Is it just me, or do other people think that given the shape of the current rise (steeper than the earlier one in the 1980s) the decline may be faster and steeper as well?
John, I think steeper - yes - but I'm not sure about faster. The next couple of years will probably see the worst of the price declines, but then I think many areas will see a few additional years of drip drip drip (a few percent a year) type price declines.
I worked in Fairfax, Va during 2003-2005. I can tell you the condos which costed 200K during 1996 went up to 600K by 2005. I KNOW, this for a fact.
So I am guessing, for the housing market, to cool it has long way to go. How steep or how fast depends in my opinion on job market, which in turn depends on Dollar appreciation.
I would guess Housing reached a balance, when condos prices in Fairfax, VA has gone back to around 200K.
Tongue in cheek (but not really) -- given the ugly economic overlay and where I think things are going, I would love to see the ramp up and down in L.A. from the '20s/'30s compared to today.
Logic seems to suggest that prices would return to the 100 index value. However, given the extreme losses associated with that and their effect on wealth and (especially) psychology, I'm fully expecting a significant overshoot below 100. Should be interesting here in LaLa Land.
--
LA Area had the biggest price gains in the country. Period. Areas where the prices more than doubled in a 15-minth period. Many many areas where prices more than tripled during 2000-06. Some lot prices quadrupled in a 12-month period here in Tehachapi during 2005.
Combine this with the overbuilding and you have the makings of the Bust Of The Century in residential RE.
BTW, the shopping sqft increased by 30%+ during 2003-07 here in Tehachapi and that is lot more than the population increase. Therefore, we will have a CRE bust at the same time leading to big employment bust. It is going to be UGLY.
Trough to peak 2/1994 to 6/2006 is almost 200%. The 10/1989 to 2/1994 decline of approx 8% may not be a good comparison.
The significant factors leading to a more rapid decline (steeper) are the reversal of gains primarily due to the silly lending and speculators. That takes us back to 2003 (about 150 on the comp index). I suspect then the slope flattens.
It seems, unless I'm wrong, that real decline in the episode from the 90's (in chart) was predicated on a price index that was calculated differently from how it is done today...or was it adjusted to make comparisons valid between then and now ?
This RE bust is going to be the worst in many decades and the bottom is no where in sight. We have barely begun to work off the mushrooming inventory of foreclosed homes, and this is going to be more difficult than ever before because lending standards have tightened. Unless they start bulldozing many of these homes, price declines are about to steepen radically.
Nice graphs. I will be printing a copy for use at certain discussions.
Jas,
It is ugly. Not to mention the exodus of mid to mid-high paying jobs/workers. My company is finally hitting the breaking point. We'll ship out people in 2008 (announcement in ~March, movements mostly June through September). Its cheaper for the company to take a $50k loss buying up each FB's home than to have the 'hiring issues' we have in CA and DC. We'll move experienced employees to 'seed the cadre' of new hires in affordable areas.
My, aren't you optimistic! Too many other factors at play, including flat to declining real wages for J6P since the turn of the century. It'll bust below 100 for sure.
Most (if not all) HELOCs are similar to credit cards with LTV being an additional variable.
The general terms are that if there is any material change to your financial condition or home value, they can initiate any number of actions including pulling your line to jacking up the rate.
"Can this be done? I don't think this is allowed (unless your loan docs state). If so this is big big news?"
The terms of HELOCs can be changed at ANY time.
In the last recession this was done to a fairly significant number of small businesses and it bankrupted nearly all of them as banks pulled back in. It hasn't hit HELOCs before because this is the first time that the HELOC collateral has been impaired.
The banks will not issue these calls if people DON'T have assets that can be liquidated.
But if you have a house paid off or lots of equity and recently bought some "toys".....
HELOCs are NOT like 30/fixed purchase mortgages...they are 100% callable.
Well, speaking from a townhome owner with a prime mortgage, I can't wait to see prices fall for a few more years. Yes, the paper gains in my current place will go away too but once housing prices become reasonable again, I can afford to by a house in Torrance. Currently a 1200 sq ft house in Torrance that was build in the 1950s will still go for over $600K. I will be happy to see prices fall so that house can be purchased by someone other then a millionaire.
Guys - a HELOC is a term for a consumer purpose open-end credit line secured by a consumer's residence.
HELOCs are very different than commercial lines. What you can do with a HELOC is bound by TILA, and found in Reg Z at 226.5b(f)
(2-3).
You can call for fraud, misrepresentation, default or if "Any action or inaction by the consumer adversely affects the creditor's security for the plan, or any right of the creditor in such security". However that last means what it says and can not be abused. If, for example, your roof was knocked in during a storm and you failed to fix it, a creditor could call.
You can halt advances or lower the credit limit for the following reasons: (A) The value of the dwelling that secures the plan declines significantly below the dwelling's appraised value for purposes of the plan;
(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances;
(C) The consumer is in default of any material obligation under the agreement;
(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
(E) The priority of the creditor's security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.
PS: Just trying to keep this blog the nerdy, accurate place it has always been, that is, when Tanta and CR aren't crashing the market with their SuperDuperShortManipulationScheme.
Oops - I wasn't supposed to reveal that last, was I?
Oh, well, buy the newsletter and you will find out how to stay ahead of the Tanta/CR engineered stock crash of 2008. For an extra fee, word has it that they will help to get presidential candidates up to speed. However, so far sales have been poor because it turns out that not one of them can read on Mortgage Pig grade level.
CR - seeing those graphs doesn't make me feel so bad for being "bearish" on housing circa 2003. I mean, after all, we had reached the inflation adjusted peaks prior to the 1990's recession and that resulted in some hefty price declines in places like LA, NYC, etc.
WRONG!
To me, it means that my prediction of 2003 prices is far too optimistic.
This is not inconsistent with my statements. They can reduce your limit to less than what you owe resulting in a number of unpleasant options including paying a higher rate on a "new" loan.
MoM - this is a carry-over from the prior thread. The rumor was (as best I recall): that WaMu was planning to invoke HELOC line reductions en masse. Yeah, right. This is, IMO, someone trying to draw attention to a shitty blog (portlandsomethingorother) via a good one (CR).
Let's think about the consequences of this for a sec: Aside from the PR nightmare, the unnecessary defaults that would result, not to mention the administrative challenges this would pose - this would primarily result in an avalance of legal challenges, and I think they already have a full plate in that regard.
Well, the post I saw was made by bofiz. In any event, what frosts me is that it was a link to a rumor posted on another blog with no source whatsoever to back it up.
This may be 'the blogs', but I kind of like it that at this blog we normally are treated to the same set of facts before we engage in debate.
Back to the property tax issue as it relates to housing deflation, yet another data point. As this municipal income stream reverses in the future, services are typically reduced, creating unrest -
"In Indiana, skyrocketing property taxes sparked protests that have included homeowners dunking their bills in rivers and lakes to mimic the Boston Tea Party. Taxes on homeowners in Indianapolis increased by an average of 34 percent, but in some cases more than doubled.
"I either have to not pay my taxes or not pay my mortgage or stop eating and turn off all the utilities in order to make it, and that would be true even if I were still working, or darn close to being true," Gunyon said. "And I'm not the only person in this situation."
On a more serious note, I would say that Vancouver declined about 10% from its peak around 93-95. I guess the peak depended on which area of Vancouver. I tend to think average prices were about 4-5 times times average household income at the time. Right now it is probably about 7-8 times average family income, but home quality has been declining significantly, and if you were to compare similar types of housing and the same amount of square feet I think you'd find Vancouver's housing is up even more.
I am not so sure that it goes back to affordable levels though. "Starter" homes have to go back to affordable levels and right now a starter home for a professional couple is a 2-bedroom condo in a suburb. A single professional working person needs to be able to comfortably afford at least a one-bedroom without being a debt or transportation slave. I'd say our prices have to come down about 40% for that to happen, but we'd still be moderate to seriously unaffordable.
Well, my holidays are just getting better and better. CR's offered an excellent chart that should allow me to explain my lack of bearishness about housing in 2008.
Look at CR's chart "Los Angeles, Real Prices," for the time period 1989-'90 into the mid-1990s.
At just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices.
The Fed eased to "fight" the recession, of course, but that really was "pushing on a string" when it comes to housing. If the reason you can't make your mortgage payment or can't qualify for a loan is that you don't have a job, it doesn't matter how low interest rates are.
So, after the recession ended and the economy got back onto a growth track again, what happened? The Fed did what it always does, it began to "tighten", removing the excess easing from when it was trying to stimulate the economy.
My point: After the housing peak of the last cycle, a sequence of recession, major job-loss and finally rising interest rates were required to keep the downtrend going.
In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started.
Are you suggesting that home prices in LA will return to 1995 prices (adjusted for inflation)?
Also, I don't understand why anyone uses the OFHEO series data when discussing LA home prices. OFHEO data only includes home sales that are looked at by Fannie Mae. The current median home price in Southern California is $435K, above the $417k amount that would trigger Fannie Mae's review.
Deborah - A fair part of the Vancouver real estate market seemed to this every other year or so tourist to be supported by buyers from Asia. Is that still the case - or has this buying dried up?
"At just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices."
So, last time it took a recession, with job losses, for housing weakness, but this time we dont need no stinkin recession or job losses for housing weakness.
It would appear that housing markets were made of sterner stuff back in the day.
Further Seb:
After the housing peak of the last cycle, a sequence of recession, major job-loss and finally rising interest rates were required to keep the downtrend going. In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started.
But, ah, this downtrend didnt require recession or job-loss to get started, right? But the ole downtrend WILL stop, wont go any further, UNLESS and UNTIL recession and/or major job-loss commence? Thats a head scratcher.
Lets recap:
Last time: right about the peak, recession and job losses obviously contributed to the sharp fall in home prices.
This time: right about the peak, no recession or job losses, but, ah, well, OK, so there has also been a sharp fall in home prices.
(Wait a minute. Thats odd. If A causes B, but Not A causes B . . . . lets come back to that one later.)
Last time: Rising interest rates kept the housing downturn going.
This time: Interest rates wont rise unless we have a recession, job losses, recovery AND THEN Fed tightening. Oh, and the housing downturn will stop anyway, because were not going to have recession. But if we did, that would start a housing downturn, for sure.
Just saw this posted. Thanks for the graphs (as always). I am covering Santa Monica at the "Santa Monica Distress Monitor" in case anyone is interested in watching the market in that area. Keep up the great work CR
We live in that area, same house over 27 years, all paid off (Yay!), and have watched the house prices with bemusement. The prices here seem to be holding pretty steady. A house similar to ours is for sale for about $800k. Our area is pretty stable, with a number of families here since it was built about 1950.
Deborah:
"My comment was not even acknowledged, the new housing will bring commercial development and increase the value of the area..."
A few months ago I attended a family gathering in Solano County California, which is pretty much a subprime hotspot. Other family members were from the Stanislaus County area, which is even worse.
In general, they weren't really aware of how badly out of control things had gotten in real estate, because they're all in their 50's and 60s and bought long ago. Chaos is going on all around them and they don't even realize it. They don't know any of the new buyers, just hang with people like themselves that they've known for 30 years. So they were still moderately optimistic on real estate.
Maybe the same thing going on with your relatives? Hasn't hit home because it doesn't affect them.
Ask anybody who's moderately comfortable and not interested in such things about the problems with real estate and credit, and they have only vague notions. It's something that doesn't affect them, so they don't pay attention.
The Economist: As an Economic Historian, Sebastian, what contributed to the last housing downturn between 1989 and 1995?
Sebastian: Using Los Angeles home prices as an example, at just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices.
The Economist: I see, so the recession is what caused the last housing downturn?
Sebastian: I wouldnt go that far, but it was a major factor.
The Economist: Point taken. Why then, once the recession had ended, did home prices continue to decline?
Sebastian: The Fed did what it always does, it began to "tighten", removing the excess easing from when it was trying to stimulate the economy.
The Economist: Yes, I do see that the Fed raised its Fed Funds Target Rate from 3.0% Feb/1994 to 6.0% by Feb 1995. However, the Fed also raised rates from 5.875% Aug/1986 to 9.8125% in May/1989, which was a period in which housing prices rose.
Sebastian: Yes?
The Economist: Well, in both periods the Fed raised rates, but in one housing prices rose, while in the other housing prices declined.
Sebastian: Yes?
The Economist: It appears to be an obvious contradiction.
Sebastian: To the untrained eye. When the Fed raises interest rates, house price appreciation slows or goes negative.
The Economist: Really? Do you have data to back that up?
Sebastian: Yes, from the last downturn and from this current one.
The Economist: A data set of two?
Sebastian: That and a whole lot of wicked logic.
The Economist: Indeed. At the expense of tarrying overlong on this point, the Fed raised interest rates from 1.0% Jul/2003 to 5.25% Jun/2006. Again, this was a period of rapid housing price appreciation, a boom if not a bubble.
Sebastian: Yes?
The Economist: Well, this seems to contradict your previous statement of, what was it you said, When the Fed raises interest rates, house price appreciation slows or goes negative.
Sebastian: With a lag.
The Economist: Just so. Lets move on to the current housing downturn: What caused it?
Sebastian: Caused what?
The Economist: The current housing downturn.
Sebastian: Are you referring to the one in certain bubbly areas?
The Vancouver market story reminded me of one told to me a long time ago when the Taiwan/Red China argument was heating up - yes that long ago. The story was a real estate agent was showing Vancouver houses to a Taiwan lady and at each stop she would say "OK lets go look at another one". The agent showed house after house and the lady didn't even get out of the car. A frustrated agent told the lady he would spend the evening reviewing offerings and that tomorrow he would show her some real attractive properties. The lady responded: "No need to do that, I will take all that you showed me today."
My late wife worked at the IRS when the Marcos regime was screwing up the Philipines and suitcases full of money were being declared to the IRS. That is what we need now. A real dust up in the east to scare the folks to bring home the dollars.
Ok an amatures question. I'm working my fico up but need another 6 mo or so before I could buy. But I'm lost in the trends. Seems prices will keep dropping. Cool for me. Interest rates edging up. RATS! Qualifying getting tougher for a lowly shmoe like me in the 620 range. If I wait to bennefit from falling prices, I may get eliminated by stricter standards and interest rates driving the nut beyond my meager income. Jump in soon and watch the bottom fall out of my lovely new home.. What to do?? Or better yet.. WHEN?? PS- Getting too old to wait much longer. Say a yr or 2.
Is Silicon Valley considered a bubble area? Listed my very unremarkable house there in early November at a reasonable price (neither very high nor low). Got 4 offers in a week and a half. Eventual buyer had to have his Dad cosign his loan but otherwise the sale was drama free. I was honestly very surprised. I expected much more difficulty. I used Help-U-Sell to reduce broker fees and got excellent service. I either got lucky timing or the local SV market is better than LA.
But of course that pales compared to the epic bust of the early 80's. About 40% nominal and 55% real. And real prices are much higher today than in 1981. Vancouver now has the worst fundamentals - price/rent and price/income - of any market in North America.
Oh, and those "rich Asian" stories always get trotted out every time there's a bubble in Vancouver. There are always some of them in fact, but it appears that a lot of people don't understand that market prices are set at the margins. And the marginal buyer is J6P, just like everywhere else.
And one more thing - population growth in Vancouver is at its lowest level since WWII, while housing starts are at their highest level since the post-war boom.
We live in that area, same house over 27 years, all paid off (Yay!), and have watched the house prices with bemusement. The prices here seem to be holding pretty steady. A house similar to ours is for sale for about $800k. Our area is pretty stable, with a number of families here since it was built about 1950.
Martin, this might be an unfair assessment, but I figure Westchester will get absolutely hammered on the price front. It's an okay neighborhood, but it's too darn close to the airport and, according to friends who live there, the schools are mediocre at best. I checked it out in 2005 and was bewildered at the phenomenal price appreciation. Up till that point it was where you went if you could not afford to live in other areas of the westside. I guess a question to ask is: are your neighbors really pulling in 250 - 300K/yr? Because that's what it would take to buy an 800K house. Again, I don't want to demean Westchester, I just have a lot of trouble believing that it's the one place that won't experience a huge decline in LA. Congrats on paying off the place.
Silicon Valley has 10,000+ AAPL and GOOG employees flush with cash looking to buy SFHs, and they stopped making SFH neighborhoods 30-40 years ago.
Bubbles are unsupportable rises. There is no bubble in the PA -> LG corridor . . . just supply/demand appreciation. The rent/own cap rates may be out of whack, but Prop-13 was designed to allow if not encourage this.
CR, those graphs are absolutely stunning . . . or should I say sobering.
The facts portrayed are not surprising and, indeed, are well known to anyone familiar with the L.A. market for 20 or more years, but somehow the pictures are worth far more than a mere thousand words each.
Great Analysis and Charts, as usual. There's a good reason Paul Krugman turns to you when he wants information on the housing markets.
I have been a long time daily reader/infrequent poster, and I am a CRE professional. I'd like to thank you for your insight as well as for your neutral, data-driven analytical viewpoint.
Merry Christmas to you and Tanta and have a great 2008.
Seb:
"In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started."
Ah, so only a recession can cause a recession. Thanks for the insight.
Is it just me, or do other people think that given the shape of the current rise (steeper than the earlier one in the 1980s) the decline may be faster and steeper as well?
John, I think steeper - yes - but I'm not sure about faster. The next couple of years will probably see the worst of the price declines, but then I think many areas will see a few additional years of drip drip drip (a few percent a year) type price declines.
Best Wishes.
CR,
I worked in Fairfax, Va during 2003-2005. I can tell you the condos which costed 200K during 1996 went up to 600K by 2005. I KNOW, this for a fact.
So I am guessing, for the housing market, to cool it has long way to go. How steep or how fast depends in my opinion on job market, which in turn depends on Dollar appreciation.
I would guess Housing reached a balance, when condos prices in Fairfax, VA has gone back to around 200K.
Best to you CR and Tanta.
Thanks
---Radhe
Very nice graphs, CR.
Tongue in cheek (but not really) -- given the ugly economic overlay and where I think things are going, I would love to see the ramp up and down in L.A. from the '20s/'30s compared to today.
Logic seems to suggest that prices would return to the 100 index value. However, given the extreme losses associated with that and their effect on wealth and (especially) psychology, I'm fully expecting a significant overshoot below 100. Should be interesting here in LaLa Land.
--
LA Area had the biggest price gains in the country. Period. Areas where the prices more than doubled in a 15-minth period. Many many areas where prices more than tripled during 2000-06. Some lot prices quadrupled in a 12-month period here in Tehachapi during 2005.
Combine this with the overbuilding and you have the makings of the Bust Of The Century in residential RE.
BTW, the shopping sqft increased by 30%+ during 2003-07 here in Tehachapi and that is lot more than the population increase. Therefore, we will have a CRE bust at the same time leading to big employment bust. It is going to be UGLY.
Jas
Trough to peak 2/1994 to 6/2006 is almost 200%. The 10/1989 to 2/1994 decline of approx 8% may not be a good comparison.
The significant factors leading to a more rapid decline (steeper) are the reversal of gains primarily due to the silly lending and speculators. That takes us back to 2003 (about 150 on the comp index). I suspect then the slope flattens.
It seems, unless I'm wrong, that real decline in the episode from the 90's (in chart) was predicated on a price index that was calculated differently from how it is done today...or was it adjusted to make comparisons valid between then and now ?
WaMu To Cut HELOC Limits Without Notice
TickerForum Error - Unauthorized Request
The banks should have begun hacking the HELOC lines months ago.
This RE bust is going to be the worst in many decades and the bottom is no where in sight. We have barely begun to work off the mushrooming inventory of foreclosed homes, and this is going to be more difficult than ever before because lending standards have tightened. Unless they start bulldozing many of these homes, price declines are about to steepen radically.
CR-
If you could expand and overlay your LA price chart (graph #1) onto graphs like these, specifically created for LA (or similarly for anywhere)...
http://bp2.blogger.com/_pMscxxELHEg/R070LlcE0MI/AAAAAAAABRE/TDaqcXL61ik/s1600-h/NewHomeSalesThroughOct07.jpg
or
http://bp1.blogger.com/_pMscxxELHEg/R11fZjRwQ0I/AAAAAAAABUc/iMsEgVyq5AI/s1600-h/EHSPercentOOUOct07.jpg
....that would be sweet, esp w/ smooth looooong-term (flattened) trendlines for no. of sales and price.
ps> maybe you are saving that for the newsletter.
CR,
Nice graphs. I will be printing a copy for use at certain discussions.
Jas,
It is ugly. Not to mention the exodus of mid to mid-high paying jobs/workers. My company is finally hitting the breaking point. We'll ship out people in 2008 (announcement in ~March, movements mostly June through September). Its cheaper for the company to take a $50k loss buying up each FB's home than to have the 'hiring issues' we have in CA and DC. We'll move experienced employees to 'seed the cadre' of new hires in affordable areas.
This month's Case-Shiller has been fascinating!
Got popcorn?
Neil
Allen C or Tanta -
Can this be done? I don't think this is allowed (unless your loan docs state). If so this is big big news?
BTW - This is why I love this blogs, this maybe OT, but important...
I suspect then the slope flattens.
My, aren't you optimistic! Too many other factors at play, including flat to declining real wages for J6P since the turn of the century. It'll bust below 100 for sure.
"Can this be done?"
Most (if not all) HELOCs are similar to credit cards with LTV being an additional variable.
The general terms are that if there is any material change to your financial condition or home value, they can initiate any number of actions including pulling your line to jacking up the rate.
cont...
The host over on that board is suggesting the motivation is capital related.
"Can this be done? I don't think this is allowed (unless your loan docs state). If so this is big big news?"
The terms of HELOCs can be changed at ANY time.
In the last recession this was done to a fairly significant number of small businesses and it bankrupted nearly all of them as banks pulled back in. It hasn't hit HELOCs before because this is the first time that the HELOC collateral has been impaired.
The banks will not issue these calls if people DON'T have assets that can be liquidated.
But if you have a house paid off or lots of equity and recently bought some "toys".....
HELOCs are NOT like 30/fixed purchase mortgages...they are 100% callable.
We now have serveral different opinons on this...
I still think they can limit all future draws, however, they can't call any LTV shortgage.
Well, speaking from a townhome owner with a prime mortgage, I can't wait to see prices fall for a few more years. Yes, the paper gains in my current place will go away too but once housing prices become reasonable again, I can afford to by a house in Torrance. Currently a 1200 sq ft house in Torrance that was build in the 1950s will still go for over $600K. I will be happy to see prices fall so that house can be purchased by someone other then a millionaire.
Guys - a HELOC is a term for a consumer purpose open-end credit line secured by a consumer's residence.
HELOCs are very different than commercial lines. What you can do with a HELOC is bound by TILA, and found in Reg Z at 226.5b(f)
(2-3).
You can call for fraud, misrepresentation, default or if "Any action or inaction by the consumer adversely affects the creditor's security for the plan, or any right of the creditor in such security". However that last means what it says and can not be abused. If, for example, your roof was knocked in during a storm and you failed to fix it, a creditor could call.
You can halt advances or lower the credit limit for the following reasons:
(A) The value of the dwelling that secures the plan declines significantly below the dwelling's appraised value for purposes of the plan;
(B) The creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances;
(C) The consumer is in default of any material obligation under the agreement;
(D) The creditor is precluded by government action from imposing the annual percentage rate provided for in the agreement;
(E) The priority of the creditor's security interest is adversely affected by government action to the extent that the value of the security interest is less than 120 percent of the credit line; or
(F) The creditor is notified by its regulatory agency that continued advances constitute an unsafe and unsound practice.
PS: Just trying to keep this blog the nerdy, accurate place it has always been, that is, when Tanta and CR aren't crashing the market with their SuperDuperShortManipulationScheme.
Oops - I wasn't supposed to reveal that last, was I?
Oh, well, buy the newsletter and you will find out how to stay ahead of the Tanta/CR engineered stock crash of 2008. For an extra fee, word has it that they will help to get presidential candidates up to speed. However, so far sales have been poor because it turns out that not one of them can read on Mortgage Pig grade level.
Mom, you're a hoot!
CR - seeing those graphs doesn't make me feel so bad for being "bearish" on housing circa 2003. I mean, after all, we had reached the inflation adjusted peaks prior to the 1990's recession and that resulted in some hefty price declines in places like LA, NYC, etc.
WRONG!
To me, it means that my prediction of 2003 prices is far too optimistic.
Thanks MOM!
Thanks MOM for the official terms...
This is not inconsistent with my statements. They can reduce your limit to less than what you owe resulting in a number of unpleasant options including paying a higher rate on a "new" loan.
MoM - this is a carry-over from the prior thread. The rumor was (as best I recall): that WaMu was planning to invoke HELOC line reductions en masse. Yeah, right. This is, IMO, someone trying to draw attention to a shitty blog (portlandsomethingorother) via a good one (CR).
Let's think about the consequences of this for a sec: Aside from the PR nightmare, the unnecessary defaults that would result, not to mention the administrative challenges this would pose - this would primarily result in an avalance of legal challenges, and I think they already have a full plate in that regard.
"someone trying to draw attention to a shitty blog (portlandsomethingorother) via a good one (CR)."
That someone is me and my only motivation for the post is confirmation and any thoughts beyond that.
cont...
BTW - If there was a prior post, I didn't see it...
Well, the post I saw was made by bofiz. In any event, what frosts me is that it was a link to a rumor posted on another blog with no source whatsoever to back it up.
This may be 'the blogs', but I kind of like it that at this blog we normally are treated to the same set of facts before we engage in debate.
According to the rumor it was only going to affect something like 3000 borrowers. Not the end of the world however it plays.
Back to the property tax issue as it relates to housing deflation, yet another data point. As this municipal income stream reverses in the future, services are typically reduced, creating unrest -
"In Indiana, skyrocketing property taxes sparked protests that have included homeowners dunking their bills in rivers and lakes to mimic the Boston Tea Party. Taxes on homeowners in Indianapolis increased by an average of 34 percent, but in some cases more than doubled.
"I either have to not pay my taxes or not pay my mortgage or stop eating and turn off all the utilities in order to make it, and that would be true even if I were still working, or darn close to being true," Gunyon said. "And I'm not the only person in this situation."
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So, my Xmas dinner conversation went something like:
Family Member: The new development down at the Fraser is really going to increase prices further.
Me: I think it will increase supply and prices will come down.
Other Family Member: Yeah, prices are really going to go up...
My comment was not even acknowledged, the new housing will bring commercial development and increase the value of the area...
Vancouver is going UP!!!!!
Come to Vancouver and buy real estate! Only around $400/sq ft. Get in while the getting in is good!!!! These babies are going to $1000/sq ft.
On a more serious note, I would say that Vancouver declined about 10% from its peak around 93-95. I guess the peak depended on which area of Vancouver. I tend to think average prices were about 4-5 times times average household income at the time. Right now it is probably about 7-8 times average family income, but home quality has been declining significantly, and if you were to compare similar types of housing and the same amount of square feet I think you'd find Vancouver's housing is up even more.
I am not so sure that it goes back to affordable levels though. "Starter" homes have to go back to affordable levels and right now a starter home for a professional couple is a 2-bedroom condo in a suburb. A single professional working person needs to be able to comfortably afford at least a one-bedroom without being a debt or transportation slave. I'd say our prices have to come down about 40% for that to happen, but we'd still be moderate to seriously unaffordable.
Well, my holidays are just getting better and better. CR's offered an excellent chart that should allow me to explain my lack of bearishness about housing in 2008.
Look at CR's chart "Los Angeles, Real Prices," for the time period 1989-'90 into the mid-1990s.
At just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices.
The Fed eased to "fight" the recession, of course, but that really was "pushing on a string" when it comes to housing. If the reason you can't make your mortgage payment or can't qualify for a loan is that you don't have a job, it doesn't matter how low interest rates are.
So, after the recession ended and the economy got back onto a growth track again, what happened? The Fed did what it always does, it began to "tighten", removing the excess easing from when it was trying to stimulate the economy.
My point: After the housing peak of the last cycle, a sequence of recession, major job-loss and finally rising interest rates were required to keep the downtrend going.
In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started.
Sebastian
CR,
Are you suggesting that home prices in LA will return to 1995 prices (adjusted for inflation)?
Also, I don't understand why anyone uses the OFHEO series data when discussing LA home prices. OFHEO data only includes home sales that are looked at by Fannie Mae. The current median home price in Southern California is $435K, above the $417k amount that would trigger Fannie Mae's review.
Deborah - A fair part of the Vancouver real estate market seemed to this every other year or so tourist to be supported by buyers from Asia. Is that still the case - or has this buying dried up?
Seb says:
"At just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices."
So, last time it took a recession, with job losses, for housing weakness, but this time we dont need no stinkin recession or job losses for housing weakness.
It would appear that housing markets were made of sterner stuff back in the day.
Further Seb:
After the housing peak of the last cycle, a sequence of recession, major job-loss and finally rising interest rates were required to keep the downtrend going. In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started.
But, ah, this downtrend didnt require recession or job-loss to get started, right? But the ole downtrend WILL stop, wont go any further, UNLESS and UNTIL recession and/or major job-loss commence? Thats a head scratcher.
Lets recap:
Last time: right about the peak, recession and job losses obviously contributed to the sharp fall in home prices.
This time: right about the peak, no recession or job losses, but, ah, well, OK, so there has also been a sharp fall in home prices.
(Wait a minute. Thats odd. If A causes B, but Not A causes B . . . . lets come back to that one later.)
Last time: Rising interest rates kept the housing downturn going.
This time: Interest rates wont rise unless we have a recession, job losses, recovery AND THEN Fed tightening. Oh, and the housing downturn will stop anyway, because were not going to have recession. But if we did, that would start a housing downturn, for sure.
Just saw this posted. Thanks for the graphs (as always). I am covering Santa Monica at the "Santa Monica Distress Monitor" in case anyone is interested in watching the market in that area. Keep up the great work CR
Question about Westchester, CA (90045):
We live in that area, same house over 27 years, all paid off (Yay!), and have watched the house prices with bemusement. The prices here seem to be holding pretty steady. A house similar to ours is for sale for about $800k. Our area is pretty stable, with a number of families here since it was built about 1950.
Any idea where I should look for trends here?
Thanks,
Martin Cohe
Deborah:
"My comment was not even acknowledged, the new housing will bring commercial development and increase the value of the area..."
A few months ago I attended a family gathering in Solano County California, which is pretty much a subprime hotspot. Other family members were from the Stanislaus County area, which is even worse.
In general, they weren't really aware of how badly out of control things had gotten in real estate, because they're all in their 50's and 60s and bought long ago. Chaos is going on all around them and they don't even realize it. They don't know any of the new buyers, just hang with people like themselves that they've known for 30 years. So they were still moderately optimistic on real estate.
Maybe the same thing going on with your relatives? Hasn't hit home because it doesn't affect them.
Ask anybody who's moderately comfortable and not interested in such things about the problems with real estate and credit, and they have only vague notions. It's something that doesn't affect them, so they don't pay attention.
The Economist: As an Economic Historian, Sebastian, what contributed to the last housing downturn between 1989 and 1995?
Sebastian: Using Los Angeles home prices as an example, at just about the time that LA prices were peaking (late 1989-early 1990) we were on the verge of recession. With the recession came a large national, widespread loss of jobs, which is a significant factor in major housing weakness. This logically and obviously contributed to the sharp fall in home prices.
The Economist: I see, so the recession is what caused the last housing downturn?
Sebastian: I wouldnt go that far, but it was a major factor.
The Economist: Point taken. Why then, once the recession had ended, did home prices continue to decline?
Sebastian: The Fed did what it always does, it began to "tighten", removing the excess easing from when it was trying to stimulate the economy.
The Economist: Yes, I do see that the Fed raised its Fed Funds Target Rate from 3.0% Feb/1994 to 6.0% by Feb 1995. However, the Fed also raised rates from 5.875% Aug/1986 to 9.8125% in May/1989, which was a period in which housing prices rose.
Sebastian: Yes?
The Economist: Well, in both periods the Fed raised rates, but in one housing prices rose, while in the other housing prices declined.
Sebastian: Yes?
The Economist: It appears to be an obvious contradiction.
Sebastian: To the untrained eye. When the Fed raises interest rates, house price appreciation slows or goes negative.
The Economist: Really? Do you have data to back that up?
Sebastian: Yes, from the last downturn and from this current one.
The Economist: A data set of two?
Sebastian: That and a whole lot of wicked logic.
The Economist: Indeed. At the expense of tarrying overlong on this point, the Fed raised interest rates from 1.0% Jul/2003 to 5.25% Jun/2006. Again, this was a period of rapid housing price appreciation, a boom if not a bubble.
Sebastian: Yes?
The Economist: Well, this seems to contradict your previous statement of, what was it you said, When the Fed raises interest rates, house price appreciation slows or goes negative.
Sebastian: With a lag.
The Economist: Just so. Lets move on to the current housing downturn: What caused it?
Sebastian: Caused what?
The Economist: The current housing downturn.
Sebastian: Are you referring to the one in certain bubbly areas?
The Vancouver market story reminded me of one told to me a long time ago when the Taiwan/Red China argument was heating up - yes that long ago. The story was a real estate agent was showing Vancouver houses to a Taiwan lady and at each stop she would say "OK lets go look at another one". The agent showed house after house and the lady didn't even get out of the car. A frustrated agent told the lady he would spend the evening reviewing offerings and that tomorrow he would show her some real attractive properties. The lady responded: "No need to do that, I will take all that you showed me today."
My late wife worked at the IRS when the Marcos regime was screwing up the Philipines and suitcases full of money were being declared to the IRS. That is what we need now. A real dust up in the east to scare the folks to bring home the dollars.
I'm amazed that you're plotting the same graph (the lower one) as what my company's senior management requested a few months ago.
Ok an amatures question. I'm working my fico up but need another 6 mo or so before I could buy. But I'm lost in the trends. Seems prices will keep dropping. Cool for me. Interest rates edging up. RATS! Qualifying getting tougher for a lowly shmoe like me in the 620 range. If I wait to bennefit from falling prices, I may get eliminated by stricter standards and interest rates driving the nut beyond my meager income. Jump in soon and watch the bottom fall out of my lovely new home.. What to do?? Or better yet.. WHEN?? PS- Getting too old to wait much longer. Say a yr or 2.
Great graphs. Thanks CR.
Is Silicon Valley considered a bubble area? Listed my very unremarkable house there in early November at a reasonable price (neither very high nor low). Got 4 offers in a week and a half. Eventual buyer had to have his Dad cosign his loan but otherwise the sale was drama free. I was honestly very surprised. I expected much more difficulty. I used Help-U-Sell to reduce broker fees and got excellent service. I either got lucky timing or the local SV market is better than LA.
I would say that Vancouver declined about 10% from its peak around 93-95
Looks more like 14% nominal to me:
http://cuer.sauder.ubc.ca/cma/data/HousingPrices/housing-pri-vancouver.pdf
But of course that pales compared to the epic bust of the early 80's. About 40% nominal and 55% real. And real prices are much higher today than in 1981. Vancouver now has the worst fundamentals - price/rent and price/income - of any market in North America.
Oh, and those "rich Asian" stories always get trotted out every time there's a bubble in Vancouver. There are always some of them in fact, but it appears that a lot of people don't understand that market prices are set at the margins. And the marginal buyer is J6P, just like everywhere else.
And one more thing - population growth in Vancouver is at its lowest level since WWII, while housing starts are at their highest level since the post-war boom.
Woohoo coleslaw, you may find an answer to your question on the Piggington website.
We live in that area, same house over 27 years, all paid off (Yay!), and have watched the house prices with bemusement. The prices here seem to be holding pretty steady. A house similar to ours is for sale for about $800k. Our area is pretty stable, with a number of families here since it was built about 1950.
Martin, this might be an unfair assessment, but I figure Westchester will get absolutely hammered on the price front. It's an okay neighborhood, but it's too darn close to the airport and, according to friends who live there, the schools are mediocre at best. I checked it out in 2005 and was bewildered at the phenomenal price appreciation. Up till that point it was where you went if you could not afford to live in other areas of the westside. I guess a question to ask is: are your neighbors really pulling in 250 - 300K/yr? Because that's what it would take to buy an 800K house. Again, I don't want to demean Westchester, I just have a lot of trouble believing that it's the one place that won't experience a huge decline in LA. Congrats on paying off the place.
is Silicon Valley considered a bubble area
Silicon Valley has 10,000+ AAPL and GOOG employees flush with cash looking to buy SFHs, and they stopped making SFH neighborhoods 30-40 years ago.
Bubbles are unsupportable rises. There is no bubble in the PA -> LG corridor . . . just supply/demand appreciation. The rent/own cap rates may be out of whack, but Prop-13 was designed to allow if not encourage this.
CR, those graphs are absolutely stunning . . . or should I say sobering.
The facts portrayed are not surprising and, indeed, are well known to anyone familiar with the L.A. market for 20 or more years, but somehow the pictures are worth far more than a mere thousand words each.
CR--
Great Analysis and Charts, as usual. There's a good reason Paul Krugman turns to you when he wants information on the housing markets.
I have been a long time daily reader/infrequent poster, and I am a CRE professional. I'd like to thank you for your insight as well as for your neutral, data-driven analytical viewpoint.
Merry Christmas to you and Tanta and have a great 2008.
There is no bubble in the PA -> LG corridor . . . just supply/demand appreciation. The rent/own cap rates may be out of whack...
Uh huh, and there was no bubble in Cisco in 2000, just supply/demand appreciation. The P/E may have been out of whack, but...
It's the fundementals, stupid.
Seb:
"In order for CR's expectation of another major downleg for housing to be the real deal, repeating the pattern of the previous cycle, we'll need the same sequence again. Until we get a recession, that sequence won't get started."
Ah, so only a recession can cause a recession. Thanks for the insight.
"Silicon Valley has 10,000+ AAPL and GOOG employees flush with cash looking to buy SFHs, and they stopped making SFH neighborhoods 30-40 years ago."
If that number were 100,000 or more, then these prices might be justifiable.
10-20,000 millionaires is about right.