one observation -- it's tempting to simply extrapolate the line from the 1987-2000 data and take that as the projected fair value settling point. but there are other factors, of course -- such as the extent to which house price appreciation in markets like cleveland or chicago are masking underlying demographic demand reductions as people move out of the rust belt.
has anyone attempted to model "equilibrium" home prices controlled for such population redistribution?
CR's chart shows that prices are moving lower, but have just started to descend in light of the 15% or 20-25% price decline estimates. 20-25% price declines would decimate housing.
IMHO, this article, on the front page no less, is huge. LA proper is still deep in the denial stage, so it's nice to see a bit of reality in the MSM for a change. Lots of people will not welcome hearing this. The letters to the editor should be interesting. . .
Shouldn't house price to income ratios at least fall back to where they were prior to 1995?
Why not just use incomes to determine were house prices should be, and then extrapolate into the future using expected rates of inflation.
Of course this wouldn't account for overbuilding, a ruined lending industry, massive government bailouts, money rains, etc. But barring government intervention, somebody has yet to explain to me why price-to-income ratios for houses wouldn't go back to "normal" (after overcorrecting, perhaps).
Several years ago I read a study that had examined burst bubble markets in numerous asset classes for over a century. The study found a remarkably consistent pattern of burst bubbles giving back the last three years of gains which would take house prices back to 2002-3 levels. If housing turns into a general credit bust and hard landing then prices could decline much further. I don't think anyone knows at this point and probably won't for 6 months or so.
These are nominal prices, I'll have more on Real vs. Nominal prices later today.
I've been expecting 15-25% declines in bubbly areas (metro-wide aggregates), with 30-40% real declines. But if a big newspaper that is normally stuffed with RE ads prints 15-25% nominal, I probably should revise upwards.
I understand the allure of calculating against the median income. But in an economic downturn, median income is a dynamic figure, i.e., by the time SoCal reaches the projected equilibrium point, it will have moved.
The real estate editor of the LA Times is going to be cleaning out his desk after printing stories like these if the Pigmen Boyz have anything to say about it.
But barring government intervention, somebody has yet to explain to me why price-to-income ratios for houses wouldn't go back to "normal" (after overcorrecting, perhaps).
What's 'normal'? The market has been so distorted by appreciation in th ehot spots that some of their income has come from their housing price appreciation. Closed loop gain big time.
I doubt that in Japan during the early 90's that any economists were predicting a RE downturn that would last 15 years and take out to 80% value. Not saying it will happen here but this idea that the markets will return to a normal upturn cycle in a couple years may be very wishful thinking.
I don't understand how people can say that there will be substantial differences in price declines across different regions in California. The bubble hit all regions. Why won't it deflate in all regions?
Go Denver! Looks like we won't drop nearly as much as other areas. And, heck, we might start seeing even MORE refugees from CA show up for our relatively "cheap" housing.
One thing for sure is that this housing cycling is playing out more slowly than just about anyone predicted. So, the idea that the bottom will come in late 09 or 10' seems reasonable. What does not seem reasonable is the idea that housing should begin recovering in 08' or even in early 08'.
But PeterBob, the bubble inflated a lot further in some areas than in others. This will lead to differences in how far prices will fall. However, as some of the experts suggested, I think that the notion that some areas, even sections of California, might not go down at all, is very far fetched wishful thinking.
Any chance you can add Seattle to that chart? Two reasons; 1) I live here so I want to see how it compares to San Diego (where I want to live) and 2) the advertised uniqueness of the Seattle market; that is, it is one of the few bright stops in the housing market these days. Thanks for considering.
The bubble hit all regions. Why won't it deflate in all regions?
It will deflate areas more where the income stream is more closely tied to the 'inflation'... think areas where a lot of the people have jobs tied to building trades & stuff that went up more during the boom... that population isn't uniformly spread across the country.
Not saying everyone won't have some effect but some folks & some areas will get crushed others just dinged.
Also - think about Sonny's Rule of RE Flotsam & Jetsam (via Mish)... Quality property sells faster & holds value better than inferior property in a fall. He wrote a nice piece on it a year or so ago. Maybe somebody still has the links.
It might effect all but I doubt it will effect all to the same degree.
This was found with less than 10 minutes looking. I have given up trying to convince people of the coming problems...I am the tin fuckin foil hat crowd during RE discussions.
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
What if Japan still has a vibrant manufacturing base and robust industrial sector...not like some who are downsizing domestic plants while expanding operations in China?
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
It seems to me that the trans national infested US economy is more vulnerable than the more nationally bound Japanese economy.
My prediction is 2020 or so. The boomers are done buying for the most part. My generation is just to small to replace them.
We also had artificial demand which pulled many people forward several years and has now fried their credit with BK and forclosures. We are probably headed for 3.5 to 4 million units a year for at least 5 years and probably more like 10-15 years.
The only pent up demand I see is for people wanting to sell not people wanting to buy. As any bottom or mild increase shows itself we will have more desperate supply hit the market driving us to new lows. 40-50% off before its over is my poor opinion.
"Southern California prices will fall 25% from their peak and won't find their bottom until the end of 2009," Thornberg said.
This seems like a good starting point, but I think things could be worse.
In my little corner of Orange County (Huntington Beach), prices are already down 10-15% from the peak (~summer 2006). In the past few months I've seen several homes sell in my neighborhood near that 15% drop.
Another 10-15% down almost seems optimistic. Prices would still be higher than they were when we bought in 2001.
Now that house flipping and housing equity withdrawal are losing their punch, WaPo has an article about a new way to make money from nothing--brokers "flipping" life insurance policies while the insured extract cash--and give strangers a strong financial interest in their early deaths. Genius.
One comment on prices returning to normal, the observed price behavior is that in bubble aftermaths, prices don't return to "normal" valuation ranges, but over shoot on the downside. After a bubble, the asset class in question carries such fear and revulsion with it that a true bargain price is needed to get the intrepid to step forward and buy what everyone else then knows is a lousy bet.
Housing may be somewhat different given that there is the shelter utility embedded in the purchase of a house (assuming you intend to occupy it - not always a valid assumption as we have seen) and that prices tend to be sticky downward. Nonetheless, I think there will be mouths agape at the prices homes will trade hands for before this is all over. Housing is not a completely hated asset class yet - think internet stocks circa Jan 2001 and you have the picture.
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
i don't think that very farfetched at all, calmo. the banks' problems are greater on the whole; there's the question of the manufacturing base; but most of all, the status as a creditor nation.
1990 japan was a massive creditor with international reserves to draw on. 2007 america is the world's largest debtor. the dynamics of a foreign flight from american debt add a higher layer of complication and potential tragedy to this for the united states, imo.
Anecdotal. My building was completed at the onset of the last downturn here in 1988. A few flats were presold for about $75K - the complex is in a desirable location, has under-the-building parking, elevators, mature landscape (a '20s development was demolished, leaving old banyans and royal palms).
It was acquired by a syndicate from Canada and became a rental conversion. The investors paid $15K - $18K per unit.
Some areas may experience more than a 25% decline in the future.
Credit expansion out of thin air necessarily destabilizes the system by creating an environment in which businesses receive false signals from the economy. The same thing happens physiologically with the abuse of narcotics. The drugs create signals of health - euphoria, intensity of emotion, pain relief - that the body's system naturally mistakes for positive signals. After all, people don't become addicted to narcotics because they are stupid. They become addicted because their bodies mistake the signals the drugs send for symptoms of health; because the drugs make them feel good.
Well that chart doesn't support the 'bubble happened everywhere' argument of Thornberg. You had the very different economies of Miami and Cleveland producing housing trends that tracked nicely until mid-2001 and then strongly diverged. I don't see any reason a priori that we will not have a market overall that returns to the trend line as it was in January of 2000 when all lines cross. Where is the argument that all those lines won't simply converge on Denver's rate?
I too would like to see Seattle included. But the data here is skewed somewhat by the strong transition from Single Family (which for the purposes of commuters to Seattle is about built out and premium priced) to Condominiums. Seattle and its suburbs are going vertical in a big way which in turn shows up in lower average sales price. Time on market is edging up but it is hard to separate that from normal seasonal stuff. (People who last visited Seattle a decade ago will find themselves a little disoriented. Come back a decade from now and about the only thing you will recognize will be the Central Tavern, Pike Place Market, and the Space Needle, and those only because they are protected.)
Thornberg illustrates very well why prices go down everywhere:
"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.
"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.
I don't think anyone is disputing that deb - but some demographics are going to get hit harder than others, some ZIPs hit harder.
Out here people hock the family jewels for lake frontage property. It sells for a significant premium over non-waterfront. In a decline it too will fall but nothing like the property a block away from the lake.
Likewise some neighborhoods have far greater income variation from boom to bust... others a lot less. The high income volatility regions will typically see far larger swings in RE prices too. Up and down.
I don't see this as a flat rate 20% markdown happening everywhere all at the same time - I don't think anyone does - but that isn't the same as saying it can't happen here either.
The decline will be universal but each area will have its own individual 'outcome' to the decline.
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
What if Japan still has a vibrant manufacturing base and robust industrial sector...not like some who are downsizing domestic plants while expanding operations in China?
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
It seems to me that the trans national infested US economy is more vulnerable than the more nationally bound Japanese economy.
I think the bubble was bigger in Japan, but Japanese consumers had a far higher rate of savings at the time and the US is a more consumption-driven economy so it might be much more vunerable to declining house prices.
Also, after the early 90s a strong US economy may have helped Japan avoid a more severe downturn.
If the world economy goes into recession along with the US, I could see a really serious outcome involving steep consumption declines.
As CR's graph clearly shows, San Diego's prices need to fall about 50%, and even Chicago's by 25%, just to get back to the trend line. Since it's pretty likely they will overshoot to the downside, the declines will be even greater.
Bush: Hey Prince Abudabi, can you help me out of this fiasco.
(meanwhile-Cheney needs a defibliator)
Prince Abudabi: Send me a couple more F16's and I'll make a couple calls....
Some of the reasons why prices have to overshoot to below trend on the downside, with real prices going below those of 2000:
In 2000 there was still some "pent-up demand" -- the home ownership rate was significantly lower than it is now. That pent-up demand is no longer present.
In 2000 mortgage lending standards were more lax than they will be going forward, while at the same time we did not have such a large fraction of the potential buyer pool in the ruined-credit status that will soon prevail.
In 2000 there was no huge overhang of vacant houses and apartments on the market, and few foreclosures.
Since the supply will be greater than in 2000, and the demand less, real selling prices will have to be lower.
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
Japan just had no idea how long and dificult the correction would last. Nobody had a clue really at least from the little I read. At least we know that it is possible to experience a long term RE decline rather then just another quickie rinse and repeat cycle. We read about folks on the sideline today waiting to buy what they think will be cheap RE next year or 2009 but they may experience what J.P. Morgan did this this Spring on their RE hedge bet.
ac-
I agree with that sentiment of just getting prices back in line with incomes. That ought to be the goal and anybody who's petrified by that notion is just too invested in the bubble mentality.
Do people really believe that all the foreclosures and upheaval around the housing market were not CAUSED by prices getting out of line with incomes in the first place?
Do we need to stress another generation of home buyers out and live with the idea of permanent home debtorship and foreclosures just so the bubble buyers/believers can stay comfortably deluded?
Enough already. The disconnect between prices and incomes has wrought it's carnage. If prices need to fall by 50% to get back in line, then that's just where they need to be. Period.
Unless you enjoy eating your young. Which, I know, some do. But if that's your bag, it would be good of you to admit it.
My fellow brokers believe the devaluation will continue with losses approaching 80% due to looming market problems. I should stress that the 80$ figure was not the worse case scenario. Very trying times indeed.
one observation -- it's tempting to simply extrapolate the line from the 1987-2000 data and take that as the projected fair value settling point. but there are other factors, of course -- such as the extent to which house price appreciation in markets like cleveland or chicago are masking underlying demographic demand reductions as people move out of the rust belt.
has anyone attempted to model "equilibrium" home prices controlled for such population redistribution?
CR's chart shows that prices are moving lower, but have just started to descend in light of the 15% or 20-25% price decline estimates. 20-25% price declines would decimate housing.
IMHO, this article, on the front page no less, is huge. LA proper is still deep in the denial stage, so it's nice to see a bit of reality in the MSM for a change. Lots of people will not welcome hearing this. The letters to the editor should be interesting. . .
Shouldn't house price to income ratios at least fall back to where they were prior to 1995?
Why not just use incomes to determine were house prices should be, and then extrapolate into the future using expected rates of inflation.
Of course this wouldn't account for overbuilding, a ruined lending industry, massive government bailouts, money rains, etc. But barring government intervention, somebody has yet to explain to me why price-to-income ratios for houses wouldn't go back to "normal" (after overcorrecting, perhaps).
The interesting question to me is nominal vs real - I look forward to CRs follow up.
I would not be surprised to see real declines be much larger than nominal declines (say looking back a decade from now). Just a WAG.
Several years ago I read a study that had examined burst bubble markets in numerous asset classes for over a century. The study found a remarkably consistent pattern of burst bubbles giving back the last three years of gains which would take house prices back to 2002-3 levels. If housing turns into a general credit bust and hard landing then prices could decline much further. I don't think anyone knows at this point and probably won't for 6 months or so.
These are nominal prices, I'll have more on Real vs. Nominal prices later today.
I've been expecting 15-25% declines in bubbly areas (metro-wide aggregates), with 30-40% real declines. But if a big newspaper that is normally stuffed with RE ads prints 15-25% nominal, I probably should revise upwards.
Of course wealthy folks would rather pay a higher price for a home! Yea right!
I understand the allure of calculating against the median income. But in an economic downturn, median income is a dynamic figure, i.e., by the time SoCal reaches the projected equilibrium point, it will have moved.
The real estate editor of the LA Times is going to be cleaning out his desk after printing stories like these if the Pigmen Boyz have anything to say about it.
But barring government intervention, somebody has yet to explain to me why price-to-income ratios for houses wouldn't go back to "normal" (after overcorrecting, perhaps).
What's 'normal'? The market has been so distorted by appreciation in th ehot spots that some of their income has come from their housing price appreciation. Closed loop gain big time.
Of course wealthy folks would rather pay a higher price for a home! Yea right!
rc | 11.27.07 - 2:10 pm | #
Oh you bet they will. But only if the riff raff can be kept away. That be us of course.
I doubt that in Japan during the early 90's that any economists were predicting a RE downturn that would last 15 years and take out to 80% value. Not saying it will happen here but this idea that the markets will return to a normal upturn cycle in a couple years may be very wishful thinking.
I don't understand how people can say that there will be substantial differences in price declines across different regions in California. The bubble hit all regions. Why won't it deflate in all regions?
Go Denver! Looks like we won't drop nearly as much as other areas. And, heck, we might start seeing even MORE refugees from CA show up for our relatively "cheap" housing.
One thing for sure is that this housing cycling is playing out more slowly than just about anyone predicted. So, the idea that the bottom will come in late 09 or 10' seems reasonable. What does not seem reasonable is the idea that housing should begin recovering in 08' or even in early 08'.
But PeterBob, the bubble inflated a lot further in some areas than in others. This will lead to differences in how far prices will fall. However, as some of the experts suggested, I think that the notion that some areas, even sections of California, might not go down at all, is very far fetched wishful thinking.
Why won't it deflate in all regions?
The Central Valley and Riverside could (and did!) build exurbs by the square mile.
Development in the Bay Area and LA is by the abandoned office park, and they're only bulding townhomes with that.
If you want a new single family house within a half-hour of work in Palo Alto or Westwood, you'll need to buy a 'scraper' and do the remodel yourself.
Any chance you can add Seattle to that chart? Two reasons; 1) I live here so I want to see how it compares to San Diego (where I want to live) and 2) the advertised uniqueness of the Seattle market; that is, it is one of the few bright stops in the housing market these days. Thanks for considering.
The bubble hit all regions. Why won't it deflate in all regions?
It will deflate areas more where the income stream is more closely tied to the 'inflation'... think areas where a lot of the people have jobs tied to building trades & stuff that went up more during the boom... that population isn't uniformly spread across the country.
Not saying everyone won't have some effect but some folks & some areas will get crushed others just dinged.
Also - think about Sonny's Rule of RE Flotsam & Jetsam (via Mish)... Quality property sells faster & holds value better than inferior property in a fall. He wrote a nice piece on it a year or so ago. Maybe somebody still has the links.
It might effect all but I doubt it will effect all to the same degree.
Here are 2 perfect examples from the most bubbly area of Port Charlotte,Fl.
Lowest price home on mls....34,900
Owned by US BANK NATIONAL ASSOC TRUSTEE for FIDELITY SELECT PORTFOLIO SE.
Purchase history...
Date \tBook/Page \tSales Codes \tSelling Price
5 /1979 \t605/1217 \tIMPROVED \t$18,000
3 /1993 \t1272/471 \tIMPROVED \t$100
9 /1997 \t1560/1090 \tIMPROVED \t$25,000
3 /2003 \t2192/841 \tIMPROVED \t$35,300
6 /2006 \t3002/164 \tIMPROVED \t$135,000
9 /2007 \t3209/1529 \tIMPROVED \t$100
135k and yes, the listing price is correct
Next one listed at 44,900.
Owned by DEUTSCHE BANK TR CO TR & CUST
for Saxon MTG.
Purchase history...
Date \tBook/Page \tSales Codes \tSelling Price
5 /1979 \t605/1217 \tIMPROVED \t$18,000
3 /1993 \t1272/471 \tIMPROVED \t$100
9 /1997 \t1560/1090 \tIMPROVED \t$25,000
3 /2003 \t2192/841 \tIMPROVED \t$35,300
6 /2006 \t3002/164 \tIMPROVED \t$135,000
9 /2007 \t3209/1529 \tIMPROVED \t$100
This was found with less than 10 minutes looking. I have given up trying to convince people of the coming problems...I am the tin fuckin foil hat crowd during RE discussions.
Chris
P.S.-The houses are next door to each other...
Also, Prop 13 is going to distort the market here, too.
People who bought in desirable areas prior to the 2000 run-up can easily cash-flow their properties as rentals, for now & evermore.
That's a nasty feed-back loop, btw. More homes off the market, higher home values, higher rents.
Everyone,
I screwed up the first sales history...here it is...
10/1982 \t711/1501 \tIMPROVED \t$36,000
12/1998 \t1667/1022 \tIMPROVED \t$11,200
12/1998 \t1667/1021 \tIMPROVED \t$11,300
6 /2006 \t3002/319 \tIMPROVED \t$140,000
6 /2007 \t3189/1940 \tIMPROVED \t$100
The first house actually went for 140k,gaaaaaaaa.
Chris
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
What if Japan still has a vibrant manufacturing base and robust industrial sector...not like some who are downsizing domestic plants while expanding operations in China?
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
It seems to me that the trans national infested US economy is more vulnerable than the more nationally bound Japanese economy.
My prediction is 2020 or so. The boomers are done buying for the most part. My generation is just to small to replace them.
We also had artificial demand which pulled many people forward several years and has now fried their credit with BK and forclosures. We are probably headed for 3.5 to 4 million units a year for at least 5 years and probably more like 10-15 years.
The only pent up demand I see is for people wanting to sell not people wanting to buy. As any bottom or mild increase shows itself we will have more desperate supply hit the market driving us to new lows. 40-50% off before its over is my poor opinion.
The idea that some areas in SoCal will be immune from decline is ridiculous. In the early 90s, no area was spared.
It's just another version of "it can't happen here"...."ok, maybe it will happen, but it will only happen where the riff-raff lives".
Just curious - Does median income count those earning NOTHING, living on the largesse of the governments UNEMPLOYEMENT/WELFARE and receiving charity?
If so then price/income ratios might have some adjustments coming.
"Southern California prices will fall 25% from their peak and won't find their bottom until the end of 2009," Thornberg said.
This seems like a good starting point, but I think things could be worse.
In my little corner of Orange County (Huntington Beach), prices are already down 10-15% from the peak (~summer 2006). In the past few months I've seen several homes sell in my neighborhood near that 15% drop.
Another 10-15% down almost seems optimistic. Prices would still be higher than they were when we bought in 2001.
FWIW
Now that house flipping and housing equity withdrawal are losing their punch, WaPo has an article about a new way to make money from nothing--brokers "flipping" life insurance policies while the insured extract cash--and give strangers a strong financial interest in their early deaths. Genius.
One comment on prices returning to normal, the observed price behavior is that in bubble aftermaths, prices don't return to "normal" valuation ranges, but over shoot on the downside. After a bubble, the asset class in question carries such fear and revulsion with it that a true bargain price is needed to get the intrepid to step forward and buy what everyone else then knows is a lousy bet.
Housing may be somewhat different given that there is the shelter utility embedded in the purchase of a house (assuming you intend to occupy it - not always a valid assumption as we have seen) and that prices tend to be sticky downward. Nonetheless, I think there will be mouths agape at the prices homes will trade hands for before this is all over. Housing is not a completely hated asset class yet - think internet stocks circa Jan 2001 and you have the picture.
Plosser and Evans are non voting members?
I have given up trying to convince people of the coming problems...I am the tin fuckin foil hat crowd during RE discussions.
Chris
Every single person I care about enough to take the time to make the big picture clear becomes a very concerned "tin foil hat" wearer.
It takes hours and a lot of references.
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
i don't think that very farfetched at all, calmo. the banks' problems are greater on the whole; there's the question of the manufacturing base; but most of all, the status as a creditor nation.
1990 japan was a massive creditor with international reserves to draw on. 2007 america is the world's largest debtor. the dynamics of a foreign flight from american debt add a higher layer of complication and potential tragedy to this for the united states, imo.
dis regard
evans has b shares
plsser still has a shares
Anecdotal. My building was completed at the onset of the last downturn here in 1988. A few flats were presold for about $75K - the complex is in a desirable location, has under-the-building parking, elevators, mature landscape (a '20s development was demolished, leaving old banyans and royal palms).
It was acquired by a syndicate from Canada and became a rental conversion. The investors paid $15K - $18K per unit.
Some areas may experience more than a 25% decline in the future.
Commentary on credit, citi, and retail by Depew at Minaynville.
http://www.minyanville.com/articles/index.php?a=15006
Credit expansion out of thin air necessarily destabilizes the system by creating an environment in which businesses receive false signals from the economy. The same thing happens physiologically with the abuse of narcotics. The drugs create signals of health - euphoria, intensity of emotion, pain relief - that the body's system naturally mistakes for positive signals. After all, people don't become addicted to narcotics because they are stupid. They become addicted because their bodies mistake the signals the drugs send for symptoms of health; because the drugs make them feel good.
Well that chart doesn't support the 'bubble happened everywhere' argument of Thornberg. You had the very different economies of Miami and Cleveland producing housing trends that tracked nicely until mid-2001 and then strongly diverged. I don't see any reason a priori that we will not have a market overall that returns to the trend line as it was in January of 2000 when all lines cross. Where is the argument that all those lines won't simply converge on Denver's rate?
I too would like to see Seattle included. But the data here is skewed somewhat by the strong transition from Single Family (which for the purposes of commuters to Seattle is about built out and premium priced) to Condominiums. Seattle and its suburbs are going vertical in a big way which in turn shows up in lower average sales price. Time on market is edging up but it is hard to separate that from normal seasonal stuff. (People who last visited Seattle a decade ago will find themselves a little disoriented. Come back a decade from now and about the only thing you will recognize will be the Central Tavern, Pike Place Market, and the Space Needle, and those only because they are protected.)
Thornberg illustrates very well why prices go down everywhere:
"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.
LA Times is far to the left of Pravda, probably fishing for a bailout.
Showed up right after the 417K limit was confirmed also.
Ciao California.
"If the gap between Riverside and Orange County becomes too great, a person will say, 'Forget it, I'm not going to live in Orange County,' " he said. "If prices get too high in Beverly Hills, it drives demand to Santa Monica." Such movement eventually drags top-end prices down, he said.
I don't think anyone is disputing that deb - but some demographics are going to get hit harder than others, some ZIPs hit harder.
Out here people hock the family jewels for lake frontage property. It sells for a significant premium over non-waterfront. In a decline it too will fall but nothing like the property a block away from the lake.
Likewise some neighborhoods have far greater income variation from boom to bust... others a lot less. The high income volatility regions will typically see far larger swings in RE prices too. Up and down.
I don't see this as a flat rate 20% markdown happening everywhere all at the same time - I don't think anyone does - but that isn't the same as saying it can't happen here either.
The decline will be universal but each area will have its own individual 'outcome' to the decline.
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
What if Japan still has a vibrant manufacturing base and robust industrial sector...not like some who are downsizing domestic plants while expanding operations in China?
Could it be that the future of the US is not as bright as the future of Japan was in the late 90s?
It seems to me that the trans national infested US economy is more vulnerable than the more nationally bound Japanese economy.
I think the bubble was bigger in Japan, but Japanese consumers had a far higher rate of savings at the time and the US is a more consumption-driven economy so it might be much more vunerable to declining house prices.
Also, after the early 90s a strong US economy may have helped Japan avoid a more severe downturn.
If the world economy goes into recession along with the US, I could see a really serious outcome involving steep consumption declines.
--
CEO of DR Horton: 2008 Is Going to be Worse Than 2007
Reported on Boob-berg.
And 2009 will be worse than 2008, says the crank. We will be in depression. DR Horton would be bankrupt before 2010.
Jas
As CR's graph clearly shows, San Diego's prices need to fall about 50%, and even Chicago's by 25%, just to get back to the trend line. Since it's pretty likely they will overshoot to the downside, the declines will be even greater.
Bush: Hey Prince Abudabi, can you help me out of this fiasco.
(meanwhile-Cheney needs a defibliator)
Prince Abudabi: Send me a couple more F16's and I'll make a couple calls....
Bush: Mission accomplished.
Some of the reasons why prices have to overshoot to below trend on the downside, with real prices going below those of 2000:
Since the supply will be greater than in 2000, and the demand less, real selling prices will have to be lower.
So often that comparison to Japan arises and the general idea that this housing correction will be longer than a few years.
Japan just had no idea how long and dificult the correction would last. Nobody had a clue really at least from the little I read. At least we know that it is possible to experience a long term RE decline rather then just another quickie rinse and repeat cycle. We read about folks on the sideline today waiting to buy what they think will be cheap RE next year or 2009 but they may experience what J.P. Morgan did this this Spring on their RE hedge bet.
Per the BEA, personal income in the Great Depression declined 44% (nominal)/29% (real), '29 to '33.
We are going to have a repeat of the '30s, because our household debt/income levels are higher than even those from the Roaring '20s.
I agree that home price/income will revert to its historical average.
Unfortunately, the denominator (income) will be a lot lower --> big, big decline in the numerator (home price).
"Southern California prices will fall 25% from their peak and won't find their bottom until the end of 2009," Thornberg said.
Most economists can't find their bottom with both hands and a flashlight.
Where are all the inflation-istas?
Freddie Mac is doing a $6B Pfd Stock offering, cutting its dividend in half. See bloomberg.com
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I agree with that sentiment of just getting prices back in line with incomes. That ought to be the goal and anybody who's petrified by that notion is just too invested in the bubble mentality.
Do people really believe that all the foreclosures and upheaval around the housing market were not CAUSED by prices getting out of line with incomes in the first place?
Do we need to stress another generation of home buyers out and live with the idea of permanent home debtorship and foreclosures just so the bubble buyers/believers can stay comfortably deluded?
Enough already. The disconnect between prices and incomes has wrought it's carnage. If prices need to fall by 50% to get back in line, then that's just where they need to be. Period.
Unless you enjoy eating your young. Which, I know, some do. But if that's your bag, it would be good of you to admit it.
See my list of Why Westside prices will fall too.
Re Seattle: Paper Economy's Case-Shiller tool includes Seattle data. Also see their post about the September data.
I'll also be writing one applied to Santa Monica.
Why doesn't the chart accompanying this entry include Los Angeles? Surely that data exists if Denver does.
Seems like that's a mistake.
My fellow brokers believe the devaluation will continue with losses approaching 80% due to looming market problems. I should stress that the 80$ figure was not the worse case scenario. Very trying times indeed.