Sticky? Again? Why won't this die? Sticky was the last dozen times of housing decline. This time is not sticky. Look at every price curve of every metro Thornberg tracks. Symmetrical. This time is different. I have been saying for years that there would be no sticky this time and now the data proves it. Sticky is dead, let's move on.
At 50% price decline, every mom and pop thrift in CA is toast.
I don't see why a 50% price decline should be viewed in appocalyptic terms. Many regions have experienced 50% or greater real-estate price drops without any major collapse of society. Japan and Hong Kong, for example, both saw greater than 50% declines but that wasn't the end of society as they knew it.
Any time there is a bubble, like in housing, markets always over shoot to the down side, just like they did to the up side. Prices still have a long way to go until they reach the historial mean. Most people don't understand the history of the housing market. The history of housing will surpise most people @ the speculator real estate first at theinvestingspeculator.com
A gauge of future U.S. economic growth fell in the latest week and its annualized growth rate, deep in negative territory, shows the economy is still facing a recession, a research group said on Friday
sniglet- not apocalyptic in the sense of everyone dies from the plague, or something, but in the sense that the resulting credit freeze and destruction of wealth will have long-term consequences for growth and stability.
Traditionally, the only way to put real estate to work was by farming it or renting it out to a tenant. But by securitizing and liquifying, lots of real estate was "put to work" in the larger economy...this is now over.
This money-crunch will be worse in some areas than others, but very few places will be entirely unaffected.
It means prices DON'T adjust IMMEDIATELY to rebalance supply and demand.
But it would be impossible for supply and demand to immediately rebalance in housing - we're still human, we operate on some kind of economic cycle. These price crashes are certainly not the "stickiness" I was reading predictions of in '06-'07.
The NAR is running local radio ads here in the Ann Arbor area touting the "now is the time to buy" theme, with the direct statement that "historically, homes double in market value every ten years."
Japan and Hong Kong, for example, both saw greater than 50% declines but that wasn't the end of society as they knew it.
I suspect that if you were to discuss this with a panel of Yokohama condo owners who bought at prices three times today's, you might find that it was indeed the end of society as they knew it. You might get a similar opinion from a Tokyo taxi driver -- or from one of the many young college graduates unable to find work on other than a one-year contract basis.
At least here in Northern Calif (sonoma county) the low end pockets due to foreclosure have some sales volume but the rest of the market is in near death sales volume. Looking for the 500K to 1M market to crumble as the inventory levels combined with increased foreclosure activity force price points lower, which will continue to impact the bottom lower and lower.
Traditionally, the only way to put real estate to work was by farming it or renting it out to a tenant. But by securitizing and liquifying, lots of real estate was "put to work" in the larger economy...this is now over.
Yes. I suspect there's a reason you put those quote marks around "put to work."
Too much of it was actually put to play.
Perhaps the housing bubble, created by the credit bubble, was just the final phase of overspending in a society that increasingly lived beyond its means. Now, rather than entering the low point of the business cycle, we are sinking down to a new normal in which most of us will consume less, because our consumption will have to come into line with our production. If that's the case, there will be no "recovery" to take us back to the kind of economy we have grown accustomed to.
Regarding "sticky", yes housing takes longer to correct than stocks, but... IMHO the sticky argument also pertains to housing not historically over-correcting. IOW, every cycle low is generally still higher than the prior low.
Sales volumes in the higher end neighborhoods of CA are critically low for the most part and facing some severe head winds. You have over 700,000 Alt-A option arms that are about to reset, 4 out of 5 of those are making the minimum payment according to Fitch. I don't care what anyone says we are in a recession (i am on the front line in the sales profession in S. Cal....trust me). And the purchasing power of the middle to lower end of the housing spectrum is gone. Right now the higher end neighborhoods are like watching ice cream melt.
Some parts of the greater DC metro area are getting close to that already. Price drops started very suddenly, last fall. In most areas prices were still up in 2006 and in some of the inner areas they didn't peak until 2007. It all seems to be driven by foreclosures. Prices stay the same or even increase until the short sellers start to get desperate. In my sister's close-in Maryland suburb with metro access some similar houses are going for almost $150,000 less than they paid in 2005. And these were relatively modest homes, too-- 4 bdrm. 2 ba. 50's vintage, going for less than $400,000 at the peak. In Manassas, an hour by commuter train from DC, townhouses that were going for $350,000 at the peak can now be bought for as low as $75,000.
Based on (1) historic norms for home price to income and (2) projected drops in income during the forthcoming Greater Depression, Dr. T. is way short of the mark: home prices will fall 70% from their ending-'07 levels.
All in, home prices will have dropped ~80% from peak during our forthcoming Greater Depression.
All of the analysis assumes that the housing market will achieve an equilibrium based on historical data, but what if current conditions have shifted from the historical experience, resulting in a different equilibrium point. Discussion about the impact of the credit bubble are premised upon "all other things being equal." However, I doubt that all other things are NOT equal.
In particular, I worry about the baby boomers who were all depending on cashing out of their homes and downsizing into condos to fund their retirement. If anything, the requirement for downsizing will be intensified by the reduction in equity that declining house values bring. This is a big factor, and I don't see a lot of analysis about its potential impact on the position of the post-credit bubble housing demand equilibrium.
"bluestatedon writes:
The NAR is running local radio ads here in the Ann Arbor area touting the "now is the time to buy" theme, with the direct statement that "historically, homes double in market value every ten years."
bluestatedon | 06.20.08 - 10:57 am | #"
The NAR better be paying close attention to the precise wording of the indictment given to the two Bear Stearns fund managers. It applies equally to them. The fact that the NAR is still out there with these types of ads, just shows how truly stupid the NAR is. They can't even take measures to protect themselves and/or are too blind to see how criminally exposed they themselves are to indictments. Few times have I seen an organization's credibility go up in flames so complete as theirs.
Sticky has meant that price declines were constrained on the way down relative to price rises on the way up. The idea is that it should take 6-8 years of declines to erase 3-4 years of gains. that is not what is happening this time. First blame buyer leverage. In the past a 20% downpayment incentivized stickiness. Why then won't people accept that 115% LTV disincentivizes? Everyone understood that part of the reason for the rapid escalation of home prices was loose credit. Where's the symmetry for rapid declines in tight lending environments? Dryfly in the previous thread described how investments in the 80s that only promised sure thing 30% were squelched as too risky relative to return. Then there's , ARMs. Houses are no longer the inflation hedge they once were for those who didn't fix. There's a disincentive that doubles down on resale prices. Finally, the elephant in the corner. The Boomers are past their peak real estate buying years and for the first time don't have a substantially larger generation to whom to sell.
I knoe this is being pedantic and picky, but the words 'trough' and 'decline' bother me in this context. Is it really a decline if it was a bubble in the first place? And is it really a trough if it returns to normal and stays there?
Obsessive internet use is a public health problem which is so serious it should be officially recognised as a clinical disorder, according to a leading psychiatrist.
accelerate and decelerate don't change meaning based upon the speed limit. Nor do uphill, downhill or valley based upon mean sea level. They defined in terms of relative context or motion.
I'm not sure I'd call a bottom in 2009 "optimistic". It means a very fast crash, which intensifies the foreclosure rate and strain on the banking system, and increases the likely overshoot. It's very reasonable, though. All that's required is that fall-winter 2008-2009 resemble 2007-2008. We had 3% per month declines for 8 months in OC and similar declines in most other areas of Socal. One more year of that and we're at 50% off peak. Nominal, even!
And yes, there are at least 2 Socal zips off 50%, and not just 1000-home high-variance areas - 92551 and 92553, in Moreno Valley (on the east edge of Greater LA sprawl)
Here's a WAG--when the dust settles (and sticky or not, that's not gonna be for a while), the low end and the high end will have fallen more than the middle will have. And that will be true in all regions, though what constitutes the low, middle and high segments of the market will vary by area, of course.
I think people who think the high end is 'different' are delusional. It may be 'stickier' in the sense that price adjustments are slower. But when I step back and consider the last couple of years, a couple of things stand out. First, at the low end, a huge amount of substantard crud was churned out and marketed to people who weren't financially stable enough to bear the burden of home ownership through an entire economic cycle. Those purchasers go back to renting, those properties go into a rental pool, and most of the water gets squeezed out of the stock. That's easy.
The harder part is the high end, and that's only partly because it's closer to home, for this crowd (pun intended, and maybe it's more aspirational than actual). I think the high end is headed for a greater percentage decline than the middle for a couple of reasons. First, few people fund those purchases with mortgages than can be serviced by their earned income. Those houses are bought with the gains on the sales of move up houses, and those gains are disappearing. Second, the willingness to pay a high price on purchase is underpinned by confidence that the purchase (and more) will be recouped on sale. Destroy that confidence and you lose that willingness. Finally, the investment component (vs. the shelter aspect) of the high end housing purchase is relatively greater as a percentage of house price than in the middle.
The idea that rich people care less about money is patently ridiculous. Sure, there will be a few people happy to fling for bling, but they aren't going to be the ones whose purchase decisions are going to establish equilibrium prices in a down market (though the REO liquidation strategies of their creditors will have some effect).
Anyhow, just a thought, that in the end, though more slowly and for different reasons, the high end is going to suffer as much as the low end, and the middle, as the middle always does, will muddle through.
I agree with Rob Dawg about the major boom areas. The pattern of declines we are seeing is not the norm - instead it looks like local busts when say a plant closes and demand dries up.
The higher stuff will decline for 5-8 years in CA in some areas. There is just no way that the price differentials can continue, and in another couple of years the boomer wave kicks in.
But the low-middle stuff is cratering in a way that's reminiscent of 1920s Florida, not any normal RE slump.
It is, however, a very normal slump in some areas like parts of Boston. One cannot generalize too much about this, because regional patterns are quite different, and highly correlated with income/price patterns at the peak. The areas with the ridiculous ratios were the areas that had the most funny-money loans, and those areas are just collapsing.
Linear Algebra - I utterly agree about the 75th percentile. There are a few very, very wealthy areas that will not do too badly, but the mass of those were trade-ups financed by price appreciation in the bubbles, and once the low-middle falls out, those prices are not sustainable at all.
Plus, it is a whole lot less fun to be living in a 1.7 mil home when you strongly suspect that in 5 years it will be a 1.2 mil home. That hurts.
VI said: "...In particular, I worry about the baby boomers who were all depending on cashing out of their homes and downsizing into condos to fund their retirement. If anything, the requirement for downsizing will be intensified by the reduction in equity that declining house values bring. This is a big factor, and I don't see a lot of analysis about its potential impact on the position of the post-credit bubble housing demand equilibrium..."
Maybe because it's a theory that doesn't actually work in practice? (Like too many bearish "arguments.")
As a baby-boomer who bought several years ago when home prices were lower, then re-financed with a sub-6% fixed-rate mortgage, I have no financial motivation to either downsize or cash-out completely and rent, and for the easiest of all reasons to understand: My monthly mortgage payment is lower than if I were to downsize (to a smaller but possibly more-expensive home with a mortgage at a higher interest rate) or rent.
Also, this fits with the statistics on retirees: The majority don't move on retirement, but simply remain in their current homes.
When folks throw percentage drop values around I always wonder if they are talking about real or nominal prices. There could be a BIG difference this time around...
I believe the Fed will be doing all they can to ensure that while real prices may crash 40-50% over a 4-5 year period, and stay down, paper (nominal) values may recover fairly quickly due to (actual, not reported) inflation.
MoM has the big picture. One reason for the protracted decline at the high end is how the high end is defined. For a while the middle stuff was going for high end prices and has since slipped back down to the middle price ranges. The high end stays the high end. My predalian manse is one such house. Maybe 1.4 at the tippy top, 900k now and something starting with a 6 in the overshoot. Meanwhile my fancy pants neighbors will stay $2.4m, $2.0m, no sale, no sale, $2.0m and thus make the transaction data look sticky.
Personally I have serious concerns for the Bay Area. Bad demographics, aging housing stock and $4 heating oil this wintah.
Despite the lack of government assurances, most of the financial gurus from companies, including Banc of America Securities LLC (BAC), Citigroup Inc. (C), Credit Suisse Group (CS), Goldman Sachs Group Inc. (GS), Lazard Freres & Co., and Morgan Stanley (MS), said institutional investors are hungry for new alternative-energy offerings.
"There is a dearth of product out there," said Morgan Stanley Managing Director Kevin Genieser. "The markets are coming back and the institutional-investor community is very excited for the next crop of initial public offerings
Real Estate prices in SoCal are geographic - price declines will not just follow high-end to low-end. They will flow coastal to non-coastal. Even a sketchy area near the ocean will hold value better than a higher-end area farther away from the ocean. The two keys to pricing here are proximity to the ocean and freeway drive time. Areas farther from the ocean and farther from the big employment areas will drop at a faster rate because of the undesirability factor. The most desirable places to live are within 10 miles of the ocean and with easy access to freeways and employment. "High-end" in Rancho Cucamonga will drop faster than "Low-end" in Carson.
If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable. In addition, the movement of empty nesters to inner city townhomes or suburban downsized homes is very real. Yes, folks tend to stay in their homes upon retirement, but usually not until death. The wave of boomer home sales is still coming, maybe just not as soon as people expect.
I had an interesting experience commenting on a blog about celebrity house sales. Often the asking prices are way above the Zillow estimate and I pointed that out. I was told by the blogger that "unique" properties are never properly evaluated by Zillow and that it's evaluations don't apply. I then asked if there was any objective standard against which to value these properties and got no answer. Perhaps sitting on the market for a lengthy time is one way to tell if the asking price is too high, but it seems imprecise to me. Anyhoo, if what these celebs are asking compared to what they recently paid (many seem to be flippers) is any indication, the upper end in S. California has experienced next to no downside and considerable upside. Sometimes however the celeb seller has lowered the first, very high asking price a bit. Is it credible that the high end celeb properties have not "adjusted" at all?
For California boomer homeowners, prop. 13 also complicate their situations.
Cashing out their homes and moving to smaller places can hike their property tax bills substantially. When they move, they need to move to much cheaper areas.
People near retirement tend to stay in their homes longer than they originally planned.
Thornberg seems to be tempering his forecast. Perhaps he doesn't want to be on the defensive with entrenched powers that be. So he sticks to a Plain-As-Day observation. Or maybe he expects Helicopter Ben and Paul in Peril to Save the Day.
Meanwhile I, like jg, predict 77% declines from the high. My own guess is that we'll hit it generally in May 2009, along about the time that everyone realizes our new President is no more capable than any other and has made things worse. Then we'll spend the next seven years picking up the pieces. (Must those Changes that we've been hearing so much about.)
jg writes:
"Based on (1) historic norms for home price to income and (2) projected drops in income during the forthcoming Greater Depression, Dr. T. is way short of the mark: home prices will fall 70% from their ending-'07 levels.
All in, home prices will have dropped ~80% from peak "
Tyler writes:
For California boomer homeowners, prop. 13 also complicate their situations.
Cashing out their homes and moving to smaller places can hike their property tax bills substantially. When they move, they need to move to much cheaper areas.
People near retirement tend to stay in their homes longer than they originally planned.
Check the law tyler.
After age 55, you get to move into a house of equal or lesser price and carry over the original home's tax basis one time.
A nice bout of inflation would do us a bit of good right now wouldn't it? Just kidding, of course, although the more general inflation there is in prices and wages, the easier it is for housing prices to settle.
Someone said that the "real" price drop would be 80%, rather than the 50% predicted price drop; I don't think that is the case. The historical trend in value is based on constant dollars; inflation acts as a lubricant by fooling people into thinking they are doing better than they really are. John Q. Banker gets his $400,000.00 first back at the foreclosure sale and doesn't have to write anything down. The fact that it's only $300,000.00 in yesterday's dollars is invisible.
High end homes here in Santa Cruz sure seem to have Sticky prices, my zip have barely dropped at all in the median sale stats, yet the south end of the county is down maybe 40%.
Many of the homes I've been looking at in the $1M to $2Million range disappeared from the MLS, but were not in the SOLD data; I discovered many of them in the Craigslist Rentals; the rents asked are about half what the owners costs must be. So it seems many prefer to bleed for a few years rather than accept a lower price on the home. These will come back on the market a few years from now when the owners have discovered how expensive and how much work being a landlord is. The prices will be pushed even lower from the degradations of being a rental.
the price may not be sticky nationally, but where i live, CA bay area, it is sticky and the decline is certain to draw in asian bargain hunters. I know of such people looking, but banks are holding back on giving out the loans, due to recapitalization.
hiker90 said: "...If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable...."
Well, the housing market is affected by a mix of factors. My mom stayed in her 60's-era single-family home until she died, 6 years after Dad passed.
After her husband passed, my mother-in-law upsized out of her 60's-era single-family house into a larger, more-contemporary, and more-expensive condo.
So, averaging-out your anecdote and mine housing just looks...ordinary, neither a glut nor a shortage.
"...In addition, the movement of empty nesters to inner city townhomes or suburban downsized homes is very real."
No question that it's real. It's just not what the nationwide majority do. Where I am now, for example, there's no inner-city area where I could live and my house is already one of the smaller ones in my neighborhood at around 2100 sq.ft. And I'm not living in a hoity-toity gated community, just a middle-to-upper class family neighborhood.
Money consists of three items: paper/coin, gold/silver, and credit. Credit is the largest, and is/will be falling (for households and companies; government debt will continue to grow, but will meet its end sometime soon). Thus, largely, the money supply is now falling.
In the face of collapsing household and commercial credit, the Fed could decide to 'print' money, issuing more paper/coin or more Treasuries. But either will further inflame interest rates, really killing demand for homes (look at what has happened already to demand for high-end homes, in light of higher jumbo rates).
Yes, the 'printing' will raise consumer prices big time, but asset prices will get killed in a high interest rate/inflationary environment.
This is not a repeat of the 1970s. This is much worse, given the household and government debt levels to GDP. Interest rates, due to the substantial risk of default at the household, commercial, and government level, given the high debt levels, could go WAY, WAY high.
Homes are toast, whether we have inflation or not. Same for any other asset.
I would not waste any brain cells hoping for a 'save' for homes from inflation. We are in extremis.
The only thing that really hammers prices is REO/foreclosure sales.
Here in Bel Air there are 2 foreclosures on my street listed at a 30% discount to the other ones for sale. They have both been on for months.
Once those go (and they will eventually) those becomes the comps for all other loans within a few miles.
The thing that is diffferent about this bust is that there will be foreclosures on the Westside because of the Option Arms. The resets on those are just hitting. Nice areas like Los Feliz are getting pummelled by foreclosure, and the platinum neighborhoods are just now getting REOs.
Most on the Westside are still in denial. These are people with resources to try to ride it out. But the denial is fading fast. I was at a dinner party with a UBS fund manager the other night. He and his wife brought up the horror that westside prices might fall 50%.
For people like that to be dishing out tin foil blog numbers, it is a sea change indeed.
I have seen some listings on the westside that really stuck out in terms of discounts, that only came up in the last three weeks. The high end in LA is finally starting to wobble, and wobble a lot. I think CR's prediction of a slow bleed in the high end is too optimistic, as real INLAND EMPIRE type capitulations are starting to show up on the fringes, even in Bel Air. Remember, none of these homes can be bought with conforming loans, so Bel Air houses sell because you sold your last house at a huge profit. The next 18 months are going to be absolutely shocking to the heretofore insulated denizens of the platinum triangle. Shocking.
re: "Bel Air houses sell because you sold your last house at a huge profit"
That might be the nail in the coffin. The bubble has wiped out a whole generation of the previous move up buyers. The lack of sales in the high end communities migh be the start of the tipping point. Here in Pacific Palisades, only 17 homes sold in May vs. a normal market of ~45. Looks like some price adjustments are needed, indeed.
I can't wait for the first 100% price declines, in areas where the value of the home plus the maintenance cost plus taxes plus the intangibles of ownership drop below rental prices. That ought to be interesting.
People near retirement tend to stay in their homes longer than they originally planned.
Well, it is home. I find it amusing that people plan on moving away from something they call home. I'm sure there are people who can coldly look at the situation, but most of my friends and relatives are happier with the comfort of the familiar surroundings.
The stickiness is going to make the downturn last longer than anyone can imagine. Sharp rises in interest rates (likely given the sharp rise in commodity prices) could make prices unsticky.
50% is in no way apocalyptic. 50% or more price drops would be needed to get prices revert to mean and in line with wage growth.
I live in Santa Clara (in the part which fall under Cupertino schools - an area sought after by asians). My neighbor sold his crapshack for almost 1 Million 2 weeks ago. He bought that house for 350K in 2001. This is pretty representative of the entire neighborhood. A 50% drop from current levels (bringing the home to 500K) would still mean a very nice appreciation from 350K in 2001 !
And then there are condos in Palo Alto (which I pass by on my way to work every day) that are listed (and seem to be selling) for 1.2M ! Townhomes in that neighborhood list for 1.7M. Those would need to correct by way more than 50% !
As a baby-boomer who bought several years ago when home prices were lower, then re-financed with a sub-6% fixed-rate mortgage, I have no financial motivation to either downsize or cash-out completely and rent, and for the easiest of all reasons to understand: My monthly mortgage payment is lower than if I were to downsize (to a smaller but possibly more-expensive home with a mortgage at a higher interest rate) or rent.
Also, this fits with the statistics on retirees: The majority don't move on retirement, but simply remain in their current homes.
As Tyler already pointed out, this is a purely CA phenomenon, due to Prop. 13.
As Uncle Ar pointed out, there exists a one-time over-55 exemption, allowing your typical born-on-third-base Boomers to take their preferential tax basis with them. However, a lot of them are not aware of this exemption, and therefore stay put.
Uh... Seb is in North Carolina, not Northern California.
Some older people like where they are and stay. Of course there are those who live in places that are miserable in the winter who move to warmer climates, but to say that staying in your house after you retire is a "purely CA" phenomenon is just weird.
"I think that Rob Dawg was arguing that high end areas are no more sticky than low end areas."
Well, I'm on the Westside of LA, and keep a real close eye on the market... sales, listings, FC rates etc. Prices are very sticky here. A few 10-15% off peak cuts that sell real quick. Many new and many stale listings at above peak prices (where they were previously purchased), FC #'s in the "good" ZIP codes are up, but still low. It's happening, but everyone's holding out hope that they'll "weather the storm". Plenty of knife catchers and no real desperation. Yet.
The majority don't move on retirement, but simply remain in their current homes.
Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same. Not only do few of them have defined-benefit pensions, they will be suffering severe losses on whatever non-housing investments they had, and they are far less likely to have positioned themselves to pay off their mortgages by retirement. (A friend of mine who has done some mortgage brokering tells me that most people nowadays think of themselves as "renting from the bank".)
Regarding stickiness -- asking prices are sticky, selling prices much less so.
Much of the deterioration in the market is in unit sales volume. The only people still buying are people who feel they have to buy, or believe the market will soon recover. In the northwest suburbs of Chicago, unit sales volume is down 50-75% relative to 2005.
The deterioration in pricing is hidden by the low volume. The "real" prices relative to those of 2005 would be those that would call forth the same volume of sales.
From JM: "Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same..."
In addition to which the savings rate for the boomer generation is much lower than preceding generations. Thus, there is a strong possibility that the boomers will be economically unable to remain in their homes. Like I said before, determining where lies the post-credit bubble house price equilibrium requires an understanding of all the other things that are not equal/the same as before. In response to Sebastian, the precarious financial position of the Boomers makes it difficult to forecast their behaviour based on the example of the preceding, much more financially responsible, generation.
"Let's go long on wool. Who are the big players in the wool business?"
Now there is a thought! As far as i know wool prices have been terrible for many years. New Zealand which once had 70 million sheep is now down to about 35 million i think.
Synthetic clothing was doing bad things to wool.
New Zealand seems to be right on the cusp of some serious house price declines........even more reasons to invest there once a bottom is reached.
I am a resident there so it might be time to think about a southern migration:-)
Desperation will arrive very quickly once the stock and bond markets tank. And, those will be coming soon, with the MBIA/Ambac-related writedowns and NBER BCDC declaration of 'The recession began in..."
Breaks my heart to see the canapes crowd consternate.
jm said: "Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same."
I think you've mis-proved your own point. If money is going to be as tight as you assume, staying in a house that you bought when it was cheaper with a low-interest rate mortgage is your best housing alternative. The cost of a real-estate commission to sell your house, the cost of moving, and the open-ended inflation risk of higher rent also argue for simply staying-put in a place you already like.
already down 39% in my little California beach town (pop. 27,000). In my hood (homallucinations! LOL) some taking their houses off the market, couple of foreclosures at rock bottom prices, and short sales too bringing prices down.
The story on retirement downsizing is a mixed bag nationally, but the large majority staying-in-place thing is a disproportionately CA phenomenon.
The bulk of pre-Boomer generations downsized or moved to retirement communities. Surveys show roughly half of Boomers expect to downsize when they retire, however, what people expect to happen and what really does happen are often 2 different things.
Some headwinds facing currently mortgaged Boomers:
--Fewer X/Y gen buyers, with significantly lower inflation-adjusted incomes/PP. Illegals are plentiful, but typically lack sufficient income (unless they are packed 12-per-room).
--Dodgy mortgage lending drying up, and some types (neg-ams, option-ARMs, NINJAs, etc.) could even be outlawed under the next Administration/Congress.
--Lousy boomer retirement savings rate means bulk of retirement "savings" is in form of house bubble equity (which is now in the process of evaporating). Much of any remaining equity has already been HELOC'd and spent on bling, vacations, cars & plastic surgery, as the 56-year national low in net loanowner equity demonstrates.
"If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable."
You nailed that on Hiker90... I concur 100%. And have seen MANY people do exacly what you said.
The professor is correct in his predictions. I'll give you a example. How can home go from 250,000 in 2004 estimated value to 700,000 in queens. So, yout telling that after 80+ years of gowth population and immigration it only grew x amount of value and in three years only it went up three times that percentage. Dosent make sense. We are going back about 50% in value declines. The upper class have more time to hang on to their homes but will crack. We heard that this week in Conn , N.J ,and PA high end homes have declines. Why would you triple home prices in four years? This make sense based on economically. Ig you triple everything in three years it will drastically econmomicaaly. I wonder about our economists.
Nothing in those links supports your contention that it is a "CA" thing.
Years ago, the majority of retirees downsized, sold their lifetime home, and headed for a retirement community. Today, the retirement real estate market is as diverse as the retiring population.
"A report from the National Association of Home Builders says that 52 percent of Baby Boomers between the ages of 45 and 54, and 57 percent of those ages 55 to 65 expect to purchase retirement property within the next five years where they can enjoy an active social lifestyle."
The data is not broken down by state and is vague and unquantified.
Even if half of them stay put, that is a large number. And remember, their unemployed children need a couch to sleep on.
The upper class have more time to hang on to their homes but will crack.
And liquidate their 401(k) and IRA portfolios in the process.
Add to the demographic changes: a generation of workers that graduate with an average of 30K in student loan debt for the vanilla undergraduate degree; up to 200K for JD/MBA/PhD/MD. Combine that with 20% DP and 7% mortgages, this is going to be one hell of a correction.
I think Sebastian is the one making a lot of unwarranted assumptions:
"staying in a house that you bought when it was cheaper with a low-interest rate mortgage is your best housing alternative"
It is almost always better for the borrower to buy an asset at a cheap price with expensive money than the reverse. Mortgages can be easily refinanced when interest rates (and lending standards) drop, but it is not so easy to get the lender to eat a loss on principal. Ultra-low rates (largely thanks to the Fed) are a big reason why prices went UP so far, not DOWN.
Q1: Did most boomers buy their current house pre-bubble?
Q2: How many traded up, or bought multiple spec properties dugint the bubble?
Q3: How many cash-out refinanced and HELOC'd and already spent those bubble equity gains?
"The cost of a real-estate commission to sell your house, the cost of moving, and the open-ended inflation risk of higher rent also argue for simply staying-put in a place you already like."
U.S. transaction costs tend to average ~8-9% in most states, assuming a realturd is involved. This is a signifanct disincentive to move frequently, true. However, the myth of rents "shooting up" beyond background inflation during the bust has already been disproven here and elsewhere, thanks to a multitude of surveys demonstrating the contrary.
You are changing the premises. Seb said "bought when cheaper with low interest rate". This is true of many of the boomers I know. Many Boomer family homes were bought back when boomers were having families. That was pre-bubble.
Sure, if they bought when expensive it would be a different story, but for many people the bubble came and went with no impact and they are sitting on a low cost basis asset with no incentive to incur transaction costs and social disruption unless the house becomes a burden.
Oddly enough, I remain convinced that the best way to tell whether there is a bubble or not is to compare rental costs to mortgage costs. This becomes difficult the more complicated mortgage contracts get, but it isn't impossible to track, and many folks do.
Last I checked, prices in most areas were still 30% above the rental-property cost baseline.
I am continually shocked by the statements of even seemingly intelligent and well meaning people to the effect that low interest rates are bad generally (or even that high transaction costs are good because they help avoid bubbles). What? This is Economics 101, people; low interest rates and low transaction costs are good things, because they make living better easier.
Now, that doesn't mean the Fed was right to keep interest rates as low as they have been, at the cost of creating inflation in asset prices and (now) actual prices. But there's no sense saying that any absolute interest rate is "too low" absent circumstances. Bubbles are created by profligate lending, tax advantages, and other distortionary incentives. Interest rates are non distortionary (unless you can only get credit for certain things - but now we're back at profligate lending).
Chairman Meow said: "...This is true of many of the boomers I know. Many Boomer family homes were bought back when boomers were having families. That was pre-bubble.
Sure, if they bought when expensive it would be a different story, but for many people the bubble came and went with no impact and they are sitting on a low cost basis asset with no incentive to incur transaction costs and social disruption unless the house becomes a burden."
Which leads me to what I don't think the bears are factoring-in: That large amount of untouched equity, along with the low monthly cost of housing for them (us), represents a huge pool of money available to be spent in the future, either in MEW or in disposable income (because our housing cost is so low).
We never get any of the press coverage, even though there are a lot more of us than there are sub-primers and we've got a ton more money as a group.
And what excess assets we don't spend, our children will inherit. My daughter's probably looking at getting a $1/2 million house with only a $50k mortgage against it...someday.
If a 50% drop in prices is what is needed to make housing affordable once again, than a 50% drop - or more - is what we will have. The lunacy can't go on forever, and the huge Ponzi scheme is sucking wind as it all comes apart.
If so many Boomers bought pre-bubble and did NOT cash-out refi/HELOC/speculate as you claim, then why didn't homeowner equity rise (instead of fall) during the bubble? And who exactly are all those NEOs (negative equity owners) CR has had so many posts about?
"That large amount of untouched mostly spent equity, along with the low monthly cost of housing resetting option-ARMs for them (us), represents a huge pool of money available to be spent long gone in the future"
I wonder how many of those that are able to rent are just covering their min payment on their option ARM? Cause when that recasts at ~110%, the rental goes away and it becomes REO.
You sure cant rent a $500/sqft and cover a 30yr fixed (correct me if I'm wrong!).
As many have said - its not IF the higher end will get pulled down, but when.
Guess there are certain tags that don't work in Haloscan. Corrected version:
"That large amount of mostly spent equity, along with the resetting option-ARMs for them (us), represents a huge pool of money long gone in the future"
"Someone said that the "real" price drop would be 80%, rather than the 50% predicted price drop; I don't think that is the case. The historical trend in value is based on constant dollars; inflation acts as a lubricant by fooling people into thinking they are doing better than they really are. John Q. Banker gets his $400,000.00 first back at the foreclosure sale and doesn't have to write anything down. The fact that it's only $300,000.00 in yesterday's dollars is invisible."
Inflation cannot fix the problem without HUGE wage inflation. And as long as the world is full of wage-slaves who are have to work for nickels a day and live in mud-huts, wage inflation is not going to happen.
"And who exactly are all those NEOs (negative equity owners) CR has had so many posts about?"
The stats on NEO's you linked to show 7% of home owners as being negative. That leaves 93% with positive equity.
The post also foreshadowed rising rates pushing that percentage as high as 15-20%. That leaves 80% with positive equity. 4 out of 5 is pretty good odds.
If so many Boomers bought pre-bubble and did NOT cash-out refi/HELOC/speculate as you claim, then why didn't homeowner equity rise (instead of fall) during the bubble?
Did I say that they did not refi or HELOC? No. Just that there is still a majority of people with positive equity in their home. AND I suggest that many of these folks are older (I consider boomers to be older) and who bought their house when they had children at home which means it was before the bubble.
Certainly the speculators and flippers had a number of boomers among them, but even if it seems like "everyone was doing it", actual participation in the bubble through use of neg am and no doc loans did not include the majority of boomers. I'd even suggest that those hurt hardest were post-boomers stretching to buy their first house. The common definition of boomers puts the youngest at 44 years old now and the oldest at 62. Those on the older side were probably sitting on a fair amount of equity in their homes even ten or fifteen years ago. As long as they weren't idiots they still have some. And, although it seems like it sometimes, not everyone is an idiot.
"Inflation cannot fix the problem without HUGE wage inflation. And as long as the world is full of wage-slaves who are have to work for nickels a day and live in mud-huts, wage inflation is not going to happen."
Not unless the dollar falls a long way relative to a general international basket of currencies. Oh, wait.
Not that I disagree with him but where was he a few years when he was employed elsewhere? He was claiming prices couldnt fall in the absence of a recession and that prices would experience a soft landing.
These economists just crack me up. What a bunch of flip floppin clowns.
Hint: most clowns are paid by the ring master. They may love the smell of the greasepaint, but they are in it to afford the hooch to drown their sorrows. Clowns are sad.
tj & the bear writes:
Regarding "sticky", yes housing takes longer to correct than stocks, but... IMHO the sticky argument also pertains to housing not historically over-correcting. IOW, every cycle low is generally still higher than the prior low.
Not this time.
Exactly. This time we will see significant undershoot. Below the last peak? possibly. What Thornburg has noted before is that there will be job destruction due to the overconsumption. late 2009? I find that hard to believe. However, of all the economists, Thornburg has generally been out front and correct.
I think we'll undershoot by 25%.
But Thornburg has also been smart and tailored his discussions to what people will listen too. Please see his videos. He'll often hint things are worse than his base prediction in ways that are not suitible print quotes.
Prices are insane. $500,000 for essentially a one bedroom apartment. The same unit, high end, rents for about $3-4,000 - close to just the cost of a mortgage. But the landlords kid themselves about the market. Most folks are looking for something under $1500/month.
The stats on NEO's you linked to show 7% of home owners as being negative. That leaves 93% with positive equity.
As of December 2007, sure, it's only 7%. Accordiong the Credit-Suisse or BofA charts posted frequently, we will not see and end to most negatively amortizing option-ARM resets until 2012 at the earliest. So... that number could go quite a bit higher.
Did I say that they did not refi or HELOC? No. Just that there is still a majority of people with positive equity in their home. AND I suggest that many of these folks are older (I consider boomers to be older) and who bought their house when they had children at home which means it was before the bubble.
CR has broken this down for us before: the "50% homeowner equity" national average includes the roughly 35% who own their home outright, which means the remainder have a lot less that 50%. Also, current average "equity" stats include what remains of bubble-era price gains, which are now dropping and sure to be lower as more loans hit their reset period. So, 35% of owners have 100% equity, while the rest have considerably less than 50%, and some have negative equity.
Show me an equity-flush homeowner, and I'll show you a WWII vet living in a modest 2bdm ranch in Ohio on a fixed income.
Certainly the speculators and flippers had a number of boomers among them, but even if it seems like "everyone was doing it", actual participation in the bubble through use of neg am and no doc loans did not include the majority of boomers. I'd even suggest that those hurt hardest were post-boomers stretching to buy their first house. The common definition of boomers puts the youngest at 44 years old now and the oldest at 62. Those on the older side were probably sitting on a fair amount of equity in their homes even ten or fifteen years ago. As long as they weren't idiots they still have some. And, although it seems like it sometimes, not everyone is an idiot.
Here's the thing: it might be true that the majority of boomer homeowners did not directly participate in the bubble (though personal experience with friends and colleagues here in CA indicates otherwise). Nontheless, pricing in the real estate market is set at the margins, and in any given year only a small % of homes are sold (I've seen estimates of 7-8%). So, even if only a sizeable minority of buyers --boomer or otherwise-- were speculators/idiots, those idiots set the market price for housing during those years.
Are you a boomer? Are your friends? Or are you on the tail end of the boomers?
The people I know in my neighborhood who have been here for the past 8 years or more are probably just fine.
You seem to be trying to make the desperate point that people don't stay in their homes when they retire by insisting that no one has any equity - well except those people in California who stay put - but according to your argument California is the place where equity has evaporated them most. It just doesn't hold together and comes across just a bit ranty. Stop pulling your hair out man. It is too hot for that.
My opinion is that the mortgage industry is done for a while. There is no programs for real people to qualify unless you got big bucks. Even then you still have to qualify. I agree that Ca. OC will see 50% fall ,. Those Arms arnen't adjusting.. people are and they are walking out and giving the keys to the bank and hey you got a foreclosure on your record. Oh well... thats the real world NOW!
Once again, I hate to say I told you so but I forecast a drop in So. Cal and other regions up up to 50-60% in 2006. Why are we only hearing about these forecasts now?
Furst?
yes you're first you grandoldturkey
CR I also expect the high end to take longer to correct for a number of well known reasons.
CR,
Prices are lubricated. Low end and high end. The timing is merely different.
At 50% price decline, every mom and pop thrift in CA is toast.
Sticky? Again? Why won't this die? Sticky was the last dozen times of housing decline. This time is not sticky. Look at every price curve of every metro Thornberg tracks. Symmetrical. This time is different. I have been saying for years that there would be no sticky this time and now the data proves it. Sticky is dead, let's move on.
RE: IMF Mortgage Reset Chart, if I'm reading it correctly shares that the majority of ARM's reset in May and June 2008 -- am I reading this correctly?
Geez, from what I've been reading, house prices are already down 50% in lots of areas in California and elsewhere...
At 50% price decline, every mom and pop thrift in CA is toast.
I don't see why a 50% price decline should be viewed in appocalyptic terms. Many regions have experienced 50% or greater real-estate price drops without any major collapse of society. Japan and Hong Kong, for example, both saw greater than 50% declines but that wasn't the end of society as they knew it.
Look at old Doc Thornberg trying to make a play for word of the year. "homallucinations".
Rob Dawg, if prices weren't sticky, the declines would already be over.
I think some people get confused on what sticky means. It doesn't mean stuck. It means prices DON'T adjust IMMEDIATELY to rebalance supply and demand.
The fact that prices have been declining for 2+ years is strong evidence that the sticky price model is correct. The question is "how sticky"?
Best Wishes.
Sniglet writes:
Japan and Hong Kong, for example, both saw greater than 50% declines but that wasn't the end of society as they knew it.
Japan is still not out of it and HK to my limited knowledge isn't in debt.
Calculated Risk writes:
I think some people get confused on what sticky means. It doesn't mean stuck. It means prices DON'T adjust IMMEDIATELY to rebalance supply and demand.
Oil prices are sticky.
Any time there is a bubble, like in housing, markets always over shoot to the down side, just like they did to the up side. Prices still have a long way to go until they reach the historial mean. Most people don't understand the history of the housing market. The history of housing will surpise most people @
the speculator real estate first at theinvestingspeculator.com
A gauge of future U.S. economic growth fell in the latest week and its annualized growth rate, deep in negative territory, shows the economy is still facing a recession, a research group said on Friday
US economy still in recession track - ECRI
| Reuters
Oh, great GoogaMooga, can't you hear me talking to you.
In real vs. nominal dollars, the adjustment will be more like -80%.
sniglet- not apocalyptic in the sense of everyone dies from the plague, or something, but in the sense that the resulting credit freeze and destruction of wealth will have long-term consequences for growth and stability.
Traditionally, the only way to put real estate to work was by farming it or renting it out to a tenant. But by securitizing and liquifying, lots of real estate was "put to work" in the larger economy...this is now over.
This money-crunch will be worse in some areas than others, but very few places will be entirely unaffected.
It means prices DON'T adjust IMMEDIATELY to rebalance supply and demand.
But it would be impossible for supply and demand to immediately rebalance in housing - we're still human, we operate on some kind of economic cycle. These price crashes are certainly not the "stickiness" I was reading predictions of in '06-'07.
CR,
I think that Rob Dawg was arguing that high end areas are no more sticky than low end areas.
"These price crashes are certainly not the "stickiness" I was reading predictions of in '06-'07."
This is why I use the term "lubricated" now. It is more descriptive without having to debate the strict definiton of sticky.
The NAR is running local radio ads here in the Ann Arbor area touting the "now is the time to buy" theme, with the direct statement that "historically, homes double in market value every ten years."
Japan and Hong Kong, for example, both saw greater than 50% declines but that wasn't the end of society as they knew it.
I suspect that if you were to discuss this with a panel of Yokohama condo owners who bought at prices three times today's, you might find that it was indeed the end of society as they knew it. You might get a similar opinion from a Tokyo taxi driver -- or from one of the many young college graduates unable to find work on other than a one-year contract basis.
speculator,
Precisely. The psychological elements will kick in to push real estate "too low" for awhile.
At least here in Northern Calif (sonoma county) the low end pockets due to foreclosure have some sales volume but the rest of the market is in near death sales volume. Looking for the 500K to 1M market to crumble as the inventory levels combined with increased foreclosure activity force price points lower, which will continue to impact the bottom lower and lower.
Housing prices are sticky.
Mere mortals have the chance to buy and sell homes in the same way that floor traders can buy and sell stocks...
OT: FRB: H.3 Release--Aggregate Reserves of Depository Institutions--December 3, 2009
Does anyone know why column 2 (Required) reserves have fallen 10% in the last 2 weeks?
Also, column 4 of non-seasonally adjusted (2nd table), Reserve balances with the Fed banks, is down over 20%.
Those declines look inordinately bad.
Traditionally, the only way to put real estate to work was by farming it or renting it out to a tenant. But by securitizing and liquifying, lots of real estate was "put to work" in the larger economy...this is now over.
Yes. I suspect there's a reason you put those quote marks around "put to work."
Too much of it was actually put to play.
Perhaps the housing bubble, created by the credit bubble, was just the final phase of overspending in a society that increasingly lived beyond its means. Now, rather than entering the low point of the business cycle, we are sinking down to a new normal in which most of us will consume less, because our consumption will have to come into line with our production. If that's the case, there will be no "recovery" to take us back to the kind of economy we have grown accustomed to.
Here's one man's take on the new normal:
Jerry Large | "Good life" may soon be redefined | Seattle Times Newspaper
Regarding "sticky", yes housing takes longer to correct than stocks, but... IMHO the sticky argument also pertains to housing not historically over-correcting. IOW, every cycle low is generally still higher than the prior low.
Not this time.
UK Property Auction Sales Value Slumps by 44% From a Year Ago
UK Property Auction Sale Values Slump by 44% From a Year Ago :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website
A well coordinated bust.
John Stark,
Take back that "perhaps"!
BTW, Thornberg is still an optimistic bear on both timing and severity.
Sales volumes in the higher end neighborhoods of CA are critically low for the most part and facing some severe head winds. You have over 700,000 Alt-A option arms that are about to reset, 4 out of 5 of those are making the minimum payment according to Fitch. I don't care what anyone says we are in a recession (i am on the front line in the sales profession in S. Cal....trust me). And the purchasing power of the middle to lower end of the housing spectrum is gone. Right now the higher end neighborhoods are like watching ice cream melt.
Some parts of the greater DC metro area are getting close to that already. Price drops started very suddenly, last fall. In most areas prices were still up in 2006 and in some of the inner areas they didn't peak until 2007. It all seems to be driven by foreclosures. Prices stay the same or even increase until the short sellers start to get desperate. In my sister's close-in Maryland suburb with metro access some similar houses are going for almost $150,000 less than they paid in 2005. And these were relatively modest homes, too-- 4 bdrm. 2 ba. 50's vintage, going for less than $400,000 at the peak. In Manassas, an hour by commuter train from DC, townhouses that were going for $350,000 at the peak can now be bought for as low as $75,000.
"At 50% price decline, every mom and pop thrift in CA is toast."
rather, pretty much everything is toast.
Based on (1) historic norms for home price to income and (2) projected drops in income during the forthcoming Greater Depression, Dr. T. is way short of the mark: home prices will fall 70% from their ending-'07 levels.
All in, home prices will have dropped ~80% from peak during our forthcoming Greater Depression.
All of the analysis assumes that the housing market will achieve an equilibrium based on historical data, but what if current conditions have shifted from the historical experience, resulting in a different equilibrium point. Discussion about the impact of the credit bubble are premised upon "all other things being equal." However, I doubt that all other things are NOT equal.
In particular, I worry about the baby boomers who were all depending on cashing out of their homes and downsizing into condos to fund their retirement. If anything, the requirement for downsizing will be intensified by the reduction in equity that declining house values bring. This is a big factor, and I don't see a lot of analysis about its potential impact on the position of the post-credit bubble housing demand equilibrium.
@RP RE:your OT / IMF Mortgage Reset Chart,
what chart are you referring to? which issue of IMF does this appear in?
"bluestatedon writes:
The NAR is running local radio ads here in the Ann Arbor area touting the "now is the time to buy" theme, with the direct statement that "historically, homes double in market value every ten years."
bluestatedon | 06.20.08 - 10:57 am | #"
The NAR better be paying close attention to the precise wording of the indictment given to the two Bear Stearns fund managers. It applies equally to them. The fact that the NAR is still out there with these types of ads, just shows how truly stupid the NAR is. They can't even take measures to protect themselves and/or are too blind to see how criminally exposed they themselves are to indictments. Few times have I seen an organization's credibility go up in flames so complete as theirs.
In Manassas, an hour by commuter train from DC, townhouses that were going for $350,000 at the peak can now be bought for as low as $75,000.
Whoa. Watch those bulls run! (A pun for Civil War buffs.)
Hun? Who gave NAR any credibility to begin with?
CR,
Jeff Collins wrote and posted the article, not Lansner. I find his writing to be less "endearing" to the OC home builders than Lansner.
Sticky has meant that price declines were constrained on the way down relative to price rises on the way up. The idea is that it should take 6-8 years of declines to erase 3-4 years of gains. that is not what is happening this time. First blame buyer leverage. In the past a 20% downpayment incentivized stickiness. Why then won't people accept that 115% LTV disincentivizes? Everyone understood that part of the reason for the rapid escalation of home prices was loose credit. Where's the symmetry for rapid declines in tight lending environments? Dryfly in the previous thread described how investments in the 80s that only promised sure thing 30% were squelched as too risky relative to return. Then there's , ARMs. Houses are no longer the inflation hedge they once were for those who didn't fix. There's a disincentive that doubles down on resale prices. Finally, the elephant in the corner. The Boomers are past their peak real estate buying years and for the first time don't have a substantially larger generation to whom to sell.
Sticky is so last recession.
these pretzels are making me thirsty. ooh, and they're sticky, too.
I knoe this is being pedantic and picky, but the words 'trough' and 'decline' bother me in this context. Is it really a decline if it was a bubble in the first place? And is it really a trough if it returns to normal and stays there?
Wally,
Define "normal".
I thought sticky meant it hurt when you peeled them off. Or maybe that's the old band-aid model and these are post-it notes...
Obsessive internet use is a public health problem which is so serious it should be officially recognised as a clinical disorder, according to a leading psychiatrist.
so afflicted!
Internet addiction is a 'clinical disorder' - Telegraph
accelerate and decelerate don't change meaning based upon the speed limit. Nor do uphill, downhill or valley based upon mean sea level. They defined in terms of relative context or motion.
Perfectly nice low end houses here now below $90/sq ft, with mid- rangers heading to $150.
Well, formerly mid-range.
$75 and $125/sq ft won't surprise me.
I'm not sure I'd call a bottom in 2009 "optimistic". It means a very fast crash, which intensifies the foreclosure rate and strain on the banking system, and increases the likely overshoot. It's very reasonable, though. All that's required is that fall-winter 2008-2009 resemble 2007-2008. We had 3% per month declines for 8 months in OC and similar declines in most other areas of Socal. One more year of that and we're at 50% off peak. Nominal, even!
And yes, there are at least 2 Socal zips off 50%, and not just 1000-home high-variance areas - 92551 and 92553, in Moreno Valley (on the east edge of Greater LA sprawl)
Here's a WAG--when the dust settles (and sticky or not, that's not gonna be for a while), the low end and the high end will have fallen more than the middle will have. And that will be true in all regions, though what constitutes the low, middle and high segments of the market will vary by area, of course.
I think people who think the high end is 'different' are delusional. It may be 'stickier' in the sense that price adjustments are slower. But when I step back and consider the last couple of years, a couple of things stand out. First, at the low end, a huge amount of substantard crud was churned out and marketed to people who weren't financially stable enough to bear the burden of home ownership through an entire economic cycle. Those purchasers go back to renting, those properties go into a rental pool, and most of the water gets squeezed out of the stock. That's easy.
The harder part is the high end, and that's only partly because it's closer to home, for this crowd (pun intended, and maybe it's more aspirational than actual). I think the high end is headed for a greater percentage decline than the middle for a couple of reasons. First, few people fund those purchases with mortgages than can be serviced by their earned income. Those houses are bought with the gains on the sales of move up houses, and those gains are disappearing. Second, the willingness to pay a high price on purchase is underpinned by confidence that the purchase (and more) will be recouped on sale. Destroy that confidence and you lose that willingness. Finally, the investment component (vs. the shelter aspect) of the high end housing purchase is relatively greater as a percentage of house price than in the middle.
The idea that rich people care less about money is patently ridiculous. Sure, there will be a few people happy to fling for bling, but they aren't going to be the ones whose purchase decisions are going to establish equilibrium prices in a down market (though the REO liquidation strategies of their creditors will have some effect).
Anyhow, just a thought, that in the end, though more slowly and for different reasons, the high end is going to suffer as much as the low end, and the middle, as the middle always does, will muddle through.
I agree with Rob Dawg about the major boom areas. The pattern of declines we are seeing is not the norm - instead it looks like local busts when say a plant closes and demand dries up.
The higher stuff will decline for 5-8 years in CA in some areas. There is just no way that the price differentials can continue, and in another couple of years the boomer wave kicks in.
But the low-middle stuff is cratering in a way that's reminiscent of 1920s Florida, not any normal RE slump.
It is, however, a very normal slump in some areas like parts of Boston. One cannot generalize too much about this, because regional patterns are quite different, and highly correlated with income/price patterns at the peak. The areas with the ridiculous ratios were the areas that had the most funny-money loans, and those areas are just collapsing.
Linear Algebra - I utterly agree about the 75th percentile. There are a few very, very wealthy areas that will not do too badly, but the mass of those were trade-ups financed by price appreciation in the bubbles, and once the low-middle falls out, those prices are not sustainable at all.
Plus, it is a whole lot less fun to be living in a 1.7 mil home when you strongly suspect that in 5 years it will be a 1.2 mil home. That hurts.
Has anyone here been to a local Realtors association meeting? Recently? Is their discussion borderline collusion?
VI said: "...In particular, I worry about the baby boomers who were all depending on cashing out of their homes and downsizing into condos to fund their retirement. If anything, the requirement for downsizing will be intensified by the reduction in equity that declining house values bring. This is a big factor, and I don't see a lot of analysis about its potential impact on the position of the post-credit bubble housing demand equilibrium..."
Maybe because it's a theory that doesn't actually work in practice? (Like too many bearish "arguments.")
As a baby-boomer who bought several years ago when home prices were lower, then re-financed with a sub-6% fixed-rate mortgage, I have no financial motivation to either downsize or cash-out completely and rent, and for the easiest of all reasons to understand: My monthly mortgage payment is lower than if I were to downsize (to a smaller but possibly more-expensive home with a mortgage at a higher interest rate) or rent.
Also, this fits with the statistics on retirees: The majority don't move on retirement, but simply remain in their current homes.
Sebastia
REPORT FROM THE FRONT IN BEL AIR
4 bedroom architectural on Mulholland Drive
bought in August '07 for 2.1 M
remodeled and put back on the market
June 08 for 2.4 M
now listed at 1.9.
When folks throw percentage drop values around I always wonder if they are talking about real or nominal prices. There could be a BIG difference this time around...
I believe the Fed will be doing all they can to ensure that while real prices may crash 40-50% over a 4-5 year period, and stay down, paper (nominal) values may recover fairly quickly due to (actual, not reported) inflation.
Got gold?
MoM has the big picture. One reason for the protracted decline at the high end is how the high end is defined. For a while the middle stuff was going for high end prices and has since slipped back down to the middle price ranges. The high end stays the high end. My predalian manse is one such house. Maybe 1.4 at the tippy top, 900k now and something starting with a 6 in the overshoot. Meanwhile my fancy pants neighbors will stay $2.4m, $2.0m, no sale, no sale, $2.0m and thus make the transaction data look sticky.
Personally I have serious concerns for the Bay Area. Bad demographics, aging housing stock and $4 heating oil this wintah.
gn writes:
Got gold?
It isn't doing particularly well.
Seb's a boomer with a mortgage?
all his advice and he still could'nt own a home without one?
I guess that's because all his real cash is in hi-yielding penny stocks.
Bullish Bankers Talk Up Alternative-Energy Market
ohhhh NOOOOOOO
Despite the lack of government assurances, most of the financial gurus from companies, including Banc of America Securities LLC (BAC), Citigroup Inc. (C), Credit Suisse Group (CS), Goldman Sachs Group Inc. (GS), Lazard Freres & Co., and Morgan Stanley (MS), said institutional investors are hungry for new alternative-energy offerings.
"There is a dearth of product out there," said Morgan Stanley Managing Director Kevin Genieser. "The markets are coming back and the institutional-investor community is very excited for the next crop of initial public offerings
Real Estate prices in SoCal are geographic - price declines will not just follow high-end to low-end. They will flow coastal to non-coastal. Even a sketchy area near the ocean will hold value better than a higher-end area farther away from the ocean. The two keys to pricing here are proximity to the ocean and freeway drive time. Areas farther from the ocean and farther from the big employment areas will drop at a faster rate because of the undesirability factor. The most desirable places to live are within 10 miles of the ocean and with easy access to freeways and employment. "High-end" in Rancho Cucamonga will drop faster than "Low-end" in Carson.
50% may be fairly close and of course you have to think in terms of time as it relates to incremental drops of 5% every qtr...
Sebastian,
If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable. In addition, the movement of empty nesters to inner city townhomes or suburban downsized homes is very real. Yes, folks tend to stay in their homes upon retirement, but usually not until death. The wave of boomer home sales is still coming, maybe just not as soon as people expect.
Best,
I thought sticky meant it hurt when you peeled them off. Or maybe that's the old band-aid model and these are post-it notes...
scav
OT, but comments like these are part of why I love to read CR so much...
I have serious concerns for the Bay Area... $4 heating oil this wintah.
Bay Areans use natural gas, not heating oil.
I ain't ever seen a heating oil truck here.
anon 12:22:
Yup, never seen heating oil-fired furnaces in the Bay or surrounding areas. It isn't cold enough there to need it.
Shnaps,RP-
The IMF chart IMFresets.jpg (image)
There's a slightly better chart (still by Credit Suisse) here: The Next Real Estate Crisis - BusinessWeek
Add ~12-18mo to this chart for when these become REOs.
And remember folks: a 100% increase is = to a 50% decrease.
I had an interesting experience commenting on a blog about celebrity house sales. Often the asking prices are way above the Zillow estimate and I pointed that out. I was told by the blogger that "unique" properties are never properly evaluated by Zillow and that it's evaluations don't apply. I then asked if there was any objective standard against which to value these properties and got no answer. Perhaps sitting on the market for a lengthy time is one way to tell if the asking price is too high, but it seems imprecise to me. Anyhoo, if what these celebs are asking compared to what they recently paid (many seem to be flippers) is any indication, the upper end in S. California has experienced next to no downside and considerable upside. Sometimes however the celeb seller has lowered the first, very high asking price a bit. Is it credible that the high end celeb properties have not "adjusted" at all?
Is it credible that the high end celeb properties have not "adjusted" at all?
Ask Ed McMahon.
Well Ed seems to have been a very exceptional case from what I have read. Anyhoo he went bust. I am talking about celebs who still are rich.
Personally I have serious concerns for the Bay Area. Bad demographics, aging housing stock and $4 heating oil this wintah.
Heating oil doesn't exist in the Bay Area. All that remains are the occasional rusting abandoned underground tank in older neighborhoods (>50 years.
Many Bay Area locations can do without heating at least through November if you have a sweater and warm slippers.
I see a brisk business in warm and comfy interior clothing as people turn back the knob a notch or two.
I also see this as a positive side effect. Thank Wall Street for saving the environment!
For California boomer homeowners, prop. 13 also complicate their situations.
Cashing out their homes and moving to smaller places can hike their property tax bills substantially. When they move, they need to move to much cheaper areas.
People near retirement tend to stay in their homes longer than they originally planned.
Thornberg seems to be tempering his forecast. Perhaps he doesn't want to be on the defensive with entrenched powers that be. So he sticks to a Plain-As-Day observation. Or maybe he expects Helicopter Ben and Paul in Peril to Save the Day.
Meanwhile I, like jg, predict 77% declines from the high. My own guess is that we'll hit it generally in May 2009, along about the time that everyone realizes our new President is no more capable than any other and has made things worse. Then we'll spend the next seven years picking up the pieces. (Must those Changes that we've been hearing so much about.)
jg writes:
"Based on (1) historic norms for home price to income and (2) projected drops in income during the forthcoming Greater Depression, Dr. T. is way short of the mark: home prices will fall 70% from their ending-'07 levels.
All in, home prices will have dropped ~80% from peak "
Tyler writes:
For California boomer homeowners, prop. 13 also complicate their situations.
Cashing out their homes and moving to smaller places can hike their property tax bills substantially. When they move, they need to move to much cheaper areas.
People near retirement tend to stay in their homes longer than they originally planned.
Check the law tyler.
After age 55, you get to move into a house of equal or lesser price and carry over the original home's tax basis one time.
A nice bout of inflation would do us a bit of good right now wouldn't it? Just kidding, of course, although the more general inflation there is in prices and wages, the easier it is for housing prices to settle.
Someone said that the "real" price drop would be 80%, rather than the 50% predicted price drop; I don't think that is the case. The historical trend in value is based on constant dollars; inflation acts as a lubricant by fooling people into thinking they are doing better than they really are. John Q. Banker gets his $400,000.00 first back at the foreclosure sale and doesn't have to write anything down. The fact that it's only $300,000.00 in yesterday's dollars is invisible.
High end homes here in Santa Cruz sure seem to have Sticky prices, my zip have barely dropped at all in the median sale stats, yet the south end of the county is down maybe 40%.
Many of the homes I've been looking at in the $1M to $2Million range disappeared from the MLS, but were not in the SOLD data; I discovered many of them in the Craigslist Rentals; the rents asked are about half what the owners costs must be. So it seems many prefer to bleed for a few years rather than accept a lower price on the home. These will come back on the market a few years from now when the owners have discovered how expensive and how much work being a landlord is. The prices will be pushed even lower from the degradations of being a rental.
the price may not be sticky nationally, but where i live, CA bay area, it is sticky and the decline is certain to draw in asian bargain hunters. I know of such people looking, but banks are holding back on giving out the loans, due to recapitalization.
hiker90 said: "...If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable...."
Well, the housing market is affected by a mix of factors. My mom stayed in her 60's-era single-family home until she died, 6 years after Dad passed.
After her husband passed, my mother-in-law upsized out of her 60's-era single-family house into a larger, more-contemporary, and more-expensive condo.
So, averaging-out your anecdote and mine housing just looks...ordinary, neither a glut nor a shortage.
"...In addition, the movement of empty nesters to inner city townhomes or suburban downsized homes is very real."
No question that it's real. It's just not what the nationwide majority do. Where I am now, for example, there's no inner-city area where I could live and my house is already one of the smaller ones in my neighborhood at around 2100 sq.ft. And I'm not living in a hoity-toity gated community, just a middle-to-upper class family neighborhood.
Sebastia
Inflation will not save housing.
Money consists of three items: paper/coin, gold/silver, and credit. Credit is the largest, and is/will be falling (for households and companies; government debt will continue to grow, but will meet its end sometime soon). Thus, largely, the money supply is now falling.
In the face of collapsing household and commercial credit, the Fed could decide to 'print' money, issuing more paper/coin or more Treasuries. But either will further inflame interest rates, really killing demand for homes (look at what has happened already to demand for high-end homes, in light of higher jumbo rates).
Yes, the 'printing' will raise consumer prices big time, but asset prices will get killed in a high interest rate/inflationary environment.
This is not a repeat of the 1970s. This is much worse, given the household and government debt levels to GDP. Interest rates, due to the substantial risk of default at the household, commercial, and government level, given the high debt levels, could go WAY, WAY high.
Homes are toast, whether we have inflation or not. Same for any other asset.
I would not waste any brain cells hoping for a 'save' for homes from inflation. We are in extremis.
The only thing that really hammers prices is REO/foreclosure sales.
Here in Bel Air there are 2 foreclosures on my street listed at a 30% discount to the other ones for sale. They have both been on for months.
Once those go (and they will eventually) those becomes the comps for all other loans within a few miles.
The thing that is diffferent about this bust is that there will be foreclosures on the Westside because of the Option Arms. The resets on those are just hitting. Nice areas like Los Feliz are getting pummelled by foreclosure, and the platinum neighborhoods are just now getting REOs.
Most on the Westside are still in denial. These are people with resources to try to ride it out. But the denial is fading fast. I was at a dinner party with a UBS fund manager the other night. He and his wife brought up the horror that westside prices might fall 50%.
For people like that to be dishing out tin foil blog numbers, it is a sea change indeed.
I have seen some listings on the westside that really stuck out in terms of discounts, that only came up in the last three weeks. The high end in LA is finally starting to wobble, and wobble a lot. I think CR's prediction of a slow bleed in the high end is too optimistic, as real INLAND EMPIRE type capitulations are starting to show up on the fringes, even in Bel Air. Remember, none of these homes can be bought with conforming loans, so Bel Air houses sell because you sold your last house at a huge profit. The next 18 months are going to be absolutely shocking to the heretofore insulated denizens of the platinum triangle. Shocking.
re: "Bel Air houses sell because you sold your last house at a huge profit"
That might be the nail in the coffin. The bubble has wiped out a whole generation of the previous move up buyers. The lack of sales in the high end communities migh be the start of the tipping point. Here in Pacific Palisades, only 17 homes sold in May vs. a normal market of ~45. Looks like some price adjustments are needed, indeed.
I can't wait for the first 100% price declines, in areas where the value of the home plus the maintenance cost plus taxes plus the intangibles of ownership drop below rental prices. That ought to be interesting.
People near retirement tend to stay in their homes longer than they originally planned.
Well, it is home. I find it amusing that people plan on moving away from something they call home. I'm sure there are people who can coldly look at the situation, but most of my friends and relatives are happier with the comfort of the familiar surroundings.
The stickiness is going to make the downturn last longer than anyone can imagine. Sharp rises in interest rates (likely given the sharp rise in commodity prices) could make prices unsticky.
50% is in no way apocalyptic. 50% or more price drops would be needed to get prices revert to mean and in line with wage growth.
I live in Santa Clara (in the part which fall under Cupertino schools - an area sought after by asians). My neighbor sold his crapshack for almost 1 Million 2 weeks ago. He bought that house for 350K in 2001. This is pretty representative of the entire neighborhood. A 50% drop from current levels (bringing the home to 500K) would still mean a very nice appreciation from 350K in 2001 !
And then there are condos in Palo Alto (which I pass by on my way to work every day) that are listed (and seem to be selling) for 1.2M ! Townhomes in that neighborhood list for 1.7M. Those would need to correct by way more than 50% !
We truly live in a fantasyland.
As a baby-boomer who bought several years ago when home prices were lower, then re-financed with a sub-6% fixed-rate mortgage, I have no financial motivation to either downsize or cash-out completely and rent, and for the easiest of all reasons to understand: My monthly mortgage payment is lower than if I were to downsize (to a smaller but possibly more-expensive home with a mortgage at a higher interest rate) or rent.
Also, this fits with the statistics on retirees: The majority don't move on retirement, but simply remain in their current homes.
As Tyler already pointed out, this is a purely CA phenomenon, due to Prop. 13.
As Uncle Ar pointed out, there exists a one-time over-55 exemption, allowing your typical born-on-third-base Boomers to take their preferential tax basis with them. However, a lot of them are not aware of this exemption, and therefore stay put.
Uh... Seb is in North Carolina, not Northern California.
Some older people like where they are and stay. Of course there are those who live in places that are miserable in the winter who move to warmer climates, but to say that staying in your house after you retire is a "purely CA" phenomenon is just weird.
"I think that Rob Dawg was arguing that high end areas are no more sticky than low end areas."
Well, I'm on the Westside of LA, and keep a real close eye on the market... sales, listings, FC rates etc. Prices are very sticky here. A few 10-15% off peak cuts that sell real quick. Many new and many stale listings at above peak prices (where they were previously purchased), FC #'s in the "good" ZIP codes are up, but still low. It's happening, but everyone's holding out hope that they'll "weather the storm". Plenty of knife catchers and no real desperation. Yet.
Sebastian wrote, concerning retirees downsizing:
The majority don't move on retirement, but simply remain in their current homes.
Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same. Not only do few of them have defined-benefit pensions, they will be suffering severe losses on whatever non-housing investments they had, and they are far less likely to have positioned themselves to pay off their mortgages by retirement. (A friend of mine who has done some mortgage brokering tells me that most people nowadays think of themselves as "renting from the bank".)
I see a brisk business in warm and comfy interior clothing as people turn back the knob a notch or two.
Let's go long on wool. Who are the big players in the wool business?
Regarding stickiness -- asking prices are sticky, selling prices much less so.
Much of the deterioration in the market is in unit sales volume. The only people still buying are people who feel they have to buy, or believe the market will soon recover. In the northwest suburbs of Chicago, unit sales volume is down 50-75% relative to 2005.
The deterioration in pricing is hidden by the low volume. The "real" prices relative to those of 2005 would be those that would call forth the same volume of sales.
From JM: "Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same..."
In addition to which the savings rate for the boomer generation is much lower than preceding generations. Thus, there is a strong possibility that the boomers will be economically unable to remain in their homes. Like I said before, determining where lies the post-credit bubble house price equilibrium requires an understanding of all the other things that are not equal/the same as before. In response to Sebastian, the precarious financial position of the Boomers makes it difficult to forecast their behaviour based on the example of the preceding, much more financially responsible, generation.
"Let's go long on wool. Who are the big players in the wool business?"
Now there is a thought! As far as i know wool prices have been terrible for many years. New Zealand which once had 70 million sheep is now down to about 35 million i think.
Synthetic clothing was doing bad things to wool.
New Zealand seems to be right on the cusp of some serious house price declines........even more reasons to invest there once a bottom is reached.
I am a resident there so it might be time to think about a southern migration:-)
Thanks, x-man, for the L.A. anecdotes.
Desperation will arrive very quickly once the stock and bond markets tank. And, those will be coming soon, with the MBIA/Ambac-related writedowns and NBER BCDC declaration of 'The recession began in..."
Breaks my heart to see the canapes crowd consternate.
jm said: "Though that has been the behavior of those currently retired, who were the beneficiaries (even if only indirectly through employer pensions) of the long bull market recently ended, as more and more of the boomers retire, they are going to find themselves unable to do the same."
I think you've mis-proved your own point.
If money is going to be as tight as you assume, staying in a house that you bought when it was cheaper with a low-interest rate mortgage is your best housing alternative. The cost of a real-estate commission to sell your house, the cost of moving, and the open-ended inflation risk of higher rent also argue for simply staying-put in a place you already like.
Sebastia
Seb,
All that AND you can take in a boarder or two...
Wonder how the banks are doing on the reverse mortgages they were touting a few years back?
"Let's go long on wool. Who are the big players in the wool business?"
Sheeple?
Let's go long on wool. Who are the big players in the wool business?
Not sure, but these guys sure make nice stuff:
Ibex Outdoor Clothing: Merino Wool Clothing, Wool Cycling Apparel, Organic Cotton Clothing, Wool Underwear and Baselayers
already down 39% in my little California beach town (pop. 27,000). In my hood (homallucinations! LOL) some taking their houses off the market, couple of foreclosures at rock bottom prices, and short sales too bringing prices down.
Don't know about wool, but pakistan is a major cotton producer. Maybe we can invade them to "lower the price"?
what ba_larker said
yes, even with the drop I've happy with appreciation since I bought in late '99. The losers in my hood are the foolish flippers that bought in 2005.
The story on retirement downsizing is a mixed bag nationally, but the large majority staying-in-place thing is a disproportionately CA phenomenon.
The bulk of pre-Boomer generations downsized or moved to retirement communities. Surveys show roughly half of Boomers expect to downsize when they retire, however, what people expect to happen and what really does happen are often 2 different things.
Some headwinds facing currently mortgaged Boomers:
--Fewer X/Y gen buyers, with significantly lower inflation-adjusted incomes/PP. Illegals are plentiful, but typically lack sufficient income (unless they are packed 12-per-room).
--Dodgy mortgage lending drying up, and some types (neg-ams, option-ARMs, NINJAs, etc.) could even be outlawed under the next Administration/Congress.
--Lousy boomer retirement savings rate means bulk of retirement "savings" is in form of house bubble equity (which is now in the process of evaporating). Much of any remaining equity has already been HELOC'd and spent on bling, vacations, cars & plastic surgery, as the 56-year national low in net loanowner equity demonstrates.
Retirement Real Estate - Real Estate Trends in Senior Living
Spendthrift Boomers Face Perilous Retirement: McKinsey - Real Time Economics - WSJ
"If my mom's and MIL's experience is any indication, boomers will stay in their homes until the husband passes away. When that occurs, a house is way too much work for a retired worman and an apartment is far more preferable."
You nailed that on Hiker90... I concur 100%. And have seen MANY people do exacly what you said.
The professor is correct in his predictions. I'll give you a example. How can home go from 250,000 in 2004 estimated value to 700,000 in queens. So, yout telling that after 80+ years of gowth population and immigration it only grew x amount of value and in three years only it went up three times that percentage. Dosent make sense. We are going back about 50% in value declines. The upper class have more time to hang on to their homes but will crack. We heard that this week in Conn , N.J ,and PA high end homes have declines. Why would you triple home prices in four years? This make sense based on economically. Ig you triple everything in three years it will drastically econmomicaaly. I wonder about our economists.
Post-bubble Tokyo experienced 50%+ broad-base decline in house prices all around its greater metropolis.
In some previously-hot properties, the prices came down to 1/3 or 1/4 of their peaks.
All these happened while the national default rates of residential mortgage stayed below 0.2% (Commercial mortgage/loan massively defaulted).
Harm,
Nothing in those links supports your contention that it is a "CA" thing.
Years ago, the majority of retirees downsized, sold their lifetime home, and headed for a retirement community. Today, the retirement real estate market is as diverse as the retiring population.
"A report from the National Association of Home Builders says that 52 percent of Baby Boomers between the ages of 45 and 54, and 57 percent of those ages 55 to 65 expect to purchase retirement property within the next five years where they can enjoy an active social lifestyle."
The data is not broken down by state and is vague and unquantified.
Even if half of them stay put, that is a large number. And remember, their unemployed children need a couch to sleep on.
The upper class have more time to hang on to their homes but will crack.
And liquidate their 401(k) and IRA portfolios in the process.
Add to the demographic changes: a generation of workers that graduate with an average of 30K in student loan debt for the vanilla undergraduate degree; up to 200K for JD/MBA/PhD/MD. Combine that with 20% DP and 7% mortgages, this is going to be one hell of a correction.
I think you've mis-proved your own point.
I think Sebastian is the one making a lot of unwarranted assumptions:
"staying in a house that you bought when it was cheaper with a low-interest rate mortgage is your best housing alternative"
It is almost always better for the borrower to buy an asset at a cheap price with expensive money than the reverse. Mortgages can be easily refinanced when interest rates (and lending standards) drop, but it is not so easy to get the lender to eat a loss on principal. Ultra-low rates (largely thanks to the Fed) are a big reason why prices went UP so far, not DOWN.
Q1: Did most boomers buy their current house pre-bubble?
Q2: How many traded up, or bought multiple spec properties dugint the bubble?
Q3: How many cash-out refinanced and HELOC'd and already spent those bubble equity gains?
"The cost of a real-estate commission to sell your house, the cost of moving, and the open-ended inflation risk of higher rent also argue for simply staying-put in a place you already like."
U.S. transaction costs tend to average ~8-9% in most states, assuming a realturd is involved. This is a signifanct disincentive to move frequently, true. However, the myth of rents "shooting up" beyond background inflation during the bust has already been disproven here and elsewhere, thanks to a multitude of surveys demonstrating the contrary.
Harm,
You are changing the premises. Seb said "bought when cheaper with low interest rate". This is true of many of the boomers I know. Many Boomer family homes were bought back when boomers were having families. That was pre-bubble.
Sure, if they bought when expensive it would be a different story, but for many people the bubble came and went with no impact and they are sitting on a low cost basis asset with no incentive to incur transaction costs and social disruption unless the house becomes a burden.
Oddly enough, I remain convinced that the best way to tell whether there is a bubble or not is to compare rental costs to mortgage costs. This becomes difficult the more complicated mortgage contracts get, but it isn't impossible to track, and many folks do.
Director’s Blog » Blog Archive » Housing price-rental ratios
Last I checked, prices in most areas were still 30% above the rental-property cost baseline.
I am continually shocked by the statements of even seemingly intelligent and well meaning people to the effect that low interest rates are bad generally (or even that high transaction costs are good because they help avoid bubbles). What? This is Economics 101, people; low interest rates and low transaction costs are good things, because they make living better easier.
Now, that doesn't mean the Fed was right to keep interest rates as low as they have been, at the cost of creating inflation in asset prices and (now) actual prices. But there's no sense saying that any absolute interest rate is "too low" absent circumstances. Bubbles are created by profligate lending, tax advantages, and other distortionary incentives. Interest rates are non distortionary (unless you can only get credit for certain things - but now we're back at profligate lending).
Chairman Meow said: "...This is true of many of the boomers I know. Many Boomer family homes were bought back when boomers were having families. That was pre-bubble.
Sure, if they bought when expensive it would be a different story, but for many people the bubble came and went with no impact and they are sitting on a low cost basis asset with no incentive to incur transaction costs and social disruption unless the house becomes a burden."
Which leads me to what I don't think the bears are factoring-in: That large amount of untouched equity, along with the low monthly cost of housing for them (us), represents a huge pool of money available to be spent in the future, either in MEW or in disposable income (because our housing cost is so low).
We never get any of the press coverage, even though there are a lot more of us than there are sub-primers and we've got a ton more money as a group.
And what excess assets we don't spend, our children will inherit. My daughter's probably looking at getting a $1/2 million house with only a $50k mortgage against it...someday.
Sebastia
If a 50% drop in prices is what is needed to make housing affordable once again, than a 50% drop - or more - is what we will have. The lunacy can't go on forever, and the huge Ponzi scheme is sucking wind as it all comes apart.
Eventually, debt has to be repaid.
Sticky: Downtown LA.
Prices just aren't dropping (still around $500 sq/ft). Instead, units originally intended for sale are going onto the rental market.
With enough bank shorts and a 50% decline in Malibu we get our free (pony) beach house.
@Chairman Meow,
If so many Boomers bought pre-bubble and did NOT cash-out refi/HELOC/speculate as you claim, then why didn't homeowner equity rise (instead of fall) during the bubble? And who exactly are all those NEOs (negative equity owners) CR has had so many posts about?
http://bp2.blogger.com/_pMscxxELHEg/R2K4yY81IFI/AAAAAAAABVk/JlHp1tp20pw/s1600-h/HouseholdPercentEquityQ307.jpg
discussed by CR in this post
@Sebastian,
"That large amount of untouched mostly spent equity, along with the low monthly cost of housing resetting option-ARMs for them (us), represents a huge pool of money available to be spent long gone in the future"
There, all fixed now!
FT Woods-
I wonder how many of those that are able to rent are just covering their min payment on their option ARM? Cause when that recasts at ~110%, the rental goes away and it becomes REO.
You sure cant rent a $500/sqft and cover a 30yr fixed (correct me if I'm wrong!).
As many have said - its not IF the higher end will get pulled down, but when.
Guess there are certain tags that don't work in Haloscan. Corrected version:
"That large amount of mostly spent equity, along with the resetting option-ARMs for them (us), represents a huge pool of money long gone in the future"
"In Manassas, an hour by commuter train from DC, townhouses that were going for $350,000 at the peak can now be bought for as low as $75,000."
Oh please!
"Someone said that the "real" price drop would be 80%, rather than the 50% predicted price drop; I don't think that is the case. The historical trend in value is based on constant dollars; inflation acts as a lubricant by fooling people into thinking they are doing better than they really are. John Q. Banker gets his $400,000.00 first back at the foreclosure sale and doesn't have to write anything down. The fact that it's only $300,000.00 in yesterday's dollars is invisible."
Inflation cannot fix the problem without HUGE wage inflation. And as long as the world is full of wage-slaves who are have to work for nickels a day and live in mud-huts, wage inflation is not going to happen.
Harm,
"And who exactly are all those NEOs (negative equity owners) CR has had so many posts about?"
The stats on NEO's you linked to show 7% of home owners as being negative. That leaves 93% with positive equity.
The post also foreshadowed rising rates pushing that percentage as high as 15-20%. That leaves 80% with positive equity. 4 out of 5 is pretty good odds.
If so many Boomers bought pre-bubble and did NOT cash-out refi/HELOC/speculate as you claim, then why didn't homeowner equity rise (instead of fall) during the bubble?
Did I say that they did not refi or HELOC? No. Just that there is still a majority of people with positive equity in their home. AND I suggest that many of these folks are older (I consider boomers to be older) and who bought their house when they had children at home which means it was before the bubble.
Certainly the speculators and flippers had a number of boomers among them, but even if it seems like "everyone was doing it", actual participation in the bubble through use of neg am and no doc loans did not include the majority of boomers. I'd even suggest that those hurt hardest were post-boomers stretching to buy their first house. The common definition of boomers puts the youngest at 44 years old now and the oldest at 62. Those on the older side were probably sitting on a fair amount of equity in their homes even ten or fifteen years ago. As long as they weren't idiots they still have some. And, although it seems like it sometimes, not everyone is an idiot.
"Inflation cannot fix the problem without HUGE wage inflation. And as long as the world is full of wage-slaves who are have to work for nickels a day and live in mud-huts, wage inflation is not going to happen."
Not unless the dollar falls a long way relative to a general international basket of currencies. Oh, wait.
Not that I disagree with him but where was he a few years when he was employed elsewhere? He was claiming prices couldnt fall in the absence of a recession and that prices would experience a soft landing.
These economists just crack me up. What a bunch of flip floppin clowns.
What a bunch of flip floppin clowns.
Hint: most clowns are paid by the ring master. They may love the smell of the greasepaint, but they are in it to afford the hooch to drown their sorrows. Clowns are sad.
... and scary
tj & the bear writes:
Regarding "sticky", yes housing takes longer to correct than stocks, but... IMHO the sticky argument also pertains to housing not historically over-correcting. IOW, every cycle low is generally still higher than the prior low.
Not this time.
Exactly. This time we will see significant undershoot. Below the last peak? possibly. What Thornburg has noted before is that there will be job destruction due to the overconsumption. late 2009? I find that hard to believe. However, of all the economists, Thornburg has generally been out front and correct.
I think we'll undershoot by 25%.
But Thornburg has also been smart and tailored his discussions to what people will listen too. Please see his videos. He'll often hint things are worse than his base prediction in ways that are not suitible print quotes.
Got Popcorn?
Neil
dafox,
Prices are insane. $500,000 for essentially a one bedroom apartment. The same unit, high end, rents for about $3-4,000 - close to just the cost of a mortgage. But the landlords kid themselves about the market. Most folks are looking for something under $1500/month.
It's not worth it to buy.
Chairman Meow writes:
The stats on NEO's you linked to show 7% of home owners as being negative. That leaves 93% with positive equity.
As of December 2007, sure, it's only 7%. Accordiong the Credit-Suisse or BofA charts posted frequently, we will not see and end to most negatively amortizing option-ARM resets until 2012 at the earliest. So... that number could go quite a bit higher.
Did I say that they did not refi or HELOC? No. Just that there is still a majority of people with positive equity in their home. AND I suggest that many of these folks are older (I consider boomers to be older) and who bought their house when they had children at home which means it was before the bubble.
CR has broken this down for us before: the "50% homeowner equity" national average includes the roughly 35% who own their home outright, which means the remainder have a lot less that 50%. Also, current average "equity" stats include what remains of bubble-era price gains, which are now dropping and sure to be lower as more loans hit their reset period. So, 35% of owners have 100% equity, while the rest have considerably less than 50%, and some have negative equity.
Show me an equity-flush homeowner, and I'll show you a WWII vet living in a modest 2bdm ranch in Ohio on a fixed income.
Certainly the speculators and flippers had a number of boomers among them, but even if it seems like "everyone was doing it", actual participation in the bubble through use of neg am and no doc loans did not include the majority of boomers. I'd even suggest that those hurt hardest were post-boomers stretching to buy their first house. The common definition of boomers puts the youngest at 44 years old now and the oldest at 62. Those on the older side were probably sitting on a fair amount of equity in their homes even ten or fifteen years ago. As long as they weren't idiots they still have some. And, although it seems like it sometimes, not everyone is an idiot.
Here's the thing: it might be true that the majority of boomer homeowners did not directly participate in the bubble (though personal experience with friends and colleagues here in CA indicates otherwise). Nontheless, pricing in the real estate market is set at the margins, and in any given year only a small % of homes are sold (I've seen estimates of 7-8%). So, even if only a sizeable minority of buyers --boomer or otherwise-- were speculators/idiots, those idiots set the market price for housing during those years.
But "It's Different HereĀ"
Harm,
Are you a boomer? Are your friends? Or are you on the tail end of the boomers?
The people I know in my neighborhood who have been here for the past 8 years or more are probably just fine.
You seem to be trying to make the desperate point that people don't stay in their homes when they retire by insisting that no one has any equity - well except those people in California who stay put - but according to your argument California is the place where equity has evaporated them most. It just doesn't hold together and comes across just a bit ranty. Stop pulling your hair out man. It is too hot for that.
My opinion is that the mortgage industry is done for a while. There is no programs for real people to qualify unless you got big bucks. Even then you still have to qualify. I agree that Ca. OC will see 50% fall ,. Those Arms arnen't adjusting.. people are and they are walking out and giving the keys to the bank and hey you got a foreclosure on your record. Oh well... thats the real world NOW!
Once again, I hate to say I told you so but I forecast a drop in So. Cal and other regions up up to 50-60% in 2006. Why are we only hearing about these forecasts now?