CR, given the information that is coming in, do you think that this curve is going to behave differently than the last L.A. real estate bust?
It seems like we're experiencing a sharp spike downwards, due to the credit freeze, rising inflation, and the fact that negative sentiment seems to travel more quickly in this day and age of 24 hour news channels and internet commentary.
Is it more likely that there will be a spike down and then a slow creep back up, something akin to the dot com crash of 2000?
Or do you still think it will slowly bleed downward from here over 5-7 years?
See that period of 92-97? Assume that that period is "normal" appreciation....akind to that of the CPI's claimed target range of ~2% per year. Now take all of the area under the curve from 97-07 and subtract out the area under a normal 2% scenario and that is the total "correction" that we should be in for. How long it takes for that correction to occur is what the Fed controls...certainly not the +/-.
I don't know if you saw the link in the last thread of last night but I had a link to all the charts from the NAHB housing conference from last Thursday.
So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been. No wonder they don't anticipate a total consumer shutdown.
The Case-Shiller numbers can show why we had such a surge in consumer spending (wealth effect) and also why now there will be a shutdown (negative wealth effect).
It will get worse, much worse, before it gets better.
So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been. No wonder they don't anticipate a total consumer shutdown.
Generally, I'd agree with that conclusion, but we probably should consult the Wright Model thingamaB first.
On NPR this morning they were saying things are starting to flow again. Hah. I agree, things are only starting to unravel. Greg Weston, it wouldn't be hard to compile a list like that for Miami. People are just starting to freak out, I think, realizing how much they owe, realizing they have run out of credit. There are factors here that have no historic precedent.
"So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been"
But the stock market priced it all in, since Sebastian informs us that wall st is an efficient future discounting mechanism, using tools like OFHEO... LOL!
3, 4, 5% per MONTH declines are fuzzy snapshots at best. 4%/mo is 41% per year, and is not a reliable trend indicator. Remember also that C-S attempts to eliminate not-at-arms-length transactions. In this market that surely means they incorrectly flagging some legitimate extreme declines and also likely incorrectly including fraudulent "deck chair on the Titanic" shuffling type transactions.
<a href="http://www.americanbanker.com/article.html?id=200804285XYDPMQP&queryid=1477278182&hitnum=1>Chicago FHLB Details Extent of Problems
WASHINGTON The Federal Home Loan Bank of Chicago provided more details Monday on the depth of the problems it is facing after its aborted merger talks with the Home Loan Bank of Dallas.
The Chicago bank said it lost $78 million for the first quarter, largely because of its troubled mortgage program and volatility in the broader market. Despite its struggles, the loss is the bank's first since it began filing with the Securities and Exchange Commission.
Last week the bank announced that it was stopping purchases under the Mortgage Partnership Finance program. Observers said the Chicago bank may need years to recover from losses associated with its mortgage holdings.
"The short answer is it could take two to three years before they can work their way through the magnitude of the situation," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp.
...
The Chicago bank began merger negotiations with the Dallas bank in response to its troubles last year. But those talks fell apart this month, in part because of problems estimating the Chicago bank's net worth. It has vowed to come up with a plan to stay independent.
...
The bank appears to be largely alone in its troubles. The Federal Home Loan banks' Office of Finance said Monday that systemwide net income rose 12.2%, to $697 million.
Yeah, right. Just wait for it.
Federal Home Loan Banks are the good folks that extended something like $650 billion in loans, including at least $50 Billion to CFC last year when the other credit markets dried up, which provoked even Sen. Schumer to protest.
Chickens Coming Home to Roost, in a barn near you.
Great point on the underestimation of the wealth effect.
There's another follow-on aspect of falling prices that gets little attention: an acceleration in foreclosures.
Falling prices produce more walk-aways (for obvious reasons). The resulting REO's cause prices to decline further. This is a classic negative feedback loop. However, most economists appear to ignore its existence in favor of a static view of supply (new home starts) and demand (household formation).
What would break the feedback loop? Rising cash rental yields. If they rise (prices fall) enough, then demand from investors should be enough to take up new REO's.
jmay,
Although home prices are sticky, they are also lubricated. Declines will be much more rapid this time. A sharp decline over a few years and then a flat line for several more years is likely.
"Falling prices produce more walk-aways (for obvious reasons). The resulting REO's cause prices to decline further. This is a classic negative feedback loop."
It's actually a positive feedback loop working on a negative process.
Mean reversion. What's remarkable is the entire industry convinced itself that this time is different, like with dotcom stocks. A few real well placed crooks from IBs pulled off the the best fee based scam in history.
I cannot wait until the lines reach -20%. I may start thinking about buying a house. I wil have the summer to enjoy the show and will start during football season.
What would break the feedback loop? Rising cash rental yields. If they rise (prices fall) enough, then demand from investors should be enough to take up new REO's.
But what part of the economy is going to support rising rents?
Empire Land, an Ontario-based land development company, has filed for bankruptcy protection, joining at least a dozen home builders that sought protection from creditors in the last 10 months as home sales and prices slumped
"Mean reversion. What's remarkable is the entire industry convinced itself that this time is different, like with dotcom stocks."
All bubbles are debt bubbles. This is just one BIG BIG BIG debt bubble created by Greenspan that keeps moving from stocks to houses to commodities.
Either it keeps on inflating or it collapses. I think it is collapsing, but god help us if Bernanke inflates an even BIGGER debt bubble for one last hurrah.
This is just one insane, couple decade long debt bubble distorting pretty much everything we think we know.
CR said: "...Now that prices are falling, if Case-Shiller is a more accurate reflection of actual prices than OFHEO (as I believe), then the Fed might be underestimating the drag on consumer spending from falling prices."
Couldn't help but notice that there was no "probable recession" disclaimer on the last chart.
You're making a pretty big mistake, IMO, assuming that the higher-volatility swings of the Case-Shiller numbers are a more-reliable indicator than the less-volatile OFHEO numbers, and especially when C-S is so heavily skewed towards the California market.
I saw something similar with my Shadow CPI when I substituted actual home prices for the OER. Home prices are volatile and the OER is a lot "smoother", but when you average it all out over a long cycle the home-price volatility was mostly noise and didn't really offer any new information.
DALLAS--(BUSINESS WIRE)--Home Interiors & Gifts, Inc. today voluntarily filed a petition under Chapter 11 of the U.S. Bankruptcy Code to reorganize the companys business operations and restructure its debt. The petition was filed in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division.
Great point on the underestimation of the wealth effect.
Maybe it should be called the "paper wealth effect" since this wealth never actually existed and was merely a fabrication by the markets.
I can hand out all these pieces of paper to people that say "You're net worth is twice what you thought it was!" and if they believe me they can feel really optimistic and have a wild spending spree.
But that doesn't mean they were ever rich or that this "wealth" could ever be made real by any kind of monetary or fiscal policy.
I too keep wanting to know where the bottom is - there are so many cheap rentals around (many of which will probably be foreclosures) that it's hard to use that as a basis.
Ceilingfan writes:
I too keep wanting to know where the bottom is
Serious question follows: Why?
Think about what such a gem of wisdom could get you. IMHO nothing. This isn't about market timing anymore. The "bottom" isn't a signal to invest. The "bottom" may not even indicate the end of losses seeing as inflation has run rampant. If the "bottom" still costs more to buy than rent what is the point?
I too keep wanting to know where the bottom is - there are so many cheap rentals around (many of which will probably be foreclosures) that it's hard to use that as a basis.
Ceilingfan | 04.29.08 - 2:42 pm | #
Housing can be looked at in two ways, the first is as an asset, the second way is as a durable good that is consumed. To the extent it is an asset, then over the long run it will be valued based on the net cash flows it will generate over its useful life. Those cash flows are known as rents. Even if you own the house, in effect you rent it from yourself since you could always rent a house down the street as an alternative. To the extent it is a durable good consumable, its value will have to be determined by the ability of people to consume it, in other words relative to incomes. Looking at it either way, housing prices need to come down about 25% to match the long terms historical norms relative to rents and incomes. That 25% assums that it stops at the historical equilibrium, rather than overshoots. Historically when bubbles burst, prices will undershoot significantly, so 25% off the top is an optimistic, but realistic scenario.
CR: Thanks for the pretty pictures. They're what I understand best.
And if the dynamic is roughly the same as '91, we're looking at a further 10 percent drop nationally -- and 20+ percent in the bubble areas -- next year alone. That's a lot of naked swimmers exposed by the outgoing tide.
Rob Dawg writes:
3, 4, 5% per MONTH declines are fuzzy snapshots at best. 4%/mo is 41% per year, and is not a reliable trend indicator. Remember also that C-S attempts to eliminate not-at-arms-length transactions. In this market that surely means they incorrectly flagging some legitimate extreme declines and also likely incorrectly including fraudulent "deck chair on the Titanic" shuffling type transactions.
Well said. I do not expect to see greater declines than the peak inclines during the bubble per year (e.g., 30%).
However, because of the deck chair suffeling (I'm seeing a fair number of housing 'trades' where both properties sell below par and thus both would be exculded from the data).
The pretty charts show scary data. It clearly shows it is no where near time to buy. Again, anyone buying in 2008 is throwing money away.
...a good trader and risk manager will always weight postions in order to see the true risk in the position (think dollar-deltas and weighted vega). You always seem to be arguing against an implicit dollar-weighting towards the coasts, but why wouldn't we dollar-weight. There are more people, more houses, and the houses have more value. (MoreMoreMore = Leverage = blowout when you're wrong.)
If everyone in the country lives in CA execept for 1 person who lives in Iowa - pointing out that Iowa real estate isn't underwater doesn't help the banks and borrowers living in the rest of my hypothetical country (where everyone lives in CA.)
Since I expect an argument back for arguments sake, despite historical track records... why don't you consider this analogy.
Why does California has more electoral votes than Iowa?
[We are hopeful that government-led actions to assist current homeowners and prospective home buyers will help bring about a recovery in homebuilding sooner than would otherwise be realized," Steven J. Hilton, the company's chairman and chief executive, said in a statement]
I must be slow on the up-take. I had typed up a nice discussion of electoral votes, 2 Senator per State, Constitutional Convention, rural, slave-holding South, populous, industrial, non-slave North, etc. etc. until I re-read your post.
Your question really puts the burden of going forward back on Sebastian. And very well done at that. Yes, the coasts should be more heavily weighted simply because they "weigh" more.
And this comes from a Chicagoan -- a resident of the Third Coast.
I found an interesting bit of anecdotal evidence on where the bottom might be, for homes NOT in that awful SubPrime zone.
This home is in Palo Alto, currently for sale; 3 previous sales within 6 years:
Sale 1: $1,350,000
Sale 2: $2,400,000 (2 years later)
Sale 3: $1,650,000 (another 3.5 yrs)
A loss of 31% on what is certainly a high end home.
The interesting part: the sales are in 1988, 1990, and 1993; the home, billed as "Palo Altos Signature Home" is now for sale at $14,750,000 only 893% of the 1993 sale price.
Houses are liabilities. Renters are assets. A house costs money to maintain, pay taxes on, and insure. A paid-for house will cost you money to own unless its value increases faster than the rate of inflation.
Speed I will say this slowly once more so you can read my lips: when I am 53 years old I will never pay rent again in my life, as I'll own my primary residence. I will pay taxes (tax deductable!), and repairs (only what I have to!) until I die, which could be up to 50 years later (god willing). Now, I want you to add up all the rent you will pay from the time you are 53 until the end of life expectancy for someone, say 77. Now do the calculations.
Oh and Speed, don't forget to think about that fact that, at age 53 and beyond, my monthly housing cost (taxes and insurance) will be under $300 a month for the duration. I could do nothing but collect SS and stay in my home comfortably, according to my last statement from SS as my monthly payment will be 1900 as it now stands.
Ipodius-Your funny-you think your going to get that SS check. Heck the govt is broke, the treasury can't pay thier bills..Walmart needs greeters...
Your also discounting higher property taxes, food and utilities. It will happen because thats the only way cities, counties and govt. will be able to pay for your services.
"Speed I will say this slowly once more so you can read my lips: when I am 53 years old I will never pay rent again in my life, as I'll own my primary residence. I will pay taxes (tax deductable!), and repairs (only what I have to!) until I die, which could be up to 50 years later (god willing)."
It's an asset, but a depreciating one. Takes continual care and resources from you to retain its "value" (quality shelter for you). "Only what I have to" repairs will include a new roof, maybe two (nobody really knows how long those "40 year roofs" really last), and may well include foundation repair (which I wouldn't wish on anybody), mold infestations (no insurance will cover), just plain old rot, gutter placement and annual cleaning (gonna do it yourself at age 65?) and whatever corners the construction crew cut (hidden time bombs), a paint job every X years, etc.
And then there's the 21st century special, a crashing local economy that reduces the need for housing and does away with your employment, making it necessary to dump the thing at a loss to follow the work elsewhere in the country, if it exists at all.
All of those things won't happen, but some of them will. Housing is a risk, don't kid yourself. It may pay off over renting, especially in an environment of rising housing prices. And it may not, especially in an environment of housing glut.
cd, i was going to count to ten and i figured someone would post something about SS not being there. Thanks for restoring my faith in blog posters!
Bob Dobbs, I call bullshit. You can play that game on yourself all you want...trying to make reality fit your conception of how the world ought to work. I'll still with how it does and learn from my parents, as much as I hate to admit that in public sometimes.
They have less than a $300 a month housing cost full stop. They are in their 70's and haven't had a house payment since my dad was 58. They actually invested my mom's entire salary from her age 50 on, and have a boatload of money. They can afford to live quite comfortably, even paying for any care they might need instead of going to a nursing facility. And they get to live in their own place they took care of with their own hands, with their own things and memories...no one is going to ask them to move. That's a beautiful thing. Much more precious than money. Some things are, you know.
squeezed, why don't you just balance the cost of the roof (my last one was 2600 2 years ago for a 40 year one) against the cost of your having to move every few years. Also you have to pay utilities EVERYWHERE you go. What kind of silly statement was that? Utilities are the same no matter where you live, rented or not.
And I said that was just SS squeezed. obviously I'm not relying on that. but i could live on that if i had to. AND still get my strawberries wherever I wanted to. And frankly, I don't want to live next to/under/above people, and all the money is well worth that. My own yard, my own everything. Again, that's not about money...stop being so utterly bitter.
I'm 52. We paid off our house six years ago. We are sitting on savings, but are probably making half what we did seven years ago because of the way hi-tech reshuffled itself; plus we're both a little old now. We don't live a "carefree life;" we at best live a decent life that still requires both of us to work. If we still had the housepayment, our lifestyle would be strictly bare-bones.
I pay $3K a year in property taxes (that's considered good in CA, $800 a year in homeowners insurance, 100 a month for water and garbage (which for renters is traditionally covered around here), and easily $1200 a year for repairs if you amortize new roofs, paint jobs, plumbing repair, regular maintenance out over their expected lives. So that's around$500 a month on a "paid off" house, and I know I'm forgetting something. Oh wait, HOA dues!
I'm glad your parents have done so well. I failed to do that well; I thought I did everything right -- tried to -- and I didn't do that well. Maybe I'm a failure or -- here's the icky part -- maybe your parents were lucky. Good job in a cheap area, stable prospects, low expenses. That's not so common every day.
Everybody sees reality from where they stand: "It sucks here, so it must suck everywhere," "It's great here, why's everyone complaining." Wise men learn to pick up a telescope and see beyond.
iPodius, I don't quite get what Bob said was bullsh*t. Housing is a depreciating asset that may or may not pay off over renting, depending on local circumstances. And bad stuff can happen to your house. (Whether you own it, or rent it, incidentally.) What's so amazing about that?
We're just re-hashing rent v. own.
I'm hereby positing Fatal's Law: The longer the housing bubble thread, the closer to 1 is the probability that a fight starts over the rent v. own calculus.
I have been renting in NYC for 12 years - avoiding buying because prices were going up irrationally (now I understand why). But what I don't understand is - why aren't prices in NYC (and, more precisely for me, Brooklyn) declining more? I know all of the arguments (foreign buyers, etc.) but they are not actually true as far as I can tell. Prices shot up here over the last several years for the same reasons as in most places. Now properties are sitting and sitting & inventories rising, and prices are going down some, but not even remotely where they should be. Thoughts on this?
I live in the area as well. The NYC market is disproportionately distorted by wall st. Wall St. layoffs are just starting, loses are piling up (smaller bonuses) etc. They also say that every wall st. job lost = 5-10 other job loses as well, for people who work there. There's a lot of money to hold the bubble afloat longer, but it will burst. It's similar to Seattle with all the MS millionaires.
Also, there is an enormous amount of condo inventory coming online in the NYC metro market in the next 1-2 years.
kzan: NYC is one of the most desirable cities to live in worldwide, finance has been booming for a long time, and the dollar is very weak.
I am bearish about my own market of San Diego, but I think NYC is going to hold up pretty well, maybe a 5-10% decline while the rest of the country goes down 30%.
ipod,
there are lots of nice detached homes for rent. the house we rent is a $500-700 less per month than a comparable home. i'll take that over the dubious appreciation of a residential real estate anytime.
squeezed let me rephrase...500-700 a month OVER THE LIFE OF THE MORTGAGE. I'm still going to live 30 years or more after it's paid off. Over that 60 year period, I'm going to end up paying LESS than you.
Jeez, I know I teach finance, but does anyone know how to figure this all out? Because if you brought figures and analysis like this to me at work, you'd be looking for a job.
you know, I'm finally figuring something out. There's a HUGE cultural divide here on a house. I'm from the Northeast. A house isn't a financial decision. It's an emotional/cultural one. We don't up and move everywhere here. We tend to die in our houses and pass them along.
I'm trying to understand the rent thing. No one I know would intentionally die a renter here. Renting means...well, raises an eyebrow. I have no desire to pick up everything and move every three years like I did in college and shortly afterwards. I don't care how much it costs. I can imagine the look on ipodius regina's face if you suggested that she and the sr ipod sell and rent until they die. She wants to stay in the house she raised her kids in, where we buried the family pets, where her grandkids played, with the xmas decorations i made in the first grade hung where they have been since i was 6. And so she shall. that's why they scrimped...to be afforded that dignity.
I'm honestly saddened by the things I read here sometimes. These posts seem so shallow...maybe it's a left coast thing. What a horrible way to live...everything has to be a financial decision. Then you die. Sad.
The rent vs own decision has to account for the cost of the money that is invested in the ownership of the home in addition to upkeep, property taxes, etc. That is, if the home is worth $500k, one has to add to the effective expenses of home ownership the loss of earnings of that $500k. Or to be more accurate, the delta between the house appreciation and the earning rate if that $500k is invested elsewhere. This is frequently ignored in the discussions on owning vs renting. Of course, there is the additional issue of taxation of the gains, so the decision does get influenced by what tax bracket you are in.
For us, we did the numbers a few years ago and sold in 9/06, and have rented since then. This has given us about $150k in equity compared to continuing to own. A side benefit is that our cash flow for housing has been reduced by about 50%, and we are living in a much nicer home!
But, this doesn't address the emotional aspect of home ownership, which really is difficult to quantify in $...
Ipodius @ 8:16, thanks for saying this -- I'm an East Coast transplant to Seattle and have found the prevalent strictly mercenary perspective on houses (thanks too for not calling it a "home") both disgusting and dismaying. That said, the market here is for fools right now, which I suppose makes me a bit of a mercenary too -- but we don't want our memories of our future house, x years down the line, to be tainted by having had to forgo and forgo merely to keep living in it. Between house-as-investment and house-as-emotional-decision, there is the house as a place in which life is lived. Why not spend a few years renting in order to maximize the odds that in the aggregate, that life will be more enjoyable and more dignified?
ipodius, spare us the holier-than-thou nonsense about how one ought to live into their old age. As far as I can tell, you are spending yours constantly typing away on a blog with strangers that you criticize and denigrate. I don't know who you really are, but I am positive that you are not who you represent.
"ipodius, spare us the holier-than-thou nonsense about how one ought to live into their old age. As far as I can tell, you are spending yours constantly typing away on a blog with strangers that you criticize and denigrate. I don't know who you really are, but I am positive that you are not who you represent."
DC, he represents himself as a college instructor/professor as I recall, and I am completely convinced that that is what he is, having much experience with such people in my job. And that is not a compliment to the profession!
Nice. They set policy with woefully wrong numbers.
These are adjusted for inflation?
On a cumulative basis, and compared to household income, might indicate how much more adjustment we might expect.
CR, given the information that is coming in, do you think that this curve is going to behave differently than the last L.A. real estate bust?
It seems like we're experiencing a sharp spike downwards, due to the credit freeze, rising inflation, and the fact that negative sentiment seems to travel more quickly in this day and age of 24 hour news channels and internet commentary.
Is it more likely that there will be a spike down and then a slow creep back up, something akin to the dot com crash of 2000?
Or do you still think it will slowly bleed downward from here over 5-7 years?
Anonymous, these are nominal numbers. I usually adjust the national numbers (released quarterly) for inflation.
wsf, I do think they underestimated the homeowner's perceived increase in wealth. I also think they are aware of this now!
Best Wishes.
See that period of 92-97? Assume that that period is "normal" appreciation....akind to that of the CPI's claimed target range of ~2% per year. Now take all of the area under the curve from 97-07 and subtract out the area under a normal 2% scenario and that is the total "correction" that we should be in for. How long it takes for that correction to occur is what the Fed controls...certainly not the +/-.
Is this bad? Is this bad?
I have a new post up showing 11 properties in the San Diego neighborhood of San Ysidro with price declines of 38-68% below 2004-2006 prices.
Meltdown in San Ysidro: 47-68% price drops from ‘04-’06 prices « Greg’s Law & Economics Blog
Pretty chart but the data is really ugly.
I don't know if you saw the link in the last thread of last night but I had a link to all the charts from the NAHB housing conference from last Thursday.
So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been. No wonder they don't anticipate a total consumer shutdown.
The Case-Shiller numbers can show why we had such a surge in consumer spending (wealth effect) and also why now there will be a shutdown (negative wealth effect).
It will get worse, much worse, before it gets better.
So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been. No wonder they don't anticipate a total consumer shutdown.
Generally, I'd agree with that conclusion, but we probably should consult the Wright Model thingamaB first.
On NPR this morning they were saying things are starting to flow again. Hah. I agree, things are only starting to unravel. Greg Weston, it wouldn't be hard to compile a list like that for Miami. People are just starting to freak out, I think, realizing how much they owe, realizing they have run out of credit. There are factors here that have no historic precedent.
"So the upside consumer spending figures of the past were not credited to home appreciation as much as they should have been"
But the stock market priced it all in, since Sebastian informs us that wall st is an efficient future discounting mechanism, using tools like OFHEO... LOL!
Is there a bottom in sight? This is getting completely out of hand....
3, 4, 5% per MONTH declines are fuzzy snapshots at best. 4%/mo is 41% per year, and is not a reliable trend indicator. Remember also that C-S attempts to eliminate not-at-arms-length transactions. In this market that surely means they incorrectly flagging some legitimate extreme declines and also likely incorrectly including fraudulent "deck chair on the Titanic" shuffling type transactions.
Sort of Off-Topic:
For those with access:
<a href="http://www.americanbanker.com/article.html?id=200804285XYDPMQP&queryid=1477278182&hitnum=1>Chicago FHLB Details Extent of Problems
WASHINGTON The Federal Home Loan Bank of Chicago provided more details Monday on the depth of the problems it is facing after its aborted merger talks with the Home Loan Bank of Dallas.
The Chicago bank said it lost $78 million for the first quarter, largely because of its troubled mortgage program and volatility in the broader market. Despite its struggles, the loss is the bank's first since it began filing with the Securities and Exchange Commission.
Last week the bank announced that it was stopping purchases under the Mortgage Partnership Finance program. Observers said the Chicago bank may need years to recover from losses associated with its mortgage holdings.
"The short answer is it could take two to three years before they can work their way through the magnitude of the situation," said Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp.
...
The Chicago bank began merger negotiations with the Dallas bank in response to its troubles last year. But those talks fell apart this month, in part because of problems estimating the Chicago bank's net worth. It has vowed to come up with a plan to stay independent.
...
The bank appears to be largely alone in its troubles. The Federal Home Loan banks' Office of Finance said Monday that systemwide net income rose 12.2%, to $697 million.
Yeah, right. Just wait for it.
Federal Home Loan Banks are the good folks that extended something like $650 billion in loans, including at least $50 Billion to CFC last year when the other credit markets dried up, which provoked even Sen. Schumer to protest.
Chickens Coming Home to Roost, in a barn near you.
CR,
Great point on the underestimation of the wealth effect.
There's another follow-on aspect of falling prices that gets little attention: an acceleration in foreclosures.
Falling prices produce more walk-aways (for obvious reasons). The resulting REO's cause prices to decline further. This is a classic negative feedback loop. However, most economists appear to ignore its existence in favor of a static view of supply (new home starts) and demand (household formation).
What would break the feedback loop? Rising cash rental yields. If they rise (prices fall) enough, then demand from investors should be enough to take up new REO's.
CR-
When will the MEW data for Q1 be available? That should be interesting.
FHLB isn't really Federal, but the following from Wikipedia shows yet another interesting interconnection of financial thingies:
"The liabilities of each FHLBank are guaranteed by all of the other FHLBanks. "
then the Fed might be underestimating the drag on consumer spending from falling prices.
Underestimating from them.... naaa never....
contained!
jmay - are you the who wrote the clever rhymes over on TBP? Good stuff!
again, massive declines (compared to '91) WITHOUT massive layoffs...reverse of '91. No, it won't get better. yes, it will get worse.
jmay,
Although home prices are sticky, they are also lubricated. Declines will be much more rapid this time. A sharp decline over a few years and then a flat line for several more years is likely.
wow. now that is one ugly chart.
"Falling prices produce more walk-aways (for obvious reasons). The resulting REO's cause prices to decline further. This is a classic negative feedback loop."
It's actually a positive feedback loop working on a negative process.
Mean reversion. What's remarkable is the entire industry convinced itself that this time is different, like with dotcom stocks. A few real well placed crooks from IBs pulled off the the best fee based scam in history.
I cannot wait until the lines reach -20%. I may start thinking about buying a house. I wil have the summer to enjoy the show and will start during football season.
What would break the feedback loop? Rising cash rental yields. If they rise (prices fall) enough, then demand from investors should be enough to take up new REO's.
But what part of the economy is going to support rising rents?
O/T
Empire Land, an Ontario-based land development company, has filed for bankruptcy protection, joining at least a dozen home builders that sought protection from creditors in the last 10 months as home sales and prices slumped
Empire Land files for bankruptcy protection - Los Angeles Times
"Mean reversion. What's remarkable is the entire industry convinced itself that this time is different, like with dotcom stocks."
All bubbles are debt bubbles. This is just one BIG BIG BIG debt bubble created by Greenspan that keeps moving from stocks to houses to commodities.
Either it keeps on inflating or it collapses. I think it is collapsing, but god help us if Bernanke inflates an even BIGGER debt bubble for one last hurrah.
This is just one insane, couple decade long debt bubble distorting pretty much everything we think we know.
CR said: "...Now that prices are falling, if Case-Shiller is a more accurate reflection of actual prices than OFHEO (as I believe), then the Fed might be underestimating the drag on consumer spending from falling prices."
Couldn't help but notice that there was no "probable recession" disclaimer on the last chart.
You're making a pretty big mistake, IMO, assuming that the higher-volatility swings of the Case-Shiller numbers are a more-reliable indicator than the less-volatile OFHEO numbers, and especially when C-S is so heavily skewed towards the California market.
I saw something similar with my Shadow CPI when I substituted actual home prices for the OER. Home prices are volatile and the OER is a lot "smoother", but when you average it all out over a long cycle the home-price volatility was mostly noise and didn't really offer any new information.
Sebastia
O/T
Is MEW falling? mmm
DALLAS--(BUSINESS WIRE)--Home Interiors & Gifts, Inc. today voluntarily filed a petition under Chapter 11 of the U.S. Bankruptcy Code to reorganize the companys business operations and restructure its debt. The petition was filed in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division.
News
Red Pill: "It's actually a positive feedback loop working on a negative process."
AKA a "death spiral"
Great point on the underestimation of the wealth effect.
Maybe it should be called the "paper wealth effect" since this wealth never actually existed and was merely a fabrication by the markets.
I can hand out all these pieces of paper to people that say "You're net worth is twice what you thought it was!" and if they believe me they can feel really optimistic and have a wild spending spree.
But that doesn't mean they were ever rich or that this "wealth" could ever be made real by any kind of monetary or fiscal policy.
You're making a pretty big mistake
You're making a pretty big mistake whenever you speak or write in public.
Yesterday's graph with the circles for recessions was more uplifting - they were colorful and better represented bubbles.
I too keep wanting to know where the bottom is - there are so many cheap rentals around (many of which will probably be foreclosures) that it's hard to use that as a basis.
Fed doesn't do anything to stop it on the way up and all the sudden will try to compensate and cushion the blow on the way down.
Creative incompetence.
Why the big jump in SRS today? Did some REITs go TU?
Ceilingfan writes:
I too keep wanting to know where the bottom is
Serious question follows: Why?
Think about what such a gem of wisdom could get you. IMHO nothing. This isn't about market timing anymore. The "bottom" isn't a signal to invest. The "bottom" may not even indicate the end of losses seeing as inflation has run rampant. If the "bottom" still costs more to buy than rent what is the point?
I too keep wanting to know where the bottom is - there are so many cheap rentals around (many of which will probably be foreclosures) that it's hard to use that as a basis.
Ceilingfan | 04.29.08 - 2:42 pm | #
Housing can be looked at in two ways, the first is as an asset, the second way is as a durable good that is consumed. To the extent it is an asset, then over the long run it will be valued based on the net cash flows it will generate over its useful life. Those cash flows are known as rents. Even if you own the house, in effect you rent it from yourself since you could always rent a house down the street as an alternative. To the extent it is a durable good consumable, its value will have to be determined by the ability of people to consume it, in other words relative to incomes. Looking at it either way, housing prices need to come down about 25% to match the long terms historical norms relative to rents and incomes. That 25% assums that it stops at the historical equilibrium, rather than overshoots. Historically when bubbles burst, prices will undershoot significantly, so 25% off the top is an optimistic, but realistic scenario.
CR: Thanks for the pretty pictures. They're what I understand best.
And if the dynamic is roughly the same as '91, we're looking at a further 10 percent drop nationally -- and 20+ percent in the bubble areas -- next year alone. That's a lot of naked swimmers exposed by the outgoing tide.
fannie chief see's no rebound until 2010
Fannie CEO doesn't see housing rebound before 2010: report - MarketWatch
Rob Dawg writes:
3, 4, 5% per MONTH declines are fuzzy snapshots at best. 4%/mo is 41% per year, and is not a reliable trend indicator. Remember also that C-S attempts to eliminate not-at-arms-length transactions. In this market that surely means they incorrectly flagging some legitimate extreme declines and also likely incorrectly including fraudulent "deck chair on the Titanic" shuffling type transactions.
Well said. I do not expect to see greater declines than the peak inclines during the bubble per year (e.g., 30%).
However, because of the deck chair suffeling (I'm seeing a fair number of housing 'trades' where both properties sell below par and thus both would be exculded from the data).
The pretty charts show scary data. It clearly shows it is no where near time to buy. Again, anyone buying in 2008 is throwing money away.
Got Popcorn?
Neil
Hey Sebastian,
...a good trader and risk manager will always weight postions in order to see the true risk in the position (think dollar-deltas and weighted vega). You always seem to be arguing against an implicit dollar-weighting towards the coasts, but why wouldn't we dollar-weight. There are more people, more houses, and the houses have more value. (MoreMoreMore = Leverage = blowout when you're wrong.)
If everyone in the country lives in CA execept for 1 person who lives in Iowa - pointing out that Iowa real estate isn't underwater doesn't help the banks and borrowers living in the rest of my hypothetical country (where everyone lives in CA.)
Since I expect an argument back for arguments sake, despite historical track records... why don't you consider this analogy.
Why does California has more electoral votes than Iowa?
Oh, and props to CR for widening the blue bar!
From the bailout shilling front, care of MTH:
[We are hopeful that government-led actions to assist current homeowners and prospective home buyers will help bring about a recovery in homebuilding sooner than would otherwise be realized," Steven J. Hilton, the company's chairman and chief executive, said in a statement]
Gamma @ 3:13 pm
I must be slow on the up-take. I had typed up a nice discussion of electoral votes, 2 Senator per State, Constitutional Convention, rural, slave-holding South, populous, industrial, non-slave North, etc. etc. until I re-read your post.
Your question really puts the burden of going forward back on Sebastian. And very well done at that. Yes, the coasts should be more heavily weighted simply because they "weigh" more.
And this comes from a Chicagoan -- a resident of the Third Coast.
Thanks and Regards,
I found an interesting bit of anecdotal evidence on where the bottom might be, for homes NOT in that awful SubPrime zone.
This home is in Palo Alto, currently for sale; 3 previous sales within 6 years:
Sale 1: $1,350,000
Sale 2: $2,400,000 (2 years later)
Sale 3: $1,650,000 (another 3.5 yrs)
A loss of 31% on what is certainly a high end home.
The interesting part: the sales are in 1988, 1990, and 1993; the home, billed as "Palo Altos Signature Home" is now for sale at $14,750,000 only 893% of the 1993 sale price.
Houses are liabilities. Renters are assets. A house costs money to maintain, pay taxes on, and insure. A paid-for house will cost you money to own unless its value increases faster than the rate of inflation.
Speed I will say this slowly once more so you can read my lips: when I am 53 years old I will never pay rent again in my life, as I'll own my primary residence. I will pay taxes (tax deductable!), and repairs (only what I have to!) until I die, which could be up to 50 years later (god willing). Now, I want you to add up all the rent you will pay from the time you are 53 until the end of life expectancy for someone, say 77. Now do the calculations.
Oh and Speed, don't forget to think about that fact that, at age 53 and beyond, my monthly housing cost (taxes and insurance) will be under $300 a month for the duration. I could do nothing but collect SS and stay in my home comfortably, according to my last statement from SS as my monthly payment will be 1900 as it now stands.
Ipodius-Your funny-you think your going to get that SS check. Heck the govt is broke, the treasury can't pay thier bills..Walmart needs greeters...
Your also discounting higher property taxes, food and utilities. It will happen because thats the only way cities, counties and govt. will be able to pay for your services.
Why would you want to live until 100?
"Speed I will say this slowly once more so you can read my lips: when I am 53 years old I will never pay rent again in my life, as I'll own my primary residence. I will pay taxes (tax deductable!), and repairs (only what I have to!) until I die, which could be up to 50 years later (god willing)."
It's an asset, but a depreciating one. Takes continual care and resources from you to retain its "value" (quality shelter for you). "Only what I have to" repairs will include a new roof, maybe two (nobody really knows how long those "40 year roofs" really last), and may well include foundation repair (which I wouldn't wish on anybody), mold infestations (no insurance will cover), just plain old rot, gutter placement and annual cleaning (gonna do it yourself at age 65?) and whatever corners the construction crew cut (hidden time bombs), a paint job every X years, etc.
And then there's the 21st century special, a crashing local economy that reduces the need for housing and does away with your employment, making it necessary to dump the thing at a loss to follow the work elsewhere in the country, if it exists at all.
All of those things won't happen, but some of them will. Housing is a risk, don't kid yourself. It may pay off over renting, especially in an environment of rising housing prices. And it may not, especially in an environment of housing glut.
"my monthly housing cost (taxes and insurance) will be under $300 a month for the duration"
And I'm sure this includes utilities and upkeep (e.g. that new roof).
Also your 50 year span is unrealistic.
The page cannot be found
"monthly payment will be 1900 as it now stands"
But could you deal with not being able to shop at whole paycheck for strawberries?
cd, i was going to count to ten and i figured someone would post something about SS not being there. Thanks for restoring my faith in blog posters!
Bob Dobbs, I call bullshit. You can play that game on yourself all you want...trying to make reality fit your conception of how the world ought to work. I'll still with how it does and learn from my parents, as much as I hate to admit that in public sometimes.
They have less than a $300 a month housing cost full stop. They are in their 70's and haven't had a house payment since my dad was 58. They actually invested my mom's entire salary from her age 50 on, and have a boatload of money. They can afford to live quite comfortably, even paying for any care they might need instead of going to a nursing facility. And they get to live in their own place they took care of with their own hands, with their own things and memories...no one is going to ask them to move. That's a beautiful thing. Much more precious than money. Some things are, you know.
squeezed, why don't you just balance the cost of the roof (my last one was 2600 2 years ago for a 40 year one) against the cost of your having to move every few years. Also you have to pay utilities EVERYWHERE you go. What kind of silly statement was that? Utilities are the same no matter where you live, rented or not.
And I said that was just SS squeezed. obviously I'm not relying on that. but i could live on that if i had to. AND still get my strawberries wherever I wanted to. And frankly, I don't want to live next to/under/above people, and all the money is well worth that. My own yard, my own everything. Again, that's not about money...stop being so utterly bitter.
iPod:
I'm 52. We paid off our house six years ago. We are sitting on savings, but are probably making half what we did seven years ago because of the way hi-tech reshuffled itself; plus we're both a little old now. We don't live a "carefree life;" we at best live a decent life that still requires both of us to work. If we still had the housepayment, our lifestyle would be strictly bare-bones.
I pay $3K a year in property taxes (that's considered good in CA, $800 a year in homeowners insurance, 100 a month for water and garbage (which for renters is traditionally covered around here), and easily $1200 a year for repairs if you amortize new roofs, paint jobs, plumbing repair, regular maintenance out over their expected lives. So that's around$500 a month on a "paid off" house, and I know I'm forgetting something. Oh wait, HOA dues!
I'm glad your parents have done so well. I failed to do that well; I thought I did everything right -- tried to -- and I didn't do that well. Maybe I'm a failure or -- here's the icky part -- maybe your parents were lucky. Good job in a cheap area, stable prospects, low expenses. That's not so common every day.
Everybody sees reality from where they stand: "It sucks here, so it must suck everywhere," "It's great here, why's everyone complaining." Wise men learn to pick up a telescope and see beyond.
Be wise.
Generally, a building depreciates (requires maintenance), land appreciates (or stays flat).
Your results may vary.
iPodius, I don't quite get what Bob said was bullsh*t. Housing is a depreciating asset that may or may not pay off over renting, depending on local circumstances. And bad stuff can happen to your house. (Whether you own it, or rent it, incidentally.) What's so amazing about that?
We're just re-hashing rent v. own.
I'm hereby positing Fatal's Law: The longer the housing bubble thread, the closer to 1 is the probability that a fight starts over the rent v. own calculus.
I have been renting in NYC for 12 years - avoiding buying because prices were going up irrationally (now I understand why). But what I don't understand is - why aren't prices in NYC (and, more precisely for me, Brooklyn) declining more? I know all of the arguments (foreign buyers, etc.) but they are not actually true as far as I can tell. Prices shot up here over the last several years for the same reasons as in most places. Now properties are sitting and sitting & inventories rising, and prices are going down some, but not even remotely where they should be. Thoughts on this?
kzan,
I live in the area as well. The NYC market is disproportionately distorted by wall st. Wall St. layoffs are just starting, loses are piling up (smaller bonuses) etc. They also say that every wall st. job lost = 5-10 other job loses as well, for people who work there. There's a lot of money to hold the bubble afloat longer, but it will burst. It's similar to Seattle with all the MS millionaires.
Also, there is an enormous amount of condo inventory coming online in the NYC metro market in the next 1-2 years.
kzan: NYC is one of the most desirable cities to live in worldwide, finance has been booming for a long time, and the dollar is very weak.
I am bearish about my own market of San Diego, but I think NYC is going to hold up pretty well, maybe a 5-10% decline while the rest of the country goes down 30%.
ipod,
there are lots of nice detached homes for rent. the house we rent is a $500-700 less per month than a comparable home. i'll take that over the dubious appreciation of a residential real estate anytime.
squeezed let me rephrase...500-700 a month OVER THE LIFE OF THE MORTGAGE. I'm still going to live 30 years or more after it's paid off. Over that 60 year period, I'm going to end up paying LESS than you.
Jeez, I know I teach finance, but does anyone know how to figure this all out? Because if you brought figures and analysis like this to me at work, you'd be looking for a job.
you know, I'm finally figuring something out. There's a HUGE cultural divide here on a house. I'm from the Northeast. A house isn't a financial decision. It's an emotional/cultural one. We don't up and move everywhere here. We tend to die in our houses and pass them along.
I'm trying to understand the rent thing. No one I know would intentionally die a renter here. Renting means...well, raises an eyebrow. I have no desire to pick up everything and move every three years like I did in college and shortly afterwards. I don't care how much it costs. I can imagine the look on ipodius regina's face if you suggested that she and the sr ipod sell and rent until they die. She wants to stay in the house she raised her kids in, where we buried the family pets, where her grandkids played, with the xmas decorations i made in the first grade hung where they have been since i was 6. And so she shall. that's why they scrimped...to be afforded that dignity.
I'm honestly saddened by the things I read here sometimes. These posts seem so shallow...maybe it's a left coast thing. What a horrible way to live...everything has to be a financial decision. Then you die. Sad.
ipod,
The rent vs own decision has to account for the cost of the money that is invested in the ownership of the home in addition to upkeep, property taxes, etc. That is, if the home is worth $500k, one has to add to the effective expenses of home ownership the loss of earnings of that $500k. Or to be more accurate, the delta between the house appreciation and the earning rate if that $500k is invested elsewhere. This is frequently ignored in the discussions on owning vs renting. Of course, there is the additional issue of taxation of the gains, so the decision does get influenced by what tax bracket you are in.
For us, we did the numbers a few years ago and sold in 9/06, and have rented since then. This has given us about $150k in equity compared to continuing to own. A side benefit is that our cash flow for housing has been reduced by about 50%, and we are living in a much nicer home!
But, this doesn't address the emotional aspect of home ownership, which really is difficult to quantify in $...
Ethan,
I am in Chicago as well - though I was born and raised on the West (Best!) Coast. Do you work in the loop? I'm in the CBOT.
Ipodius @ 8:16, thanks for saying this -- I'm an East Coast transplant to Seattle and have found the prevalent strictly mercenary perspective on houses (thanks too for not calling it a "home") both disgusting and dismaying. That said, the market here is for fools right now, which I suppose makes me a bit of a mercenary too -- but we don't want our memories of our future house, x years down the line, to be tainted by having had to forgo and forgo merely to keep living in it. Between house-as-investment and house-as-emotional-decision, there is the house as a place in which life is lived. Why not spend a few years renting in order to maximize the odds that in the aggregate, that life will be more enjoyable and more dignified?
ipodius, spare us the holier-than-thou nonsense about how one ought to live into their old age. As far as I can tell, you are spending yours constantly typing away on a blog with strangers that you criticize and denigrate. I don't know who you really are, but I am positive that you are not who you represent.
DC Beacon says:
"ipodius, spare us the holier-than-thou nonsense about how one ought to live into their old age. As far as I can tell, you are spending yours constantly typing away on a blog with strangers that you criticize and denigrate. I don't know who you really are, but I am positive that you are not who you represent."
DC, he represents himself as a college instructor/professor as I recall, and I am completely convinced that that is what he is, having much experience with such people in my job. And that is not a compliment to the profession!