I kept hearing the housing specuvestors saying 5-7 years when they were going to sell and that was last year. Now I see them defaulting. So factoring in those hold outs I would expect we have around 5 years before we see price bottoms.
It would seem (although this may be a false assumption from the San Diego data) that the higher the run up the longer it takes for prices to stop retreating and hit bottom. If that is the case CR, would it be safe to say that it will take longer than the 3 years of the early 90's this time around to find bottom nationally? Again, assuming that '08 sees the RI bottom, that would put the price bottom out in the 1012 to 1014 time period.
Andrew, something like that. (I like Junior's comment to your typo! Very funny)
Different areas will see price bottoms at different times. For the more bubbly areas, I'd expect the price bottom no sooner than 2011, probably later. If I'm still bloggin' then, I'll try to call the price bottom for some of the bubbly areas (like San Diego).
My guess for Phoenix would be a bottom in 2012, after several false starts and hopeful moments.
I note that commercial has yet to experience any real damage. When that starts, the wheels will come off of Wall Street.
Once again another crisis is going to cause the retirement dreams of a generation to go up in smoke. The boomers are going to be very very very unhappy with their 201ks after this debacle fully materializes.
I am beginning to think a generational crisis of confidence is going to result from this debacle as all forms of debt become suspect to the people who might buy them. A true buyer's strike will be compounded by a large drop in the dollar resulting from foriegn disinvestment in the US. Loss begets more loss, and at some point a lot of folks will want their money someplace closer to home.
Depending on how severe the credit crunch is I think that the process of finding bottom could get accelerated a bit. If no one can get financing, people's illusions about what their house is "worth" could get stripped away much faster. At the very least, it makes holding out for the price you want much harder with an extremely reduced pool of qualified (and probably very choosy) bidders.
i would have to second that. if u look carefully at the rolling over peak in price around 1990, it precedes the trough in RI by about 1 year. but if you look at present day, they are rolling over together which MIGHT imply they'll bottom together.
and this falls into the "what the hell is this camp of affirmations?"
"The review didn't include an analysis of structured investment vehicles (SIVs), market value, or CDO commercial paper programs, which are being reviewed and will be commented on separately. "
"To be sure, the 10-year fell more dramatically in 2002 and 2003 as the Fed kept cutting rates and a deflation scare set in. But my point is that in December 2000, several Fed cuts were priced in. So as the Fed actually did cut in 2001, all that happened was the curve steepened. The 10-year moved very little. Even as the Fed blew way past everyone's expectations, long-term rates remained stubbornly high."
Seems fairly clear that upward price signals (and demand) lead the residential investment boom with a not too large lag where the building follows the pull of the $. But prices are not what residential busts are made of; they are the result. Residential building stops booming once the bloom comes off demand through the supply/demand imbalance. Prices are linked to the building downturn only in so much as they are required to change (downward) to clear the market.
Obviously, the supply overhang is going to hang around quite a while even if building stops altogether. But of course it wont, because builders dont just top building. They may slow the start of new projects through delays, and may pull the plug on some, but much of their business model is too long term with too much fixed investment already in place, that they cant abandon. So build they must. The supply pullback will mostly come through the bankruptcy process, when building ceases from specific builders who no longer can build because of financial constraints. To the extent any of the Feds or Congresses allow marginal builders to stay in business longer than they otherwise would, this prolongs the building, and drags out any recovery in prices as the supply overhang lasts longer. It potentially even adds to the psychological damage and reduces demand, compounding the problem. As I said yesterday, any kind of bailout that keeps marginal builders in business actually is more likely to cause recession than avert it.
So you can pretty much guarantee that if you just went through the absolute most easily available credit environment at the top of the boom, and havent even yet come close to finding the bottom of the credit availability standards, you cant even talk about the bottom in demand for housing and prices. Once credit bottoms, and then loosens, you might be able to think about a bottom, but that will still depend on the supply overhang.
And of course, as some here like to point out, "my market is different, the prices havent fallen and they wont". Well, possibly yes, but possibly no. All depends on the source of the financing. If you look at Sillycon valley, sure, it could stay afloat. It's only so big, the people in it largely have tons of money. They can pay the overly inflated prices for new purchases, and can manage whatever mortgage payment. But why would they? When you can rent those same houses for less than half the monthly nut? Well, perhaps renting is looked down upon? I dont know. It's hard to know how those specific markets will clear. Frankly, if we end up with an even more segregated and polarized real estate market, so be it. I think the nicest places could end up that way, but anything which isnt looked at as a trophy has a lot of downside potential.
And how exactly do we know that when the economy's wheels come off, those same rich folks will continue to be able to pay for those overpriced homes? Lots of unknowns.
Some of those sayings look like they were collected from comments here;-}
Ursa Major is coming to visit soon. Even CR seems to have been infected by the meme.
I would love to be in some of the closed conference rooms in J.H. WY this week. Today's seminar question: How much damage can the credit markets take before Wall Street infects main street? We shall soon find out!
Someday this war's gonna end...and a US House Member said if it ends early we get $9 gas! I just can't wait for that one...
OK, so house prices are sticky because owners are typically reluctant to mark them down. Instead they will cut back on expenses, eat into their savings, and even borrow money to hang onto that home. Thats what normally happens, so thats what we expect this time, right? Here are a few What ifs to challenge this expectation:
What if a significant number of homeowners have no savings to keep them afloat for any length of time?
What if their friends and family also have no savings to help them out?
What if the coming recession is quite severe such that the loss of income necessitates a large amount of savings to hang onto the house?
What if all asset classes move downward simultaneously, depleting the resources of some homeowners who thought they had financial cushion?
What if lenders become fearful of making loans, except on terms that will not help such homeowners?
What if an unprecedented number of homeowners mail in their keys, so that REO numbers skyrocket?
Seems like some of these What ifs are not iffy at all. Does that make this time different? I dont know, but I am curious to find out.
The fall in housing prices in the 90's was caused by unemployment and recession. People lost jobs but were able to maintain mortgage payments for a while as unemployment benefits and savings were slowly depleted.
This time the cause is directly related to the payment in question. Employment remains high, for now, but there is no savings and the cards are all maxed out. I think this downturn will be faster because of that difference. Prices aren't so sticky when the home is a liability on some bank's books.
Wouldn't the rate of price declines depend a great deal on how much downward pressure there is on the market -- or stated another way -- the greater the need to sell, the greater the price drop.
The 1990s housing recession came, if I'm not mistaken, at the end of a real estate bubble much smaller than current, a fairly mild economic recession, a fairly mild jobs recession, at at time when fixed term, fixed rate, mortgages were the majority and teaser rate IO and Opt ARMs nearly unknown, at a time of relatively strong dollar and relatively small Federal budget deficit, at a time of relatively high interest rates (at least until Greenspan began cutting), at a time of relatively strong manufacturing production and employment in the US, at a time when the financial, banking, mortgage industry was strong (except certain S&Ls), at a time of positive savings rate, at a time when baby boomers were still quite a ways from retirement age, at at time when real inflation was low (not the fake CPI the fed reports now), at a time of very low commodity and oil prices, etc, etc, etc.
How fast and how many properties, both residential and commercial, will be abandoned to the lenders? How much pressure will the lenders be under to dispose of these properties? How long will lenders be able to hold onto and maintain properties while waiting to recapture loan principles on inflated values? How long will cities allow vast tracks of empty and unfinished housing projects to sit like so many ghost towns?
I suggest that what we are seeing now has no recent comparative event. Judgments regarding the severity and the speed of a "housing bottom", not to mention the length of this "housing bottom" may be wildly off-mark. We keep hearing how "surprised" and "astonished" the financial world has been by the speed of recent deterioration events -- I suspect we will continue to be "surprised" and "astonished" by the increasing speed of deterioration.
What if a significant number of homeowners have no savings to keep them afloat for any length of time?
What if their friends and family also have no savings to help them out?
Like you said, I don't think this is a what if.
Epiphany moment for me was when credit counselling commercials started showing the man with the perfect house, car, golf membership, etc. That's when I knew that it just wasn't JSP in trouble.
Residential building stops booming once the bloom comes off demand through the supply/demand imbalance.
This is a major point: in 2001 there wasn't that great of a supply / demand imbalance based on historic home ownership rates. Home ownership rates had started to go up some due to the low housing prices of the 90s and the job / wage increase basically brought on by the tech / Y2K boom. By 2001 that had essentially played itself out. Almost none of the 2002 - 2007 housing bubble had anything to do with supply / demand. At the tail end of what ever housing bottom we eventually get to, there won't be any large pent up demand to give a bounce -- barring a huge surge in birthrate or immigration. We will be resting at the bottom for a long time.....
1985 the boomers were hitting age 35 in large numbers, 1995, 45 and now hitting 55 +. The landscape for historical housing charts is based on very different population trends then we have today.
The other issue that pops out is the debt that boomers and their parnets were carrying during these past cycles, was quite small compared to today's ATH.
Nice. A fourfold increase over ten years just like Japan. So what is next? This is how it went in Japan but of course we will be able to do better for home owners.
Psychology-driven price increase in the boom was helped by media coverage and the change in psychology aided by the new media (blogs etc) and a frankly better informed public will lead to a faster decline now.
RnL - agreed. The next leg down will be steeper and faster.
The current push down is based on a few things : 1)a lack of demand because of inability to afford the price peak (lack of income gains and no more easing of credit terms - I mean, could it realistically gotten any EASIER to get a mortgage? and it does have to get increasingly easy if prices are to keep rising on stagnant real buying power) 2) clear lack of upside price potential gains as the wilting demand started to erode the need to outbid other buyers 3) a modest amount of job losses in some states (MI, OH, etc) 4) the lagged effect of a building boom where somehow builders decided these types of price gains were sustainable and actually built at a faster pace- (did ANY builder slow development a couple of years ago in anticipation of the problems of a demand slump? I doubt it.) 5) a speculative pushback of properties on the market (which reinforces the supply problem) 6) mortgages resetting - first to simply higher rates which was inevitable, but second, the resets that occured after the price peak, which made refi impossible and foreclosure inevitable.
I could go on - the important thing to note, is that all this is slowly wearing on that 71% of GDP that is consumer spending. And as that CS slows, the need for capital investment slows as well, as does the need for hiring more potential homebuyers. So, how long does the reverse go on? Sure looks like from a housing perspective the pressure on the CS side is just starting. Which of course, leads you to the inevitable - the rising first time unemployment insurance claims, the sinking confidence, and the lack of spending and rise in personal saving that goes with it as housing wealth evaporates.
I'm still waiting for a convincing argument of how the continued unraveling somehow leads to a soft landing when we are practically in recession already and heading downward. The job losses are starting, the lack of hiring will follow, and then the job losses will start in earnest.
Pankaj, that is an 18% nominal decline for San Diego - it just looks flat because the huge runup in recent years. I was trying to show the time relationship of the bottoms, not how far prices fell.
risk capital, speculations are mostly out of the market now - as buyers!!! But as the article says, as sellers many speculations are still getting crushed.
I may be interpreting the graph incorrectly, particularly since I agree with Geoff and want to believe Y.S.Wayne is anywhere close to correct: the GSax "bottom," notwithstanding the agreed upon delay in timing of house-price bottom, is at a higher point than the ones in the '80s and '90s. That doesn't make sense to me, from everything I've seen and read, as in: I think GSax is unduly optimistic about the bottom -- IF there is a historical relationship between the two, mathematically (rough).
The bubble makers are all ready hard at work, my rough guess is that the stock market is the best bet for a fresh round of wealth effect created by the FED with a series of rate cuts. Your home may face immediate foreclosure and you can't afford to dine out but the Dow will be at ATH so it can't be all that bad, that's what the CBS evening news will be saying. No crystal ball here, just will never be surprised by the financial crowd and what they can accomplish.
Or the same logic-waves. So many keep writing that the issue is somehow getting the easy credit bubble going again, or figuring out how to mod these crazy loans to keep people in their "hyper-valued" houses...
Problems is --
People have no savings.
Declining real wages and rapidly rising cost of living.
Housing prices so inflated that people can NEVER actually buy their houses -- only rent at inflated rental rates. The 75 and 100 year fixed rate mortgage I guess is supposed to fix that.
People can't actually afford their current lifestyle -- they are technically INSOLVENT.
Far, far too many mouths have been trying to slice, dice, and tranche a millionaire's lifestyle off of the backs of insolvent Joe6Pack homeowners.
Commercial and Service economies, and their correlated building and infrastructure investment, is completely based on the extreme oversupply of junk that people don't need, and now it seems, don't want.
Great take. I;'ve been pondering the same thing. This time it REALLY is different. Job losses trailing foreclosures. Savings negative. CC's maxed out.
Investor homes are failing first. Yes, because of above. Max out cards, default on spec home, default on CC next.
If such investors have 5-10 yrs in a house, 30 yr fixed, 20-30% equity, they're just battoning down the hatches...waiting for the storm to pass. That's what they did in SoCal in the early 90's.
This time it's different. This time spec'rs went HELOC on that 30yr, 30% equity (which rose to I dunno 60% equity do to bubbliscious prices). Now there's nothing to defend. All is lost.
I'm really depressing myself now. I have family members who refused to listen to me in '05....for what it's worth,
Add to that the retirement and psychological issues that could make things worse. If you are one of the people who actually DIDN'T HELOC all your gains away, now would be a pretty good time to sell and cash out, putting that future-phantom equity into the real world. I think if you are like a lot of people and have stopped saving lately because your house went up so much the past few years, you've got a lot at risk if you just watch and wait it out.
I have no idea how much more this potentially adds to the downside for the market, but I think it is not insubstantial.
Ron, I just dont think you can continue to prop the market if underlying earnings are eroding. Interest rates are part of the equity pricing equation, but they are only a part, and they can't compensate for the market for a particular product falling apart. There's a lot of downside, regardless of rate cuts. Rate cuts worked last time because they allowed people to load up on debt, thereby preventing the real pain of a consumer downturn and the hit to earnings that would have ensued. Now, I dont see that making a lot of credit available is going to help in quite the same way. Some effect, yes, it will have, but not as much, and it could backfire since we have no other weapons and the rate cuts might make the FED appear impotent. In that case, welcome to Japan.
In the 90s we had flippers, but most of the homeowners had some skin in the game and were looking to stay for the long term -- things just didn't work out.
2001 - real estate is treated as a short term liquid assets like stocks that in time of trouble, you just make a quick call to your broker and tell them to sell. Even worse, speculators started treating real estate like a leveraged hedge fund. 2/28 mortgages are by their very nature, temporary funding vehicles. Buying multiple, stated-income, 100% LTV properties is leveraging. Great profits in an appriciating market, Terrific losses in a declining market. Just re-wind to the late night "Get Rich In Real Estate" seminars and note how often the "leverage" is mentioned.
Problem is, if you were a prudent saver and home buyer with a down paymt and a 30 fixed with some equity and you DIDN'T squander your equity with a HELOC, and you were planning to cash in your home for retirement capital a few years down the road what you are seeing now is devastating. Joe Prudent is sitting in his recliner with clenched white knuckles now as he contemplates the almost sure evaporation of his equity and nest egg -- and with little likelihood that it's coming back any time soon. Or that he can anything about it, like sell, in this environment.
Chip, I've added a new graph that might make it clearer.
Bob_in_MA, history has been an excellent guide so far. I've noted before that most housing busts are blamed on something other than housing - even though SoCal saw a speculative housing bubble in the late '80s. Yes, there were other factors on the way down, but I've pointed out before that the jobs lost in SoCal to construction dwarfed the job lost to DoD cutbacks. That part of the story always seems to get lost.
History tells us some of the dynamics, and yes, we also have to remember this speculative housing bubble was much larger than previous bubbles.
A final comment: when I first started writing this blog, people kept saying I was all "doom and gloom". I just kept writing how I thought it would work out. I'm still writing how I think it will work out - but I'm sensing, as bearish as I am on housing - some people are far more bearish than me. So fair warning: someday I will turn positive on housing. Not any time soon, but it will happen. First for RI and some time later for prices.
RnL - agreed. So, in that case, do you sell now and take what you can get (as in, cut the price below current asking in your submarket - and yes, you will sell at the right price, you just wont like the haircut) thereby saving some of your hoped for gains, or, do you do a NASDAQ 2001 and keep praying its already the bottom. I recall a lot of people saw their retirmement nesteggs disappear in a few years then, in total denial that things could just keep dropping.
No reason it cant happen again now, just at a slower and more painfully depressing pace.
I love this blog because here we can have rational, detailed conversations about whether the bottom is 2010 or 2013. Like we know. But its fun.
Anyway- my contribution: If prices are just "correcting" back to more rational levels, then 2009-2010 is bottom (after the 13.5% correction predicted by GS), since job and income growth will sustain some reasonable level of demand at those lowered prices. However, if the correction process itself triggers a consumer led-recession, then all bets are off. Flat or falling in real terms until 2012-2015.
I think RI is less of a signal this time because RI reduction possibly triggering, rather than reacting to, a recession.
It is harder to artificially inflate the U.S. stock market today than before due to globalization. Look at the last month. Europe and Japan have fallen harder than the U.S. for a simple reason. The PPT doesn't have a chapter in Europe and Japan.
Eventually (and [probably soon) the arbitrage effect will go to work as institutional investors, macro hedge funds and global mutual funds look for the best stock bargain anywhere in the world. They won't be here. These investors will sell U.S. equities (especially the most fragile) and buy European and Japan (especially the most durable). Big, blue-chip globally diversified companies aren't in bad shape. But the idea that we have the economic mess we're in and small cap U.S. equities still have a TTM P/E of 38 is amazing and ridiculous. The best way to short the small caps is TMM.
Bottom of market will be 3 years after CR turns positive on housing again. That seems to be about how long it takes conventional wisdom to turn around and head in the right direction, and I trust CR to know the right direction.
I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management in Greenwich, Connecticut, in an interview today.The market is going to overshoot itself and not lend money to people who deserve it.''
hopeinsd, I'm not using RI as a signal. Maybe I wasn't clear.
There are usually two bottoms for housing: 1) RI, 2) existing home prices.
RI happens first - it almost has to.
Every time I write about RI, people start asking about existing home prices. The reason is obvious: people care about existing home prices and not RI. Economists (and the economy) care about RI.
All I'm trying to say is there is some chance RI will bottom at the end of '08 (that is GS's view). It's too early to tell, but it might.
But that has nothing to do with existing home prices - that bottom will happen much later. How much later I don't know and I'm asking for a few years to consider the issue.
"Among the most tangible moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.
Mr. Bush will also call on Congress to temporarily suspend a tax provision that is leaving some distressed homeowners with whopping tax bills. And he will announce an initiative, to be lead jointly by the U.S. Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers."
Boy, if there was ever a reason for jingle keys, that is it right there. Get away from your underwater 100% financed house tax free. In California you could wait 4 months payment free and leave with a good chunk of change in your pocket.
"If you are one of the people who actually DIDN'T HELOC all your gains away, now would be a pretty good time to sell and cash out,"
I disagree. I bought in '99. 25% down, 7.5% 30 yr condo. I doubt the nominal value will reach below my purchase prices as the FED LOVES inflation. In ~20 yrs, when I will be looking at retirement, my payment will be taxes and HOA and will be very small...no MELORUSE here. It'll be an OLD building then, but, it'll be cheap. I'm not looking at it as a funding mechanism, but as a secure place to hang me hat.
I'll use my gold and silver, sold w/o gov't knowledge, to fund my living expenses.
My Lord, I sound like my depression era grandparents. My only debt is my mortgage. I have cash enough to buy a vehicle if my paid off 2002 Expedition fails, my 42" plasma was paid cash. My self built uber computer worth $4g's and 2g laptop cash.
I dunno Geoff, I think actions depend on debt levels and financial strategy. I've been EXTREMELY conservative for 13 yrs...selling would destroy that strategy.
This recovery timeing is all very well in assuming that housing operates in it's own little world where a cyclic pattern comes into play, but the reality is is that there are many geopolitical issues that will become far more apparent in the next few years. The unprecedented extent of the debt for the consumer (and all other entities) is enough to guarantee an unprecedented depth of trough, but it these external factors that will continue to bury the "average" American consumer. I have come to believe that for the great majority of the population, if they have not achieved financial security by now, it will never happen.
These external factors include the energy/oil crisis, food supply issues, water supply issues, global labor arbitrage, continued and increasing deficits caused by unsustainabe projects, "blowback" from ill-considered adventures, unbearable health care cost expenditures, climate change, etc., etc.,.
While we have sucessfully pretended that these issues are not there, many of these geopolitical issues will be worsened by the oncoming recession.
And tragically, these major issues will be breaking wide open at a time (in 3+ years) when the mythic housing recovery is scheduled to begin.
For these more global reasons, I think the recovery will be a long time coming. And after that "recovery", the world will be a very different place.
A nice curly tail on a graph (which even looks "early" in scale with other recoveries) represents wishes and not the future.
MoM says:
"Misean - I tried also. Don't be depressed - it's very hard to fight the tide. Bubbles do have a manic element. Everyone just is so sure.:"
Yeah, but it's me mum and her hubby...both estate agents. My Sunday Mom calls don't get anwsered or returned some weekends, because her husband asks me market questions, and she doesn't want to hear it.
This is going to pulverize the middle class...and I think it is intentional, by the powers that be.
Cal,
Shrub-boy's mal-administration is just setting people up to be debt slaves forever...100yr mortgages...yeah that's the ticket. But it might help poppy shrub's Carlyle group, which is bleeding cash over one of it's hedgies. I'll post if I can find the article on it.
Sorry, I ain't got nothin' witty to end this with either...
"builders don't just top building. They may slow the start of new projects through delays, and may pull the plug on some, but much of their business model is too long term with too much fixed investment already in place, that they can't abandon."
This does deserve some thought. All home building that I've ever been aware of (virtually all, anyway) has been funded by construction loans. These are short term loans, not mortgages, and are backed by the assets and guarantees of the building company and, for all smaller companies, by personal guarantees. I am not in the market for such financing lately so I don't know how easy they are to get these days, but I bet that it is quite hard. A builder may be willing to damn the torpedoes, but the bank may not want to go along on that ride.
The issue of prices lagging the RI bottom is very interesting. I have no doubt it will occur again. The differences this time are: the rat-through-the-python of baby boomer retirements will begin soon, which could change sales numbers and create demand for different housing types. Also, the internet era has made info dissemination faster and I think that has affected the stock market and real estate markets. An example: ten years ago info I now read on this blog would have been unavailable to me or would have lagged by many months.
random comments.
It looks to me like there is a lot of money chasing qualified home buyers who meet prudent lending standards. There may be a lot of deserving people who do not meet the current definition of prudent, but remember that prudent is determined by he who has the gold, and a fair bit of that gold seems to have gone missing. When it is found, lending standards will likely relax to loose but not insanely loose. I'm not sure why GSE and FHA standards would not cover most.
For those who argue that incomes are good, I can only agree. Mine is better than I would have ever imagined a few years ago. My concern is that the distribution of those incomes is increasingly troubling and that suboptimal distribution will have a negative impact not considered by the traditional measures of economic well-being.
As for the sorry plight of the Boomers, I wonder if the reports of the death of our economic well-being are greatly exaggerated. Having recently attended my 35 year reunion, and being somewhat obsessed by this subject, I was struck by what a fiscally conservative bunch my classmates were. This is in a small town community 25 miles north of Portland, OR. that had a decent percentage of rural, but a lot of suburbanites in the group.
I get your point, but where I don't follow your 'optimism' about RI is this:
what do you see to put a bottom in RI, in other words, after a great shake out of investments, where will the kinds of capital flows needed possibly come from? Up until now they have come from the willingness of consumers to pawn their future earnings, and lo and behold, it turns out that they were wildly overoptimistic. As we have been talking about, that is due to people being naturally overoptimistic/unrealistic, coupled with an enormous economic incentive for every capital producing enterprise to play along. Now that the realities of the situation set in, it seems to me that both legs are gone from any recovery; no consumers will be in the position to borrow the vast amounts needed to feed reinvestment, nor will any investor trust the mechanisms that have played havoc with these markets. While we generally focus on what is happening in the States, this game has been played world wide, and the aftermath will very likely effect the same changes in every credit market that comes out the other side. If I compare this vastly larger implosion with the things I understand about other localized but severe downturns (RE in Japan, the oil boom, steel and agriculture in the US) it could be a generation until the capital returns to real estate investment. How do you see that differently?
I know that you rarely discuss international precedents and you base your examples on the American economy but you may find interesting to read this paper about the housing (and economic) crash in Finland in early 1990s. This was the most violent housing crash I'm aware of and the deepest recession in a developed country in recent years. Although the direct trigger of the economic problems was the collapse of the trade with Soviet Union, the main reason was the housing crash that was a result of a huge bubble in the real estate (and loose credit) in the late 1980s. The prices collapsed violently. In Helsinki, they stoped growing (after a huge runup) in 1989, dropped by 10% in 1990 and the plummet by more than 20% in 1991 and additional almost 25% in 1992. And then the crash was basically over and the economy started recovery.
As you can see, not always the housing dowturns last long. I'm not saying this pattern will be repeated. It is almost imposiible since USA has a too large and too diverse economy but some local markets can have show similar patterns. I find more similarities between the current boom and the Finnish one than with the previous American booms.
This paper is also a very good description of the economic depression in Finland (and its causes) but is subscription only.
CR:
in the home price prediction, interest (mortgage rates) needs to be accounted too..in the 90s, i believe, rates were in decline thus arresting price decline..
in the event of credit crunch (jumbo rates have already gone up)price may fall sharper...also i agree that fall will be swifter as %of investor home/speculator homes are huge this time around..2008 will see sudden big decline. i think.
I had no idea. I've been basing my worst case CPI figures on Japan.
Now I have something else to look at when it comes to worst case: Finland.
Of course the housing market recession was also bound up with the very severe economic recession during which unemployment soared from 3.2 per cent in 1990 to 16.6 per cent in 1994 (Statistics Finland/ Finnish Labour Force Survey).
Yeah, that seems fairly worst case all right. Ouch.
A difference between today and past cycles: fraction of vacant homes (not for rent) is aprox 2.8%, vs. past peaks at aprox 1.9% (from memory). That may be growing as builders continue to bang away.
These empties are the real "inventory" -- more so than homes for sale on the secondary market.
At what price would you buy a 2nd home to keep empty, waiting for better days? Note the ratio of vacant rentals is also high.
The surplus of emply homes (rent or own-occupied) is largely price-insensitive. Until it drops to "normal" levels these empties will depress prices.
Only demographics and in-migration will fill those empties. Unless, as we did during the Depression with food, we deliberately destroy them to boost prices.
Finland is an unabiguous proof that there can be an inflationary depression and that's the reason I think Bernanke is absolutely wrong about his helicopters. There were many similar examples but mostly in the developing world. I still don't think such a scenario is likely now but certainly it is possible.
Thank you for the excellent data presentation of the 1990s housing bust, CR.
The situation in 1990 differed from today's in that we had a recession preceeding the RI bottom in Q1/91 (if I remember correctly there was a recession in Q3 and Q4 1990). This time around, there is no recession and according to the most reliable models there won't be one before the coming RI bottom. We could therefore see prices bottoming earlier than 3 years from the RI bottom this time as well. We were also coming from the worst bank crisis in the US history in the late 1980s into the recession and RE bust of 1990/91. This time around, there is no bank crisis. Lastly, the stock market had a much stronger correction in 1990 than the one we're seeing this year (both corrections led by financials BTW). To sum it up, the general economy is in much better shape today than 1991. This will help us avoid a recession and shorten the housing correction in my opinion.
Fabius, demographics won't fill those empty homes; go review population growth in the 30s. It dropped off a cliff.
We have all time high vacancies. We have all time low housing occupancy density (people per house). Our investments and equity will be moving down sharply in value. To save money/survive, old folks will be moving in with children, and children in with parents. Vacancies are going to skyrocket.
jg -- I never said demographics would fill them quickly. I just said demographics and migration are the only factors than will fill (i.e., can fill) the empties -- unlike price changes.
Economic growth can, to some extent, affect household formation and migration -- plus or minus. Your example of the 1930's is pertinent, if hopefully beyond anything we'll see.
I just reread his helicopter speech. He didn't say there wouldn't be bad times or even very bad times. He simply said that deflation wasn't going to happen here. If Finland is any indicator, he might be right.
I'm fairly confident that if Bernanke can keep consumer price inflation "range bound" (the fun phrase of the day in my opinion based on the Bob Pisani's commentary of the stock market) he'll consider it a success. I might too. I for one don't expect him to be a miracle worker and that's realistically the most we should probably expect from him: price stability.
Sure, he could print more money to employ more people in the short term. In the long term, that doesn't actually help though (the Zimbabwe unemployment rate is roughly 80%). I think he understands that and might not be nearly the inflation dove people make him out to be. Little good can come from price instability. It adds more uncertainty to an already uncertain situation. If we go down the inflation path in a major way, we'd spend all right but we'd all be buying the wrong things (like more gold, more silver, and maybe eventually even bedpans). Who is that going to help? Been there, done that once already. I don't think he wants me to do it again. Neither do I.
Most housing downturns last only a few years. The longer decline of the 1990s was an aberration caused by the unusual dislocations of the late 1980s bubble, and the government intervention to resolve that crisis (a story unto itself).
The cyclical housing decline of the 1990s would have been faster and more severe without the intervention of the Resolution Trust Corporation. The RTC removed excess inventory from the market, and then slowly released it back into the market over many years. While this action mitigated the severity of the price decline, it also greatly extended the duration. This warehousing of supply also made it easier for builders to resume building, further exacerbating the supply overhang, and further extending the duration of the housing price decline.
The timelines from the 1990s downturn are not typical.
In the 1980s I was a highly leveraged speculator (in Los Angeles), and I would have gone bust had I not sold right before the local decline started in 1989.
In 1988 I expected the decline to be worse than average. And I knew that the west coast economy and market cycle lagged the east coast by about two years in those days (that lag has been gone for many years now). I happily kept buying even in 1987 when the east coast market had faltered and started to decline, "knowing" I had two years before I needed to get out. I was willing to take that timing risk because I also knew that the biggest price increases come in the last few years of a bubble.
I should have sold everything in 1989, but I did sell enough to nearly eliminate all of my debt. And prices had nearly doubled during the last two years in that market.
Watching CNN today (hats off to anyone who can do that all the time - the mind reels), I had the thought: what we have here is a classic inventory correction, but something more. The recessions I grew up with in the sixties, and the dandy I graduated into in the seventies, were classic inventory correction led recessions. I.E. profits were high, stock market was high, car and retail sales were high. There was too much exuberance at the top end, consumption couldn't keep pace, and inventories needed to be liquidate, leading to unemployment. There was a role for monetary tightening and in '79 with oil for an external shock. Today wer're seeing an inventory correction in real estate, true - BUT REAL ESTATE HAS BECOME INSEPARABLY CONNETED WITH THE MONEY SUPPLY. Even in the Finnish example, and certainly not in earlier recessions here, I doubt people were using HELOCs as ATM's. And securitized debt instruments did not make up such a large part of the supply of capital. This, and the lower status of the dollar is what I feel will put the fed in a box and lead to a more likely recessionary outcome.
First! Please do not feed the trolls, but please help the newbies in life understand all this mess.
Thank you!
I kept hearing the housing specuvestors saying 5-7 years when they were going to sell and that was last year. Now I see them defaulting. So factoring in those hold outs I would expect we have around 5 years before we see price bottoms.
It would seem (although this may be a false assumption from the San Diego data) that the higher the run up the longer it takes for prices to stop retreating and hit bottom. If that is the case CR, would it be safe to say that it will take longer than the 3 years of the early 90's this time around to find bottom nationally? Again, assuming that '08 sees the RI bottom, that would put the price bottom out in the 1012 to 1014 time period.
It takes a long time for hope to die.
"...that would put the price bottom out in the 1012 to 1014 time period."
Yep, it's back to the Dark Ages for all of us.
Andrew, something like that. (I like Junior's comment to your typo! Very funny)
Different areas will see price bottoms at different times. For the more bubbly areas, I'd expect the price bottom no sooner than 2011, probably later. If I'm still bloggin' then, I'll try to call the price bottom for some of the bubbly areas (like San Diego).
Best to all.
My guess for Phoenix would be a bottom in 2012, after several false starts and hopeful moments.
I note that commercial has yet to experience any real damage. When that starts, the wheels will come off of Wall Street.
Once again another crisis is going to cause the retirement dreams of a generation to go up in smoke. The boomers are going to be very very very unhappy with their 201ks after this debacle fully materializes.
I am beginning to think a generational crisis of confidence is going to result from this debacle as all forms of debt become suspect to the people who might buy them. A true buyer's strike will be compounded by a large drop in the dollar resulting from foriegn disinvestment in the US. Loss begets more loss, and at some point a lot of folks will want their money someplace closer to home.
Someday this war's gonna end...
CR-
I thought the speculators would have been long gone-
Expired
Whoops.. Sorry about that. Who'd a thought it would be possible to have financial Freudian slips. LOL.
So, in my talking to people from California, there seemed to be quite a bit of pain in that 90's bust.
At the risk of stating the obvious,well, the hump that happens to right of that looks awfully big.
Depending on how severe the credit crunch is I think that the process of finding bottom could get accelerated a bit. If no one can get financing, people's illusions about what their house is "worth" could get stripped away much faster. At the very least, it makes holding out for the price you want much harder with an extremely reduced pool of qualified (and probably very choosy) bidders.
Andrew
i would have to second that. if u look carefully at the rolling over peak in price around 1990, it precedes the trough in RI by about 1 year. but if you look at present day, they are rolling over together which MIGHT imply they'll bottom together.
This is interesting, the we have no plans to use it, but, we'll file at the earliest possible date-
JUST IN CASE, universal registration
Expired
and this falls into the "what the hell is this camp of affirmations?"
"The review didn't include an analysis of structured investment vehicles (SIVs), market value, or CDO commercial paper programs, which are being reviewed and will be commented on separately. "
MarketWatch.com
and, a potential precedent in the making-
Expired
Is it me not understanding Case-Shiller index or the house prices don't really fal but just stagnate?
Accrued Interest
"To be sure, the 10-year fell more dramatically in 2002 and 2003 as the Fed kept cutting rates and a deflation scare set in. But my point is that in December 2000, several Fed cuts were priced in. So as the Fed actually did cut in 2001, all that happened was the curve steepened. The 10-year moved very little. Even as the Fed blew way past everyone's expectations, long-term rates remained stubbornly high."
Seems fairly clear that upward price signals (and demand) lead the residential investment boom with a not too large lag where the building follows the pull of the $. But prices are not what residential busts are made of; they are the result. Residential building stops booming once the bloom comes off demand through the supply/demand imbalance. Prices are linked to the building downturn only in so much as they are required to change (downward) to clear the market.
Obviously, the supply overhang is going to hang around quite a while even if building stops altogether. But of course it wont, because builders dont just top building. They may slow the start of new projects through delays, and may pull the plug on some, but much of their business model is too long term with too much fixed investment already in place, that they cant abandon. So build they must. The supply pullback will mostly come through the bankruptcy process, when building ceases from specific builders who no longer can build because of financial constraints. To the extent any of the Feds or Congresses allow marginal builders to stay in business longer than they otherwise would, this prolongs the building, and drags out any recovery in prices as the supply overhang lasts longer. It potentially even adds to the psychological damage and reduces demand, compounding the problem. As I said yesterday, any kind of bailout that keeps marginal builders in business actually is more likely to cause recession than avert it.
So you can pretty much guarantee that if you just went through the absolute most easily available credit environment at the top of the boom, and havent even yet come close to finding the bottom of the credit availability standards, you cant even talk about the bottom in demand for housing and prices. Once credit bottoms, and then loosens, you might be able to think about a bottom, but that will still depend on the supply overhang.
And of course, as some here like to point out, "my market is different, the prices havent fallen and they wont". Well, possibly yes, but possibly no. All depends on the source of the financing. If you look at Sillycon valley, sure, it could stay afloat. It's only so big, the people in it largely have tons of money. They can pay the overly inflated prices for new purchases, and can manage whatever mortgage payment. But why would they? When you can rent those same houses for less than half the monthly nut? Well, perhaps renting is looked down upon? I dont know. It's hard to know how those specific markets will clear. Frankly, if we end up with an even more segregated and polarized real estate market, so be it. I think the nicest places could end up that way, but anything which isnt looked at as a trophy has a lot of downside potential.
And how exactly do we know that when the economy's wheels come off, those same rich folks will continue to be able to pay for those overpriced homes? Lots of unknowns.
Of course, plenty of Santa Bar
Test
plenty of Santa Barbara like places where the supposed immunity has turned out to be anything but. My bet is that almost any market can succumb.
making news in aussie land:
McMansion mortgage meltdown fosters a new breed of equity strippers - Business
Some of those sayings look like they were collected from comments here;-}
Ursa Major is coming to visit soon. Even CR seems to have been infected by the meme.
I would love to be in some of the closed conference rooms in J.H. WY this week. Today's seminar question: How much damage can the credit markets take before Wall Street infects main street? We shall soon find out!
Someday this war's gonna end...and a US House Member said if it ends early we get $9 gas! I just can't wait for that one...
OK, so house prices are sticky because owners are typically reluctant to mark them down. Instead they will cut back on expenses, eat into their savings, and even borrow money to hang onto that home. Thats what normally happens, so thats what we expect this time, right? Here are a few What ifs to challenge this expectation:
What if a significant number of homeowners have no savings to keep them afloat for any length of time?
What if their friends and family also have no savings to help them out?
What if the coming recession is quite severe such that the loss of income necessitates a large amount of savings to hang onto the house?
What if all asset classes move downward simultaneously, depleting the resources of some homeowners who thought they had financial cushion?
What if lenders become fearful of making loans, except on terms that will not help such homeowners?
What if an unprecedented number of homeowners mail in their keys, so that REO numbers skyrocket?
Seems like some of these What ifs are not iffy at all. Does that make this time different? I dont know, but I am curious to find out.
The fall in housing prices in the 90's was caused by unemployment and recession. People lost jobs but were able to maintain mortgage payments for a while as unemployment benefits and savings were slowly depleted.
This time the cause is directly related to the payment in question. Employment remains high, for now, but there is no savings and the cards are all maxed out. I think this downturn will be faster because of that difference. Prices aren't so sticky when the home is a liability on some bank's books.
Wouldn't the rate of price declines depend a great deal on how much downward pressure there is on the market -- or stated another way -- the greater the need to sell, the greater the price drop.
The 1990s housing recession came, if I'm not mistaken, at the end of a real estate bubble much smaller than current, a fairly mild economic recession, a fairly mild jobs recession, at at time when fixed term, fixed rate, mortgages were the majority and teaser rate IO and Opt ARMs nearly unknown, at a time of relatively strong dollar and relatively small Federal budget deficit, at a time of relatively high interest rates (at least until Greenspan began cutting), at a time of relatively strong manufacturing production and employment in the US, at a time when the financial, banking, mortgage industry was strong (except certain S&Ls), at a time of positive savings rate, at a time when baby boomers were still quite a ways from retirement age, at at time when real inflation was low (not the fake CPI the fed reports now), at a time of very low commodity and oil prices, etc, etc, etc.
How fast and how many properties, both residential and commercial, will be abandoned to the lenders? How much pressure will the lenders be under to dispose of these properties? How long will lenders be able to hold onto and maintain properties while waiting to recapture loan principles on inflated values? How long will cities allow vast tracks of empty and unfinished housing projects to sit like so many ghost towns?
I suggest that what we are seeing now has no recent comparative event. Judgments regarding the severity and the speed of a "housing bottom", not to mention the length of this "housing bottom" may be wildly off-mark. We keep hearing how "surprised" and "astonished" the financial world has been by the speed of recent deterioration events -- I suspect we will continue to be "surprised" and "astonished" by the increasing speed of deterioration.
Nude and ReadingNLearning,
We must have been riding the same brain waves...
ShortCourage said:
What if a significant number of homeowners have no savings to keep them afloat for any length of time?
What if their friends and family also have no savings to help them out?
Like you said, I don't think this is a what if.
Epiphany moment for me was when credit counselling commercials started showing the man with the perfect house, car, golf membership, etc. That's when I knew that it just wasn't JSP in trouble.
This is a major point: in 2001 there wasn't that great of a supply / demand imbalance based on historic home ownership rates. Home ownership rates had started to go up some due to the low housing prices of the 90s and the job / wage increase basically brought on by the tech / Y2K boom. By 2001 that had essentially played itself out. Almost none of the 2002 - 2007 housing bubble had anything to do with supply / demand. At the tail end of what ever housing bottom we eventually get to, there won't be any large pent up demand to give a bounce -- barring a huge surge in birthrate or immigration. We will be resting at the bottom for a long time.....
1985 the boomers were hitting age 35 in large numbers, 1995, 45 and now hitting 55 +. The landscape for historical housing charts is based on very different population trends then we have today.
The other issue that pops out is the debt that boomers and their parnets were carrying during these past cycles, was quite small compared to today's ATH.
Nice. A fourfold increase over ten years just like Japan. So what is next? This is how it went in Japan but of course we will be able to do better for home owners.
http://digitalcommons.libraries.columbia.edu/cgi/viewcontent.cgi?article=1243&context=japan_wps
Psychology-driven price increase in the boom was helped by media coverage and the change in psychology aided by the new media (blogs etc) and a frankly better informed public will lead to a faster decline now.
RI will fall well below the 1980s bottom.
RnL - agreed. The next leg down will be steeper and faster.
The current push down is based on a few things : 1)a lack of demand because of inability to afford the price peak (lack of income gains and no more easing of credit terms - I mean, could it realistically gotten any EASIER to get a mortgage? and it does have to get increasingly easy if prices are to keep rising on stagnant real buying power) 2) clear lack of upside price potential gains as the wilting demand started to erode the need to outbid other buyers 3) a modest amount of job losses in some states (MI, OH, etc) 4) the lagged effect of a building boom where somehow builders decided these types of price gains were sustainable and actually built at a faster pace- (did ANY builder slow development a couple of years ago in anticipation of the problems of a demand slump? I doubt it.) 5) a speculative pushback of properties on the market (which reinforces the supply problem) 6) mortgages resetting - first to simply higher rates which was inevitable, but second, the resets that occured after the price peak, which made refi impossible and foreclosure inevitable.
I could go on - the important thing to note, is that all this is slowly wearing on that 71% of GDP that is consumer spending. And as that CS slows, the need for capital investment slows as well, as does the need for hiring more potential homebuyers. So, how long does the reverse go on? Sure looks like from a housing perspective the pressure on the CS side is just starting. Which of course, leads you to the inevitable - the rising first time unemployment insurance claims, the sinking confidence, and the lack of spending and rise in personal saving that goes with it as housing wealth evaporates.
I'm still waiting for a convincing argument of how the continued unraveling somehow leads to a soft landing when we are practically in recession already and heading downward. The job losses are starting, the lack of hiring will follow, and then the job losses will start in earnest.
We've got a long ride down ahead of u folks...
Pankaj, that is an 18% nominal decline for San Diego - it just looks flat because the huge runup in recent years. I was trying to show the time relationship of the bottoms, not how far prices fell.
risk capital, speculations are mostly out of the market now - as buyers!!! But as the article says, as sellers many speculations are still getting crushed.
Best to all
Pankaj, to be clear, that 18% decline in nominal prices was for the early '90s bust. It just looks flat.
Best Wishes.
I may be interpreting the graph incorrectly, particularly since I agree with Geoff and want to believe Y.S.Wayne is anywhere close to correct: the GSax "bottom," notwithstanding the agreed upon delay in timing of house-price bottom, is at a higher point than the ones in the '80s and '90s. That doesn't make sense to me, from everything I've seen and read, as in: I think GSax is unduly optimistic about the bottom -- IF there is a historical relationship between the two, mathematically (rough).
AllenM and ShortCourage, your prognosis and logic makes great sense (or, at least matches mine!).
I think you're onto something, but the red line will go a little deeper and longer than you have drawn for three reasons:
We just haven't faced this set of variables ever before. It's a life-altering experience.
Geoff:
The bubble makers are all ready hard at work, my rough guess is that the stock market is the best bet for a fresh round of wealth effect created by the FED with a series of rate cuts. Your home may face immediate foreclosure and you can't afford to dine out but the Dow will be at ATH so it can't be all that bad, that's what the CBS evening news will be saying. No crystal ball here, just will never be surprised by the financial crowd and what they can accomplish.
I think Nude makes a good point, the early 90s in San Diego was a pretty different situation, the aerospace industry faced years of cutbacks.
I'm still skeptical past downturns will offer much guidance on how this will play out.
ShortCourage -
Or the same logic-waves. So many keep writing that the issue is somehow getting the easy credit bubble going again, or figuring out how to mod these crazy loans to keep people in their "hyper-valued" houses...
Problems is --
ReadingNLearning:
Great take. I;'ve been pondering the same thing. This time it REALLY is different. Job losses trailing foreclosures. Savings negative. CC's maxed out.
Investor homes are failing first. Yes, because of above. Max out cards, default on spec home, default on CC next.
If such investors have 5-10 yrs in a house, 30 yr fixed, 20-30% equity, they're just battoning down the hatches...waiting for the storm to pass. That's what they did in SoCal in the early 90's.
This time it's different. This time spec'rs went HELOC on that 30yr, 30% equity (which rose to I dunno 60% equity do to bubbliscious prices). Now there's nothing to defend. All is lost.
I'm really depressing myself now. I have family members who refused to listen to me in '05....for what it's worth,
Cheers,
Misean - RnL - others :
Add to that the retirement and psychological issues that could make things worse. If you are one of the people who actually DIDN'T HELOC all your gains away, now would be a pretty good time to sell and cash out, putting that future-phantom equity into the real world. I think if you are like a lot of people and have stopped saving lately because your house went up so much the past few years, you've got a lot at risk if you just watch and wait it out.
I have no idea how much more this potentially adds to the downside for the market, but I think it is not insubstantial.
Ron, I just dont think you can continue to prop the market if underlying earnings are eroding. Interest rates are part of the equity pricing equation, but they are only a part, and they can't compensate for the market for a particular product falling apart. There's a lot of downside, regardless of rate cuts. Rate cuts worked last time because they allowed people to load up on debt, thereby preventing the real pain of a consumer downturn and the hit to earnings that would have ensued. Now, I dont see that making a lot of credit available is going to help in quite the same way. Some effect, yes, it will have, but not as much, and it could backfire since we have no other weapons and the rate cuts might make the FED appear impotent. In that case, welcome to Japan.
In the 90s we had flippers, but most of the homeowners had some skin in the game and were looking to stay for the long term -- things just didn't work out.
2001 - real estate is treated as a short term liquid assets like stocks that in time of trouble, you just make a quick call to your broker and tell them to sell. Even worse, speculators started treating real estate like a leveraged hedge fund. 2/28 mortgages are by their very nature, temporary funding vehicles. Buying multiple, stated-income, 100% LTV properties is leveraging. Great profits in an appriciating market, Terrific losses in a declining market. Just re-wind to the late night "Get Rich In Real Estate" seminars and note how often the "leverage" is mentioned.
Geoff -
Problem is, if you were a prudent saver and home buyer with a down paymt and a 30 fixed with some equity and you DIDN'T squander your equity with a HELOC, and you were planning to cash in your home for retirement capital a few years down the road what you are seeing now is devastating. Joe Prudent is sitting in his recliner with clenched white knuckles now as he contemplates the almost sure evaporation of his equity and nest egg -- and with little likelihood that it's coming back any time soon. Or that he can anything about it, like sell, in this environment.
Chip, I've added a new graph that might make it clearer.
Bob_in_MA, history has been an excellent guide so far. I've noted before that most housing busts are blamed on something other than housing - even though SoCal saw a speculative housing bubble in the late '80s. Yes, there were other factors on the way down, but I've pointed out before that the jobs lost in SoCal to construction dwarfed the job lost to DoD cutbacks. That part of the story always seems to get lost.
History tells us some of the dynamics, and yes, we also have to remember this speculative housing bubble was much larger than previous bubbles.
A final comment: when I first started writing this blog, people kept saying I was all "doom and gloom". I just kept writing how I thought it would work out. I'm still writing how I think it will work out - but I'm sensing, as bearish as I am on housing - some people are far more bearish than me. So fair warning: someday I will turn positive on housing. Not any time soon, but it will happen. First for RI and some time later for prices.
Best Wishes!
RnL - agreed. So, in that case, do you sell now and take what you can get (as in, cut the price below current asking in your submarket - and yes, you will sell at the right price, you just wont like the haircut) thereby saving some of your hoped for gains, or, do you do a NASDAQ 2001 and keep praying its already the bottom. I recall a lot of people saw their retirmement nesteggs disappear in a few years then, in total denial that things could just keep dropping.
No reason it cant happen again now, just at a slower and more painfully depressing pace.
CR,
It must feel strangely odd to be considered somewhat of an optimist here in the comments!
What odds do you give that this time is likely to be different as far as quick price drops?
I love this blog because here we can have rational, detailed conversations about whether the bottom is 2010 or 2013. Like we know. But its fun.
Anyway- my contribution: If prices are just "correcting" back to more rational levels, then 2009-2010 is bottom (after the 13.5% correction predicted by GS), since job and income growth will sustain some reasonable level of demand at those lowered prices. However, if the correction process itself triggers a consumer led-recession, then all bets are off. Flat or falling in real terms until 2012-2015.
I think RI is less of a signal this time because RI reduction possibly triggering, rather than reacting to, a recession.
It is harder to artificially inflate the U.S. stock market today than before due to globalization. Look at the last month. Europe and Japan have fallen harder than the U.S. for a simple reason. The PPT doesn't have a chapter in Europe and Japan.
Eventually (and [probably soon) the arbitrage effect will go to work as institutional investors, macro hedge funds and global mutual funds look for the best stock bargain anywhere in the world. They won't be here. These investors will sell U.S. equities (especially the most fragile) and buy European and Japan (especially the most durable). Big, blue-chip globally diversified companies aren't in bad shape. But the idea that we have the economic mess we're in and small cap U.S. equities still have a TTM P/E of 38 is amazing and ridiculous. The best way to short the small caps is TMM.
CR, sorry my last post was sent off before I saw your newest post...
Bottom of market will be 3 years after CR turns positive on housing again. That seems to be about how long it takes conventional wisdom to turn around and head in the right direction, and I trust CR to know the right direction.
Misean - I tried also. Don't be depressed - it's very hard to fight the tide. Bubbles do have a manic element. Everyone just is so sure.
I don't think the Fed understands how critical the situation is,'' said Neal Neilinger, co-founder of NSM Capital Management in Greenwich, Connecticut, in an interview today.The market is going to overshoot itself and not lend money to people who deserve it.''
Commercial Paper Extends Slump on Asset-Backed Woes (Update5) - Bloomberg.com
hopeinsd, I'm not using RI as a signal. Maybe I wasn't clear.
There are usually two bottoms for housing: 1) RI, 2) existing home prices.
RI happens first - it almost has to.
Every time I write about RI, people start asking about existing home prices. The reason is obvious: people care about existing home prices and not RI. Economists (and the economy) care about RI.
All I'm trying to say is there is some chance RI will bottom at the end of '08 (that is GS's view). It's too early to tell, but it might.
But that has nothing to do with existing home prices - that bottom will happen much later. How much later I don't know and I'm asking for a few years to consider the issue.
Best to all.
Bush Moves to Aid Homeowners - WSJ.com
"Bush Plans Response to Subprime Crisis"
"Among the most tangible moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.
Mr. Bush will also call on Congress to temporarily suspend a tax provision that is leaving some distressed homeowners with whopping tax bills. And he will announce an initiative, to be lead jointly by the U.S. Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers."
Boy, if there was ever a reason for jingle keys, that is it right there. Get away from your underwater 100% financed house tax free. In California you could wait 4 months payment free and leave with a good chunk of change in your pocket.
Geoff says:
"If you are one of the people who actually DIDN'T HELOC all your gains away, now would be a pretty good time to sell and cash out,"
I disagree. I bought in '99. 25% down, 7.5% 30 yr condo. I doubt the nominal value will reach below my purchase prices as the FED LOVES inflation. In ~20 yrs, when I will be looking at retirement, my payment will be taxes and HOA and will be very small...no MELORUSE here. It'll be an OLD building then, but, it'll be cheap. I'm not looking at it as a funding mechanism, but as a secure place to hang me hat.
I'll use my gold and silver, sold w/o gov't knowledge, to fund my living expenses.
My Lord, I sound like my depression era grandparents. My only debt is my mortgage. I have cash enough to buy a vehicle if my paid off 2002 Expedition fails, my 42" plasma was paid cash. My self built uber computer worth $4g's and 2g laptop cash.
I dunno Geoff, I think actions depend on debt levels and financial strategy. I've been EXTREMELY conservative for 13 yrs...selling would destroy that strategy.
Cheers,
This recovery timeing is all very well in assuming that housing operates in it's own little world where a cyclic pattern comes into play, but the reality is is that there are many geopolitical issues that will become far more apparent in the next few years. The unprecedented extent of the debt for the consumer (and all other entities) is enough to guarantee an unprecedented depth of trough, but it these external factors that will continue to bury the "average" American consumer. I have come to believe that for the great majority of the population, if they have not achieved financial security by now, it will never happen.
These external factors include the energy/oil crisis, food supply issues, water supply issues, global labor arbitrage, continued and increasing deficits caused by unsustainabe projects, "blowback" from ill-considered adventures, unbearable health care cost expenditures, climate change, etc., etc.,.
While we have sucessfully pretended that these issues are not there, many of these geopolitical issues will be worsened by the oncoming recession.
And tragically, these major issues will be breaking wide open at a time (in 3+ years) when the mythic housing recovery is scheduled to begin.
For these more global reasons, I think the recovery will be a long time coming. And after that "recovery", the world will be a very different place.
A nice curly tail on a graph (which even looks "early" in scale with other recoveries) represents wishes and not the future.
"... based on the new Goldman Sachs housing forecast..."
Uh...and what were these folks saying a year ago? Two years ago? And so forth?
Do they have a track record worth considering?
MoM says:
"Misean - I tried also. Don't be depressed - it's very hard to fight the tide. Bubbles do have a manic element. Everyone just is so sure.:"
Yeah, but it's me mum and her hubby...both estate agents. My Sunday Mom calls don't get anwsered or returned some weekends, because her husband asks me market questions, and she doesn't want to hear it.
This is going to pulverize the middle class...and I think it is intentional, by the powers that be.
Cal,
Shrub-boy's mal-administration is just setting people up to be debt slaves forever...100yr mortgages...yeah that's the ticket. But it might help poppy shrub's Carlyle group, which is bleeding cash over one of it's hedgies. I'll post if I can find the article on it.
Sorry, I ain't got nothin' witty to end this with either...
Cheers,
"builders don't just top building. They may slow the start of new projects through delays, and may pull the plug on some, but much of their business model is too long term with too much fixed investment already in place, that they can't abandon."
This does deserve some thought. All home building that I've ever been aware of (virtually all, anyway) has been funded by construction loans. These are short term loans, not mortgages, and are backed by the assets and guarantees of the building company and, for all smaller companies, by personal guarantees. I am not in the market for such financing lately so I don't know how easy they are to get these days, but I bet that it is quite hard. A builder may be willing to damn the torpedoes, but the bank may not want to go along on that ride.
The issue of prices lagging the RI bottom is very interesting. I have no doubt it will occur again. The differences this time are: the rat-through-the-python of baby boomer retirements will begin soon, which could change sales numbers and create demand for different housing types. Also, the internet era has made info dissemination faster and I think that has affected the stock market and real estate markets. An example: ten years ago info I now read on this blog would have been unavailable to me or would have lagged by many months.
ShortCourage, yes, it does feel strange. Especially since I'm so bearish. But I do enjoy a good discussion.
I'm a little concerned - based on some of the comments here - that people missed the point of this post.
Best to all.
random comments.
It looks to me like there is a lot of money chasing qualified home buyers who meet prudent lending standards. There may be a lot of deserving people who do not meet the current definition of prudent, but remember that prudent is determined by he who has the gold, and a fair bit of that gold seems to have gone missing. When it is found, lending standards will likely relax to loose but not insanely loose. I'm not sure why GSE and FHA standards would not cover most.
For those who argue that incomes are good, I can only agree. Mine is better than I would have ever imagined a few years ago. My concern is that the distribution of those incomes is increasingly troubling and that suboptimal distribution will have a negative impact not considered by the traditional measures of economic well-being.
As for the sorry plight of the Boomers, I wonder if the reports of the death of our economic well-being are greatly exaggerated. Having recently attended my 35 year reunion, and being somewhat obsessed by this subject, I was struck by what a fiscally conservative bunch my classmates were. This is in a small town community 25 miles north of Portland, OR. that had a decent percentage of rural, but a lot of suburbanites in the group.
CR,
I get your point, but where I don't follow your 'optimism' about RI is this:
what do you see to put a bottom in RI, in other words, after a great shake out of investments, where will the kinds of capital flows needed possibly come from? Up until now they have come from the willingness of consumers to pawn their future earnings, and lo and behold, it turns out that they were wildly overoptimistic. As we have been talking about, that is due to people being naturally overoptimistic/unrealistic, coupled with an enormous economic incentive for every capital producing enterprise to play along. Now that the realities of the situation set in, it seems to me that both legs are gone from any recovery; no consumers will be in the position to borrow the vast amounts needed to feed reinvestment, nor will any investor trust the mechanisms that have played havoc with these markets. While we generally focus on what is happening in the States, this game has been played world wide, and the aftermath will very likely effect the same changes in every credit market that comes out the other side. If I compare this vastly larger implosion with the things I understand about other localized but severe downturns (RE in Japan, the oil boom, steel and agriculture in the US) it could be a generation until the capital returns to real estate investment. How do you see that differently?
CR,
I know that you rarely discuss international precedents and you base your examples on the American economy but you may find interesting to read this paper about the housing (and economic) crash in Finland in early 1990s. This was the most violent housing crash I'm aware of and the deepest recession in a developed country in recent years. Although the direct trigger of the economic problems was the collapse of the trade with Soviet Union, the main reason was the housing crash that was a result of a huge bubble in the real estate (and loose credit) in the late 1980s. The prices collapsed violently. In Helsinki, they stoped growing (after a huge runup) in 1989, dropped by 10% in 1990 and the plummet by more than 20% in 1991 and additional almost 25% in 1992. And then the crash was basically over and the economy started recovery.
As you can see, not always the housing dowturns last long. I'm not saying this pattern will be repeated. It is almost imposiible since USA has a too large and too diverse economy but some local markets can have show similar patterns. I find more similarities between the current boom and the Finnish one than with the previous American booms.
This paper is also a very good description of the economic depression in Finland (and its causes) but is subscription only.
CR:
in the home price prediction, interest (mortgage rates) needs to be accounted too..in the 90s, i believe, rates were in decline thus arresting price decline..
in the event of credit crunch (jumbo rates have already gone up)price may fall sharper...also i agree that fall will be swifter as %of investor home/speculator homes are huge this time around..2008 will see sudden big decline. i think.
poszi,
Thanks so much for posting that!
I had no idea. I've been basing my worst case CPI figures on Japan.
Now I have something else to look at when it comes to worst case: Finland.
Of course the housing market recession was also bound up with the very severe economic recession during which unemployment soared from 3.2 per cent in 1990 to 16.6 per cent in 1994 (Statistics Finland/ Finnish Labour Force Survey).
Yeah, that seems fairly worst case all right. Ouch.
I used OECD Statistics (GDP, unemployment, income, population, labour, education, trade, finance, prices...) to find their consumer price index through those years.
1981: 48.8
1982: 53.4
1983: 57.9
1984: 62.0
1985: 65.2
1986: 67.1
1987: 69.9
1988: 73.5
1989: 78.3
1990: 83.1
1991: 86.7
1992: 89.2
1993: 91.2
1994: 92.2
1995: 92.9
1996: 93.5
1997: 94.6
1998: 95.9
1999: 97.0
2000: 100.0
No deflation seen. A housing collapse and a severe recession isn't necessarily going to bring deflation to the grocery store.
I feel ever so slightly more comfortable sitting in TIPS.
A difference between today and past cycles: fraction of vacant homes (not for rent) is aprox 2.8%, vs. past peaks at aprox 1.9% (from memory). That may be growing as builders continue to bang away.
These empties are the real "inventory" -- more so than homes for sale on the secondary market.
At what price would you buy a 2nd home to keep empty, waiting for better days? Note the ratio of vacant rentals is also high.
The surplus of emply homes (rent or own-occupied) is largely price-insensitive. Until it drops to "normal" levels these empties will depress prices.
Only demographics and in-migration will fill those empties. Unless, as we did during the Depression with food, we deliberately destroy them to boost prices.
Stagflationary Mark,
Finland is an unabiguous proof that there can be an inflationary depression and that's the reason I think Bernanke is absolutely wrong about his helicopters. There were many similar examples but mostly in the developing world. I still don't think such a scenario is likely now but certainly it is possible.
"Chip, I've added a new graph that might make it clearer."
CR -- Whoa -- it sure does. Confidence in the Deep Decline restored. Thanks very much.
Thank you for the excellent data presentation of the 1990s housing bust, CR.
The situation in 1990 differed from today's in that we had a recession preceeding the RI bottom in Q1/91 (if I remember correctly there was a recession in Q3 and Q4 1990). This time around, there is no recession and according to the most reliable models there won't be one before the coming RI bottom. We could therefore see prices bottoming earlier than 3 years from the RI bottom this time as well. We were also coming from the worst bank crisis in the US history in the late 1980s into the recession and RE bust of 1990/91. This time around, there is no bank crisis. Lastly, the stock market had a much stronger correction in 1990 than the one we're seeing this year (both corrections led by financials BTW). To sum it up, the general economy is in much better shape today than 1991. This will help us avoid a recession and shorten the housing correction in my opinion.
O-Joe
Fabius, demographics won't fill those empty homes; go review population growth in the 30s. It dropped off a cliff.
We have all time high vacancies. We have all time low housing occupancy density (people per house). Our investments and equity will be moving down sharply in value. To save money/survive, old folks will be moving in with children, and children in with parents. Vacancies are going to skyrocket.
This time is WAY different.
Ginnie Mae eliminating restriction on the size of mortgage loans guaranteed by the VA that can be pooled in securities guaranteed by Ginnie Mae
http://www.ginniemae.gov/apm/apm_pdf/07-11.pdf
jg -- I never said demographics would fill them quickly. I just said demographics and migration are the only factors than will fill (i.e., can fill) the empties -- unlike price changes.
Economic growth can, to some extent, affect household formation and migration -- plus or minus. Your example of the 1930's is pertinent, if hopefully beyond anything we'll see.
poszi,
I just reread his helicopter speech. He didn't say there wouldn't be bad times or even very bad times. He simply said that deflation wasn't going to happen here. If Finland is any indicator, he might be right.
I'm fairly confident that if Bernanke can keep consumer price inflation "range bound" (the fun phrase of the day in my opinion based on the Bob Pisani's commentary of the stock market) he'll consider it a success. I might too. I for one don't expect him to be a miracle worker and that's realistically the most we should probably expect from him: price stability.
Sure, he could print more money to employ more people in the short term. In the long term, that doesn't actually help though (the Zimbabwe unemployment rate is roughly 80%). I think he understands that and might not be nearly the inflation dove people make him out to be. Little good can come from price instability. It adds more uncertainty to an already uncertain situation. If we go down the inflation path in a major way, we'd spend all right but we'd all be buying the wrong things (like more gold, more silver, and maybe eventually even bedpans). Who is that going to help? Been there, done that once already. I don't think he wants me to do it again. Neither do I.
But what do I know?
Most housing downturns last only a few years. The longer decline of the 1990s was an aberration caused by the unusual dislocations of the late 1980s bubble, and the government intervention to resolve that crisis (a story unto itself).
The cyclical housing decline of the 1990s would have been faster and more severe without the intervention of the Resolution Trust Corporation. The RTC removed excess inventory from the market, and then slowly released it back into the market over many years. While this action mitigated the severity of the price decline, it also greatly extended the duration. This warehousing of supply also made it easier for builders to resume building, further exacerbating the supply overhang, and further extending the duration of the housing price decline.
The timelines from the 1990s downturn are not typical.
In the 1980s I was a highly leveraged speculator (in Los Angeles), and I would have gone bust had I not sold right before the local decline started in 1989.
In 1988 I expected the decline to be worse than average. And I knew that the west coast economy and market cycle lagged the east coast by about two years in those days (that lag has been gone for many years now). I happily kept buying even in 1987 when the east coast market had faltered and started to decline, "knowing" I had two years before I needed to get out. I was willing to take that timing risk because I also knew that the biggest price increases come in the last few years of a bubble.
I should have sold everything in 1989, but I did sell enough to nearly eliminate all of my debt. And prices had nearly doubled during the last two years in that market.
Thanks for the Finland piece:
Watching CNN today (hats off to anyone who can do that all the time - the mind reels), I had the thought: what we have here is a classic inventory correction, but something more. The recessions I grew up with in the sixties, and the dandy I graduated into in the seventies, were classic inventory correction led recessions. I.E. profits were high, stock market was high, car and retail sales were high. There was too much exuberance at the top end, consumption couldn't keep pace, and inventories needed to be liquidate, leading to unemployment. There was a role for monetary tightening and in '79 with oil for an external shock. Today wer're seeing an inventory correction in real estate, true - BUT REAL ESTATE HAS BECOME INSEPARABLY CONNETED WITH THE MONEY SUPPLY. Even in the Finnish example, and certainly not in earlier recessions here, I doubt people were using HELOCs as ATM's. And securitized debt instruments did not make up such a large part of the supply of capital. This, and the lower status of the dollar is what I feel will put the fed in a box and lead to a more likely recessionary outcome.