. FL condos, inventories ARE ginormous - not sure what to make of that).
Check out the CFC foreclosure site for foreclosure distribution, combined with where builders have and are concentrating SFH building and you have the basic's for where the largest drop in prices over the next 5 years will probably occur. Employment centers such as SV-San jose to San Francisco will probably fall at a much slower pace excluding a recession in hi-tech.
ron, the bay area just has a longer fuse, and also has a lot bigger bomb at the end of it. Don't kid yourself. There is a lot of excess fluff in bay area housing prices.
barely: I agree, my point is simple, the huge foreclosure numbers Plus builder zeal in Sac, Modesto, Freso, Inland Empire, etc are the prime area's to take the largest drop in values. Palo Alto, Mt. View, San Mateo etc are very over priced but at least they are close to the employment center and do not have any builders creating hundreds of new homes like in Modesto etc. They will get wacked by foreclosers and the general drop in land values but probably not as huge as the outline areas.
I think it is extremely remote that prices will fall back to '98 through '01 levels.
Again, I find it almost impossible for prices NOT to fall back at least that far. Over at HBB I recently listed 15 reasons why "this time it really is different", and you could pick any 5 and still justify such a decline.
If all those new townhouses on the outskirts of Columbus are vacant and owned by hopeful flippers, god help Ohio prices. And I'm just not sure what the story is.
And Omaha, and Des Moines, and KC and... they are everywhere.
But Houston in the late 1980's unraveled pretty quickly - major declines over 3 years.
MAJOR job loss associated with the crash in oil patch. I had six Chem E classmates go to Houston in 1980 to work the oil patch - they tried to drag me down there in '81 (didn't bite). All six lost their jobs within two years along with many thousands of others. Some took two years to land another job... it was like dotcom.
Unless we see that kind of coupling it is unlikely Houston will be repeated.
Compare to Texas, which has high growth but no boom prices
I think TX's high RE tax rates have something to do with that. Fresno and the Central Valley saw boom prices like crazy 2004-2006, and were building without any odious zoning restrictions.
The dotcom money caused the Bay Area to boom first, 1998-2001. Then the dotcom crash took the wind out the market until 2004-2005, when the speculators started to really get into the game with the 2/28, neg-am, and stated-income products.
It's pretty simple -- decreasing monthly payments, through rate cuts, neg-am, teaser rates, etc drove prices up dollar for dollar ($500/mo can carry a IO $100,000 loan).
Another effect I see is the 2001-2003 tax cuts. When you give everyone 2-5% more income, where's that money going to go???
As long as the BA has the tech employment levels it has now, there will be no steep decline. I'm in Sunnyvale, and most H1Bs I see want to buy a place to move their parents etc. in, plus rents are still edging back up to their 2000 peak, which indicates there is still more demand than supply here.
Houses coming out of Storage creates an additional supply source - lender generated housing.
NOD = Building Permits/Starts
Forecloseure = Completions.
Actual Building Permits alone are no longer a reliable leading indicator of supply.
With these inflated housing price levels, Demand will remain insensitive to any decline in interest rates. There's no pent-up demand at the margin. A significant shift in Housing prices will occur, simply because the market will demand it.
I am in the BA (South Bay, Cupertino area), so I too have a ringside view of the insanity here. The refrain that BA is immune/mostly immune/largely insulated from home price drops is one that I keep hearing on an almost daily basis.
The current BA housing mania is driven by expectations of 15% YoY growth way out into the future.
We are in the midst of a tech IPO bubble right now. With unprofitable startups going IPO, trading at stratospheric valuations on hope of great earnings down the road. A lot of the frenzy is driven by this tech bubble, in my opinion.
Most people believe that the BA economy will remain "decoupled" from the malaise about to hit the rest of the economy. I think this is nonsense.
Outside of Googlers and people that have made money in tech IPOs, most other homebuyers are struggling to keep up with payments. I see a lot of dual income families stretched to the max, trying to make ends meet. When a recession hits, a lot of tech jobs are simply going to vanish.
People are fond of saying "there is a lot of money here", but to me, unless that can be quantified and compared to housing stock, that statement is utterly useless. Clearly all homebuyers are not Googlers or tech IPO millionares.
Right now, there is a masssive VC funding bubble. Look at the internet startups getting funded. Most of them have no hope of ever turning a profit ! When the VC funding tide recedes (as it inevitably will, now that we have the beginnings of a credit crunch), most startups are going to fold, with a lot of job loss.
The BA bulls song used to be "BA is immune". Now it has changed to "South Bay is immune", given the softness that is emerging in East Bay (Danville, San Ramon, Dublin, parts of Fremont) as well as extreme South Bay (Gilroy, Morgan Hill). I expect this tune to change to "Palo Alto is immune" shortly.
If YoY appreciation slows or vanishes. Even if home prices remain flat for a few years, that will be terrible for buyer psychology and future demand, given the huge payments (and huge drains on monthly finances). Again, to me, the perception of YoY 15% appreciation is what is driving demand here. If it appears that appreciation is flattening, renting (which is about 70% cheaper than owning) will appear suddenly very very attractive as an option.
Disclaimer : I rent, paying about 2100/mo for a home that would easily sell for 900K+, hence my opinions are terribly influenced by the negative economics of home ownership
It's amazing how 7 short years after the dot-com bubble burst that the BA now believes it's somehow immune. What, was that debacle considered a vaccination of sorts? The only things in ample supply in the BA is denial and delusion.
Ben Graham said it best - "On Wall Street people forget everything and learn nothing". I think the same applies to Main Street (at least to the Bay Area). If you look at the resurgence in profitless tech IPOs and the rise in VC funding of LOSER dotcom startups you'll realize how true and profound Graham's statement is.
The argument from most Bay Aryan homeowners goes something like this - "We had the worst possible tech downturn and yet home prices did not drop then. Therefore nothing can cause home prices to drop here !". I am not making this up ! I have heard this several times, in the context of people telling me what a renter loser I am and urging me to mortgage myself upto my eyeballs.
When I hear this, I don't bring up the argument that the Govt dropped money from B-52s after the tech crash, which created the illusion of prosperity in the BA and elsewhere. These people are unwashed masses that have either never taken Econ 101 or have forgotten everything learned in Econ 101.
Prices will have to come down near 50% in most Bubble areas to match salaries for the region. Salaries are not going up with outsourcing and insourcing all the rage, inflation is high (despite Fed nonsense to the contrary), and taxes are going up here in Maryland (along with utility rates - 75% jump), and taxes will be sky-high in the future because of retiring Boomers, etc.
People in the future will be poorer in real terms than today for many reasons, and I don't see any wage inflation in our future since that is the only type of inflation the Fed wants to stop. So, housing prices will need to drop down to what can be supported by current incomes, which is around a 50% drop.
Does anyone have an opinion over whether some of the run-up might have been a reaction to the change in real-estate cap-gains tax law established in 1997. It seems that this created further tax advantages favoring real-estate over other asset classes. If this is the case, some of the run-up was a rational reaction to the changes. It might also mean that any decline will not return to a historical base-line, but some higher set point.
I agree with kokopelli (and disagree with CR) that the slowness of moves in housing worsens the effects rather than spreads them and softens them. The counter to the opinion that 'housing always goes up' is the belief that 'housing isn't worth buying'. The situation is not "fixed" until we get there. We are a long, long way from there today.
The rats have not even left the ship yet - observe the CFC statement about nobody expecting what is happening made by somebody who peeled personal funds out of the company for months in advance... and who now throws out terms like "great depression" trying to stampede public opinion toward a Fed move...
The graph shows a permanent decline in the interest rate. If that is the case, why is the outward shift of the demand curve only temporary? Should it not be permanent?
Nice!
Note: This type of speculation was probably only rampant in the coastal regions.
The investors or the properties? AZ & NV certainly aren't coastal.
Excellent econ 101 CR!
A question, given that housing markets aren't efficient (at least in the near-term), nor homogenous, any guess as to what the kind of demand decline you illustrated translates to in terms of real and nominal prices nationally over the next say five years? Or if you prefer, just the coastal regions?
Thanks.
tj & the bear, I was thinking AZ and NV too - so I guess "coastal" isn't a good description. This flipper type speculation was in most areas with rapid price appreciation.
The more widespread speculation was the speculation with leverage - i.e. home buyers using nontraditional mortgages to stretch into homes.
BTW, I saw the state sales tax data for AZ, NV, CA and FL today - it is ugly and it appears MEW is hitting retail.
Best to all.
Love pictures... except this one.
When interest rates notched back up, demand mirrored the 1/2 circle downward.
I'm drawing a hangman.
Nice job CR. In the previous bust, early '90s in CA where it was more pronounced, do you spot an uptick in your sales chart, after the slowest period, in '94-'95 or so that might represent a large supply of REOs that sold cheap, for a period and then a lull again?
banker, price declines - over the course of the bubble - are the difficult to predict. Price declines are definitely local, and prices will probably decline slowly over several years.
I think real prices will decline at least 20%, from peak to trough, in many bubble areas. Maybe 40%+ declines (in real terms) in some areas.
In the '90s bust, we saw 20% to 30% real price declines in several areas of California. I expect at least that much of a decline.
For other readers: five years of flat nominal prices is probably about a 12% to 15% decline in real terms. So it doesn't take much of a nominal decline over 5 years to get to 20% in real terms.
Best to all.
barely, that is an interesting question, and unfortunately this is national data. In much of California prices were still falling in the '90s (through '96), but it looks like sales volumes picked up before prices. But I don't know if that was related to REOs.
Best Wishes.
IMHO the lax lending criteria "shock" was infinitely greater than the interest rate shock.
Well, I can see the bottom from here, but to get there is going to cause a large portion of the current financial system some stress.
Excellent analysis, CR, but I think that it will take a while for your interest rate demand shift to come into reality. The reason why interest rates will not come down quickly is that lenders will build in a default rate premia again, and until defaults/foreclosures drop they will attempt to collect that premia to keep their cashflow positive and account for busted deals. When the great passoff scheme was in full tilt selling every bit of the mortgage but the squeal at over par prices, the need for the premia vanished into somebody else's portfolio and lenders could compete by squishing that premia out of their interest rates. With BBB tranches running 50 cents on the dollar and discount all the way up the food chain, the only way to get back to even in the face of potential 4% defaults on any pool is to keep the rates higher than they have been in the past.
Now throw in decining asset values and one can easily see a near total lockup in the markets that will only be solved through federal intervention of 1% rates, or of fiscal stimulus through the taxcode.
ARCO will be beautiful for real estate investors- the surviving investors, that is.
Someday this war's gonna end...
Some homebuilder stocks are ready to bottom. I am expecting BZH to bottom first, with another 16.79 points drop. It will be followed by MTH and HOV.
even if the FED CUTS TO 0%, MORTGAGE Rates are set to increase. Now take that to the bank.
CR, demand isn't just being shifted, it's being destroyed. Do we have any basis for projecting that?
Cal, I agree. In fact I think the interest rate shock was gone by early 2004 - and sales should have fallen back to '98 to '01 levels. Instead they kept climbing. The interest rate demand shift is long gone - leaving speculation as the driver.
Best Wishes.
tj & the bear, you are pointing to the shortcoming of these Supply and Demand diagrams - they work pretty well for efficient markets, but housing isn't efficient on the downside. Demand could just freeze up since supply and demand haven't found an equilibrium price.
Last Friday, I noted: The above diagram works well for commodities, like corn, and these facts - shifts in supply and demand - would lead to falling prices, bringing the quantity demanded and the quantity supplied back into equilibrium. But, for housing, prices are sticky because 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.
With perfect information, sellers would reduce their prices to P2, and the markets would clear. However, with imperfect information and sticky prices, we usually see a precipitous decline in the quantity demanded instead.
Best to all.
Where do you think prices will end up?
If Q1 is 2001, then Q3 and P3 is 2000, 1999, 1998?
I guess I dont think someone who in normal times got turned down by the bank as a speculator. I'm just splitting hairs, I agree wholeheartedly with your conclusions. I think it is all a matter of how much time it takes to get back to equilibrium (or as you point out, beyond).
I was thinking that the majority of foreclosures reported by dataquick today probably havent even hit the market yet (if you remember Ivys Zelman foreclosure timeline). If you look at Leo Nordines site (REO specialist) and look at his residential inventory, there is a lot of it "Not on the market" yet (still occupied or being worked on).
Nordine Realtors Residential Inventory
I bet the bulk is still being processed through the system.
CR, if you look at studies of prices, thre is a correlation of high zoning with high prices, because builders are prevented from responding to demand in a timely way. That is the reason for boom and bust cycles in CA and in AZ too. Compare to Texas, which has high growth but no boom prices, due to efficient zoning.
My prediction for June sales is a little worse than economists' predictions. However, with the recent mortgage tightening, publicity on price declines and foreclosures etc., my hunch is that sales will decline rather more sharply into the fall.
After waiting for quite a while, it almost seems surreal to see the lenders like CFC and DSL take such big hits. The mortgage insurers MTG and RDN were both down 6% today. I bought some puts on MTG yesterday and the position was up 80% today.
Thanks CR - great read.
Schahrzad Berkland, naturally everyone wants to know about prices. Even though sales will probably fall significantly, prices are sticky and will decline slowly over several years.
I think it is extremely remote that prices will fall back to '98 through '01 levels. Small real declines over several years - until wages catch up - is my expectation.
Best Wishes.
Nominal prices in San Diego have declined approximately 15-20% YOY for condos already. This includes condos in highly sought after coastal areas, not just overbuilt exurbs.
Single family homes have taken less of a haircut thus far. From the repeat listings I have gotten for the last two years, I'd conservatively estimate that single family homes have had a 5-10% haircut from the peak.
Many overbuilt exurbs here will take 40% nominal price drops. If you check out the bubbletracking blog you will see that many individual properties already have.
Bill,
June sales are predominantly those escrows opened in May (and some early June). Because of the big interest rate move up in May those interested buyers with locks would have been "motivated" to buy. So I think the sales wont be as bad as July or August will be.
We wont see the next leg down in the housing numbers until at least next month numbers. The credit tightening resulting from the S&P/Moodys downgrades just happened in the last few weeks, the higher interest rates are really just filtering into the market. The rest of the year looks to be pretty grim, but the NAR numbers will lag significantly where we are in reality today. It wasnt until late May the numbers even took into account the subprime blowup in late February.
CR
I think that what has been done to the financial system is way beyond a rate cut.
Lowering the interest rates will only destroy the dollar in terms of all we import including oil but not limited to that. That leads to higher prices for everything else besides housing. So the squeeze is on from all sides. Those with over priced homes are in serious trouble. The fed and the government created this mess with to low of rates for to long and absence of regulatory oversight.
Why do I think this that there is nothing that can/will fix this mess? Wide spread credit deterioration.
People seem to see a trend and project in their minds that the trend will go on for ever. Stocks always go up. Houses always go up. When people with good credit buy as a part of the frenzy, many of them got into ARM and even more exotic loans. Many with the belief that housing would keep going up and that they could always sell if they needed to. Afterall, there was a shortage of homes for a while as the number of homes listed for sale was so low that bidding became common. As with all trends or manias, things always change.
We have a lot of just regular people, that had good credit, that will be hammered by what has started with the slowing demand and lowering of prices. This is going to go way beyond the last few housing down turns. This got way beyond REAL with price appreciation and funky loans to support them. Almost every one that bought in the last 5 or 6 years is going to regret it. Not to mention what all this is going to do to the pension funds that support millions of retirees or the insurance companies or ..
Even though the demand curve has headed toward the down side, builders are still building. Now we have way to much inventory for the number of house holds. On top of that credit is being squeezed because many found that houses dont always go up in price and when the reset came, they couldnt afford the home and now can not sell it. This is not a one time event. This will go with these people for years. Affecting the cost of their credit cards and anything else they have to buy on time.
This is going to be quite a process of unwinding and there is nothing to prevent it. Wages/incomes of the average worker have not gone up so a return to even normal risk/reward loan pricing leaves an extreme number of people out of the money. They can not afford to live where they are and they can not afford to move. Their credit will be mangled and they will then no longer qualify for any reasonably priced loan of any kind. They may be relegated to only ATM cards for their existence for years.
This leaves a huge hole between existing pricing and inventory and qualified buyers. The prices will have to come down a lot more than CR thinks for this to get worked out. Actually I think we need to demolish about 2+ million dwelling units and halve the prices to be back near balance.
Greed rules until it doesnt any more and we have reached a point w
Kokopelli, I agree with you, however, things are never as bleak as they seem or as good as they seem.
Something will be done to fix this problem to the extent that it doesn't cause complete panic and dislocation on a grand scale. My thoughts are Fannie & Freddie etc will end up getting a waiver to take up more of the slack. But it could be something else, including RTC V2.
Best to keep an even keel Even though the shorting and puts seem like they will last forever, they won't. Still a little more here I think though...
Hold everything.....
This diagram depicts how I'd expect an interest rate shock to impact housing demand
After reading that, I was under the impression that this was a perfect 20/20 hindsight explanation of what occured circa 2002-05...
Your not suggesting that is a foward looking statement,ru?
Nice work, CR.
All the IT and JIT advances in the world cannot eliminate the creation of external speculative storage...the business cycle, it seems, is alive and well -- it's just been outsourced to speculators.
Suggestion for a good topic: Tools at the disposal of the PPT to protect the RE market from absolute freefall...
Kokopelli
I agree with you on that point. Bubblenomics dragged drastically more supply into the market. I see a final price point well below P3-Q1 as Q'1 will be a supply curve somewhere to the right of S1 (S'1). That's the really frightening thing about this.
Not ALL markets experienced an increase in supply, but So Cal, Fla, Phoenix, LV certainly did, on a rather massive scale. I drive by an area in Woodland Hills CA regularly, with tons of overpriced units still going up. They're right next store to two 350 + unit sites that are currently half empty. Not good.
CR,
US population growth (including legal immigration?) is ~1% yoy ..so since 98, say ~8% more homebuyers at this time...so may be buying will bottom @2001 level?
Yeah, deregulation has a great historical record of smoothing out boom and bust cycles in Texas (?!?!?!)
And while we're on the subject of how Texas-style government can improve things for ordinary people, any chance of you Texans taking back your crappy ex-governor a year early?
A few points of disagreement
1 - interest rate changes don't just temporarily change (owned) housing demand, they have both temporary and permanent effects. When rates drop, some people become homeowners earlier, causing a temporary increase in demand that will go back down of its own volition (borrowing from future demand, as some call it), but there is also a permanent effect. As interest rates drop, the annual cost of owning a house decreases and people will want to buy bigger/fancier (more) houses. So long as rates are low, the quantity of housing demanded, measures in square feet, not houses, will be higher, and the result is, as we observed, tear downs of older/smaller places, "luxury" units, and McMansions. When rates go up, not only do fewer people want to own houses, but people want to own smaller houses - that's when you start seeing big places start to get cut up, deferred maintainance causing former "luxury" units to slide down the quality scale, etc. Those effects of rate changes are permanent.
2 - I'm less sanguine than CR in the non-bubble areas. The S-D diagrams are out of Econ 101. If you think back to Econ 301, think of "putty-clay" models. Stuff is malleable, and responds to price incentives, until you build it. Then you are stuck with it, no matter the price incentives. In "coastal areas" (loosely defined) where housing supply is inelastic (in Phoenix and Vegas there's a lot of empty land, but the process of getting water rights - BLM sales, etc. is painfully slow, unlike say Indianapolis) the increase in demand showed up as a big increase in price, but in the middle of the country the increase in demand showed up as a big increase in quantity. If that demand evaporates and the new construction doesn't all go up in suspicious fires then price is falling anyway. What I'm not sure of is just how much of that new construction was new owned housing instead of new rental housing. If it was mostly just a substitution in type of housing (more single family detached, less apartment) then I assume the rental market will absorb the stuff without a lot of heartache. If all those new townhouses on the outskirts of Columbus are vacant and owned by hopeful flippers, god help Ohio prices. And I'm just not sure what the story is.
3 - I'm less sanguine than CR about the speed of fall in the coastal areas. When prices are 5% or 10% out of whack they are sticky and fall slowly. But Houston in the late 1980's unraveled pretty quickly - major declines over 3 years. Now that the ball is rolling in Sacramento CA and Bradenton FL it might fall pretty fast. Foreclosures are coming on line, builders are still building. If prices don't fall fast existing home sellers won't sell squat and inventories will be ginormous (of course, for S. FL condos, inventories ARE ginormous - not sure what to make of that).
Good suggestion, albrt (-;
Check out the CFC foreclosure site for foreclosure distribution, combined with where builders have and are concentrating SFH building and you have the basic's for where the largest drop in prices over the next 5 years will probably occur. Employment centers such as SV-San jose to San Francisco will probably fall at a much slower pace excluding a recession in hi-tech.
ron, the bay area just has a longer fuse, and also has a lot bigger bomb at the end of it. Don't kid yourself. There is a lot of excess fluff in bay area housing prices.
barely: I agree, my point is simple, the huge foreclosure numbers Plus builder zeal in Sac, Modesto, Freso, Inland Empire, etc are the prime area's to take the largest drop in values. Palo Alto, Mt. View, San Mateo etc are very over priced but at least they are close to the employment center and do not have any builders creating hundreds of new homes like in Modesto etc. They will get wacked by foreclosers and the general drop in land values but probably not as huge as the outline areas.
I think it is extremely remote that prices will fall back to '98 through '01 levels.
Again, I find it almost impossible for prices NOT to fall back at least that far. Over at HBB I recently listed 15 reasons why "this time it really is different", and you could pick any 5 and still justify such a decline.
If all those new townhouses on the outskirts of Columbus are vacant and owned by hopeful flippers, god help Ohio prices. And I'm just not sure what the story is.
And Omaha, and Des Moines, and KC and... they are everywhere.
But Houston in the late 1980's unraveled pretty quickly - major declines over 3 years.
MAJOR job loss associated with the crash in oil patch. I had six Chem E classmates go to Houston in 1980 to work the oil patch - they tried to drag me down there in '81 (didn't bite). All six lost their jobs within two years along with many thousands of others. Some took two years to land another job... it was like dotcom.
Unless we see that kind of coupling it is unlikely Houston will be repeated.
Compare to Texas, which has high growth but no boom prices
I think TX's high RE tax rates have something to do with that. Fresno and the Central Valley saw boom prices like crazy 2004-2006, and were building without any odious zoning restrictions.
The dotcom money caused the Bay Area to boom first, 1998-2001. Then the dotcom crash took the wind out the market until 2004-2005, when the speculators started to really get into the game with the 2/28, neg-am, and stated-income products.
It's pretty simple -- decreasing monthly payments, through rate cuts, neg-am, teaser rates, etc drove prices up dollar for dollar ($500/mo can carry a IO $100,000 loan).
Another effect I see is the 2001-2003 tax cuts. When you give everyone 2-5% more income, where's that money going to go???
As long as the BA has the tech employment levels it has now, there will be no steep decline. I'm in Sunnyvale, and most H1Bs I see want to buy a place to move their parents etc. in, plus rents are still edging back up to their 2000 peak, which indicates there is still more demand than supply here.
NOD = Building Permits/Starts
Forecloseure = Completions.
Actual Building Permits alone are no longer a reliable leading indicator of supply.
Ron & Troy
I am in the BA (South Bay, Cupertino area), so I too have a ringside view of the insanity here. The refrain that BA is immune/mostly immune/largely insulated from home price drops is one that I keep hearing on an almost daily basis.
The BA bulls song used to be "BA is immune". Now it has changed to "South Bay is immune", given the softness that is emerging in East Bay (Danville, San Ramon, Dublin, parts of Fremont) as well as extreme South Bay (Gilroy, Morgan Hill). I expect this tune to change to "Palo Alto is immune" shortly.
If YoY appreciation slows or vanishes. Even if home prices remain flat for a few years, that will be terrible for buyer psychology and future demand, given the huge payments (and huge drains on monthly finances). Again, to me, the perception of YoY 15% appreciation is what is driving demand here. If it appears that appreciation is flattening, renting (which is about 70% cheaper than owning) will appear suddenly very very attractive as an option.
Disclaimer : I rent, paying about 2100/mo for a home that would easily sell for 900K+, hence my opinions are terribly influenced by the negative economics of home ownership
It's amazing how 7 short years after the dot-com bubble burst that the BA now believes it's somehow immune. What, was that debacle considered a vaccination of sorts? The only things in ample supply in the BA is denial and delusion.
Houston has NO zoning.
TJ+Bear
Ben Graham said it best - "On Wall Street people forget everything and learn nothing". I think the same applies to Main Street (at least to the Bay Area). If you look at the resurgence in profitless tech IPOs and the rise in VC funding of LOSER dotcom startups you'll realize how true and profound Graham's statement is.
The argument from most Bay Aryan homeowners goes something like this - "We had the worst possible tech downturn and yet home prices did not drop then. Therefore nothing can cause home prices to drop here !". I am not making this up ! I have heard this several times, in the context of people telling me what a renter loser I am and urging me to mortgage myself upto my eyeballs.
When I hear this, I don't bring up the argument that the Govt dropped money from B-52s after the tech crash, which created the illusion of prosperity in the BA and elsewhere. These people are unwashed masses that have either never taken Econ 101 or have forgotten everything learned in Econ 101.
Prices will have to come down near 50% in most Bubble areas to match salaries for the region. Salaries are not going up with outsourcing and insourcing all the rage, inflation is high (despite Fed nonsense to the contrary), and taxes are going up here in Maryland (along with utility rates - 75% jump), and taxes will be sky-high in the future because of retiring Boomers, etc.
People in the future will be poorer in real terms than today for many reasons, and I don't see any wage inflation in our future since that is the only type of inflation the Fed wants to stop. So, housing prices will need to drop down to what can be supported by current incomes, which is around a 50% drop.
Does anyone have an opinion over whether some of the run-up might have been a reaction to the change in real-estate cap-gains tax law established in 1997. It seems that this created further tax advantages favoring real-estate over other asset classes. If this is the case, some of the run-up was a rational reaction to the changes. It might also mean that any decline will not return to a historical base-line, but some higher set point.
Just a thought.
lurker
I agree with kokopelli (and disagree with CR) that the slowness of moves in housing worsens the effects rather than spreads them and softens them. The counter to the opinion that 'housing always goes up' is the belief that 'housing isn't worth buying'. The situation is not "fixed" until we get there. We are a long, long way from there today.
The rats have not even left the ship yet - observe the CFC statement about nobody expecting what is happening made by somebody who peeled personal funds out of the company for months in advance... and who now throws out terms like "great depression" trying to stampede public opinion toward a Fed move...
The graph shows a permanent decline in the interest rate. If that is the case, why is the outward shift of the demand curve only temporary? Should it not be permanent?
tj said: The only things in ample supply in the BA is denial and delusion.
Well, sir, I live here, and I have to say: you are absolutely right on!!