The question i keep asking myself is how much the Internet changes things? The main effect there is to speed up the flow of information, which would argue for the bust to be much quicker, in terms of people reacting to changed conditions. zipRealty, propertyShark et al.
On the other hand, houses themselves are very long latency things in terms of buying, selling, foreclosing and renting, so how much real effect the quicker information has is highly debatable.
Hard to compare a regional downturn in LA due to a economic recession vs a national housing downturn today caused by excessive credit speculation.
Throw in the current consumer driven unflolding recession of some unkown duration and strength which may cause that predication to look rather rosy.
IMO, we're definitely better off as a country with a short painful bust than a prolonged fall that erodes confidence that it will ever end.
Of course, that makes public policy all the more baffling. Large tax credits for home builders to help them survive? All that does is prevent the market from lowering supply side capacity, which is exactly what is needed to work off the inventory glut.
NEW YORK, April 4 (Reuters) - A gauge of future U.S. economic growth and its annualized growth rate were lower in the latest week, evidence that the downturn in the U.S. economy shows no sign of abating, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 129.9 in the week to March 28 from 131.7 in the prior week, downwardly revised from 131.8.
The fall was due to higher interest rates and jobless claims, along with slower housing, and was partly offset by higher stock prices, said Lakshman Achuthan, managing director at ECRI.
The index's annualized growth rate slid to minus 10.7 percent from minus 10.0 percent. This reading hit the same low in mid-February, and is at its lowest since October 2001.
"With the WLI continuing its slide and WLI growth back at its cycle low, an end to the recession is nowhere in sight" said Achuthan. (Reporting by Rodrigo Campos, editing by Walker Simon)
Why is everyone calling it a bailout of Bear Stearns, or arguing it isn't a bailout of Bear Stearns....
It's a bailout of Bear Stearns counter party.
If BS investors had gotten all their cash out in time, the counter party (JPM? Who?) would've gotten bupkiss.
It's sort of like distinguishing between the folks who got their cash out of the hedge funds BEFORE redemptions were halted, versus after. The ones who were late to panic are going to end up with the losses necessary to pay off the debt counterparty.
Red Pill is on the right track. The chart comparison prods us to think of this in historic price terms, but today's price is a function of a bunch stuff, including yesterday's price, but also including interest rates, employment and income, tax policy and the like. So, I think this is a very valuable exercise, but I just want to remind myself and others not to be too deterministic. There are a bunch of unknown factors that will drive housing prices, along with the known factor of the extent of price appreciation during the bubble.
I don't mean to imply that our host is unaware of these things. His prior posts demonstrate clearly that is he is aware.
Lenders Swamped By Foreclosures Let Homeowners Stay (Update1)
Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.
The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.
michael greenberger, the former head of the CFTC futures and trading division was interviewed last night by terry gross on npr...
simply the best, clear cut description i have heard about the mess we are in and how regulators were brushed aside as of IBs rushed ahead in marketing exotic securities and derivatives.
I agree. I'd rather get it over with quickly, even if it means the initial crash goes lower than a "controlled, orderly" descent. All of this slow grinding is excruciating. It's like staying in a bad marriage until the kids (now toddlers) are grown and gone off to college.
During the Congressional hearing, NYFed Timothy said JPM was unwilling to take on the risky assets directly, under the arguement that JPM is strong enough to save BS, but apparently too weak to really save BS (take on it's assets)...which didn't compute.
(speculation)
But what if it turns out that JP didn't want the BS assets, because they really are AAA garbage. What if they wanted repayment in cash from their counterparty, and the panic of BS investors to withdraw was vacuuming out all the cash that JPM was eye'ing?
i.e. What happens when you get the bad assets you provided leveraged loans against, instead of getting cash back after the assets are liquidated (at the expense of the BS shareholers, not you the loan provider)?
Is the Fed effectively saying too big to fail banks needed BS to die in a bank run, because the too big to fail banks would've held the asset bag no one but the Fed seems to want?
I think the methodology points to another factor that could skew future projections.
We discount the possibility of rising inflation at our modeling peril. I would like to see the same graphs with projections using min and max inflation estimates for the future. The 90's decline was in the post-Volcker period of controlled inflation. With the ECB now clearly in an anti-inflationary stance, in stark opposition to the Fed (whose every measure might be viewed in some circles as nothing more than stoking the flames), what are the chances that inflationary pressure will dampen what you rightly observe to be a more precipitous decline this time?
My friends at the WB and IMF are buying property in the States, as a possible hedge now. What of their instincts?
warlock, information could speed up the process. But I think access to information can cut both ways - enhance both greed and fear - as we saw with the NASDAQ bubble.
k harris, yes, nothing is quite the same - but I think it is helpful to try to put the bust in some perspective. It is possible with the flood of REOs that prices could bottom much earlier - but I suspect we need to see buyer psychology really change before we find a price bottom - and that takes time.
arun, these graphs are in real terms. More inflation would lead to faster price declines - and could speed up the eventual bottom.
It is possible that some buyers can find reasonable prices now - but I doubt the price declines in general are any where near over.
CR, you said: More inflation would lead to faster price declines - and could speed up the eventual bottom.
That confused me for a moment... But I guess you mean price declines in real terms. Or in other words, the nominal price declines would end sooner, just because incomes/wages would (hopefully) catch us up to home prices...
It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust.
CR,
One big difference is that the 1990s downturn (housing, but the wider recession to some extent as well) was centered on California. The fact the bust is being felt so much more widely will definitely influence how it plays out. For one thing, it makes government rescues more likely. For another, it means the knock-down effects will be much more severe.
Alternatively, with the current difficulties in creating any kind of wage inflation, (outside of wall street at least), then the more people have to spend on basics like petrol and food, the less they can spend on rent and mortgages.
That's an excellent comparison template, and the macro situation is somewhat comparable to the early 90's. It's just one more piece of evidence that points towards the adjustment in real house prices only being about half way done. Look for more blowups this year in the financial system, and a long, slow recovery ala the early 90's as well. The only caveat I would throw out is that inflation doesn't look set to fall like it did in the 90's, making real assets, like real estate, more attractive, which means an overshoot and long bottoming process may not be features of this down cycle. I may not be an uber-bear, but I'm puzzled as to how anyone can look at a chart like that and believe the troubles for housing, banking and the economy as a whole are nearly behind us.
enders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.
We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview.Looking at the data, we see the problems, but they are probably measurably greater than we think.'
As CR said, buyer psychology must change before a true washout bottom can be put it. Strangely, there is STILL a lot of buying interest out here in Sacramento (one of the hardest hit bubble zones). In my office, two folks are buying REO's right now and a third is talking about it non-stop. They view the recent significant price-haircuts and are elated at the "great bargains" that can be had. What needs to happen is these knife catchers get their heads handed to them in the form of MORE heavy haircuts and after a few waves of this, then nobody will want to touch RE with a ten foot pole.
Then a true bottom can be put in when EVERYONE thinks that RE is a terrible investment. Also prices are still way too high and rents are going DOWN. Overall, still way too much optimism unfortunately.
Turbo said: "That's an excellent comparison template, and the macro situation is somewhat comparable to the early 90's..."
All we need now to complete that "comparable" picture is a recession, 1.6 million lost jobs, unemployment up around 6%, and conventional fixed-rate mortgages in the 9%-10% range.
"Prices are falling faster this time, probably because the bubble was larger."
another possibility (actually 3):
1) it is possible the LA bubble last time wasn't really a bubble, but somewhat supported by economic fundamentals (strong defence economy causing increased income), that were hacked off at the knees with recession.
This time there were no/little fundamentals to the bubble.
2) Americans had savings in the 1990's, thus more able to hold out before selling into a weak market compared to today
3) difference in down payments. Low downpayments equals incentive to stop paying earlier (less skin in the game)
perhaps the above 3 points all are encapsulated by "bigger bubble" but I thought they warranted specific attention to how "it's different this time"
Some people stay in their houses until someone comes to kick them out,'' said Angel Gutierrez, owner of Dallas-based Metro Lending, which buys distressed mortgage debt.Sometimes no one comes to kick them out.''
Banks are reluctant to foreclose on homeowners for a variety of reasons that include the cost, said Peter Zalewski, real estate broker and owner of Condo Vultures Realty LLC, a property consulting firm in Bal Harbour, Florida.
Legal fees and maintaining a vacant property while paying the mortgage, insurance and taxes can add up to as much as 15 percent of the value of the home, and it may take months for the foreclosure to work through the legal system, he said....
Some of the banks just don't want the houses to be empty, especially if it's in an area where there's a lot of theft or there are five other houses empty on the street,'' said Kapsalis, who works at Added Value Realty LLC in Livonia, Michigan, another Detroit suburb.They'll lose toilets, plumbing, appliances, everything. Banks are getting wise and allowing people to live there longer.''.....
Five million existing homes were sold in February, down 31 percent from the peak of 7.25 million in September 2005, data compiled by the Chicago-based National Association of Realtors show. More than 4 million existing homes were on the market in February, 53 percent more than the 2.6 million average of the past nine years, the Realtors reported.
Excess inventories pose the biggest risk to the market,'' Michelle Meyer and Ethan Harris, New York-based economists at Lehman Brothers Holdings Inc., wrote in a report last month.As long as inventories are high, home prices will fall.''....
More than 4 million existing homes were on the market in February, 53 percent more than the 2.6 million average of the past nine years, the Realtors reported.
``Excess inventories pose the biggest risk to the market,'
Unemployment was higher, and the rise in unemployment, from a cycle low of 4.4% to 5.1% is a recession warning.
Re: Yellen
"Looking ahead, it seems likely that the period of house price declines will not be over very soon, since some models of the fundamental value of houses suggest that prices are still too high, and futures markets for house prices indicate further declines this year. This trajectory of house prices plays a critical role in the economic outlook ..."
I think it is an important observation that this recession came after the housing bust instead of the other way.
Why? We have finished up nearly three decades of credit growth relative to income. The last phase was a blowout expansion though housing. It only ended when it was IMPOSSIBLE to lower loan standards even further. There were actually first payment defaults. Others were barely hanging on with teaser rates. Meanwhile prices shot up giving millions access to money that would have normally taken Americans decades to save. 10s of TRILLIONS of paper wealth appeared. We consumed.
As more spent on credit (not money made by work) the economy shifted to a "services" economy away from manufacturing. The service sector will collapse.
Now prices supported by crazy finance are falling and credit is contracting. People are heavily in debt as we can see by record high debt/income ratios at all levels.
The first half is mostly nominal price declines and the second half mostly real price declines. It is moving faster, but I am not sure psychology changes any more rapidly. Just saw people camping out for million dollar homes (down 30%) north of LA just like the old days.
Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year earlier, according to RealtyTrac Inc., a foreclosure database in Irvine, California.
Growing inventory pulled median home prices down to $195,900 in February, a 15 percent drop from the peak of $230,200 in July 2006, the Realtors said.
Borrowers in California who fight foreclosure can stretch the process to 18 months, said Cameron Pannabecker, chapter president of the California Association of Mortgage Brokers and president of Cal-Pro Mortgage Inc. in Stockton.
Ok, watching the market's recent reaction to the bad news, but also in light of how young I am and how little experience I have with the stock market, I pose the following question:
Are the movers and shakers in the stock market now so huge that through a concerted effort (with help or at least without condemnation from the government) they can keep prices of stock "unnaturally" elevated for the duration of this economy-wide disaster?
OR, will they eventually eat eachother alive?
I just wonder - what percentage of the trading on the market is by ~5-10 of the biggest? And where can I find that kind of stuff out?
Considering that month -36 on this chart, in 2003, was already at a level over 150, and that level is about the same at the LA peak, we could have even more time to the bottom. I think.
Nate said: "Are the movers and shakers in the stock market now so huge that through a concerted effort (with help or at least without condemnation from the government) they can keep prices of stock "unnaturally" elevated for the duration of this economy-wide disaster?"
Absolutely, unequivocally no. They can shove it around big-time for a day or two which can create the illusion of "momentum" for a week or 10 days, but that's the extent of it.
the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).
Some factors may differ this time from the last downturn, but the most important similarity probably will be that the bottom is broad.
I had made similar considerations when deciding a good time to go house-hunting ourselves. The last two busts took about five years, and from what I have read on the blogs, the peak was in the second half of 2005 - in 2006, the market already slowed considerably and incentives for buyers skewed the price statistics. Sometimes 2010-2012, we should be out house-hunting and just look what we want and can afford and don't care about the market.
I agree with comments above that job losses (yet to come) will be key. We've had dramatic price drops without dramatic unemployment.
Also the ability of the government to help out in this crisis is much more limited than in past episodes. The housing bust is decimating revenues nationwide, real interest rates are already negative, two expensive wars are draing resources, etc... Not only is the government driving with limited fuel in the tank, but also unintended consequences could defeat their attempts at solutions.
"As CR said, buyer psychology must change before a true washout bottom can be put it. Strangely, there is STILL a lot of buying interest out here in Sacramento (one of the hardest hit bubble zones). In my office, two folks are buying REO's right now and a third is talking about it non-stop."
I'm in Santa Cruz County, and we just got our first REO bus tour operation. I'm going to sign on next week just to see who, if anybody, is signing on for this and what their attitude is. Personally, I think it's 'way too learly.
"simply the best, clear cut description i have heard about the mess we are in and how regulators were brushed aside as of IBs rushed ahead in marketing exotic securities and derivatives." - mock turtle | 04.04.08 - 12:55 pm |
If I had the funds, I would make a CD/DVD of this and mass mail it to every address in the US. Any volunteers?
Total housing inventory fell 3.0 percent at the end of February to 4.03 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.2-month supply in January.
I think inventory will fall in relation to the amount of unemployed people staying in homes waiting for Katrina to hit shore.
Existing-home sales including single-family, townhomes, condominiums and co-ops rose 2.9 percent to a seasonally adjusted annual rate (1) of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007.
Also see:
The National Association of Realtors®, in a letter today to U.S. Secretary of the Treasury Henry Paulson, expressed opposition to the Blueprint for a Modernized Financial Regulatory Structure, which would permit banking conglomerates to engage in the commercial activity of real estate brokerage and management, and asked the Treasury to withdraw this proposed rule.
The blueprint makes extremely ambitious recommendations, most of which, as you have acknowledged, will require many years of debate and refinement, said NAR President Dick Gaylord. The immediate response to the blueprint from those potentially affected confirms that the subject is one of great importance and controversy.
CR
"dynamics of the current bust will be similar to the previous bust"
To add onto Bob's thread:
I think the dynamics are very different.
1. I think the folks who had purchased in this recent bubble are different - it was much more about getting in vs. getting a home.
2. We have been running negative savings rates.
3. We have seen little if any increase in net incomes.
4. The mentality in the 90s was where folks saw a decling inflation rate and now we are seeing an increase in inflation and expectations will change.
5.I would argue that consumers are relatively more indebted now than in the 90s.
6. Deomgraphics have shifted and maybe there is not a ready pool of financially strong buyers waiting in the wings.
My sense is that the drops will be dramatic (more acceleration in downward pressure) till end 2009 and then something much more drawn out, but drifting lower.
The only thing that this data and graph don't explain is why then have home prices in the good areas in West LA been rock solid? The driveover areas in the Inland Empire or even the valley got hammered 20-40%, but according to the date Santa Monica has barely budged at all in the past two years. Does it mean Santa Monica is immune?
i'm pretty much with barley.
i don't think you can compare this housing decline to past ones for a couple of reasons.
1) in the past declines, the people living in their homes had to be qualified as to their ability to make the payment. Unless they lost their job or their health, they had the option to stay. That is in stark contrast to todays homebuyer who pretty much had to qualify that he/she was breathing. Many at the margin had no intention of living in the home, they were trying to flip it for a buck.
The use of the home as an atm just exacerbates the problems of number one. Even if, at some point, the homeowner was qualified to make the payment, they may not be qualified to make the new payment in addition to the heloc.
Add in credit cards, and their rapid proliferation, their usurious rates when things start to go bad, and
today's homeowner (or enough of them to matter) has absolutely no cushion to wait it out.
this is really going to make the banks miserable, as the many articles pointed out above reveal. They are not set up to be in the rental business.
Something I've been wondering about for a while: Dave Deadbeat borrows $1,000 from Benny the Banker. Gus the Gullible, not being sufficiently familiar with Dave, offers a credit-default swap, at a price of $150, that will pay $900 if Dave fails to pay off.
Does somebody who buys the swap from Gus need to have Dave's IOU in order to collect or not? Are there significant numbers of swaps written both ways?
To restate: one way, the purchaser of Gus's swap will need to buy the IOU from Benny after Dave defaults. The other way, he doesn't.
I find myself agreeing with Sebastian: no group behind the scenes can manipulate the stock market for any longer time, like longer than two days. The Fed, of course, influences the stock market openly, but even Fed rate changes normally don't break trends.
I assume that all the larger markets are relatively unmanipulated, because the large players balance each other (stocks, oil, currencies, treasuries etc.). If you want to corner a market, go for small size (antics? is that still small?).
I would include along with Barley's list is that demographics now are a bit different than the early 90s, with aging baby boomers have different agendas going forward.
Bob Dobbs--"Personally, I think it is way too early."
Agreed. We certainly don't know when or where the bottom of this thing is. If the index drops back to 100 (or God forbid, even below!) it's still a long, long way down. And if past performance is any indication of future performance, once bottom is reached, the climb back up will be slow--plenty of time to jump on the wagon.
That said, I don't believe many home buyers look at it this way. The decision for most is emotional, not financial.
It's tough to say which would be better a quicker, harder landing or a longer landing process.
This is one case where using real dollar amounts may be a bit distorting, at least for the experience of the individual homeowner. If real home values are falling, but nominal home values are flat or even rising less than inflation, individuals will still be able to sell their homes and pay off the mortgage. And with leverage, possibly break even or at least cover transaction costs.
A thought: I'm wondering if we might see an eventual (if temporary) Dutch Auction for houses. Example:
Mr. Smith will spend $xx for certain features, and all the banks offer certian properties. Once Mr. Smith makes a decision and a visit a deal is consumated.
Certianly possible given the inventory and the internet.
k harris, and anyone else who cautions against projecting this graph forward:
You're absolutely right, of course.
But the best use of the graph is to deflect myths that still come flying at us every day from the media idiots and real estate inc. For example, if most people actually knew that the last downturn lasted 7 years, some of the bottom-calling spin would lose traction fast.
CR, can you duplicate the Case-Schiller LA graph and time shift the copy to overlay the recent peak to the past peak? Perhaps you could also shift it down so the two peaks actually appear at the same point on the graph. I think what we would see is that while we are way behind in time, we are way ahead in price drop, from the prior crash. I am beginning to suspect the nose-dive will abruptly correct, vs. the smooth correction to the upside before.
I believe the "process" of the housing bust this time will mirror the previous bust time wise. Obviously the situations are very different (now vs. lates 80's early 90's) but bubble busts tend to behave the same way.
With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occuring if things are as great as some (like Seb) seem to think. With the two most important factors for home prices extremely favorable, that the collapse is occurring should cause more concern.
I think you freaks need to talk about farms and the cost of farm stuff:
Nonfarm business sector (Productivity and Costs)
The nonfarm business sector is a subset of the domestic economy and excludes the economic activities of the following: general government, private households, nonprofit organizations serving individuals, and farms. The nonfarm business sector accounted for about 77 percent of the value of gross domestic product (GDP) in 2000.
CR,
Very fine post, analysis of real prices is surely the right way, and future will be like the past is first/basic.
A thought, not a prediction: one way the future (going down) might be faster than the past (went down) follows. I have long believed that asset bubbles would be well-deterred if and when real inflation-corrected price histories were well-apparent to the people -- for examples, see Calculated Risk; and also here: Real Dow & Real Homes & Personal Saving & Debt Burden
So far NOT! But if the foregoing if and when enlightenment occurs during going down, acceleration is plausible.
This particularly galls me: it is first time home-buyers who are most hurt by being price-history-fooled; such people average younger and have had less time to know better; and from the ranks of younger people, primarily, come those who are doing the dying, etc. in Iraq, Afghanistan ... to defend our civilization, which includes all of our actions back here!
Well, prices doubled to tripled in 5 to 7 years here in Maryland. Salaries haven't gone up that much at all. Let's be generous and say 20% over 7 years. Prices are now down by AT MOST 10%. So, we're still hosed. I used to be able to buy a Post-War rancher for say... $120,000 if I made $50,000 a yaer. Fine: at the peak of the Bubble, that same house would go for say about $270,000. Now, maybe it is going for $243,000... but I only make $60,000 a year. Clearly, this is not working!
The Bubble will be over when:
1) Housing prices return to fundamentals based upon salaries and traditional (sane) lending standards, down payments, etc.
2) When the government bails everyone out and buys up all the foreclosed homes and either sells them with taxpayer backed liar-loans at absurd prices or choses to bulldoze most of them to create an artificial housing shortage. This will lead to hyperinflation and a crash, which will eventually take us back to option 1, but with us all being a lot poorer.
I suspect we'll see some sort of version of choice 2 which will eventually crash into choice 1. In the end, we may get our affordable house, but it will be a decade late!
Santa Monica is not immune, it will just drop at a slower rate. Most of the high end homes are purchased with major down payments, so folks will simply refuse to sell when it would destroy their equity. Sales volume drops, and the only sales are to those for whom price is only a minor concern. People for whom price is only a minor concern are usually buying the finest and most expensive homes, so the median price actually rises! But look carefully at same home sales, and you can find horrific losses in value.
The price drops at the fringe create a steep price slope, it just takes time for the peak to erode.
With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occuring
I'll give you my theory why it's occuring... standards for writing loans dropped so low that it sucked in people that, even on a bad day in the past, would have never been allowed to even fill an application out. That provided the juice for the final frenzy as prices climbed due to the demand curve (I mean really, if you ever think that it's ok to pay ABOVE the posted price for anything you should step away).
The steeper drop you see now is due to the rapid defaults in this wave of purchases and the demand curve working in reverse as everyone steps away until they are sure that prices have somewhat stabilized. Never before has such a thing happened, so the velocity of purchases towards the end will be matched to the velocity of declines on the way down.
What I think we will see is then a less steep drop, as these people are shaken out and more solid buyers come back in to scoop up any values. That will provide stabilization. And then housing will drag across the bottom like the last time, and probably for the same duration until prices naturally come back into line with underlying salary fundamentals. I'll publish a paper on this soon
the chart shows a crash and the momentum is picking up to the downside. this bubble probably will bottom quicker but deeper imo and drag along the bottom for several years.
So in the next 12 months the price drop will be excrutiating but the bottom will be near imo.
correction: house prices will drop severely in the next 12 months imo and will take less time to bottom because it will happen so fast, but prices will scrape bottom for several years.
JJL said: "With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occurring if things are as great as some (like Seb) seem to think. With the two most important factors for home prices extremely favorable, that the collapse is occurring should cause more concern."
Not so much "great" as "not as bad as perceived."
I would offer this question: With interest rates and the unemployment rate this low, how likely is it that this is a "bust"? Or the "bust"?
As near as I can tell, what's happening is something that Tanta alluded to on a different thread. A lot of people took out ARMs at or near the extreme low in rates and got badly burned when they turned up. They are the "busted," and it wasn't because they lost their jobs in large numbers.
But there are also a lot of people like me who took out fixed-rate mortgages (new or re-fi) near the extreme low in rates, and aren't much troubled at all at the prospect of screwing our lenders for the next 30 years. We are the "not-busted," and it's not because we're independently wealthy or make embarrassing amounts of income.
Unless and until the "not-busted" get hit hard, I don't see how we can be in a "bust."
My cousins have $1.1M in loans, and something less than $100K combined income. You have to be blind to think
someone is getting their money back...it disappeared with the smart folks who sold those 2 homes to my cousins.
Great chart CR. It seems like many of the charts are now starting to reflect one another. That is, even until late last year DataQuick was still reporting year over year median price increases. Of course the trend was already heading lower but psychologically saying that you are up year over year still carries an impact.
Now, the recent DQ numbers show:
Los Angeles County Down 12.9 percent
If anything, the trend is definitely heading lower especially looking at recent sales numbers for the county which are off 45 percent from a year ago. We still have over a year of inventory given current sales for the entire Southern California region.
Now I was looking at the $300 billion FHA proposal. From my read on it, most sub-prime and Alt-A loans in California will not qualify right off the bat simply because they are underwater. The forced right off of principal will also push prices lower and force comp prices lower. I also keep hearing that raising the caps will help but what good is it to have higher caps if incomes cannot support prices?
For instance, In January 2008, the top 5 market makers traded these volumes across the entire NASDAQ Composite:
UBS Securities LLC 3.98B
Goldman, Sachs & Co. 3.71B
Morgan Stanley & Co. 3.05B
Merrill Lynch 3.01B
Lehman Brothers Inc. 2.86B
You can break down their trading reports per issue or per market maker.
Compare this with the total volume numbers and you could get a good idea of what percentage of market volume is generated by the biggest players. I agre with Sebastian - any single market maker trying to manipulate the market will not be able to succeed for very long.
call me crazy but its quite clear to me that the dollar's demise has left the entire middle and lower classes unable to pay their bills any longer. inflation impacts them acutely and quickly. anyway, i can envision a migration of the upper/upper middle classes to the countryside over the next ten years, away from the overcrowded, densely-lower class areas that usually surround big cities. crime is certain to rise in the face of this economic debacle. i think land acreage within 2-3 hours of major cities will trade at a major premium going forward. there are simply too many wealthy people living in major cities right now who will become targeted by nearby slaves of inflation. even if this mad max scenario doesnt materialize, the sheer thought of it will force the wealthy to hedge their vulnerable urban residence with some 200 acres of land hundreds of miles away.
warlock | 04.04.08 - 12:38 pm wrote: The question i keep asking myself is how much the Internet changes things? The main effect there is to speed up the flow of information, which would argue for the bust to be much quicker, in terms of people reacting to changed conditions. ziprealty, propertyShark et al.
Warlock, You're 100% on the money. The Internet will serve to accelerate booms and busts (in Internet time). Note that information is now available to amateur speculators (lemmings as NYU's Damodaran might call them). Given that risk has a way of travelling to people least prepared to handle them, more lemmings will get killed and newer ones born.
So I beg to disagree with CR; the duration of this bust will be small and next boom's runup will be even more rapid. How about 60 second home purchases in the year 2013? (just like today's 60 second credit card approval based on FICO alone). Once the bust happens 2014 the credit spigot will close in a few days in 2013 instead of a few months now.
To determine length of bust, I would look at rate of household formation and local migration (demand) and compare that to the excess supply of housing units. The prices should drop until demand balances with supply...and add a bit for damaged consumer perceptions. Of course this is best done on a local basis as local economic conditions vary (e.g. SanFran v Detroit). Bingo, there's your answer... The prior bust could be a guide, but you need to see how much excess supply you had at that time compared to today's situation - I suspect today's is much worse.
What if the securitization process seizes up?
What if the financial system seizes up?
The charts are pretty, but the bottom is in.
The question i keep asking myself is how much the Internet changes things? The main effect there is to speed up the flow of information, which would argue for the bust to be much quicker, in terms of people reacting to changed conditions. zipRealty, propertyShark et al.
On the other hand, houses themselves are very long latency things in terms of buying, selling, foreclosing and renting, so how much real effect the quicker information has is highly debatable.
We'll know by the end of this year, i guess.
In the famous lyrics of Bob Dylan for us babyboomers, a hard rain's gonna fall.
A few months ago, someone posted the opinion and supporting data that housing crashes are of 2 varieties: Short (7-8 years), and long (18-20 years).
Can't remember who posted it.
We'll be lucky if this bust (with no bubble waiting in the wings, and a bad credit scenario) is of the shorter variety.
Hard to compare a regional downturn in LA due to a economic recession vs a national housing downturn today caused by excessive credit speculation.
Throw in the current consumer driven unflolding recession of some unkown duration and strength which may cause that predication to look rather rosy.
Marcus Aurelius,
IMO, we're definitely better off as a country with a short painful bust than a prolonged fall that erodes confidence that it will ever end.
Of course, that makes public policy all the more baffling. Large tax credits for home builders to help them survive? All that does is prevent the market from lowering supply side capacity, which is exactly what is needed to work off the inventory glut.
Apologies if this was posted already
NEW YORK, April 4 (Reuters) - A gauge of future U.S. economic growth and its annualized growth rate were lower in the latest week, evidence that the downturn in the U.S. economy shows no sign of abating, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell to 129.9 in the week to March 28 from 131.7 in the prior week, downwardly revised from 131.8.
The fall was due to higher interest rates and jobless claims, along with slower housing, and was partly offset by higher stock prices, said Lakshman Achuthan, managing director at ECRI.
The index's annualized growth rate slid to minus 10.7 percent from minus 10.0 percent. This reading hit the same low in mid-February, and is at its lowest since October 2001.
"With the WLI continuing its slide and WLI growth back at its cycle low, an end to the recession is nowhere in sight" said Achuthan. (Reporting by Rodrigo Campos, editing by Walker Simon)
OT, but wondering:
Why is everyone calling it a bailout of Bear Stearns, or arguing it isn't a bailout of Bear Stearns....
It's a bailout of Bear Stearns counter party.
If BS investors had gotten all their cash out in time, the counter party (JPM? Who?) would've gotten bupkiss.
It's sort of like distinguishing between the folks who got their cash out of the hedge funds BEFORE redemptions were halted, versus after. The ones who were late to panic are going to end up with the losses necessary to pay off the debt counterparty.
Comments?
Red Pill is on the right track. The chart comparison prods us to think of this in historic price terms, but today's price is a function of a bunch stuff, including yesterday's price, but also including interest rates, employment and income, tax policy and the like. So, I think this is a very valuable exercise, but I just want to remind myself and others not to be too deterministic. There are a bunch of unknown factors that will drive housing prices, along with the known factor of the extent of price appreciation during the bubble.
I don't mean to imply that our host is unaware of these things. His prior posts demonstrate clearly that is he is aware.
OT but interesting:
Lenders Swamped By Foreclosures Let Homeowners Stay (Update1)
Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.
The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.
Lenders Swamped By Foreclosures Let Homeowners Stay (Update1) - Bloomberg.com
michael greenberger, the former head of the CFTC futures and trading division was interviewed last night by terry gross on npr...
simply the best, clear cut description i have heard about the mess we are in and how regulators were brushed aside as of IBs rushed ahead in marketing exotic securities and derivatives.
Our Confusing Economy, Explained : NPR
for all our friends who think only outsiders are sounding the alarm...
Ron, I have first hand experience that CitiBanks has been looking the other way for awhile now. Deliquency numbers reported are not correct.
iceman | 04.04.08 - 12:49 pm
I agree. I'd rather get it over with quickly, even if it means the initial crash goes lower than a "controlled, orderly" descent. All of this slow grinding is excruciating. It's like staying in a bad marriage until the kids (now toddlers) are grown and gone off to college.
Continuing the last OT comment....
During the Congressional hearing, NYFed Timothy said JPM was unwilling to take on the risky assets directly, under the arguement that JPM is strong enough to save BS, but apparently too weak to really save BS (take on it's assets)...which didn't compute.
(speculation)
But what if it turns out that JP didn't want the BS assets, because they really are AAA garbage. What if they wanted repayment in cash from their counterparty, and the panic of BS investors to withdraw was vacuuming out all the cash that JPM was eye'ing?
i.e. What happens when you get the bad assets you provided leveraged loans against, instead of getting cash back after the assets are liquidated (at the expense of the BS shareholers, not you the loan provider)?
Is the Fed effectively saying too big to fail banks needed BS to die in a bank run, because the too big to fail banks would've held the asset bag no one but the Fed seems to want?
CR:
I think the methodology points to another factor that could skew future projections.
We discount the possibility of rising inflation at our modeling peril. I would like to see the same graphs with projections using min and max inflation estimates for the future. The 90's decline was in the post-Volcker period of controlled inflation. With the ECB now clearly in an anti-inflationary stance, in stark opposition to the Fed (whose every measure might be viewed in some circles as nothing more than stoking the flames), what are the chances that inflationary pressure will dampen what you rightly observe to be a more precipitous decline this time?
My friends at the WB and IMF are buying property in the States, as a possible hedge now. What of their instincts?
Sorry...meant to type "needed BS to NOT die in a bank run"
warlock, information could speed up the process. But I think access to information can cut both ways - enhance both greed and fear - as we saw with the NASDAQ bubble.
k harris, yes, nothing is quite the same - but I think it is helpful to try to put the bust in some perspective. It is possible with the flood of REOs that prices could bottom much earlier - but I suspect we need to see buyer psychology really change before we find a price bottom - and that takes time.
arun, these graphs are in real terms. More inflation would lead to faster price declines - and could speed up the eventual bottom.
It is possible that some buyers can find reasonable prices now - but I doubt the price declines in general are any where near over.
Best to all
I moved to Maui in 1999.
People there had been waiting for 8 long years for the housing market to come back.
Most of them had to throw in the towel before the market could save them.
At the time the Maui market was tied to the Southern California market.
The next 3 years after 1999 saw High Tech entrepreneurs, Hollywood and Music Stars and Middle Eastern investors pour in and buy at rock bottom prices.
Now Maui is tanking again..who's gonna come in this time?
bonds rise (because of the bad report), stocks rise (because of the bad report), commodities rise, gold rises.
everyone wins!
CR, you said: More inflation would lead to faster price declines - and could speed up the eventual bottom.
That confused me for a moment... But I guess you mean price declines in real terms. Or in other words, the nominal price declines would end sooner, just because incomes/wages would (hopefully) catch us up to home prices...
It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust.
CR,
One big difference is that the 1990s downturn (housing, but the wider recession to some extent as well) was centered on California. The fact the bust is being felt so much more widely will definitely influence how it plays out. For one thing, it makes government rescues more likely. For another, it means the knock-down effects will be much more severe.
Alternatively, with the current difficulties in creating any kind of wage inflation, (outside of wall street at least), then the more people have to spend on basics like petrol and food, the less they can spend on rent and mortgages.
It all evens out, eventually.
That's an excellent comparison template, and the macro situation is somewhat comparable to the early 90's. It's just one more piece of evidence that points towards the adjustment in real house prices only being about half way done. Look for more blowups this year in the financial system, and a long, slow recovery ala the early 90's as well. The only caveat I would throw out is that inflation doesn't look set to fall like it did in the 90's, making real assets, like real estate, more attractive, which means an overshoot and long bottoming process may not be features of this down cycle. I may not be an uber-bear, but I'm puzzled as to how anyone can look at a chart like that and believe the troubles for housing, banking and the economy as a whole are nearly behind us.
enders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.
We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview.Looking at the data, we see the problems, but they are probably measurably greater than we think.'
As CR said, buyer psychology must change before a true washout bottom can be put it. Strangely, there is STILL a lot of buying interest out here in Sacramento (one of the hardest hit bubble zones). In my office, two folks are buying REO's right now and a third is talking about it non-stop. They view the recent significant price-haircuts and are elated at the "great bargains" that can be had. What needs to happen is these knife catchers get their heads handed to them in the form of MORE heavy haircuts and after a few waves of this, then nobody will want to touch RE with a ten foot pole.
Then a true bottom can be put in when EVERYONE thinks that RE is a terrible investment. Also prices are still way too high and rents are going DOWN. Overall, still way too much optimism unfortunately.
Turbo said: "That's an excellent comparison template, and the macro situation is somewhat comparable to the early 90's..."
All we need now to complete that "comparable" picture is a recession, 1.6 million lost jobs, unemployment up around 6%, and conventional fixed-rate mortgages in the 9%-10% range.
Sebastia
The L.A. downturn had some additional problems. The Rodney King Riots, 1992. The Northridge Earthquake, 1994.
"Prices are falling faster this time, probably because the bubble was larger."
another possibility (actually 3):
1) it is possible the LA bubble last time wasn't really a bubble, but somewhat supported by economic fundamentals (strong defence economy causing increased income), that were hacked off at the knees with recession.
This time there were no/little fundamentals to the bubble.
2) Americans had savings in the 1990's, thus more able to hold out before selling into a weak market compared to today
3) difference in down payments. Low downpayments equals incentive to stop paying earlier (less skin in the game)
perhaps the above 3 points all are encapsulated by "bigger bubble" but I thought they warranted specific attention to how "it's different this time"
CR,
So what are you saying 3 years to hit bottom?
Some people stay in their houses until someone comes to kick them out,'' said Angel Gutierrez, owner of Dallas-based Metro Lending, which buys distressed mortgage debt.Sometimes no one comes to kick them out.''
Banks are reluctant to foreclose on homeowners for a variety of reasons that include the cost, said Peter Zalewski, real estate broker and owner of Condo Vultures Realty LLC, a property consulting firm in Bal Harbour, Florida.
Legal fees and maintaining a vacant property while paying the mortgage, insurance and taxes can add up to as much as 15 percent of the value of the home, and it may take months for the foreclosure to work through the legal system, he said....
Some of the banks just don't want the houses to be empty, especially if it's in an area where there's a lot of theft or there are five other houses empty on the street,'' said Kapsalis, who works at Added Value Realty LLC in Livonia, Michigan, another Detroit suburb.They'll lose toilets, plumbing, appliances, everything. Banks are getting wise and allowing people to live there longer.''.....
Five million existing homes were sold in February, down 31 percent from the peak of 7.25 million in September 2005, data compiled by the Chicago-based National Association of Realtors show. More than 4 million existing homes were on the market in February, 53 percent more than the 2.6 million average of the past nine years, the Realtors reported.
Excess inventories pose the biggest risk to the market,'' Michelle Meyer and Ethan Harris, New York-based economists at Lehman Brothers Holdings Inc., wrote in a report last month.As long as inventories are high, home prices will fall.''....
"Looking at the data, we see the problems, but they are probably measurably greater than we think."
If they are measurable then measure them,
More than 4 million existing homes were on the market in February, 53 percent more than the 2.6 million average of the past nine years, the Realtors reported.
``Excess inventories pose the biggest risk to the market,'
Unemployment was higher, and the rise in unemployment, from a cycle low of 4.4% to 5.1% is a recession warning.
Re: Yellen
"Looking ahead, it seems likely that the period of house price declines will not be over very soon, since some models of the fundamental value of houses suggest that prices are still too high, and futures markets for house prices indicate further declines this year. This trajectory of house prices plays a critical role in the economic outlook ..."
I think it is an important observation that this recession came after the housing bust instead of the other way.
Why? We have finished up nearly three decades of credit growth relative to income. The last phase was a blowout expansion though housing. It only ended when it was IMPOSSIBLE to lower loan standards even further. There were actually first payment defaults. Others were barely hanging on with teaser rates. Meanwhile prices shot up giving millions access to money that would have normally taken Americans decades to save. 10s of TRILLIONS of paper wealth appeared. We consumed.
As more spent on credit (not money made by work) the economy shifted to a "services" economy away from manufacturing. The service sector will collapse.
Now prices supported by crazy finance are falling and credit is contracting. People are heavily in debt as we can see by record high debt/income ratios at all levels.
This is BEFORE the recession.
Actually, I think it will be a severe depression.
Comparing to LA has many issues... the defense industry contraction.
Is this a quicker down cycle with a shorter, more drastic correction?
The first half is mostly nominal price declines and the second half mostly real price declines. It is moving faster, but I am not sure psychology changes any more rapidly. Just saw people camping out for million dollar homes (down 30%) north of LA just like the old days.
I wish there were some way to track repayment performance other than the bank's self-reporting. Its absolutely in their best interest to lie.
A little thought experiment.
What would the price of homes be if loans were completely unavailable?
Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year earlier, according to RealtyTrac Inc., a foreclosure database in Irvine, California.
Growing inventory pulled median home prices down to $195,900 in February, a 15 percent drop from the peak of $230,200 in July 2006, the Realtors said.
Borrowers in California who fight foreclosure can stretch the process to 18 months, said Cameron Pannabecker, chapter president of the California Association of Mortgage Brokers and president of Cal-Pro Mortgage Inc. in Stockton.
Ok, watching the market's recent reaction to the bad news, but also in light of how young I am and how little experience I have with the stock market, I pose the following question:
Are the movers and shakers in the stock market now so huge that through a concerted effort (with help or at least without condemnation from the government) they can keep prices of stock "unnaturally" elevated for the duration of this economy-wide disaster?
OR, will they eventually eat eachother alive?
I just wonder - what percentage of the trading on the market is by ~5-10 of the biggest? And where can I find that kind of stuff out?
Considering that month -36 on this chart, in 2003, was already at a level over 150, and that level is about the same at the LA peak, we could have even more time to the bottom. I think.
Nate said: "Are the movers and shakers in the stock market now so huge that through a concerted effort (with help or at least without condemnation from the government) they can keep prices of stock "unnaturally" elevated for the duration of this economy-wide disaster?"
Absolutely, unequivocally no. They can shove it around big-time for a day or two which can create the illusion of "momentum" for a week or 10 days, but that's the extent of it.
Sebastia
CR:
Some factors may differ this time from the last downturn, but the most important similarity probably will be that the bottom is broad.
I had made similar considerations when deciding a good time to go house-hunting ourselves. The last two busts took about five years, and from what I have read on the blogs, the peak was in the second half of 2005 - in 2006, the market already slowed considerably and incentives for buyers skewed the price statistics. Sometimes 2010-2012, we should be out house-hunting and just look what we want and can afford and don't care about the market.
Red Pill at 1:49
Yeah. The appraisal process (for RE taxes) is supposed to be a willing seller and a willing buyer for CASH.
But try to get that one by the county assessor!!
CR,
Do you have similar data for new home prices? It would be great to compare both. I bet it would be somewhat different.
O-Joe
Some similarities to early '90s but many differences
Bubble bigger
Waging wars
Oil prices at record levels & increasing
Global forces pushing incomes lower
Interest rates already near zero
I think it'll be worse this time.
Red Pill writes:
What if the securitization process seizes up?
What if the financial system seizes up?
Red Pill
What if a red pill becomes a blue pill?
O-Joe
I agree with comments above that job losses (yet to come) will be key. We've had dramatic price drops without dramatic unemployment.
Also the ability of the government to help out in this crisis is much more limited than in past episodes. The housing bust is decimating revenues nationwide, real interest rates are already negative, two expensive wars are draing resources, etc... Not only is the government driving with limited fuel in the tank, but also unintended consequences could defeat their attempts at solutions.
"As CR said, buyer psychology must change before a true washout bottom can be put it. Strangely, there is STILL a lot of buying interest out here in Sacramento (one of the hardest hit bubble zones). In my office, two folks are buying REO's right now and a third is talking about it non-stop."
I'm in Santa Cruz County, and we just got our first REO bus tour operation. I'm going to sign on next week just to see who, if anybody, is signing on for this and what their attitude is. Personally, I think it's 'way too learly.
"simply the best, clear cut description i have heard about the mess we are in and how regulators were brushed aside as of IBs rushed ahead in marketing exotic securities and derivatives." - mock turtle | 04.04.08 - 12:55 pm |
If I had the funds, I would make a CD/DVD of this and mass mail it to every address in the US. Any volunteers?
Total housing inventory fell 3.0 percent at the end of February to 4.03 million existing homes available for sale, which represents a 9.6-month supply at the current sales pace, down from a 10.2-month supply in January.
I think inventory will fall in relation to the amount of unemployed people staying in homes waiting for Katrina to hit shore.
Existing-home sales including single-family, townhomes, condominiums and co-ops rose 2.9 percent to a seasonally adjusted annual rate (1) of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007.
Also see:
The National Association of Realtors®, in a letter today to U.S. Secretary of the Treasury Henry Paulson, expressed opposition to the Blueprint for a Modernized Financial Regulatory Structure, which would permit banking conglomerates to engage in the commercial activity of real estate brokerage and management, and asked the Treasury to withdraw this proposed rule.
The blueprint makes extremely ambitious recommendations, most of which, as you have acknowledged, will require many years of debate and refinement, said NAR President Dick Gaylord. The immediate response to the blueprint from those potentially affected confirms that the subject is one of great importance and controversy.
CR
"dynamics of the current bust will be similar to the previous bust"
To add onto Bob's thread:
I think the dynamics are very different.
1. I think the folks who had purchased in this recent bubble are different - it was much more about getting in vs. getting a home.
2. We have been running negative savings rates.
3. We have seen little if any increase in net incomes.
4. The mentality in the 90s was where folks saw a decling inflation rate and now we are seeing an increase in inflation and expectations will change.
5.I would argue that consumers are relatively more indebted now than in the 90s.
6. Deomgraphics have shifted and maybe there is not a ready pool of financially strong buyers waiting in the wings.
My sense is that the drops will be dramatic (more acceleration in downward pressure) till end 2009 and then something much more drawn out, but drifting lower.
The only thing that this data and graph don't explain is why then have home prices in the good areas in West LA been rock solid? The driveover areas in the Inland Empire or even the valley got hammered 20-40%, but according to the date Santa Monica has barely budged at all in the past two years. Does it mean Santa Monica is immune?
i'm pretty much with barley.
i don't think you can compare this housing decline to past ones for a couple of reasons.
1) in the past declines, the people living in their homes had to be qualified as to their ability to make the payment. Unless they lost their job or their health, they had the option to stay. That is in stark contrast to todays homebuyer who pretty much had to qualify that he/she was breathing. Many at the margin had no intention of living in the home, they were trying to flip it for a buck.
today's homeowner (or enough of them to matter) has absolutely no cushion to wait it out.
this is really going to make the banks miserable, as the many articles pointed out above reveal. They are not set up to be in the rental business.
Something I've been wondering about for a while: Dave Deadbeat borrows $1,000 from Benny the Banker. Gus the Gullible, not being sufficiently familiar with Dave, offers a credit-default swap, at a price of $150, that will pay $900 if Dave fails to pay off.
Does somebody who buys the swap from Gus need to have Dave's IOU in order to collect or not? Are there significant numbers of swaps written both ways?
To restate: one way, the purchaser of Gus's swap will need to buy the IOU from Benny after Dave defaults. The other way, he doesn't.
CR -- nice analysis, plausible hypothesis.
Just factor in that the floor/trough will be much lower this time.
Per this paper, real prices for commercial real estate in Manhattan fell in half from '29-'39 (too bad they did not tell us what prices were at the depression's trough in '33):
http://web.mit.edu/CRE/research/papers/WP90wheatonbaranski.pdf
Red Pill -- loans will be available during the forthcoming Greatest Depression, but few will qualify and fewer still will want them.
What would the price of homes be if loans were completely unavailable?
How much does the average buyer have after cleaning out the 401K and getting a loan from the parents?
I find myself agreeing with Sebastian: no group behind the scenes can manipulate the stock market for any longer time, like longer than two days. The Fed, of course, influences the stock market openly, but even Fed rate changes normally don't break trends.
I assume that all the larger markets are relatively unmanipulated, because the large players balance each other (stocks, oil, currencies, treasuries etc.). If you want to corner a market, go for small size (antics? is that still small?).
Barley agrees w/ barely!
I would include along with Barley's list is that demographics now are a bit different than the early 90s, with aging baby boomers have different agendas going forward.
Oh shoot. I didn't read Barley's last point until just now!
Bob Dobbs--"Personally, I think it is way too early."
Agreed. We certainly don't know when or where the bottom of this thing is. If the index drops back to 100 (or God forbid, even below!) it's still a long, long way down. And if past performance is any indication of future performance, once bottom is reached, the climb back up will be slow--plenty of time to jump on the wagon.
That said, I don't believe many home buyers look at it this way. The decision for most is emotional, not financial.
What would the price of homes be if loans were completely unavailable?
Oh, probably at a price that gave a net rental yield (after all expenses) comparable to BBB corporate bonds.
Investors would buy houses as fixed income investments. Lack of leverage would put capital gains out of the picture.
It's tough to say which would be better a quicker, harder landing or a longer landing process.
This is one case where using real dollar amounts may be a bit distorting, at least for the experience of the individual homeowner. If real home values are falling, but nominal home values are flat or even rising less than inflation, individuals will still be able to sell their homes and pay off the mortgage. And with leverage, possibly break even or at least cover transaction costs.
A thought: I'm wondering if we might see an eventual (if temporary) Dutch Auction for houses. Example:
Mr. Smith will spend $xx for certain features, and all the banks offer certian properties. Once Mr. Smith makes a decision and a visit a deal is consumated.
Certianly possible given the inventory and the internet.
k harris, and anyone else who cautions against projecting this graph forward:
You're absolutely right, of course.
But the best use of the graph is to deflect myths that still come flying at us every day from the media idiots and real estate inc. For example, if most people actually knew that the last downturn lasted 7 years, some of the bottom-calling spin would lose traction fast.
CR, and Tanta if she's out there:
A Harvard professor does no credit to his institution with an attack on cramdowns, and defense of taxpayer bailouts:
Taking a hard line on rewriting the bankruptcy code - The Boston Globe
The Boston Globe is running a real estate haiku collection on its blog, just for fun:
Mortgage Haiku - Boston Real Estate - Boston.com
CR, can you duplicate the Case-Schiller LA graph and time shift the copy to overlay the recent peak to the past peak? Perhaps you could also shift it down so the two peaks actually appear at the same point on the graph. I think what we would see is that while we are way behind in time, we are way ahead in price drop, from the prior crash. I am beginning to suspect the nose-dive will abruptly correct, vs. the smooth correction to the upside before.
KnotRP, here's an explanation of why the Bear Stearns deal is a shareholder bailout:
http://www.freedomtalks.org/2008/04/03/why-the-bear-stearns-deal-was-a-shareholder-bailout/
A major hurricane this summer could speed things up nicely.
DialM
Is something like this what you're looking for?
http://bp3.blogger.com/_ym8Q9yxUg34/R-kNtJYon0I/AAAAAAAACpY/qVrg25HZJOQ/s1600-h/csi0108yoybar.JPG
Can anybody tell me what software creates these nice charts on CR?
Thanks
I believe the "process" of the housing bust this time will mirror the previous bust time wise. Obviously the situations are very different (now vs. lates 80's early 90's) but bubble busts tend to behave the same way.
With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occuring if things are as great as some (like Seb) seem to think. With the two most important factors for home prices extremely favorable, that the collapse is occurring should cause more concern.
I think you freaks need to talk about farms and the cost of farm stuff:
Nonfarm business sector (Productivity and Costs)
The nonfarm business sector is a subset of the domestic economy and excludes the economic activities of the following: general government, private households, nonprofit organizations serving individuals, and farms. The nonfarm business sector accounted for about 77 percent of the value of gross domestic product (GDP) in 2000.
CR,
Very fine post, analysis of real prices is surely the right way, and future will be like the past is first/basic.
A thought, not a prediction: one way the future (going down) might be faster than the past (went down) follows. I have long believed that asset bubbles would be well-deterred if and when real inflation-corrected price histories were well-apparent to the people -- for examples, see Calculated Risk; and also here:
Real Dow & Real Homes & Personal Saving & Debt Burden
So far NOT! But if the foregoing if and when enlightenment occurs during going down, acceleration is plausible.
This particularly galls me: it is first time home-buyers who are most hurt by being price-history-fooled; such people average younger and have had less time to know better; and from the ranks of younger people, primarily, come those who are doing the dying, etc. in Iraq, Afghanistan ... to defend our civilization, which includes all of our actions back here!
Oops! A little bit of reality just intruded into fantasyland.
*DJ Fitch: MBIA Inc. Long-Term Rating Cut To A From AA
April 04, 2008 14:23 ET (18:23 GMT)
02 23 PM EDT 04-04-
*DJ Fitch Cuts MBIA's IFS To 'AA'; Outlook Negative>MBI
Well, prices doubled to tripled in 5 to 7 years here in Maryland. Salaries haven't gone up that much at all. Let's be generous and say 20% over 7 years. Prices are now down by AT MOST 10%. So, we're still hosed. I used to be able to buy a Post-War rancher for say... $120,000 if I made $50,000 a yaer. Fine: at the peak of the Bubble, that same house would go for say about $270,000. Now, maybe it is going for $243,000... but I only make $60,000 a year. Clearly, this is not working!
The Bubble will be over when:
1) Housing prices return to fundamentals based upon salaries and traditional (sane) lending standards, down payments, etc.
2) When the government bails everyone out and buys up all the foreclosed homes and either sells them with taxpayer backed liar-loans at absurd prices or choses to bulldoze most of them to create an artificial housing shortage. This will lead to hyperinflation and a crash, which will eventually take us back to option 1, but with us all being a lot poorer.
I suspect we'll see some sort of version of choice 2 which will eventually crash into choice 1. In the end, we may get our affordable house, but it will be a decade late!
Arti:
Santa Monica is not immune, it will just drop at a slower rate. Most of the high end homes are purchased with major down payments, so folks will simply refuse to sell when it would destroy their equity. Sales volume drops, and the only sales are to those for whom price is only a minor concern. People for whom price is only a minor concern are usually buying the finest and most expensive homes, so the median price actually rises! But look carefully at same home sales, and you can find horrific losses in value.
The price drops at the fringe create a steep price slope, it just takes time for the peak to erode.
With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occuring
I'll give you my theory why it's occuring... standards for writing loans dropped so low that it sucked in people that, even on a bad day in the past, would have never been allowed to even fill an application out. That provided the juice for the final frenzy as prices climbed due to the demand curve (I mean really, if you ever think that it's ok to pay ABOVE the posted price for anything you should step away).
The steeper drop you see now is due to the rapid defaults in this wave of purchases and the demand curve working in reverse as everyone steps away until they are sure that prices have somewhat stabilized. Never before has such a thing happened, so the velocity of purchases towards the end will be matched to the velocity of declines on the way down.
What I think we will see is then a less steep drop, as these people are shaken out and more solid buyers come back in to scoop up any values. That will provide stabilization. And then housing will drag across the bottom like the last time, and probably for the same duration until prices naturally come back into line with underlying salary fundamentals. I'll publish a paper on this soon
the chart shows a crash and the momentum is picking up to the downside. this bubble probably will bottom quicker but deeper imo and drag along the bottom for several years.
So in the next 12 months the price drop will be excrutiating but the bottom will be near imo.
correction: house prices will drop severely in the next 12 months imo and will take less time to bottom because it will happen so fast, but prices will scrape bottom for several years.
JJL said: "With historic low interest rates and historic low unemployment a good question to ask is why the current bust is occurring if things are as great as some (like Seb) seem to think. With the two most important factors for home prices extremely favorable, that the collapse is occurring should cause more concern."
Not so much "great" as "not as bad as perceived."
I would offer this question: With interest rates and the unemployment rate this low, how likely is it that this is a "bust"? Or the "bust"?
As near as I can tell, what's happening is something that Tanta alluded to on a different thread. A lot of people took out ARMs at or near the extreme low in rates and got badly burned when they turned up. They are the "busted," and it wasn't because they lost their jobs in large numbers.
But there are also a lot of people like me who took out fixed-rate mortgages (new or re-fi) near the extreme low in rates, and aren't much troubled at all at the prospect of screwing our lenders for the next 30 years. We are the "not-busted," and it's not because we're independently wealthy or make embarrassing amounts of income.
Unless and until the "not-busted" get hit hard, I don't see how we can be in a "bust."
Sebastia
Seb - your eyes are closed, or sight challenged.
My cousins have $1.1M in loans, and something less than $100K combined income. You have to be blind to think
someone is getting their money back...it disappeared with the smart folks who sold those 2 homes to my cousins.
But ignorance is bliss, as you prove daily.
Great chart CR. It seems like many of the charts are now starting to reflect one another. That is, even until late last year DataQuick was still reporting year over year median price increases. Of course the trend was already heading lower but psychologically saying that you are up year over year still carries an impact.
Now, the recent DQ numbers show:
Los Angeles County Down 12.9 percent
If anything, the trend is definitely heading lower especially looking at recent sales numbers for the county which are off 45 percent from a year ago. We still have over a year of inventory given current sales for the entire Southern California region.
Now I was looking at the $300 billion FHA proposal. From my read on it, most sub-prime and Alt-A loans in California will not qualify right off the bat simply because they are underwater. The forced right off of principal will also push prices lower and force comp prices lower. I also keep hearing that raising the caps will help but what good is it to have higher caps if incomes cannot support prices?
Red Pill @ 1:49
Let's see....
Lot is $1000.00
Demolition is $2500.00
so....
- $1500.00
Because when builders sell land for
$0.15 per previous $1, the cost of demo can be beyond the price of the raw land.
Now where are you going to get renters
when jobs fall off? Free rent?
Not likely.
Nate:
NASDAQ at least publishes pretty good information on volume data.
Monthly Share Volume Report
For instance, In January 2008, the top 5 market makers traded these volumes across the entire NASDAQ Composite:
UBS Securities LLC 3.98B
Goldman, Sachs & Co. 3.71B
Morgan Stanley & Co. 3.05B
Merrill Lynch 3.01B
Lehman Brothers Inc. 2.86B
You can break down their trading reports per issue or per market maker.
Compare this with the total volume numbers and you could get a good idea of what percentage of market volume is generated by the biggest players. I agre with Sebastian - any single market maker trying to manipulate the market will not be able to succeed for very long.
call me crazy but its quite clear to me that the dollar's demise has left the entire middle and lower classes unable to pay their bills any longer. inflation impacts them acutely and quickly. anyway, i can envision a migration of the upper/upper middle classes to the countryside over the next ten years, away from the overcrowded, densely-lower class areas that usually surround big cities. crime is certain to rise in the face of this economic debacle. i think land acreage within 2-3 hours of major cities will trade at a major premium going forward. there are simply too many wealthy people living in major cities right now who will become targeted by nearby slaves of inflation. even if this mad max scenario doesnt materialize, the sheer thought of it will force the wealthy to hedge their vulnerable urban residence with some 200 acres of land hundreds of miles away.
warlock | 04.04.08 - 12:38 pm wrote:
The question i keep asking myself is how much the Internet changes things? The main effect there is to speed up the flow of information, which would argue for the bust to be much quicker, in terms of people reacting to changed conditions. ziprealty, propertyShark et al.
Warlock, You're 100% on the money. The Internet will serve to accelerate booms and busts (in Internet time). Note that information is now available to amateur speculators (lemmings as NYU's Damodaran might call them). Given that risk has a way of travelling to people least prepared to handle them, more lemmings will get killed and newer ones born.
So I beg to disagree with CR; the duration of this bust will be small and next boom's runup will be even more rapid. How about 60 second home purchases in the year 2013? (just like today's 60 second credit card approval based on FICO alone). Once the bust happens 2014
the credit spigot will close in a few days in 2013 instead of a few months now.
Enjoy the ride!
Ciao,
Print First Ask Questions Later
To determine length of bust, I would look at rate of household formation and local migration (demand) and compare that to the excess supply of housing units. The prices should drop until demand balances with supply...and add a bit for damaged consumer perceptions. Of course this is best done on a local basis as local economic conditions vary (e.g. SanFran v Detroit). Bingo, there's your answer... The prior bust could be a guide, but you need to see how much excess supply you had at that time compared to today's situation - I suspect today's is much worse.